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Edited Transcript of AF.PA earnings conference call or presentation 31-Oct-19 7:30am GMT

Q3 2019 Air France KLM SA Earnings Call

Roissy Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Air France KLM SA earnings conference call or presentation Thursday, October 31, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin M. Smith

Air France-KLM SA - CEO & Director

* Erik R. Swelheim

KLM Royal Dutch Airlines - CFO & Member of Board of MDs

* Frédéric N. P. P. Gagey

Air France-KLM SA - CFO

* Steven Zaat

Air France-KLM SA - EVP of Finance - Air France

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Damian Brewer

RBC Capital Markets, Research Division - Analyst

* Daniel Roeska

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

* Jaime Bann Rowbotham

Deutsche Bank AG, Research Division - Research Analyst

* Jarrod Castle

UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team

* Johannes Braun

MainFirst Bank AG, Research Division - Director

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Michael Kuhn

Societe Generale Cross Asset Research - Equity analyst

* Ruxandra Haradau-Doser

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Savanthi Nipunika Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q3 2019 Air France-KLM Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Frédéric Gagey, Chief Financial Officer of Air France-KLM. Please go ahead, sir.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [2]

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Good morning to everybody. Welcome to this analyst call for the result of Air France Third Quarter 2019. I am in Paris with the CFOs of Air France and KLM and the team of the Investor Relations.

So I go to the presentation directly. I propose to go to the first slide, which is short. As you may have heard, the result for this third quarter, what is happening during these last 3 months? First, we continued to increase our activities. Traffic is up 2%. But as we warned you already in August, we have a negative passenger unit revenue. If you add together the networks Air France-KLM plus Transavia, we have this passenger unit revenue at minus 0.6%. So this in line with the message we have translated to the market in the middle of the summer. This is the main source explaining why the operating result is less than the last year. In Q3 2018, operating result was EUR 1.065 billion. For the third quarter 2019, we are EUR 900 million for the operating result, which is minus EUR 165 million. So it's a drop. Explaining mainly, we will see that later by the negative passenger unit revenue and also by the hit coming from the fuel bill.

The net debt is down minus EUR 253 million compared to December 2019, below EUR 6 billion at EUR 5.900 billion end of September 2019. With the reduction, which has been a bit impacted by the quite strong dollar, we had at the end of the month of December -- we will see also that the level of the dollar end of September has impacted the net result of the company. So basically, this is -- I showed you about this result, good traffic, passenger net revenue negative, and operating result less than last year, but we continue to have -- see a decrease on the new debt.

I go to the next slide when you see a bit more precise number. First, the revenue, up to 2%, up 1% at constant currency; fuel expenses, EUR 1.5 billion, which is a bit more compared to last year, around EUR 130 million, EUR 140 million. We see that the net impact excluding currency is a bit less. The EBITDA, at EUR 1.6 billion, minus 7% compared to last year. Operating result, I discussed it. Operating margin, of course, direct impact of the operating result, we stand at 12% compared to 14% last year. The net income is also less than 2018 Q3. We have a drop of minus EUR 400 million, which is more than the drop in the operating result.

Two main explanations behind that: First, the fact that we have opened the -- to take into account earlier phaseout of the 380, and the impact on this third quarter is EUR 100 million below the operating result. And we have also a noncash impact coming from the strong dollar, which is impacting the financial cost due to the revaluation of the debt and the revaluation of some maintenance provisions. We expect that part of this effect will be reverted in the fourth quarter progressively. The dollar is a bit weaker right now compared to what it was at the end of the third quarter.

Adjusted operating free cash, I will show you that later, indicating what we have over the 9-month period year-to-date. So net debt, with a reduction of EUR 250 million, I already indicated that. And the net debt-on-EBITDA ratio is at 1.5.

Next slide is the Airbus 380 phaseout financial impact. So as we have already announced in the second quarter, we have taken the decision to phase out progressively the Airbus 380 following, by the way, the decision of other carriers. The global noncurrent result is estimated at EUR 400 million, and this impact will be spread over the period between now and 2022. But for the third quarter 2018, the impact is EUR 100 million negative, which is the sum of the impairment of assets for EUR 75 million and EUR 25 million of accelerated aircraft depreciation. And for Q4, we expect an impact of EUR 50 million, again, below the operating result.

I go to the next slide just to describe what is happening in the various businesses of the group. Network, I told you that the unit revenue was minus 0.6%, but it was by adding Network and Transavia. If we focus only on the Network Air France-KLM, then the unit revenue is minus 0.9%, so clearly, indicating that the global IRO environment is less brilliant or positive compared to what we had in 2018 and in 2017. Even over the year, the situation has been changing from one quarter to another one. Q2 was not so bad. Q3 is negative. Q1 was a bit weak. So we see that there is some uncertainty concerning the evolution of the passenger demand and the capacity for airlines to maintain the level of the unit revenue. I think that the result of British Airways this morning are giving also the same type of indication.

A signal which is really negative on my point of view concerning the global environment is the cargo unit revenue, minus 13%. It is numbers we have not seen already for 2 or 3 years. We have seen that in the middle of the crisis, before 2016. Concerning the cargo activity, it was far better during the last 2 years. But since the beginning of the year 2019, we see again a negative unit revenue development concerning the cargo. And for the third quarter, the number, I would say, is relatively impressive, minus 13%.

