Air France KLM : Full year 2018 results

20 February 2019

FULL YEAR 2018 RESULTS

Resilient results despite the impact of strikes and fuel bill increase

FULL YEAR 2018

•  More than 100 million passengers carried, the leading European group for long-haul traffic,

•  Unit revenues per ASK up 1.1%,

•  Revenue growth in all business segments, with a double-digit increase at Transavia,

•  Unit costs increase by 0.6% at constant currency, fuel and pension charges1,

•  Operating result at 1,332 million euros, the strong commercial performance and cost control helping to partly offset the Air France strikes in the first half of the year and the fuel bill increase1,

•  Further reduction in Group net debt, down 195 million euros to 6.2 billion euros and Net debt/EBITDA ratio at 1.5x.

OUTLOOK 2019

•  The Group will continue to work on yield improvement within the context of an anticipated fuel bill increase. Based on the current data for the Passenger network:

  •  Long-haul forward booking load factors from February to April are on average stable compared to last year, and positively oriented for the early summer,

  •  Passenger unit revenues at constant currency expected below last year for the first quarter 2019 partly due to the Easter shift,

•  Unit cost (CASK) reduction between -1% and 0% at constant currency and fuel price,

•  Net debt/EBITDA ratio below 1.5x.

The Board of Directors of Air France-KLM, chaired by Anne-Marie Couderc, met on 19 February 2019 to approve the financial statements for the Full Year 2018.

"With the largest long-haul network operating out of Europe, the Air France-KLM Group has reached an important milestone by carrying more than 100 million passengers in 2018", commented Benjamin Smith, CEO of Air France-KLM. "The strong performance of our front-line teams and continued cost control helped partly offset the impact of strikes at Air France in the first half of the year, as well as significant fuel headwinds. In the past five months, we have made significant progress in reinforcing the trust and dialogue with our employees in both Air France and KLM, allowing for a shared strategic approach to accelerate the Group's profitable development. I am particularly pleased that yesterday we reached the last step in this phase, the majority of Air France pilots having approved the proposed categorical agreement. We have also strengthened our offer by simplifying our brand portfolio and initiating an improvement in our network and fleet management. These first achievements pave the way for our ambition to regain a leading position in Europe and worldwide."

Air France-KLM Group	Fourth Quarter	Full Year
	2018 Change1	2018 Change1
Passengers (thousands) Unit revenue per ASK2 (€ cts) Operating result (€m) Net income - Group part (€m) Adj. operating free cash flow (€m) Net debt at end of period (€m)	24,462 +3.4% 6.46 -0.4% 40 -188 -218 +710 -12 +90	101,447 +2.8% 6.61 +1.1% 1,332 -591 409 +246 115 -562 6,164 -195

1 Since 1 January 2018, the Air France-KLM Group has applied the new IFRS 9, 15 and 16 accounting standards. For the purposes of comparison, the Group's consolidated financial statements have been restated as of 1 January 2017.

2 Passenger and Transavia, change at constant currency

1

Full Year 2018 business review

Network: Revenue increase driven by higher unit revenues and operating result impacted by strikes

Network	Fourth Quarter	Full Year
	2018 Change Change constant currency	2018 Change Change constant currency
Capacity (EASK m) Total revenues (€m) Scheduled revenues (€m) Unit revenue per EASK (€ cts) Unit cost per EASK (€ cts) Operating result (€m)	82,325 +2.9% 5,727 +3.7% +4.1% 5,403 +2.6% +3.0% 6.56 -0.3% +0.1% 6.52 +3.0% +2.3% 34 -165 -112	329,199 +1.8% 22,943 +1.6% +4.1% 21,732 +0.8% +3.4% 6.60 -1.0% +1.5% 6.30 +1.8% +3.6% 994 -561 -382

Full Year 2018 combined Passenger and Cargo revenues increased by 4.1% at constant currency to 22.9 billion euros driven by capacity growth and positive unit revenues. The operating result amounted to 994 million euros, a 382 million euros decrease at constant currency compared to last year, mostly due to the strikes in the 2018 first half and to the fuel increase.

Passenger: Long-haul and medium-haul hubs contributing to positive unit revenue performance

Passenger network	Fourth Quarter	Full Year
	2018 Change Change constant currency	2018 Change Change constant currency
Passengers (thousands) Capacity (ASK m) Traffic (RPK m) Load factor Total passenger revenues (€m) Scheduled passenger revenues (€m) Unit revenue per ASK (€ cts)	21,110 +2.2% 72,970 +3.2% 62,835 +3.5% 86.1% +0.2 pt 5,092 4,849 6.64 +3.7% +4.3% +2.6% +3.1% -0.6% -0.1%	85,619 +2.0% 292,184 +2.1% 255,405 +2.8% 87.4% +0.6 pt 20,655 19,743 6.76 +1.3% +3.9% +0.6% +3.2% -1.5% +1.1%

Full Year 2018 capacity increased by 2.1%, mainly driven by the South American, North Atlantic and Asian networks with respective growth of 8.6%, 3.0% and 2.1%.

