Air France-KLM SA (OTCPK:AFRAF) Q3 2022 Earnings Conference Call October 28, 2022 2:30 AM ET
Company Participants
Benjamin Smith – CEO
Steven Zaat – CFO
Marjan Rintel – CEO, KLM
Anne Rigail – Deputy CEO & CEO of Air France
Conference Call Participants
Ruxandra Haradau-Doser – Kepler Cheuvreux
Sathish Sivakumar – Citigroup
Jarrod Castle – UBS
Muneeba Kayani – Bank of America Merrill Lynch
James Hollins – BNP Paribas Exane
Alexander Irving – Sanford C. Bernstein & Co.
Sumit Mehrotra – Societe Generale Cross
Johannes Braun – Stifel
Operator
Good morning, and welcome to the Air France-KLM Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Ben Smith and Stevens Zaat. Please go ahead, sir.
Benjamin Smith
Okay. Thank you. Good morning, everyone and thank you for joining us for this presentation of the Air France-KLM Group’s results for the Third Quarter of 2022. I am joined by Steven Zaat, our CFO; Anne Rigail, Air France’s CEO; and Marjan Rintail, KLM’s CEO. As usual, I will start by presenting the highlights of the quarter, then I will give the floor to Steven for a detailed presentation of our results and the outlook for the quarter, before concluding the presentation myself and opening the Q&A session.
First, I’d like to thank all of my colleagues across our airlines and business units for their hard work and dedication over the last three months. They did their very best to accommodate our customers throughout the summer season, which proved particularly busy and challenging this year.
Slide 3, before diving into the Group’s performance, I’d like to start by looking at the airline industry at a macro level. Just trying to get the slides going here, sorry. The graph on the slide shows that overall traffic to and from Europe, for the industry as a whole, has been catching up with capacity. Thus, closing the load factor gap with 2019.
As expected, summer demand has been strong after a gradual easing of health restrictions and customers returning in great numbers, putting the entire airline value chain under pressure. For the remainder of the year, the expectation for the industry is that capacity will continue to increase, albeit at a slightly slower pace in line with the evolution of demand and in spite of a still volatile market and geopolitical conditions.
Turning now to Slide 4. Air France-KLM has been preparing for months for this crucial summer season and I’m proud of the way the group has managed to achieve its roadmap for this period. Despite the operational difficulties across our global network and an industry wide context of staff shortages, severe disturbances and local strikes affecting some key industry players and airport service providers, we were able to limit the number of late cancellations.
This is largely thanks to the outstanding work of our colleagues across our airlines and business units. They worked hard to deliver the best services to our customers and I would like to thank them again for their commitment and dedication.
Overall, our groups airlines were more resilient than our European competitors in maintaining their capacity during the summer. If we take a closer look, operations in France have proven more robust compared to other countries despite isolated disruptions in Paris. KLM, however, was operating in adverse conditions with Amsterdam Schiphol airport requesting a capacity reduction in July.
We worked hard to mitigate these disruptions, for instance, by prioritizing delayed customers over on-time performance or by facilitating rebooking to manage such capacity restrictions. During Q3, we incurred costs for these disruptions to the tune of EUR60 million, slightly lower than in Q2, essentially in the form of compensation to our customers to limit the negative impact on their travel as much as possible. Additionally, the capacity restrictions imposed at Schiphol and strikes in France resulted in EUR225 million in missed revenues.
Now moving to Slide 5. All-in-all, Air France-KLM delivered strong results in Q3. The group posted an operating result of just slightly over EUR1 billion, above its 2019 level before the pandemic. This result performance was mostly driven by favorable travel demand, which our airlines were able to anticipate and manage, thanks to the ramp up of capacity throughout the year.
With load factors reaching 88% over the quarter, we carried almost 50% more passengers than in the same period last year, bringing us closer to our 2019 levels. This combination of strong capacity increases and higher load factors translated to a sharp revenue growth of plus 78% bringing quarterly revenues to EUR8.1 billion, EUR400 million more than in Q3 2019.
Our adjusted operating free cash flow amounted to EUR290 million, thanks to our strong EBITDA generation of EUR1.7 billion, which fully funded working capital, CapEx and lease payments. This good operational performance and solid cash flow generation allowed us to post a positive net result of EUR460 million, which will contribute to further strengthening our balance sheet, our cash position remains solid with one — sorry, EUR12.2 billion in cash and we reduced our net debt by more than EUR2.3 billion since the beginning of the year.
Now moving on to Slide 6. I also wanted to give you an update on the long haul network which continues its upward momentum, thanks to a strong summer demand. In terms of load factor for the premium cabins, example, first and business class, I’m very pleased to say that we are now above the levels of 2019, driven by high yield leisure demand.
The evolution of the load factor for economy and premium economy was also positive as we continue to ramp up throughout the quarter and almost reached its 2019 level. Corporate travel revenue and traffic continued to grow gradually throughout the quarter with a positive yield dynamic.
Now on to Slide 7, I’d like now to focus for a moment on an important strategic achievement this quarter, the great progress we have made on the optimization of our network out of Paris, Orly Airport. The full restructuring of our Orly slots will soon be completed. More than 40% of our slots operated by Air France and HOP, have now been transferred to our lower unit cost airlines, Transavia, which took over some French domestic service and commenced future medium haul long-term greater profit potential routes.
Overall, this repositioning of our slot portfolio saw the share of short haul domestic flights decreasing from 61% of the total portfolio during summer 2019, to 38% in summer 2022, to the benefit of medium haul flights. Although, we’re not yet at full maturity, we expect significant profitability improvement of transferred slots with EUR30 million improvement already yielded on our point-to-point domestic service to-date.
This restructuring effort helped Air France safeguard it’s slot portfolio, while adapting its network to new French regulations, which banned domestic flights on routes operating direct trains of less than 2.5 hours. Further optimization of the Orly slot portfolio will continue with domestic profitability remaining a priority.
Now on to Slide 8. To conclude this introduction, let’s now take a closer look at the performance and achievements of our airline and business units. Starting with our passenger business, I’m very pleased to announce that for the first time since the beginning of the COVID crisis, both Air France and KLM have returned to double-digit operating margins. This solid performance is of course linked to the strong rebound in demand. I also see it as a result of the continued efforts made by the two airlines to always remain the preferred option for customers.