Concerning Transavia, both Transavia France and Transavia Holland, the summer has been fully okay. We have capacity increasing by 8%. The unit revenue is positive, plus 3% in spite of the capacity, and the margin is -- or the operating result is almost even, minus EUR 5 million. Note, however, that the summer has been impacted in Transavia France by some operational difficulties due mainly to the delays in the training of captain for operating the fleet of Transavia France, and it had impacted both the capacity or the capability of Transavia to go accordingly to the budget, as it has also increased a bit the unit cost of Transavia during that period.

The maintenance development is okay. You see the operating result, minus EUR 2 million compared to last year, mainly explained to be -- to be precise, by some one-off, especially the one-off coming from the bankruptcies of Aigle Azur and XL Airways where we have some doubtful debt, which alas will be never paid. The impact is estimated around EUR 10 million, which means that if you exclude this one-off, the maintenance margin will have increased during the third quarter. When we go a bit deeper in the analysis after discussion with controllers of the maintenance, it's clear that the margins on the equipment, the margins on airframe are increasing compared to last year same period. And the margin vis-à-vis third clients -- third parties, not internal but with the external clients, is also stable, so good development of the business in the maintenance. And so the result is the group evolution of the operating result I have already described.

I go to the next slide to see what is happening in terms of unit revenue. When you look at the various network or subnetwork of the group, there is, I would say, first good news, which is evolution of the RASK in the French domestic network, plus 4%, which is clearly a good result largely explained by the fact that the capacity are going down steadily, minus 12.4%. It is totally aligned with the strategy we announced in the second quarter. We expect the capacity of the domestic market to be reduced by 6% in 2019 and again 6% in 2020. It is, of course, part of the restructuring plan for this heavy loss-making network of Air France, and the reduction in capacity goes together with the transformation of the fleet. By the beginning of 2020, the fleet of ATR, which are the propellers used by HOP!, will be totally phased out.

Second good news is the relatively good development of the RASK concerning the medium-haul hubs from both flights going to Charles de Gaulle off to Schiphol. We have developed capacity during the third quarter by plus 3%, and the RASK is stable at 0%. And of course, what this explains mainly is the reduction of the RASK during the third quarter is the long-haul. Long -- total long-haul RASK is minus 1.5% explained by Latin America, not a surprise with the crisis in Argentina and Brazil where the RASK is minus 7%; followed by Asia, minus 3%.; in North America, when we are excluding currency, a unit revenue of minus 1.8%. Two small subnetworks are doing not too bad. It's mainly Caribbean & Indian Ocean, where the RASK is plus 5%; and Africa and Middle East.

I go to the next slide, which is just consisting on the phaseout of the ATR fleet I just indicated and also the good medium-haul hubs and French domestic performance in terms of unit revenue.

Next slide on the unit cost. Unit cost is up 0.4% during this quarter. But if you go to year-to-date, we are at minus 0.7%, which means that we are fully out to satisfy the guidelines of unit cost between 0% and minus 1% for the full year 2019. As I told already, during the Q2, we expect to be on the very good side of the range, which means that we will be closer to minus 1% than to 0%.

Next slide. We insist a bit on that because you know that it is a focus for Ben Smith and Anne Rigail to improve and to come back to normal situation in terms of on-time performance and Net Promoter Score for Air France. In fact, it is going not too bad. You have on the slide the evolution of Air France on-time performance among the European peers. And you see that in July, August, September, the rank has been #7, #5 and #3, which is clearly far better if you compare that to the situation, for example, in the Q3 2018. And you see also on the right of the slide, an impressive movement concerning the Net Promoter Score for Air France, for Q1, Q2, Q3, this KPI is now 24, 25, 25, which is almost twice better than the result in 2018. So I think it's really encouraging result, showing all the work which is developed right now by Anne Rigail in order to improve the situation for these specific KPIs.

Next slide is the waterfall for the operating result from Q3 2018 to Q3 2019. Main explanation in terms of the decrease is the unit revenue, minus EUR 114 million. The other biggest impact is the fuel price ex currency, minus EUR 74 million. And finally, we have the same impact for unit cost, negative minus EUR 25 million; and currency impact, positive, plus EUR 24 million. So it really is the unit revenue and the fuel price which are explaining the deterioration of the operating results, sorry, from Q3 last year and Q3 this year.

I go to the next slide to comment the performance of the 2 companies. So at the top, you have the evolution for Q3 where I will say the evolution is relatively similar for both Air France and KLM, which is a deterioration of the margin of minus 2.2 for KLM, minus 2.5 for Air France. Keep, however, in mind that there is some one-offs in Air France which are relatively significant for this quarter. The first one, I have already discussed it, is the impact of the bankruptcy of Aigle Azur and XL Airways in the French market. These 2 companies left an unpaid bill of around EUR 10 million. Second, we had a compensation for the strike last year to be paid to Delta, which is also in the order of magnitude of EUR 10 million negative for Air France. And finally, the end of operations in June have forced Air France to take some one-off costs for EUR 8 million. So in total, you have EUR 30 million of one-offs in Air France for this quarter. If you correct for that, we can admit that the evolution of the operating margin for Air France and KLM are relatively the same for this third quarter.