The long-haul network delivered a solid performance with an increased load factor and a unit revenue1 up 1.2%. The additional capacity has been well absorbed by the robustness of demand and thanks to the strong performance of the commercial teams.

•  The North America network benefitted from robust demand in the premium segment and posted a 2.9% unit revenue increase in Full Year 2018.

•  The Asian network delivered a solid performance, with Full Year unit revenue growth up 2.0%, driven in particular in the second half of the year by Japan and South Korea.

•  The 8.7% additional capacity on South America was driven by growth on the Andean routes and the opening of the Fortaleza service. The new routes performed in line with expectations and the Full Year unit revenue performance was flat, despite a weak second half of 2018 due to economic difficulties in Argentina and political uncertainties in Brazil.

•  The performance of the other long-haul networks was relatively stable compared to last year.

1 At constant currency 2

The medium-haul network delivered a unit revenue increase of 1.5% for Full Year 2018: the unit revenue was up 2.8% on the medium-haul hub network, and down 2.6% on the point-to-point network mainly due to the competitive pressure from rail.

Cargo: Total revenue growth of 6.4% at constant currency on stable capacity

Cargo business	Fourth Quarter	Full Year
	2018 Change Change constant currency	2018 Change Change constant currency
Tons (thousands) Capacity (ATK m) Traffic (RTK m) Load factor Total Cargo revenues (€m) Scheduled cargo revenues (€m) Unit revenue per ATK (€ cts )	303 +0.7% 3,631 +0.7% 2,321 +1.8% 63.9% +0.7 pt 635 554 15.25 +3.4% +3.1% +2.4% +2.0% +1.6% +1.3%	1,137 -0.1% 14,365 +0.1% 8,657 +0.7% 60.3% +0.4 pt 2,288 1,988 13.84 +4.1% +6.4% +3.0% +5.3% +2.9% +5.2%

In a context of stable Cargo network capacity, revenues grew by 6.4% at constant currency thanks to a strong unit revenue performance. The trading environment proved better than expected particularly over the summer period, and the Asian and American networks made a strong contribution to the results. Higher yields in both full freighters and bellies resulted in an overall unit revenue increase of 5.2% at constant currency for Full Year 2018.

Transavia: Strong growth and a record high margin

Transavia	Fourth Quarter	Full Year
	2018 Change	2018 Change
Passengers (thousands) Capacity (ASK m) Traffic (RPK m) Load factor Total passenger revenues (€m) Unit revenue per ASK (€ cts) Unit cost per ASK (€ cts) Operating result (€m)	3,352 +11.7% 6,817 +14.4% 6,199 +15.0% 90.9% +0.5 pt 309 +12.0% 4.51 -0.9% 5.13 -0.1% -42 -7	15,828 +7.1% 30,850 +8.4% 28,392 +10.1% 92.0% +1.4 pt 1,611 +12.2% 5.18 +3.6% 4.73 +3.2% 139 +21

Transavia carried 15.8 million passengers in Full Year 2018, an increase of 7.1% compared to last year. Full year 2018 saw the launch of several new routes and a strong capacity growth of 8.4%, with an acceleration in the fourth quarter to 14.4%. Unit revenues increased by 3.6% compared to last year. The Full Year 2018 operating result stood at 139 million euros, an improvement of 21 million euros compared to last year and the best result since the launch of the Transavia businesses. The Transavia France performance stood out with capacity growth of more than 20% and an operating margin of 9.1%, a year-on-year improvement of 1.0 point.

Maintenance: Order book increase continuing

Maintenance	Fourth Quarter	Full Year
	2018 Change Change constant currency	2018 Change Change constant currency
Total revenues (€m) Third party revenues (€m) Operating result (€m) Operating margin (%)	1,206 +10.7% 490 +5.4% +2.9% 46 -18 3.8% -2.0 pt -19 -2.1 pt	4,349 +4.7% 1,920 +6.6% +11.0% 195 -57 4.5% -1.6 pt -42 -1.4 pt

Maintenance revenues increased compared to last year with third-party revenues up by 11.0% at constant currency due to the inflow of new contracts. The Maintenance order book stood at 11.4 billion dollars at the end of the 2018, an increase of 0.6 billion dollars compared to the end of 2017, driven by the signature of several new NextGen Components and Engine contracts.

The operating margin expressed as a percentage of total revenues stood at 4.5%, a decrease of 1.4 points at constant currency compared to last year, partly explained by one-offs and competitive pressure for the component business.