To do this, they are constantly innovating and reinventing themselves to offer a truly differentiated experience to customers. These efforts were reflected again in this quarter with the launch of the new KLM premium comfort class and the award of the Best Airline for the West European region to Air France by Skytrax. Transavia is also enjoying a strong momentum with capacity well above 2019 levels.
The French arm is well on track with its growth plan with a capacity close to 50% higher than in 2019, thanks to the expansion of its fleet. After assigning of a strategic partnership agreement with CMA CGM before this summer, our cargo teams are now actively working on shaping the setup of our future cooperation with CMA CGM. This strategic commercial partnership is expected to generate significant revenue synergies, including the joint design of the full freighter networks and enhanced products and service mix opportunities.
To accelerate our efforts in decarbonization, the cargo teams have also launched a new option for their customers, allowing them to adjust the level of sustainable aviation fuel used for each shipment they book, through our proprietary banking system. Customers are given a choice for contribution levels, which will allow them to proportionately reduce their contribution to CO2 emissions when booking.
And finally, maintenance continues to enjoy a positive momentum with a growing number of shop visits and new MRO contracts with well-known airlines, including Virgin Atlantic, ITA and China Airlines. The official signature of a CFMI branded service agreement for LEAP-1A and LEAP-1B engines will see Air France-KLM engineering and maintenance provide the full scope of fleet maintenance, repair and overhaul services for operators worldwide. This allows the group to scale up its presence on the biggest engine MRO market.
After this overall summary of our Q3 performance, I now give the floor over to Steven, who will go into more detail about our results for the quarter.
Steven Zaat
Mercy, Ben. Good morning, everybody. Thanks for taking the time to listen to us. I repeat again, we live in remarkable times. It’s good to see that the financial recovery is continuing in our industry, despite all the operational problems and the very high jet fuel price. In this context, we were able to outperform the results of 2019, but we still have 11% less capacity here and knowing that we cannot fly the real market demand. So, I’m very happy to see this financial recovery going faster than our own expectations, despite the turmoil and that we continue to deliver on the transformation, despite the pressure on costs by inflation.
So let’s go to Page 10, and let’s look first at the topline. If we look at the topline and I will later explain the change versus 2021, we see that we are already EUR500 million higher than before COVID in the Q3 results. So EUR500 million, EUR200 million is coming from passenger business revenues, very strongly supported by high yields. If you compare that to 2019, we talk about the yield rough (ph) of 22% and rough even of 28%, so fairly strong yield, in which we actually are capable to pay off, let’s say, the higher fuel price.
Then the second positive element is the cargo, EUR300 million more than where we were in 2019. And on top, we have EUR200 million higher Transavia revenues, also driven by very strong yields at these three business segments. The only where we still are behind 2019 is in our maintenance business, where we still need to recover our order book, let’s say, we lost some customers due to bankruptcies. They are phased — the fleet is phased out and we need to recover that turnover. I will come back on that later when we discuss the business segments.
If we then go to the fuel bill, up by EUR1.5 billion. It is amazing, mainly driven by a very high jet fuel prices, EUR1.2 billion coming from the jet fuel, literally we have hedges in place for EUR200 million actually covering part of that fuel price increase. And of course, the negative development on the dollar, which also added another EUR100 million to our fuel bill. So, out of this EUR1.5 billion, there is only EUR300 million related to capacity growth compared to 2021.
Then on the salary costs, the salary costs are going up compared to 2021 mainly driven for 50% actually that we don’t have the NOW anymore, so all the furlough schemes in the Netherlands and we have a very limited active [indiscernible] Air France, only EUR12 million. So, in total we lost around EUR250 million of furlough, so if that is actually explaining 50% and then, of course, we need to attract new FTEs to, let’s say, support us in our operations. So even FTE increase of labor staff increase of 2,000 mainly at KLM and at Transavia France.
And then we had the CLA restorage on KLM which added on the labor cost EUR13 million and we have an increase on activity which brings more than EUR150 million, which is actually related to the fact that we have to pay the pilots and cabin crew because we fly more and we have less, let’s say, intake activity, that’s good news actually that we pay for this higher activity our staff.
Then, on the other operating expenses, I will come back on this on the unit cost. We have a lot of pressure coming in from the airports also from the outstations, et cetera., but I’ll come back on that later when I will take a deeper dive on the unit cost. But it ends that we have an EBITDA already above the 2019 level, and if you look at the overriding results, we are having a result above EUR1 billion, which we didn’t reach in 2019, and they’re bringing us to a margin of 12.6% versus 11.9% in 2019.
And of course, that is very important for us, we see now finally strong positive net income close to EUR500 million in which even is a EUR300 million impact of the dollar. So there is, let’s say, a negative impact of the dollar on the balance sheet, which is not a cash out, but which hampers actually our net income. So, if you would exclude that we would even be closer to EUR800 million in net results.
Let’s go then to the business by business line. Let’s first start at the passenger business. So, a capacity growth of 29% and the unit revenue growth of 55% and that’s even excluding the impact of the stronger dollar. If you would take that, then it would be close to 60%. So, very strong unit revenue performance, which is actually coming from two parts, one is the load factor, we had a load factor of 65% last year and we are now having a load factor of 88%, which has been already explained is, let’s say, very close to the 2019 levels.
So that brings in the unit revenue 24% out of the 55% and then on top we have a yield — a yield, which is up 18%, which explains, let’s say, the other parts of our unit revenue. So, it’s good to see that we can grow capacity, we’re filling up further our planes and on top of it we have a stronger price especially to cover all the higher costs coming, especially from the fuel.
Then going to the cargo business, on the cargo business, we already expected of course that our unit revenue would go down. We have now more passenger business planes in and these passenger business planes brings additional cargo capacity, but we know that we fly them with a lower load factor than what we do for instance on the freighter, and especially in the summer, we are looking for, let’s say, more passenger business friendly destinations than cargo destinations. So, an increase of capacity of 16% related to the increase of the bellys and then we have, let’s say, a drop of 19% in unit revenue.
First, the load factor goes from 62% last year to 46%, which is almost in line what we usually have. If you see all the values of belly is let’s say between 40% and 50% in load factor and then, and that is, I think is very good news. You see that also the yield is holding strong and is even up compared to 2021.