At the bottom of the slide, we have the evolution year-to-date. Here, clearly, the situation is a bit different. For KLM, the reduction of the operating result is minus EUR 246 million, so a reduction of margin of minus 3 points, sorry. For Air France, it is less. But you have, of course, to take into account the fact that last year, we have the strike in Air France with a global impact in the range of EUR 200 million. So if you correct for that, you have a far more parallel evolution of the situation among the 2 carriers of the group.

I go to the next slide, which is giving the evolution of the free cash and the net debt since December 2018. The adjusted operating free cash flow is positive over the period, plus EUR 100 million. This is the last dark blue bar on the left.

And on the right, you have the evolution of the net debt between December '18 to September '19. We have to take into account the adjusted operating free cash; the payment of lease debt, of course; the new lease debt, which is all due to the entry of leased aircraft or the extension of already existing leased aircraft into the fleet. And you note also the impact of the currency, which is mainly the impact of the strong dollar at the end of September. But as I told before, I expect that some of this impact will vanish during the fourth quarter, the dollar being a bit weaker compared to what it was at the end of September. Altogether, the net debt-on-EBITDA ratio is at 1.5x, stable if you look at December '18 and September '19.

We go on the next slide concerning the revenue outlook. So first indicator we use with you quite often is the long-haul forward booking load factor. It's relatively stable if you look at the period December to March '20. It is plus 1, plus 1, plus 1, plus 1, so there is nothing good or nothing bad, I would say. It is not indicating that we have a great capability to maneuver concerning the evolution of the unit revenue. That's why after discussion with the revenue management team, we consider that for the next quarter or the current quarter, fourth quarter, we expect unit revenue at constant currency which should be slightly down compared to last year. So it is a bit -- the situation comparable to the third quarter, probably a bit less -- or a little bit better, sorry, compared to what we had in Q3. But we are still expecting a slightly down unit revenue for the fourth quarter.

I go to the next slide just to actualize the fuel bill increase. In Q2, we have indicated -- or end of Q2, we were expecting a fuel bill increasing by EUR 550 million compared to 2018. With the new market, we are now closer to EUR 600 million due to the fact that we have a bit increase of the fuel price. You see on the slide that the hedging result for the year 2019 is expected to be close to 0, plus $50 million. And at the current forward curve we have for 2020, a hedge result which is expected to be minus $150 million. But as always, concerning the fuel, things can change a lot.

So next slide, on the full year guidance. Not many changes. For the passenger capacity, we stick to the plus 2% to plus 3%. We reduce by 1% the expectation concerning the Transavia capacity. In Q2, we indicated plus 7% to plus 9%. We consider now that we will be closer to plus 6% to plus 8%, which is, of course, largely explained due to the delay in the cockpit crew training in Transavia in France.

Fuel, plus EUR 600 million, and I have already indicated that. The currency over the full year, it would have been a natural effect, and we still consider that it will be the case. Unit cost, again, we said in the guidance that probably in the right side of it, so closer to minus 1% to 0% happily. The CapEx, an increase of EUR 100 million, which is a minor CapEx increase, which is mainly explained by the fact that we have decided to acquire instead of leasing some spare engines, considering that the implicit margin in the lease was far too expensive. So we consider that to move from lease to acquisition is good for the P&L. And net debt on EBITDA, at 1.5, as we said, since the beginning of the year.

So this is the end of the presentation. All in all, message are aero environment, a bit more difficult than what we had in 2018, explaining largely the deterioration of the operating result compared to the third quarter of last year. Fuel bill is not helping. Temporarily in Q3, the unit costs are up, but we stick to full guidance concerning the unit cost over the full year.

So I have finished the presentation, and we are now all listening to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Ruxandra Haradau-Doser from Kepler Cheuvreux.

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Ruxandra Haradau-Doser, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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You highlighted a strong improvement of the Net Promoter Score at Air France. Could you please give more details on what exactly has been driving this strong improvement? Second, could you please give an update on Virgin Atlantic? And third, considering the nonfuel unit cost decline in the first 9 months and the weak comparable basis at Air France in Q4, is it fair to assume that the nonfuel cost guidance for the full year is quite conservative?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [3]

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Thank you for the 3 questions. NPS, I think that for the -- probably the main explanation behind the NPS improvement is coming from the other part of the slide when you see the strong improvement in terms of on-time performance. It's clear that when you look a bit deeply in the NPS, answer is coming from the clients. There is a rule which is that a good flight without nonconformity has a very strong NPS. The same flight with a small nonconformity has a very bad NPS, which means that the client is extremely sensitive to a small delay or a small change in the schedules. And this type of things are improving quite strongly the NPS, which means that when you focus on the quality of operations, less delay, better on-time performance, a good percentage in terms of flight according to the plan, we have immediately an improvement in the NPS. So this is the first explanation.

The second explanation is that if you compare that to the last year, for example, it's clear that in 2018, as you remember, the situation in the group Air France was a bit, let's just say, a bit hectic there with the departure of Jean-Marc and the crisis at the beginning of the year. When you are right now act accordingly to the policy of Ben and Anne in the period, which is more calm, quite more positive, you see also that the behavior of the teams with the direct client is improving, and I think it is the other explanation.

Concerning Virgin Atlantic, we have decided with a partner that due to various delay, a large part of them being coming from administrative work and discussion with authorities and also to simplify the treatment in terms of accounting, we have all decided the launch, official launch of the JV will be 1st of Jan 2020. So which means that there is a small delay compared to what we have announced earlier. We had indicated to you that the JV should be in operation 1st of September. But after some delays, we have moved to the 1st of Jan 2020. And there is still absolutely good relationship and work among the various working team.

