AIR FRANCE KLM REPORTS FINANCIAL YEAR 2013

QUARTER JULY-SEPTEMBER 2013
 Operating result of 634 million euros (491 million euros at 30th September 2012)  Revenues of 7.2 billion euros (+0.4% and +3.8% at constant exchange rates)
 Further reduction in unit costs

NINE MONTHS TO 30th SEPTEMBER 2013
 Revenues up 1.0% to 19.51 billion euros
 382 million euro improvement in operating result to 183 million euros
 Operating cash-flow of 1.29 billion euros (0.71billion euros at 30th September 2012)
and free cash flow of 500 million euros

OUTLOOK FOR FULL YEAR 2013
 Target of improvement in Second Half operating result in line with that of the First Half maintained
 Reduction in net debt relative to 31st December 2012
The Board of Directors of Air France-KLM, chaired by Alexandre de Juniac, met on 30th October 2013 to
examine the accounts for Third Quarter 2013.

“The Group continued to improve its operating result during this quarter. This is very encouraging since it shows that the roll-out of the measures in the Transform 2015 plan is proceeding in line with our expectation. However, it was considered necessary, last September, to supplement them with additional measures to strengthen the Group within the prevailing uncertain economic environment, particularly in the medium-haul and cargo sectors which are facing major difficulties” said Alexandre de Juniac during the meeting.

Key data

• Restated for revised IAS 19 on pensions applicable since January 1st 2013 and backdated to January 1st 2012
  Quarter July-September 2013
  The operating environment of the third quarter remained difficult and marked by a sharp rerating of the Euro relative to all currencies, limiting the rise in revenues. Transform 2015 continued to bear fruit, leading to a further reduction in unit costs, despite limited growth in global capacity (1.5%).
  Ongoing capacity control
  The group enjoyed a good Summer season in the passenger business, with traffic up 2.5% for a rise in capacity limited to 1.4%. The load factor gained almost one point to 86.9% (0.9 points). Unit revenue per available seat kilometre (RASK) rose 2.7% on a constant exchange rate basis, but was down 0.6% on the back of a significant currency effect. Similarly, passenger revenues rose by 0.7% to 5.73 billion euros, but by 3.9% on a constant exchange rate basis. The operating result of the passenger business stood at 577 million euros (+31%) thanks to a decline in operating costs, including the fuel bill.

Cargo continued to be affected by the economic slowdown and the situation of overcapacity. As a result, traffic declined by 3.8% for capacity down 1.4%. The load factor stood at 60.4% (-1.5 points). Unit revenue per available tonne kilometre (RATK) declined by 9.1% and by 5.2% on a constant exchange rate basis. This sharp decline in revenues (-9.3% to 687 million euros) led to a deterioration in the operating result to -84 million euros (against -69 millions at 30th September 2012) despite significant cost efforts.

Third party maintenance revenues rose 19.5% to 306 million euros. The operating result stood at 54 million euros (51 million euros at 30th September 2012).
The leisure business generated revenues of 397 million euros (+8%) and an operating result of 66 million euros (70 millions euros at 30th September 2012). The other businesses, essentially catering, generated third party revenues of 88 million euros and an operating result of 21 million euros.

In total revenues amounted to 7.21 billion euros, up 0.4% and 3.8% at constant exchange rates. Unit revenues measured in equivalent available seat kilometres (EASK) declined by 1.5% (+1.7% on a constant currency basis).

Further reduction in unit costs

Unit costs measured in equivalent available seat kilometres (EASK) declined 3.8% and by 1.5% on a constant currency and fuel price basis, for production in EASK up 1.5%. Operating costs declined 1.7%.The main features were as follows:
 The fuel bill fell 109 million euros to 1.86 billion euros mainly on the back of a favourable currency effect (-6%), with the rise in volumes offset by economies linked to the fuel plan.
 Employee costs declined 1.6% to 1.86 billion euros mainly reflecting the reduction in headcount (-48 million euros).
 Other costs increased by 0.9% under the effect of a rise in maintenance purchases (+21.4%) resulting from a 19.5% increase in third party business.

The operating result stood at 634 million euros and the adjusted operating result at 712 million euros, implying an adjusted operating margin of 9.9% (respectively 491 million euros, 577 million euros and 8.0% at 30th September 2012).

Air France company recorded a restructuring provision of 216 millions euros under non-current charges within the framework of the complementary voluntary departure plan. Net interest costs amounted to 98 million euros. Other financial income and costs amounted to a positive 108 million euros (215 million euros a year earlier) including a positive change in the fair value of derivatives of 100 million euros, versus a positive change of 210 million euros a year earlier.

After income tax of 140 million euros and a negative 137 million euros relating to the share in the results and the depreciation of the residual value of Alitalia shares, the net result, group share, stood at 144 million euros (versus 296 million euros at 30th September 2012). Per share, the net result was 0.49 euro and the diluted net result was 0.41 euro (respectively 1.0 euro and 0.82 euro at 30th September 2012).