So, the yields, the price per ATK is up by 14% compared to 2019, which was a bit, to be honest, a surprise because we expected usually by the mix of cargo that would actually deliver a lower yield because the freighters brings an higher yield than our belly capacity. So, if you take that altogether we are at an operating result of our net circa of EUR851 million, it is an increase of EUR864 million is amazing with a margin of 12%. So, very strong results at both carriers, which I will explain later.
Then we go to our low-cost segments, Transavia. Capacity up 28%, unit revenue up with 32%, the same kind of dynamics as we see on the network. So the load factor is up from 78% to 89%. So, we get closer to the, let’s say, the normal levels in our Transavia business, which is slightly above the 90% in this season. And at the same time, the yield increased with 16%. So, also yield and load factor contributing by a stronger revenues on top of the capacity increase. So, EUR123 million bringing an operating margin of 14% in this, the Q3 is always our best quarter, also for Transavia, also for the network, but especially on the local segment.
And then on maintenance sides, as already explained, we need to recover from the crisis. It’s good to see that we increased our revenues with 39%, driven by the current contracts. So we have more flight hours from our customers and our engine shops are completely full, so that is good news. And on the top of it, you see that we signed also new contracts. We signed five big engine contracts in this quarter and six big components contracts. So that is also to restore our revenue trajectory in the coming years. So, the 13% operating margin better than where we were in 2019 is very promising also for the periods to come.
Then, let’s take a dive into the performance of both airlines. First and it has been already said, I want to give a big compliment to all the staff for this good results. It was a very challenging summer, especially for KLM at Schiphol, it was quite a challenge to, let’s say, achieve and to make sure that we fly the capacity. We want to fly and even we were limited, as you know, by the restrictions at Schiphol. Both airlines are above the 10%. So that is very good to see that both carriers are performing above the 10% and you see more or less the same kind of dynamic.
If we go to Air France, you see the capacity is going up, with 42% and at the same time, you see also that the unit revenue is increasing, so it is 17% additional load factor would come from 71% last year to 88% and there is a yield increase of 16%. So bringing operating yield of EUR570 million, which is already above the 2019 levels, and bringing in a margin of 11%.
Then if we go to KLM then you’ll see that the capacity is less with KLM was ahead actually in putting capacity in place compared to Air France. So, the capacity is up by only 14%, of course also in part by the fact that we have restrictions at Schiphol and we did it with a load factor increase of 26%. So, there was more load factor available for KLM to fill the planes and on top of it, there was a yield of 15%.
So both carriers on the revenue side developing very well and we see that Air France, you see especially is kicking in now the structural cost savings in Air France, reducing further the gap between the two carriers. So the gap is now 3%. Of course, we know that KLM was hampered severely by the impact of the Schiphol restrictions. So both carriers given the current circumstances has a very good operating performance.
Then on the capacity on Page 13, we show the capacity and the load factor developments, but we are getting now, let’s say, to levels in a network of 85%, but the best news is that especially the load factor is keeping up. So in the total network, we end now in September with 87% load factor, where we were in 2019 at 88%, long-haul doing very strong close to 90% in terms of load factor and on the short and medium-haul excluding Transavia, we are currently — we were in Q3 at 84%.
So a small gap still compared to 2019, where we were at 87%. And in Transavia, we boost up of course the capacity over there, and then, you see that we are still able to have a load factor of close to 19%. So I think we put in place, what we could, we were more restricted by the airports. If you could have flown further, we would further increased also the capacity in the third quarter and we were sure we would have filled these planes, because there is a very strong demand in the market, in this quarter, but also actually what we see for the period ahead.
Let’s take a look then on the results per region. And let’s start at the most beautiful part at least in profitability, which is our North America segment. So, the North America segment, we are already above the 2019 levels in terms of capacity. We have the load factor of 91% and we have a very strong yield that is 25% up coming off a very high willingness to travel to Europe from the U.S. and of course also helped by the dollar. So, the very strong pricing in the U.S. brings us very high yield and another exemplary is that our JV with Delta and Virgin is working over there.
Also good to mention to give a little bit of color, that you see that the premium segment is doing very well. So the first-class, we got a 70% load factor, which is 24% up compared to where we were in 2019. And with the yield 24% up then in 2019 and also in the business class we were 4 points above the 2019 levels in load factor.
Then on South America, you see that there is an imbalance between supply and demand. So we see that a lot of South American carriers have restructured their companies. They do that through Chapter 11 and they have reduced the number of planes, but also the number of staff. So, it’s difficult for them to bring back that capacity and on which we profited.
So, we had a yield of 38% compared to 2019 and a load factor of 92% and the only reason that we don’t have all the ASKs and that we have certain destinations, which we still don’t want to fly because they are not profitable enough. So, we fly where we can make the profits and we do that with a very high yield of 38% compared to 2019.
On the Caribbean, you see that we are benefiting from the strong demand from the Dutch and the French haul market for the Caribbean and Indian Ocean. So, we grew our capacity with 22%, still with the load factor close to 90% and a yield increase of 8%. So, we are benefiting there from the big demand we see for these islands.
And then on Africa, always, let’s say, a strong core of our performance. We are still 4% down, but we have a very capacity shortly compared to 2019, is very strong demand for East and West Africa. South Africa is still, let’s say, a little bit weaker, but with load factors of 87% and yields of 21%, we can be very proud of these results and it was actually stable, actually also during our COVID and much more stable than the other regions.
And then, let’s say, my least favorite part at this moment, which is still Asia where we are still having the restrictions in China, in Japan in Q3. So we are at a level 54% lower in ASKs. The load factor is doing well, 86% and also the yield is exploring over there to 47%, but I prefer that we have no restrictions that we can fly the planes even if it will cost something on the yield side.
So, let’s see how that will develop especially, let’s say, in 2023 when these markets will be opening up probably, we don’t know of course the exact timing, but let’s say that these we expect somewhere in 2023 for these markets to open up.
So coming back segment by segment, long-haul very strong performance still 85% ASKs in due to the restrictions in Asia, a load factor close to 90% and the yield 28% and if you then take into account that we also have a very strong cargo, you can imagine the profitability on that segment.
Then on the short and medium haul, still only despite that actually we have no restrictions, we are still at 86% of the capacity. Load factor getting back to the 2019 levels around 85% and the yield up with 18%. So in total, a yield of 24%, still 85% capacity and the load factor close to the 19%.