In the meantimes, I'll remind you that the JV between Air France-KLM and Delta is, of course, still in operation. I think it is -- we have not stopped the concept of the JV between Air France-KLM and Delta. It will move to Air France-KLM, Delta and then Virgin beginning of the next year.

And then I missed the third question. And (inaudible) to -- sorry, unit cost. So the question is, is minus 1 a bit not too shy. Okay, we are on the good range -- I'm sorry, on the good part of the range. I will limit my comment here. But we can be at the extremely good end of the range, I would say, if it is a bit more precise.

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Operator [4]

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We will now take our next question from Savi Syth from Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [5]

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A couple of questions for me. First on Transavia, it looks like it had a bit slower growth here in the fourth quarter as you crew up. Just any thoughts on how we should think about the growth next year? And if you're able to take any of the advantages of slots opening up at Orly from -- for some of the carriers that went away?

Second, in Latin America, it looks like things are down but improving. And I was wondering if that's the result of easier comps. Or if you are actually starting to see improvement in Latin America? And then just somewhat tied to that region, Delta announced a partnership with LATAM. And then I know you have an investment in GOL. Just wondering how you see the opportunity in kind of partnering with the various airlines in Latin America, especially given kind of the development with your partner, Delta?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [6]

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Okay. Concerning the first question, it's true. We are very clear on that, that Transavia France has been impacted this year and limited in growth due to the operational problems coming mainly from the training of the crews, technical crews. For the next year, when you look to the budget of Transavia France, they expect a growth of 10%. First, that is the growth will come back in 2020. Second, part of this growth can be also impacted, in fact, by the distribution of the slots coming from the bankruptcy of Aigle Azur and Eastern Airways. Eastern Airways had no slot at Orly, so it has no direct impact on the slot distribution at Orly. Aigle Azur had a significant share of slots at Orly with around 13 daily flights. Due to the fact that the company bankrupt, we expect, as usual, that the slot will be redistributed by the state coordinator accordingly to the European rules, which is, if I do that quickly, 50% for the existing operators, 50% for the new entrants. So which means that in all the case, Transavia and Air France, by the way, will receive their normal shares of the slot left or made free by the bankruptcy of Aigle Azur.

Behind the slot, there is something which is also extremely important for Transavia, which are the traffic rights to Algeria. Aigle Azur was, in fact, quite present on the French Algerian market. This is a market which is still regulated with traffic rights negotiated between France and Algeria. And of course, as a relative small numbers of carriers, Transavia France will be extremely interested to receive a significant part of the traffic rights mainly between Orly and Algeria. So the destination and possibly the development in terms of capacity out of Orly -- out of Transavia, sorry, will be linked to this question.

Concerning LATAM, in fact, it is -- what happened with some lease, in fact, is something quite new. I think this probably is the biggest number of an alliance suddenly deciding to move from one alliance to another one. As you know, LATAM was in oneworld, quite close to British Airways and partly owned by Qatar, and we add to them leases moved. When you see Delta entering and developing vis-à-vis LATAM, the strategy a bit comparable to what we have done, for example, with Aeromexico, which is developing a strong partnership partly based on an equity stake.

First remark, it is an ongoing process in the sense that there is a lot of authorization, check, finalization of the financial operation before to have this operation fully, I would say, operational. Which means that in the meantime, of course, company Air France-KLM will continue to work with GOL, and we will see in the next years if we need to change something to the strategy. But clearly, for the time being, we have some agreements with GOL, and Air France-KLM will continue to work accordingly to seize existing agreements. But I cannot deny that the step made by Delta in South America is something which is a bit new compared to the former situation.

There is one question you have to ask yourself is in the move to Lat Am, what is really the intention of Delta? Is it to be focused on the North-South route, I mean South America to the U.S.? Or is it also west to east or east to west? And my first personal feeling is that the step made by Delta is for them first something which is focused on the North-South route, which means that it links between South America and the U.S.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [7]

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That makes sense. And if I might follow up on the Transavia. If there is -- you get some of these slots and access to Algeria, are you able to kind of grow Transavia France faster than the 10%?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [8]

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Not significantly. I think it will be -- it's possible that we get a lot of the traffic rights to Algeria, and we can increase a bit the growth. But it will be not significant. The most significant will be the reorganization of the network. Of course, if there is good part of the traffic rights to Algeria given to Transavia, Transavia can be forced to reorganize a better network in order to respect this new commitment vis-à-vis the French Algeria market. But I think that it will not impact significantly the growth we have today in the budget.

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Operator [9]

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We will now take our next question from Jarrod Castle from UBS London.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [10]

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One on 2019 and 2 on 2020. Just on 2019, the net worth of, obviously, EUR 160 million reduction in operating profit. Can you give any kind of scale or what percent relates maybe to pressure in cargo to the passenger? Secondly, just looking into 2020, can you give any ideas in terms of what impairment we can expect from the A380 in 2020? And lastly, just the fuel bill, it's obviously up since the half year, although jet kerosene in the presentation seems kind of flat to down. So how should we think about this being up in terms of capacity indications in 2020 versus 2019?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [11]

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So concerning the impairment for the 380, we expect for the year 2020, around EUR 100 million negative again -- not again, EUR 100 million negative for the full year, which is mainly coming from the acceleration in the depreciation of the aircraft. And it will be almost the same, probably a bit less in 2021. And in total, if you take '19 to '22, it will be at EUR 400 million.