Nine months to 30th September 2013
In the passenger business, capacity and traffic rose by 1.4% and 2.2% respectively during the first nine months of 2013. The load factor gained 0.6 points to 84.2%. Unit revenue per available seat kilometre (RASK) declined by 0.5%, but rose 0.9% on a constant currency basis.

In the cargo business traffic fell 5.5% for capacity down 3.2%, leading to a 1.5 decline in load factor to 62.1%. Unit revenue per available tonne kilometre (RATK) declined 5.5% and by 3.7% at constant exchange rates.

Total revenues amounted to 19.51 billion euros, up 1.0% after a negative currency impact of -1.4%. Operating costs declined by 1.0%.

The operating result stood at 183 million euros (-199 million euros at 30th September 2012) while the adjusted operating result was 420 million euros, implying an adjusted operating margin of 2.2%.

The net interest charge stood at 299 million euros, above the level of 2012, mainly on the back of the latest bond issues. Other financial income and costs stood at a positive 18 million euros (+37 million euros at 30th September 2012).

The net result, group share, was -649 million euros (-980 million euros at 30 September 2012).

Per share the net result and the diluted net result stood at -2.19 euros against -3.31 euros at 30th September 2012.

Free cash flow of 500 million euros

In the first nine months tangible investments stood at 959 million euros (1.26 billion euros at 30th September 2012) and lease-back operations at 170 million euros (650 million euros at 30th September 2012); operating cash flow was positive at 1.29 billion euros, and the group generated operating free cash flow of 498 million euros. The group had cash of 4.3 billion euros and fully available credit lines of 1.8 billion euros.

Net debt3 stood at 5.40 billion euros against 5.97 billion euros at 31st December 2012, a decline of 560 million euros. The financial ratios4 improved with a net debt/EBITDA ratio on 12 sliding months of 4.3 at 30th September 2012 down to 3.1 at 30th September 2013.

Outlook for Full Year 2013

Based on a fuel bill of 2.3 billion dollars (forward curve at 18th October 2013) and within an economic environment that remains highly volatile, the Group maintains its target of an improvement in second half operating result in line with that of the first half.

Update Transform 2015

Transform 2015 on track

All the measures defined in 2012 in the framework of Transform 2015 have been fully implemented within the pre-defined timetable: modest capacity growth, lower investments, headcount reduction, the implementation of new working agreements and improvements in productivity. At the same time the group invested in upgrading the quality of its products and services offered to customers. These measures have led to an improvement in the group’s operating result as of the second half of 2012, including in medium-haul and cargo, and a reduction in net debt.

Nevertheless, in persistently difficult economic environment, the turnaround of the medium-haul and cargo activities is not progressing sufficiently. As a result, at the September 2013 review, which was provided for when the plan was initiated, the group decided to adopt additional measures.

Additional measures
These measures include both industrial and headcount actions.
 Industrial measures
Industrial measures in medium-haul mainly relate to the Air France point-to-point activity in France:
 Adjustment of the network with a complementary reduction of the fleet by two aircraft at Orly and seven aircraft in the provincial bases as of 2015;
 Stations in France: reorganisation of processes and increased use of sub-contracting;
 Development of Transavia with a planned increase in the fleet of five aircraft per annum until 2016;
 Reduction of the fleet at Hop!
In cargo the industrial measures are the continued reduction in the full freighter fleet at Air France and KLM (-4 aircraft taking the fleet to 10 aircraft in 2015) and the sub-contracting of the Orly cargo station.
3 Definition in the 2012 reference document on page 151. Reconciliation table available in the results presentation.
4 In view of the significant volatility in shareholders’funds introduced by the application of IASD 19R, the Group no longer considers the balance sheet debt ratio a relevant indicator. See financial cover ratios on page 151 of the 2012 Registration Document.
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 Headcount measures

The industrial reorganisation of the medium-haul and cargo activities at Air France will entail a headcount reduction of 2,880. To deal with the surplus headcount among ground staff, Air France presented a voluntary departure plan covering 1,826 jobs. The departures will be staggered between February and December 2014. The new voluntary departure plan should generate savings of some 150 million euros on an annualised basis. Pilot (350 FTEs) and cabin crew (700 FTEs) over-staffing will be addressed in 2014 through other measures. Elsewhere, the company is also seeking to better adapt its organisation to the seasonality of the business, which has accentuated in recent years.

These additional measures, to be put in place during 2014, will deliver their full effect in 2015. However, they should enable, in 2014, a significant reduction in medium-haul and cargo losses, but without enabling them to break even, as initially targeted. As a result, in an environment of low growth and high oil price and currency volatility, and in spite of the strong improvement in the long-haul and maintenance activities, the group expects EBITDA in 2014 to be around 2.5 billion euros, at the bottom of the targeted range, while the two billion euro reduction in net debt will be achieved in 2015.