Then on the unit costs, I would like to stress that despite the circumstances, we are still having very strong unit cost performance. The unit cost is up close to 3% while capacity is 11% below 2019 and a big complement I would make to all the teams that we are able to still keep this unit costs at this level, despite the fact that there is inflation pressure in the market and we don’t have to forget that we paid a lot on customer compensation for all the disruptions, Ben just explained the EUR60 million. So, if you look what are driving it, actually the unit cost, there was an increase of labor cost of KLM which we already explained.
On the airport side, we saw the tariff at Schiphol going up by 9% and we see charge increase of the Air Traffic Controls actually in Europe, and on top, we have very high inflation cost on the outstations. They are up with 17% which is partly coming from a higher dollar, but we see that it is already kicking in this results, and then coming back on the customer compensation where there is 1% up compared to 2019. If you look in the unit costs, in the total unit cost it represents 1% of our unit cost key development.
On the right side, you see that staff cost, we are still below the 2019 levels, we had a 16% decrease in staff in Air France, if we exclude the growth in Transavia France and 11% at KLM. So the continuation and the successful transformation program on Air France, we are able to reduce significantly, let’s say, our staff and at the same time at KLM, you see that we are in line with the capacity decrease for this quarter.
Then, let’s talk about cash, because that is part — that’s a big part of my job. So if you see the cash development, you see that we had a very strong Q3 again. Ben already explained EUR300 million up in terms of cash, despite the fact that in this quarter, we burned as we call EUR800 million of tickets. So, we flew more tickets than we sold tickets. So, despite this working capital development, we were able to have a EUR300 million cash, which brings us for the year-to-date figure, at a cash level of EUR2.5 billion. Of course, the change in working capital is amazing.
So we’re restoring our outstanding ticket and you see that the working capital develop, it’s EUR2.2 billion year-to-date for a main part driven by the increase of the advance ticket sales for EUR1.5 billion and of course, when you start growing your capacity, you get more trade payables. So, you still have to pay some bills. So that’s EUR800 million in that number.
And that brings us that actually our net debt is now from EUR8.2 billion to EUR6 billion, which is, let’s say, at least it is — let’s say, if you compare where we were before COVID, we are getting close, but we don’t — we have to forget we have still some items in the working capital to pay that is related, first of all, to the wage tax in the Netherlands.
I think I already explained, it is still EUR1.5 billion to pay and we still have also Air France to pay on the franchise that we didn’t pay during the crisis for EUR1 billion on the Air France side. But still very positive development on cash and we have a cash at hand at this moment of EUR12.3 billion, which also gives us room now to pay earlier back the state-guaranteed loan on the French side, but I will come back on that in the next slide.
If you look at our trajectory and I go a little bit back where we started. So, we of course, we have, let’s say, big support during the crisis from the states and this with the state guaranteed loans, we started actually to pay back these loans in December 2021. So we started with EUR500 million on the Air France side. We had EUR4 billion of French state-guaranteed loans. So we reduced it from EUR4 billion to EUR3.5 billion last year.
Then KLM paid this just before the summer, EUR900 million, so KLM has totally paid back the full RCF and the Dutch State loan, which are — and so that’s another $900 million and now we are aiming to pay another $1 billion of the state-guaranteed loan on Air France. First, we have a very strong cash and we see also that interest rates are creeping up.
If you look at our total gross debt, 40% of our debt is floating and out of that 40%, 30% is related to the state-guaranteed loan. So we want to reduce that exposure. If we pay EUR1 billion back to the banks, then we are at 30%. For the planes, actually, most of our plane financing is done on a fixed rate. So, we fix the rate when the rates were very low, which is very favorable for the period to come.
Then we are still aiming for possible hybrid bonds. We are eyeing on the market for the exact right moment to repay further on the hybrids, which we have with the French State. So there is still EUR900 million to go on the French State hybrid, and we are aiming to put EUR1.2 billion in hybrids into the market, it can be hybrid convertible or state hybrids. So we are ongoing in our restoration of our Group negative equity to, let’s say, to — gap, as soon as possible to a positive net equity. We do that by net profit generation and further asset monetization through quality equity projects where we are working on at this moment.
Then, we go to the outlook. So let’s first go to Q4, we reduced our capacity outlook for Q4. We were — we had a higher outlook last quarter, it is actually due to the imposed capacity ban on departing passengers at Schiphol. For the rest we keep the, let’s say, the capacity as we planned and we are then at 85% if we compare it to 2019. For Transavia, we are — we were already above 100 — we will be at 140 especially due to the Transavia France growth in the fourth quarter, and we still see very healthy yields for the winter season.
If you go to the right of the page you see that for Q4, we already sold three-fourth of our tickets. So, and it’s very close to what we are used to in 2019. So, we were then at 77% on the long-haul. We already sold 75% of all the capacity, which we plan. And for the first quarter, we are aiming actually at a level of 90% capacity. So we are restoring further closer to 2019 and if you look at the long-haul, you’ll see we are even at 91% and we have already sold one-third of these tickets.
For the short and medium haul, it’s a bit different, it is a later booking market. So, we sold 60% which is more or less, let’s say, in line what we see a new behavior that people are a little bit later booking than what they did before. So compared to 2019, we are 65%, so we see still a very strong booking climate. And for Q1, yeah, that is always difficult to say because there is not, people are not booking very much ahead for this market, but still we sold 14% already from this capacity.
And then on Transavia, we are going to capacity levels of over 140% in Q4 and Q1 2023, we sold already two-thirds for Q4 and 21% for Q1. So, still despite the fact that we increased significantly the capacity we are able to, let’s say, quite fill this capacity. Of course, not at the same levels as 2019, but we are 40% higher in capacity. So we need to fill this capacity in the period to come.
On fuels, yes it is everyday another day. So it goes up, it goes down, it goes up, it goes down, we are today, the oil is above $95 per barrel. What you see is that the jet fuel is coming a little bit at lower levels than what we have seen in Q2 and Q3 in the market. So, you see that there is a little bit release of pressure on the fuel price. We were hedged about 70% up to now and we have hedged already 70% for Q4. And if you go for 2023, it’s not on the slide, that we hedged already 32% and for the first quarter, 55% is hedged for the second quarter, more than 40% is already hedged, and it brings that in total we have a benefit this year of $1 billion due to our hedge policy.