Concerning your first question on the cargo, it was not so clear for me.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [12]

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I was just wondering. Within the network reduction in profits of EUR 160 million. Can you give an idea how much of that impact was due to weakness in cargo versus weakness in the network airlines?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [13]

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As you know, we do not normally give an indication anymore on the cargo result because we have decided to integrate this activity to -- sorry, to the passenger activity. If I take year-to-date, I will say that 1/3, basically, of the passenger or what we call the passenger activity is due to the reduction of the cargo contribution, 1/3 and 2/3 is coming from the pure -- the pure -- sorry, passenger unit revenue and specific cost due to the pure passenger activity. Third question?

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [14]

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The third question was just around the 2020 fuel bill. It's gone up from 5.5% at the half year to 5.6%, and it does look like jet kerosene is broadly stable. So is there anything you can say in terms of capacity indications? Is that what's driving it? Or is it currency, the slight increase?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [15]

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[The question] of the capacity, I see that it will be something between 2% and 3%.

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Operator [16]

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We'll now take our next question from Damian Brewer from Royal Bank of Canada.

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Damian Brewer, RBC Capital Markets, Research Division - Analyst [17]

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2 questions from me. First of all, just following up on the theme of cargo, maybe something for next week, but given the expectations, the cargo market's going to still remain weak and sort of capital allocation within the business. Will you look at taking any more capacity, particularly taking the dedicated freighters out of the cargo business? Or at least defer maintenance events there and maybe recycle back into Transavia? And then secondly, on the comments in the presentation where it talks about the pilot ramp up for 2020. What exactly are you implying by that? Is that mainly for Transavia's growth? Or is there something else implied behind that comment?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [18]

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Concerning the freighter. First, it is a situation to today. If you take in the last 2 years, the contribution of the cargo to the passenger business unit was positive. So yes, you have not to take a decision just because there is, in 2019 result, which are not as good as the last 2 years, which means that for the time being, we have not anticipated to reduce the capital we use for the full freighter activity. You know that we have totally changed the model over the last 10 years. I remind you that in 2013, there were 10 full freighter aircraft into Air France and around 6 into KLM. 2 in KLM and 4 in Martinair. And now we have a full cargo or full freighter fleet, which is extremely limited, with 2 aircrafts in Air France and 3.5 aircraft, I would say, into KLM. So clearly, in terms of capital allocation, we have totally -- we're secure [full view] concerning the allocation of capital to the freighter activity. And right now, more than 80% of the activity is transported in the belly of the passenger aircraft. And for the next year, this share of the bellies will still increase.

In terms of capital allocation, there is a big decision taken by KLM, which is to phase out the 747 cargo, which is also a reallocation of the capital to the pure passenger -- combi, sorry, combis, which are very specific 747, half passenger, half cargo. And by doing that, it is another step into the reallocation of capital to the pure passenger activity by reducing the capital used for the cargo. So this is clearly going into the right direction and to the really direction of your question, I think.

The second question? Can you just repeat it, please?

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Damian Brewer, RBC Capital Markets, Research Division - Analyst [19]

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Yes. In the presentation, you did talk about the pilot ramp up for 2020. I'm just wondering what you implied by that? If growth is going to be 2% to 3%, what's driving that pilot ramp up? Is it Transavia? Or is there something else changing there?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [20]

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When we speak about that, it's both for -- it is both for Transavia, Air France and KLM. In the sense that when you grow also due to the fact that we have a weight pyramid, which is implying that there is relatively, I would say, high weight of natural departure in the pilot populations in both Air France and KLM. It means that when you are entering new pilots, of course, you have to expect what it's called in the airlines and what you know perfectly well in the seniority list, which means that there is a young pilot entering, there is an old pilot leaving the company and you have all cascade of trainings that we have to be organized in order to respect the seniority list. That's why it is so important to have a simpler fleet and that's why all the steps taken by both Air France and KLM in order to reduce the number of aircraft types in their fleet is so important for the future in terms of unit cost.

By carrier moving to a fleet mainly focused on 777 and 787, it means that in the future, there will be a far less impact of the ramp-up of pilot hiring into KLM because of the [long haul], there would be a unique cockpit when the Swiss [AT] fleet will be phased out. In Air France also there will be simplification of the fleet, which is going on, which, for example, the end of the ATR, the expected end of the 340, the end of the 380, with a fleet in Air France, which will be focused on the 777, the 787 and the 350. So altogether, but it's true for any airlines, you can of course reduce the operational cost if you have a fleet as simple as possible and a limited number of cockpits.

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Operator [21]

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Our next question comes from Daniel Roeska from Bernstein Research.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [22]

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Three, if I may. On the competitive development maybe for winter and into early next year. You talked about your network plans a little bit in the French domestic market, but could you talk a little about if you see any airlines aside from Air France and Transavia, also moving into the French market trying to take up some share out of the Aigle Azur share? Do you see anybody else pivoting towards Orly? What are your jetliners doing? What's your expectation kind of over the next couple of months for their positioning?