Air France-KLM Group: Full Year revenue growth of +5.0% at constant currency, operating result at 1,332 million euros

Fourth Quarter	Full Year
2018 Change Change constant currency	2018 Change Change constant currency
Capacity (EASK m) Capacity excl. Cargo (ASK m) Traffic excl. Cargo (RPK m) Unit revenue per EASK (€ cts) Revenues (€m) EBITDA (€m) Operating result (€m) Operating margin (%) Net income - Group part (€m)1	89,142 +3.7% 79,787 +4.1% 69,034 +4.5% 6.41 -0.6% -0.2% 6,538 +4.1% +4.3% 776 -193 -147 40 -188 -140 0.6% -3.0 pt -218 +710 -2.3 pt	360,049 +2.4% 323,034 +2.7% 283,797 +3.5% 6.48 -0.8% +1.5% 26,515 +2.5% +5.0% 4,217 -546 -358 1,332 -591 -408 5.0% -2.4 pt 409 +246 -1.9 pt

In 2018, the Air France-KLM Group posted an operating result of 1,332 million euros, down 591 million euros compared to last year, including a negative impact of 355 million euros from the Air France strikes in the first half.

The rise in the Group's unit revenues contributed positively to the operating result for 353 million euros excluding currency effects, and absorbed more than half of the significantly higher fuel bill compared to last year.

The fuel bill including hedging amounted to 4,958 million euros for Full Year 2018, up 451 million euros and 665 million euros at constant currency, due to the increase in the fuel price. The fuel hedges resulted in a gain of 649 million euros.

1 Net income - group part one-off elements:

- Positive effect after tax of €47 million in Q4 2017 and €386 million in FY 2017 resulting from IFRS 16 restatement of lease debt in dollars

- Non current expense impact of €233 after tax in Q3 2017 (Cabin) and €1,195 million after tax in Q4 2017 (Pilot) related to KLM pension plan de-recognition.

Excluding these one-offs, the change of Net income - group part Q4 2018 is €-438 million compared to last year and -€796 million for the Full Year 2018 compared to last year.

Currencies had a negative 623 million euro impact on revenues and a positive 440 million euro effect on costs including currency hedging. The net impact of currencies thus amounted to a negative 183 million euros for Full Year 2018.

Full year unit cost up 0.6%, in line with the target range of 0 to +1%

On a constant currency, fuel price and pension-related expense basis, unit costs were down -0.9% in the fourth quarter 2018, despite a 50 million euro impact from the Air France annual wage agreement, fully booked in the fourth quarter.

For the Full Year 2018, the unit cost was up 0.6%, consistent with the Full Year target range of 0 to +1%, and down -0.2% excluding the impact of the strikes.

Improvement in labor productivity and implementation of annual wage agreements in Air France in the fourth quarter 2018

Productivity measured in EASK per FTE increased by 2.2% in the fourth quarter 2018 while capacity increased by 3.7%.

Full Year 2018 productivity, measured in EASK per FTE, increased by 1.0% while capacity increased by 2.4%. Compared to last year, the average number of FTEs increased by 1,200 including +250 Pilots and +450 Cabin Crew in response to the capacity growth. Ground Staff increased by 500 FTEs, mainly driven by the IT Innovation department, third-party activities in E&M and the Customer Centres.

Net employee costs were up 1.8% in 2018 compared to last year, mainly due to the impact of the wage agreements for Air France and KLM staff.

Positive operating free cash flow and net debt reduction in 2018

In € million	Fourth Quarter	Full Year
	2018 Change	2018 Change
Cash flow before change in WCR and Voluntary Departure Plans, continuing operations Cash out related to Voluntary Departure Plans Change in Working Capital Requirement (WCR) Net cash flow from operating activities Net investments before sale & lease-back* Operating free cash flow Reduction of lease debt Adjusted operating free cash flow **	568 -84 3 +44 236 +136 807 +96 -583 -8 224 +88 -236 +2 -12 +90	3,596 -353 -130 +11 246 -45 3,712 -387 -2,625 -187 1,087 -574 -972 +12 115 -562

* Sum of 'Purchase of property, plant and equipment and intangible assets' and 'Proceeds on disposal of property, plant and equipment and intangible assets' as presented in the consolidated cash flow statement.

** The "Adjusted operating free cash" is Operating free cash flow" with deduction of the repayment of lease debt.

Adjusted operating free cash flow: +115 million euros for Full Year 2018

The Group generated positive adjusted operating free cash flow of 115 million euros in 2018, a reduction of 562 million euros compared to 2018. This decrease compared to last year mainly resulted from the strike impact and a net 187 million euro increase in investments.

Net debt reduction driven by adjusted operating free cash flow generation and repayment of lease debt

In € million	31 Dec 2018	31 Dec 2017
Net debt	6,164	6,359
EBITDA	4,217	4,763
Net debt/EBITDA	1.5 x	1.3 x

The Group reduced its net debt to 6,164 million euros at 31 December 2018 versus 6,359 million euros at 31 December 2017, despite the negative impact of the repurchase of 197 million euros of hybrid notes