So, if we then go to the outlook, so, on the capacity, I think I already guided you. Then on the operating result, we expect an operating result above EUR900 million based on the fuel forward curve of last Friday. We always use the Friday’s to calculate, let’s say weekly our fuel bill, it is a weekly process we have. So the last known calculation including hedges are included in that number and of course it is under the currently foreseen circumstances.
So, we think we will be above EUR900 million for the full year, which is quite an achievement after, let’s say, the difficult period we had in 2020 and 2021 that we see that we are recovering now to results which were used to, of course, it’s still not above the EUR1 billion. It’s not yet at the 7% to 8% margin, but we are going faster, actually in our trajectory than what we had in our trajectory before.
And on the capital expenditure side, we had a guidance of EUR2.5 billion, we reduce it to EUR2.3 billion related to the investment delay for the [indiscernible] at KLM which will move to 2023 and also by a reduced ground CapEx spend.
That’s it from my side, Ben. I give the floor back to you.
Benjamin Smith
Thanks, Steven. So moving now on to Page 23. I’d like to share with you another initiative that we took on our environmental roadmap. We’ve just announced the signing of two multiyear SAF purchase agreements with Neste and DG fuels. These contracts will lead to a supply of a total volume of 1.6 million tons of SAF by 2030, and constitute a further step for the Group to achieve its 10% SAF incorporation targets by this date, with 3% already secured.
Both agreements lead to an average reduction of 80% in CO2 emissions, and are fully compliant with a strict sourcing policy that the Group has put in place. They do not compete with human food or animal feed supply and are not derived from palm oil. By increasing use in demand, Air France-KLM aims to play its part in advancing the commercial scale of SAF production for broad adoption by 2030. These contracts are an important step in the right direction.
Now moving to Page 24, we have delivered strong revenues, more than EUR500 million above 2019 levels with capacity gradually increasing and load factors close to pre-COVID levels. This ongoing recovery has led to a significant improvement of our profitability and of our operating margin now at 12.6%, which is again higher than 2019, which stood at 12%. We also continue to deliver on our financial roadmap and with a solid cash position and a lower net debt down to EUR2.3 billion compared to last December.
Moving forward, we intend to continue our deleveraging efforts with the partial and early redemption of the state-backed PGE [indiscernible] loans for Air France amounting to EUR1.5 billion out of the EUR3.5 billion outstanding. And as described, we have executed on our decarbonization roadmap with a concrete and major step forward on SAF long term purchase agreements.
Now, looking ahead the world that the industry’s environment remained challenging with geopolitical tensions, macroeconomic uncertainties and volatile markets. In such conditions and leveraging on what we have achieved, we need to continue transforming and adapting our business and it is essential that we continue optimizing our operating model for better efficiency and resilience. We will achieve this through genuine and transparent dialog with our employees, who all have shown considerable amounts of dedication and commitment and are an integral part to delivering on our financial performance goals and on our sustainability roadmap.
So, thank you and we are now available to open up our Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will take our first question from Ruxandra Haradau-Doser. Your line is open. Please go ahead.
Ruxandra Haradau-Doser
Yes. Good morning. Congratulations on the strong performance. Three questions, please. First, Schiphol was the most or one of the most disruptive airports in Europe this year. What was the overall financial impact on KLM from the disruptions in the nine months this year and do you expect an improvement of operations at Schiphol Airport in 2023?
Second, what is your expectation for the cargo business in Q4? And sir, could you please provide an update on the discussions related to ITA, there are several other airlines in restructuring or for sale in Europe. What is your view on consolidation in European airline sector and do you expect 2023 to be a decisive year in this respect? Thank you very much.
Steven Zaat
Sorry, we have to distribute a bit the questions amongst ourselves. So, sorry for small delay. If you go to Schiphol, first, as you can see on Page 4, you see that we had EUR60 million in customer compensation, of which EUR30 million was for the Air France Group and EUR30 million was for the KLM Group. So EUR30 million is from that part for KLM or for Schiphol and if you look at the missed revenues, EUR225 million, that is EUR145 million for KLM and EUR55 million for Transavia Netherlands. So it is EUR200 million out of this EUR225 million.
The improvement, I will give that later to Marjan. I will come back on the cargo. Yeah, the other cargo, we still see that actually we expect already that, of course, the market will go down. We still see that the yield is still holding, of course, we bring in more capacity with our belly planes. So, actually, we see same kind of environment of Q3, but the cargo is always very difficult to predict and most of the cargo will be shipped especially in November also, when it’s just before the Christmas season. So we still have to see it. There is not a long-term hooking market as we have in passenger business, but so far so good, I would say. Marjan?
Marjan Rintel
The disruptions at Schiphol airport will hold at least until December hopefully ending March. Schiphol authorities announced they need 800 extra employees at security to solve these problems. So, there will be another waiting moment in December to see if we can increase our capacity. There is a new CEO in Ruud Sondag, looking forward to join him and execute all the plans in place very fast.
Benjamin Smith
And regarding ITA and consolidation in Europe, so there is an exclusivity in place for the two tariffs led bid, which we are a part of, and that is until the end of October. So just coming up. Now as you know, the Italian market is always been difficult and so the discussions and negotiations continue. We are of course studying other consolidation potential opportunities in Europe and elsewhere. So that does continue nothing to announce today.
But what you have seen in the presentation that we’ve shown is that there are some unique opportunities for Air France-KLM to organically grow, which is not always the case with many of our other competitors, you can see on the long-haul what we call the coy (ph) markets. So, this is to the French and Dutch territories around the world and the Caribbean and the Indian Ocean, we have some very attractive growth opportunities.
And now with Transavia France, we were able to re-enter many markets that we had vacated in the past due to profit issues. So if you look at the opportunities for Transavia, first obviously our number one priority is to optimize our slot portfolio at Orly and once that’s done, we can look at other opportunities out of the main French domestic markets, which we’ve mentioned over the last a year or two with you.
So from all the secondary cities, the Air France Group, part of the Air France-KLM Group, we do not have any year round European service out of these seven or eight secondary cities. So, from a consolidation perspective, it’s an organic opportunity for us if it’s too difficult to find a target consolidation that we can integrate in a reasonable way. So, I think we’re in a unique position when it comes to consolidation.
Ruxandra Haradau-Doser
Thank you very much.
Operator
We will take our next questions from Satish Sivakumar. Your line is open. Please go ahead.