And then secondly, maybe still staying on the LATAM question. Could you update us on the progress for the joint venture with Air Europa? And how you think about that going forward, given the latest developments with LATAM and Delta? And I guess we'll talk about the strategic plan next week, but you commented that the main developments in Q3 were essentially based to market, on RASK and fuel. Now is there any short-term self-help cost reduction you can still do in Q4, Q1, Q2? Kind of are there any plans to be a little bit more aggressive on unit cost? And what would you be thinking about in the near term?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [23]

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On the French question, depending on which part of the French domestic you consider, it's true that if you look at French province to Europe and some destinations, there is a lot of competitions. You can have in there easyJet, Volotea and some others trying to participate to the strong expansion of the traffic between the French province and Europe or North Africa, to make it short. Concerning the competition for the domestic routes, I mean France to France. Let us say that out of Orly due to the saturation of the airport, it's relatively limited. There is a bit more competition from the [North South France] routes. For example, Bordeaux to Lyon or Lille to Marseilles. But when you hear about [new aircraft] entering the French market, it's mainly focused on the development of the traffic between Provence and Europe or North Africa, which is not what we really would call the France domestic. When we speak about the French domestic, to be frank, it is mainly Air France against the train or Air France against various modes of transportation. And the situation I described concerning the capacity on what we call French domestic is closure of small routes, losing a lot of money or [some reduction] of capacity between Orly and Bordeaux, for example. Of course, you're right, the slots made free by Air Brazil interested a lot of people, but I suppose that for a large of the competition out of Orly, it will be to operate routes from Orly to Europe and not Orly to Marseilles, for example. Just an example between Orly and Marseilles, there is only Air France today. Which means that it is such a difficult route, but it is important for Air France because this is a natural market for us, but there is no competition on Marseille and Orly. It's not the case when you look at, for example, Nice.

Concerning LATAM and the JV with Air Europa, we continue to work, of course, with Air Europa, but as you know for these type of things, there is many countries in the South America. So which means that you have to go first to Brazil and after that to a large number of South American countries in order to get the needed the antitrust immunity and that explains why this part is progressing certainly, but a bit slowly.

On the Q3, Q4, I give the room to Steven, the CFO of Air France.

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Steven Zaat, Air France-KLM SA - EVP of Finance - Air France [24]

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Yes. So if you look at the unit cost development in Q4 last year, we had a one-off related to the labor agreement we had. So of course, the last quarter will be, for Air France, much better than it was last year. And for Q1 and Q2, we are very hard-working on the transformation plans. So actually, we will discuss that next week in our strategic plan that we expect, especially from our transformation, a lot. In the context where we have limited growth, and we see also kinds of inflation around the world. So we are working hard on it and we will tell you much more next week.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [25]

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Okay. And could I maybe try my luck and just press and say, of course, you'll be working on the transformation plan. But is there a material impact you're expecting kind of in the near term from those activities?

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Steven Zaat, Air France-KLM SA - EVP of Finance - Air France [26]

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Yes, we do. So we expect -- we already have some impacts this year, what we call the speed savings. And also, next year, we will have the first impact of the transformation.

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Operator [27]

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We'll take our next question from Jaime Rowbotham from Deutsche Bank.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [28]

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Just one from me. So Frédéric, you have almost EUR 1 billion of operating profit year-to-date. Last year, you did EUR 40 million in Q4. As it stands, it looks like yield and fuel cost headwinds alone could maybe reduce that by up to EUR 100 million year-on-year. So on CASK ex fuel, is it realistic to think you could generate EUR 100 million tailwind to offset? I think that would be around a 2% reduction in nonfuel unit costs at constant currency. And if so, can you just make it clear what's driving that reason? Why it's so weighted to the fourth quarter after the nonfuel unit costs went up 40 basis points in Q3?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [29]

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So let us wait for the Q4. It's true that last year, we have some base effect and one-off into Q4. Which means that we really expect a contribution of the unit cost in the fourth quarter, which will be significant and leading us to be on, as I said already, on the right side of the range we gave to the market. Yes.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [30]

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Could you remind us what those base effects were? Sorry.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [31]

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Some specific treatment in the maintenance, for example, yes, which has impacted unit cost development in the last quarter of last year.

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [32]

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And the labor deal.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [33]

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Sorry?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [34]

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And the labor deal.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [35]

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And the?

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Benjamin M. Smith, Air France-KLM SA - CEO & Director [36]

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Labor deal, we made...

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [37]

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Yes, so also the labor deal. As you know, some labor deal has been initiated -- has been negotiated and had specific impact, for example, in November, in Air France, where following the arrival of [then], the labor of deal has been settled and paid for 2018 in November.

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Operator [38]

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Our next question comes from Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [39]

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This question is about KLM. Can you just update us on what the situation is with the labor pensions? Are they all over, give or take, the caterers, who I think are still depriving the poor KLM passengers of fine food? But what's happening with the other crew groups at KLM? And then can you just elaborate a little bit on this EUR 10 million payment to Delta in the quarter from Air France relating to the strike? That -- can you explain how that works? And then slightly related to that, does that play across to the North Atlantic unit revenues in any way? Because if we just compare your North Atlantic unit revenues this quarter with your compatriots, who's reported over here in London, they look to be trading rather better on the North Atlantic than you. I appreciate they've got a different capacity trend than you, but it looks quite different.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [40]

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If okay, may I give the floor to Erik, our CFO for KLM.