Satish Sivakumar
Yeah. Thanks again for taking my questions. I got three questions here. In terms of your capacity growth for Q1, how much further you have like headroom to grow Q2 and Q3 as the demand rebounds. So could you go back to 2019 levels without any constraints both on say labor as well as in terms of the fleet?
And then the second one is around the FX, mainly around CapEx, how much of your yield CapEx is actually hedged for USD exposure, any color on that would be helpful? And the third one is around the U.S. point of sales, given that you are seeing a strong yield out of North America, any color on this bookings have changed versus 2019, how much of your revenue is now actually originated out of U.S. versus 2019. Thank you.
Benjamin Smith
Okay. First of all, the connection is very poor. So, it was difficult for us to understand clearly your question. I think the second and third questions came out relatively clear. So I’ll have Steven answer those and then after, perhaps if you could repeat the first question and we’ll come back to that one.
Steven Zaat
Yeah. Let’s first the dollar hedge. So for Q4, we have hedged of our operational expenses 61% and for 2023, we already had 54% and even for 2024, we already have hedges in place, so that’s 32%. Then on top, don’t forget that we also have hedges in place for our investment. So, we continue to build up hedges, so that at the moment if an aircraft needs to be delivered, we have these hedges in place.
If I understood your first question is, could we have been at 100% capacity, if there were no restrictions. I think that would be a big step in terms of capacity on the ground. Of course, we are already limited by the capacity of the airports. So it needs a big step from the summer period is always a very busy period. So I think we would not be able to have reached 100%, but 100% is very, very far of course for what we have delivered in the Q3.
And then on North America, I heard what you’re saying, but I didn’t completely get your action because I gave a lot of coloring on it. So I gave you already the higher yields, the higher capacity and higher load factor. So of course, we are far ahead of the revenues of 2019. So, I don’t exactly understand your questions. If you look at the total revenues compared to 2019, we are up 30% if that’s your question.
Satish Sivakumar
Yes. Thanks.
Benjamin Smith
And perhaps if you could repeat your first question.
Satish Sivakumar
Sorry for the bad line actually, yeah, Steven did answer my first question on the capacity headroom, how much further you could actually ramp up into 2023 as we go into the summer.
Operator
We will take our next question is from Jarrod Castle. Your line is open. Please go ahead.
Jarrod Castle
Thanks very much. Good morning, Ben and Steven. Just firstly, can you just clarify what’s in that other operating income of minus EUR335 million versus about EUR200 million odd delta versus a year ago because net income a bit light as we move down the P&L. Secondly, are you able to give any kind of color on the scale of the synergies that CMA agreement will bring, it seems like things are on track, but any color on that? And then where are you standing today looking towards your medium-term targets. Do you feel more or less confident when you look at the challenges ahead and the way costs are coming out? Thanks.
Steven Zaat
Can you repeat the first question because it was not totally clear.
Jarrod Castle
Just the other operating income, which was a deficit of EUR335 million in your P&L versus EUR114 million negative a year ago, what that is actually?
Steven Zaat
You mean below current operating income. Okay. No, no, it is related, the main impact is coming from the impact of the U.S. dollar. So we have to, let’s say, revalue our balance sheet position, especially on the maintenance side and that brought EUR283 million negative impact on our results, is that were you are referring to, the difference between operating margin and net income?
Jarrod Castle
Yeah. That’s right.
Steven Zaat
It is of course very normal.
Jarrod Castle
Yeah. Thank you so much.
Steven Zaat
[Multiple Speakers] of course, the interest costs.
Jarrod Castle
Yeah.
Steven Zaat
Yeah. Then the other questions, let me start. I think on the CMA, we are currently finalizing actually the contract we don’t give the exact numbers on the synergies, but that it will bring lots to our belly as well we have an additional channel where we can sell. So, we are very hopeful that we will get these results in the next year. It’s good to see that we having a good discussion, we completely understand each other business model and together, I think we are much stronger in this business, and especially because it will support our belly capacity where we always have, let’s say, capacity available to sell.
Then on the medium targets, I am more confident, because we are growing faster than expected, especially, if you take into account the war, the fuel price, et cetera. But even then we are growing faster than actually what we had in our trajectory in our growth of 7% to 8% margins.
Benjamin Smith
And then on the cost that you’ve mentioned. So, like most other countries that we operate, we have inflation to deal with. And I think to-date, it’s the management team at our various business units have been doing a good job at balancing out in a global fashion. We have — we still have work to do on the transformation side, both at KLM and at Air France. The domestic market, as I mentioned, still has work to do, but we have already exited over 7,000 employees at Air France, 3,000 at KLM.
There are some that are coming back as the business comes back, but not nearly at the numbers that exited. So, we are going to have a structural reduction in the number of staff at the Group. As you may know, we have reduced the highest unit cost money-losing operations at Air France, which was the regional operation HOP, we’ve cut that capacity by 50%. So there are still transition costs going on there.
The Orly operation is still not profitable as we ramp up Transavia, that is going to take a little bit longer. You will see the improvement coming on. So, I would say we’re quite optimistic with the continued containment on costs. Of course, if things do come up we have challenges with our airports in particular Schiphol airport, absolutely not acceptable. But overall, we were quite — quite pleased with the way our plans are moving along. They’re on track.
Jarrod Castle
Great. Thanks very much. Very clear.
Operator
We will take our next question from Muneeba Kayani. Your line is open. Please go ahead.
Muneeba Kayani
Hi. Good morning. Thanks for taking my questions. How are you thinking about industry supply next year? Do you think these challenges around ATC airport will continue and impact available capacity or do you expect to ramp up next year. And then on yields, I didn’t catch kind of what you’re seeing in terms of your current bookings in the fourth quarter and the first quarter. Is it that kind of over 20% that you’ve seen in the — in the third quarter. And then just following up on the previous question around cost. So I know it’s early days, but can you give an indication of how you’re thinking about how your ex-fuel unit cost would be for next year.
Steven Zaat
So on the industry supply, I think we still see that these problems will probably not be totally over in 2023, let’s say, there’s several things. We need all the things in place everywhere. So we talk about airport capacity, ATC you talked about, it’s not the biggest constraints by the way, but there need to be planes. There are not a lot of planes ordered by our competition.
We have our planes ready, but we know that the competition downscaled seriously their capacity and we see that are not a lot of orders getting in during the crisis and it takes sometimes to deliver these planes. So for sure on the supply side, it will be next year. Still, let’s say, limited compared to 2019 and the industry will not fully back on the 2019 levels, but I think we are ready to go back to closer to these levels, but we always guided that it should be 2024 to be at the levels of 2019.
Then on the forward bookings, I did a very, very extensive explanation. So I’m sorry that didn’t — that was not clear, just to show on chart, if you look at the long haul, you see that in Q4 2024, we are at 87% of the capacity of 2019. And we already filled the planes with 75%. So that is how you should read this graph. So, that’s all the coloring we can give.
And on the unit cost, you know we had a strong transformation in place. We are, let’s say, currently we are at 3% up but we are minus 11% in capacity. So part is very related how much capacity will get back and we are just working on our full budget session. So I can give a clear answer I think with the full-year results on that question.
Benjamin Smith
And then, if I may just add one other point for color is, in France it’s CDG, one of our main competitors across the Atlantic to some very key markets in the United States, Norwegian no longer has airplanes here. So, the eight or so, eight or nine, 787s that were flying in some of our major markets are now out of the market is good, and it’s not only the capacity, it’s also the very low yields that we were competing against that has helped us and we don’t foresee them coming back in the near future. Obviously OSC (ph) airport is open. So we could see a replacement, but for the time being we don’t have that type of competitor in the market at CDG.
Operator
We will take our next question is from James Hollins. Your line is open. Please go ahead.
James Hollins
Yeah. Good morning. Good morning. Hi, Steven and Ben. Probably if I missed this and do feel free just to tell me to [indiscernible] the transcript later. But if you were talking about yields being healthy, I was just wondering if you could give a bit more color on what that means, do we — are we thinking similar to Q3, I think some other airlines have flagged that, or maybe you’d say up over 20% against Q4 ’19. Just a bit more there or tell me to go away.
And then just for clarification, again might be being sheepy here, but you’re talking about yields in the quarter up 24.4% in Slide 14, so its premium up 18, economy up 22. I’m not sure how that math works. Please just tell me where I’m being stupid. And then finally on corporate travel volumes at 16% in Q3. Maybe just either of you just give your expectations on that for Q4 as you might see it and then even if it’s just an opinion on how you would see that for 2023. Thank you.
Steven Zaat
So let’s first with the most easy question, which is the corporate traffic. So you see we are getting back, let’s say we are not fully back where we were in 2019, it has been — we are now at, let’s say, 76% in terms of revenues. What we see is that, let’s say, a lot of our business class capacity here because the load factor in the business class is doing better, actually than in our economy, is picked up by leisure, but we see also a strong demand from the SME.
So, we are now at 76%, of course, when we opened routes like China et cetera., corporate terrific will also because there is more of a corporate traffic market than the other ones that will also help, let’s say, our corporate traffic revenues, but we are now 76%. We were steep going up in Q1, Q2 and there you see also in Q3, and we are expecting a little bit to stay at these levels for the end of the year and then gradually when capacity comes back also to Asia, et cetera., that we will increase that core product revenue.
Then your question on the yields. Yeah, it is always a matter of load factor and yields. We don’t give an exact indication, but let’s say, that will be close to it. Let’s say it this way, we don’t go further into the details. And your very difficult math on question two, there is — I didn’t fully get it, but I [indiscernible] to me, said that the difference is coming from the mix effect if you want, we can take that also offline together this afternoon.
James Hollins
Okay. Fair enough. Thanks very much.
Operator
We’ll take our next question is from Alex Irving. Your line is open. Please go ahead.
Alexander Irving
Hi. Good morning. Three from me as well please. My first one on Amsterdam, but longer term you expect the Dutch government’s proposed permanent airport capacity reduction to take effect and if this does indeed happened can KLM grow again. Second question Portuguese government suggesting TAP may be for sale. How do you think about the attractiveness of this asset and use of cash versus say re-fleeting or deleveraging.
And then my third one, you had a slide early on about sustainable aviation fuel and some agreements in place for 2030. Can you give us a bit of insight into how the price is determined please [Technical Difficulty] appreciate it. Thank you.
Benjamin Smith
So, the line is extremely poor. I don’t think we understood any of those questions and perhaps if you could repeat them, it would be helpful. Thank you.
Alexander Irving
Let me try, if this is any better. So, my first question was on Amsterdam, but a bit longer term around the Dutch government’s proposed permanent airport capacity reduction, do you expect this to take effect and if it does, then can KLM grow again? My second is on TAP, the Portuguese government suggesting that this may be for sale. How are you thinking about the attractiveness of this asset and the use of cash versus say re-fleeting or deleveraging?
And then third on sustainable aviation fuels, you mentioned that [Technical Difficulty] SAF will be determined please, either a fixed price or the mechanism by which that would happen cost plus or a margin or a premium of jet fuel for example. Thanks.
Benjamin Smith
Okay. So, the line is better, not perfect, but I think we have got most of the — most of what you were asking. So I’ll start on the KLM question, then Marjan can add some further comments. But, there is — prior to the said decision by the Dutch state to reduce activity from 500,000 to 440,000 movements at Schiphol, the airport was closed from a slot perspective and all of those slots were in operation. So there were no growth opportunities for KLM or any other airline at that point. So, growth in terms of new destinations or new flights, new destinations were only possible by canceling other flights or cancelling other destinations.
So from a growth perspective, we were limited because of the slots. Now with a lower slot allocation, that just puts additional challenges. So the way is for us to grow or maintain our capacity at Schiphol or as you can imagine increase engaged, so we can have — if we can have similar flight that yields 100 seats you going to have 200, 300, 400. So that is the sole tool we have today. And then of course we can’t alter the number of customers that we accept on a connection basis versus a local basis to ensure we have the proper exposure in different types of markets. Perhaps Marjan, you may want to add one or two extra points.
Marjan Rintel
Yeah. We still think smaller Schiphol harms enormously the international accessibility and employment in the Netherlands. We don’t think and the goal should be 440 flight movements, but the goal should be CO2 reduction and noise reduction and we think we have a better alternative with our investments in new fleet and using of SAF. So we will offer an alternative and the decision of the 440 is already postponed for a year, because they should follow the balanced approach processes within the EU.