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Erik R. Swelheim, KLM Royal Dutch Airlines - CFO & Member of Board of MDs [41]

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Okay, Andrew. For the labor agreements in KLM, you know we have 3 groups. We have agreement with all ground unions. It's looking very positive for the cockpit unions. The biggest problem is with the cabin unions. And we have not found an agreement yet. We don't think there's a lot of willingness to strike, but we may expect some actions in the coming weeks. But we also are positive to find an agreement in the coming weeks. For catering, it's a bit different. Catering, it's more a national theme where Schiphol was very much used to get some exposure. Also that is not yet agreed. I've no news on that one. But it's relatively small for KLM. Indeed, it's not our long-haul fleet. It's not that flight. It's mainly the -- as you've experienced, the European regional fleet where we had to decide on some days to fly with minimum catering.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [42]

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Any the impact coming from the JV, Steven?

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Steven Zaat, Air France-KLM SA - EVP of Finance - Air France [43]

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Yes, it is related actually to the EU compensation, which Delta paid on behalf of us. So it has nothing to do with something else. It is just to pay off what they paid for us on the EU 246 combination.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [44]

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So is it fair to say that, that is a pressure on the cost line of the group?

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Erik R. Swelheim, KLM Royal Dutch Airlines - CFO & Member of Board of MDs [45]

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If it's impacted the unit cost?

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [46]

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Yes.

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Erik R. Swelheim, KLM Royal Dutch Airlines - CFO & Member of Board of MDs [47]

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Yes, that's impacted the unit cost. It's a one-off in the unit cost this quarter.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [48]

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Okay, cool. And then can you explain -- or can you give us any color as to why the North Atlantic is down 2% and (inaudible) IAG have produced positive RASK on the North Atlantic?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [49]

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So first, we don't -- I do not -- I am not in mind, sorry. What is the capacity development of BA during the quarter . . .

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [50]

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(inaudible) flat.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [51]

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That's 1.7%, I think, by half. If you look at what has been developed by IAG and the North Atlantic. So if you compare the minus 1.7% to the plus 4%, there is clearly a gap in terms of development of capacity, which can contribute to explain the gap in terms of unit revenue. Second, also, you can have a difference in terms of 2018 days. The Q3 2018 North Atlantic was extremely strong into Air France-KLM, plus 4%, while I remember that IAG was flat during the same quarter, just like how that you would check easily the numbers I report. So we are also different in terms of base effect. Yes. So base effect, plus development different in terms of capacity can explain probably RASK part of the explanation. Compared to the 0% of BA. And what I show you in terms of unit revenue, minus 0.8%, so [impacted Air France]. Then after that, I know that 2 are corrected for currency, but we have also that the nominal currency for BA, which is pounds and euro [and little bit of the dollar allowing for] a bit of a different impact during the period. So I can just say that for the time being. Having said that, and as somebody living in London, you know that perfectly it is true that the level of competition on the North Atlantic route out of London and out of Continental Europe is a bit different. You know the story that out of Paris, you have 10 or 9 now, 9 airlines flying between Paris and New York. So clearly, the intensity of the competition is a bit stronger out of Continental Europe compared to what it is in London, [contest] is for airport.

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Operator [52]

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We'll now take our next question from Johannes Braun from MainFirst.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [53]

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3 questions from me. Firstly, could you share any early findings of the McKinsey study that was conducted in September, in particular, what the potential for cost savings is for 2020? Secondly, on the 2.5% capacity increase you are planning for the winter season, especially the 4% increase for long-haul. Isn't that a bit optimistic in light of the still shaky demand environment? Just wondering if this is a reflection of recent insolvencies in Paris as well the [reigning] market share fights or whether you expect demand to recover to that extent in 2020? And then lastly, Aéroports de Paris has applied for increasing airport fees for the next regulatory period. I guess this is not in line with what you want. So just wondering what your line of argumentation is here?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [54]

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Okay. I take the second one and Steven will take -- 1 and 3, sorry. It's 2.5% including Transavia and again, Transavia, as you know, and based on the relatively good performance, is increasing more than the rest of the group. If you exclude Transavia, we are rather close to 1% to 2% for the airline. So it is more reasonable and not the 2.5% you just described.

Concerning McKinsey, Steven?

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Steven Zaat, Air France-KLM SA - EVP of Finance - Air France [55]

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Yes. So the full transformation, which we will present next week, is based on the McKinsey study. So we started with the McKinsey study and we did our own deep dive on where we think we can reduce further costs and increase revenues, which we will present next week.

Regarding Aéroports de Paris, yes, of course we are not happy with the development on the tariffs. For the next year, it was already in the framework. We are currently discussing the framework for the years after 2020. And our opinion is that we should go for a further reduction in tariffs instead of increasing the tariffs. So we are in that discussion with them. Also on the future of Aéroports de Paris in terms of construction. So we are also having, let's say, all of our wishes in terms of improving the performance of Aéroports de Paris.

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Johannes Braun, MainFirst Bank AG, Research Division - Director [56]

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So you are not being in favor of increasing fees, is that right?

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Steven Zaat, Air France-KLM SA - EVP of Finance - Air France [57]

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Of increasing fees, that's right.