Steven Zaat
And for the sustainable aviation fuel, it’s — usually it’s based on the feedstock prices. If you see the contract for 2023, we already fixed price and we will discuss that in 2023 for 2024. So we take there a year-on-year approach and we’re trying to fix the prices [Technical Difficulty]
Alexander Irving
Thanks. And TAP?
Benjamin Smith
Regarding TAP. Yes, the Portuguese government now has a 100% ownership of TAP and it’s our understanding that they are looking at different options. So, at the appropriate time, we will definitely engage on a formal basis, but the entire Iberian peninsula, we’ve been studying for many years.
As you may know, we’ve had extensive involvement, both commercially and on the investment side with Air Europa, so that we couldn’t find a deal or construct that was satisfactory to us. So, we’re very familiar with the Iberian peninsula and TAP of course there could be another option for us to have a larger presence. We are the number two operator right now on the transatlantic, on the southern part of the transatlantic, then of course maintaining our position there is a key strategic importance for us.
Alexander Irving
All right. Thank you very much.
Operator
We will take our next question is from Sumit Mehrotra. Your line is open. Please go ahead.
Sumit Mehrotra
Thank you. My question would be, how do you see your competitive position with Asian peers for next year, given that the Russian air space is closed. So, what is your strategy there once the markets open next year. Secondly, Steven, could you guide us a little bit about how you see the financial expenses, developing into next year keeping into mind the instruments that you are now resorting to. Also I noticed your preference, for you mentioned a convertible hybrid bonds. Why would you be motivated to look in that direction.
Lastly, I will still try on the yield levels, I mean, James’s question that there is a — that you have significant difference between economy and premium versus the 24% you report for the full year, you mentioned something about the mix. So, a bit of an explanation there. Thank you.
Benjamin Smith
Okay. So regarding the service to Asia. So our presence in Asia was relatively small compared to our competitors going to and from that region. As the Japanese market reopens which is good news for us, we’ve already — we already have the Korean market that’s open. The market is absorbing the increased costs that we are incurring because of the inability to fly over Russia. So we believe with such a lack of capacity that perhaps will continue, that’s what we see going forward and that’s what we’re planning for in terms of our schedules. If by chance the Chinese market does reopen, the number of aircraft we had allocated to China was not — was not that large.
So we do have alternatives for that capacity, as you saw this summer, we added capacity on the transatlantic over and above what we had in 2019 and that market is still proved to be extremely strong. So the diversity of our global network, both at KLM and Air France, we’re quite confident that we’ve got abilities to reallocate our capacity in ways that are superior to the two main groups we compete with here in Europe and the United Kingdom.
But specifically, on Asia, I think we’re ready to move quickly if markets do open up. We have a long history in Japan, in particular on the Air France part of our business and at KLM, we have a long history, particularly in Indonesia, which to-date has been also been strong. So I don’t foresee us being — our performance being in the lower half compared to the others. I think we will actually perform in the top tier when it comes to the markets reopening versus our 2019 performance. So, it’s not a concern for us that we will be disadvantaged in any way versus our competitors when certain markets open up.
Steven Zaat
And then coming back, let’s say, your question on the yield. So on the premium, it’s 18% and economy is 22% and then your question I understand also the previous question is why is the total then 24%, that is the discussions we always have with our revenue management and it comes from the fact that we have now more premium in. So if you have relatively more premium in, then of course your yields for the average are going up. So that is the reason where it’s not the average between 18 and 22, if you have more premium, you will increase your yields. And on the interest cost, let’s say we will for sure be below this year. So that is — that is what I can guide you for the moment, and you can do your math yourself on the one that we will repay.
Sumit Mehrotra
Thank you. If I can slip a follow-up, that was quite a big impact on the foreign exchange line because of your leased aircraft liabilities. How do we want to see this developing into next year.
Steven Zaat
We have a very difficult accounting scheme I can tell you, because the leased aircraft, we first of all we depreciate them in euros. So, that is more an impact on the debt side. So of course the debt will increase with these higher dollar but we take that already into account now, because we are already currently at a very high dollar rate. So that has already been taken into account. And then on the interest side, there is an impact of course coming from it, but I just guide you on the number that was including also the operating leases.
Sumit Mehrotra
Yeah. Thank you.
Operator
We will take our last question from Johannes Braun from Stifel. Your line is open. Please go ahead.
Johannes Braun
Good morning. I have two questions, basically and the first one is again on yields. You said that the yields in Q4 are trending on a similar level than in Q3 versus 2019. My question would be what yield level do you need to maintain profitability in 2023 versus 2022 based on the inflation and fuel and labor costs, is the first question. The second question, I was wondering if you could talk a little bit about the competitive situation for Transavia as you further ramp up the business, so the competitive situation with low cost carriers especially easyJet again. Thank you.
Steven Zaat
So what kind of yield you need is, especially, of course, related to the fuel price. You know that the forward curve for the fuel price for the moment is still getting down. So actually, that should give us even a little bit more room to maneuver. You know that around 30% of our cost is fuel. So, you can easily do the math, that is the biggest chunk in our, let’s say, what we needed to recap this year in terms of yields. So it’s difficult to give that exact number because it all depends on the fuel, but still the expectations in the market is that the fuel price will go down, this with the current yields, it should cover it, but again, it depends on the aircraft fuel.
Benjamin Smith
And then I think I’ll just add a little bit more color. The phenomenon we saw this summer in on the North Atlantic where the market fully absorbed the increase in fuel and all the other inflation — inflationary items that went into our cost, we fully expect and when other markets such as Asia and now that Japan is opening that we should see a similar effect that the inflation impact and the rising fuel impact which the market should be able to absorb that.
And then your question on Transavia, to-date, all of our Transavia expansion has pretty much been at Orly Airport and Orly Airport being closed, to answer your question right now the comparison for us is with our internal previous operator which was HOP and to some extent Air France. So this is a totally different way of looking at this at least for now. And once we’ve optimized Transavia as I said, to answer one of the previous questions, then we will look at how we deploy this unit to compete in markets where we’ve been — we’ve exited because the profit issues.
So, first step for Transavia is to optimize the Group’s portfolio and performance at Orly, which is still ongoing. We should be — that should be completed in the next 12 to 24 months and then second step is to look at expansion opportunities for Transavia outside of Orly.
Johannes Braun
Thank you.
Benjamin Smith
Okay, operator. I think we have reached our time limit.
Operator
This concludes today’s call. Thank you for your participation, you may now disconnect.
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