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Operator [58]

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We will now take our next question from Malte Schulz from Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [59]

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First of all, if you can maybe put a little bit more color also on your [apec] outlook? Or what do you think, particularly, I mean for the rest of the year? And as we look a little bit into 2020? Do you have any signs -- is it kind of recovered, particularly in the China demand? Then, on the contrary, which is then if there's no recovery, would you also adjust your capacity a little bit more in this region? And then additionally, I mean you're also targeted that you look already into cutting further on Air France domestic capacities. But is there also anything -- I mean with the new agreement, you've got also more flexibility on your mid-haul, long-haul size. Is there also something that you plan to restructure kind of your medium-haul network out of Air France particularly out to Africa? I mean maybe exchanging wide bodies to narrow bodies just to kind of [mitigate] on cost there?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [60]

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For the fourth quarter, there will be a bit less capacity to Asia. We expect due to the base effect, probably LATAM will be better than what we had seen the beginning of the year. And the first indication we have for the month of October was not too bad, I would say. Yes, if you want the flavor today. We have in terms of freight revenue. This is what I can -- what I can tell you. Then I missed the second question, sorry? Changing the network and the strategy medium-haul. Okay. I propose that for this type of thing, we wait for the Investor Day next week. It is typically the type of question that we can answer together with Ben, Anne and Peter.

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Operator [61]

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(Operator Instructions) We'll now take our next question from Michael Kuhn from Societe Generale.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [62]

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There was one, I would say, worrying trend in the unit revenues in the third quarter, and that was that premium, I think, for the first time in many quarters, underperformed economy by 1 full percentage point. Could you provide us some more details on what drove that development? Was that French corporate? Or was that also driven by point of sales outside France? And sticking with that topic. Is that a trend that you continue to see into the fourth quarter? So a sustained weakness in premium demand? Or would you see that rather as a temporary dip in the third quarter and recovering soon?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [63]

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Of course, this is a difficult question. It's clear that the corporate bookings segment is soft today with European corporate clients. We are seeing some cuts in travel budgets. And you'll see that when you speak to bankers, and you know that, of course, if you follow all the sectors that for the time being, let us say, many sectors, situation is not dramatic, but there is a lot of uncertainty. And as a result, it's true that we have seen this new behavior of some -- it's mainly European, I would say, but also French, that we have seen a softer trend in terms of demand for travel of corporate clients. It's also true for French with a negative demand trend, which is visible since the beginning of the summer. So now I cannot tell you if it is for how long.

You know the source of uncertainty right now. You know also today the specific situation of, I would say, a relatively significant numbers of countries. If you do business with Lebanon, with Argentina, with Brazil, with Hong Kong, with Algeria, with [China], I don't know that you are really inclined to do these trips right now and you will wait a bit before to reopen your discussion with your business partners in these countries. I think that the risk today -- I forgot Ecuador. I forgot Chile. Okay, so I will not make the long list of the countries, which are right now a bit in a -- let's just say, in a bit unstable situation. We hope that they will all find a way to recover and to stabilize politically and economically the situation.

But let's just say that for people like us, which are supposed to help people traveling between all these countries, we can just admit that the situation is not optimal. And it can be one of the explanation behind the softer demand for premium. We have observed out of the European market and out of the French market. When you look to the comment of Delta, if you come back to the North Atlantic slide, I already indicated that the non-U. S. point-of-sale has been impacted by uncertain economic outlook. So I think that it is not only our feeling, but it is a feeling which is shared by some of our colleagues.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [64]

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Maybe just one quick follow-up. As you mentioned the corporate, is there a particular weakness in some sectors, so financial companies or automotive companies? Or is this rather a broader weakness across the board?

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [65]

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I have not (inaudible) what are the most impacted sectors. I would say automotive, surely. Well, probably the (inaudible) Fiat can create new opportunities of travel for some managers of this sector, but globally -- but again, I take the comment of Andrew some minutes ago concerning the good difference of British Airways and Air France carriers in terms of future revenue to the North Atlantic. But when you look to the numbers published by British Airways this morning, Asia Pacific is, in terms of RASK corrected for currencies, minus 3.7%; Latin America, minus 9%; Europe, minus 1%; and [America], which should be, I don't know what; Asia, I don't know. I mean Africa, east -- okay, well, I don't know what they are (inaudible). I would say that all in all, Asia, we had 2.8%. British Airways is minus 3.7% domestic -- sorry, Europe, they are at minus 1%. We are at 0. North America, it's true, there is a difference in Latin America, we are at 7%, they are at minus 9%.

So I would say that globally speaking, if I just take -- I'm not trying to open discussion with our colleagues from British Airways, but let us say that we are, I would say, a bit facing the same environment. But of course, we know the specificity of the London U.S. routes, where British Airways is beneficiating on the congestion of the airport and its big market share on the specific routes. But the idea is that British Airways (inaudible) where we are facing softer demand coming from the business travelers. I think it's probably a reality, which is shared by a lot of airlines through the industry. Let us wait also for the result of Lufthansa next week to compare, but I think it's -- seems something which is not a good news but shared by a lot into the industry. So we take the last question, if you want.

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Operator [66]

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There are no further questions in the queue.

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Frédéric N. P. P. Gagey, Air France-KLM SA - CFO [67]

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Thank you for your attendance, I suppose that we will meet a lot of you next Tuesday for the Investor Day into the beautiful city of Paris. Not sure that the weather would be sunny, but I am sure that the meeting would be interesting. So have a nice weekend. Thank you.

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Operator [68]

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Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.