Edited Transcript of AF.PA earnings conference call or presentation 7-May-20 6:30am GMT

In response to the acceleration of COVID-19, starting in February, we immediately took a wide range of far-reaching emergency measures. I will go through these measures in more detail in a minute. But first, I’d like to point out that the collective action of our group and our 85,000 employees has been recognized by both the French and Dutch states. Their strength, resilience, tenacity and compassion for our customers and fellow citizens was nothing short of remarkable. And for this, over 300,000 European residents repatriated by Air France-KLM and Transavia, that owe them a debt of gratitude. Both the Dutch and French governments have also clearly demonstrated their support to the importance of their respective national aviation industries by supporting the group’s business plan and environmental goals. Thanks for their backing, I feel confident in stating that amongst the large European airline groups, we are the furthest along in terms of the implementation of specific aid measures that will enable our group to remain solvent while meeting our obligations in the current crisis.

As an integral part of the financial support measures, we will create a new transformation plan for our group, including ambitious new environmental goals. At the end of this presentation, I’ll go into more detail on these goals and our approach to delivering on these commitments.

I’d now like to hand over the call to Frédéric Gagey, the group’s CFO, for the presentation on the Q1 2020 financial results.

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

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Thank you, Ben. To everybody, I propose to move Slide 5, when you have the main numbers for this first quarter. Not a surprise that they’re extremely impacted, as explained by Ben, because of COVID crisis. And we saw the first impact, which is mainly coming from the month of March because, as explained by Ben, is the first 2 months were okay, I mean, in line with budget, with a positive unit revenue and a stronger cost reduction. It is, of course, not the case anymore when you integrate March to the first 2 months of the year, which leads to the following results concerning the quarter: A drop in the revenue, minus EUR 922 million, which is, of course, significant. To be frank, relatively comparable to what we heard from Lufthansa and the IAG Group, which means that, of course, the impact is quite similar on all the airlines in Europe.

The fuel expenses are close to last year. Of course, hedging result is not positive due to the strong drop of the fuel cost — of the fuel price during all this period. EBITDA, negative, which is quite strange. It is really not quite common to see a negative EBITDA for the first quarter. It was EUR 443 million last year. It’s minus EUR 61 million during the first of quarter 2020. They’re going together with a drop in the operating ratio to of course, at minus EUR 815 million and an operating margin of minus 16%. The net income is at minus EUR 1.8 billion, a drop, which is far more significant than the drop in operating results, but I will explain why in the next slide.

ROCE and the net debt on EBITDA are still, I would say, acceptable, but it’s clearly just explained by the fact that these 2 KPIs are calculated over a 12-month sliding period. Of course, as we will go farther in the crisis, and we will add the very bad quarters in the next month, you will see alas, a further deterioration of the ROCE and of the leverage ratio.

I move Page 6, just to clarify the waterfall between the operating result and the net income. So the operating result of minus EUR 800 million, net income minus EUR 1.8 billion. What is between the 2, probably the biggest impact is the fuel hedge result, which is minus EUR 455 million. That is origin of this negative impact. Quite clear, we were hedged normally and accordingly to the hedging strategy we developed already for years. Due to the drop in capacity, we plan now for the rest of the year, we are accidentally over hedged in the sense that the volume of fuel, which is hedged, is higher than the volume of fuel we expect to burn due to air activity. So we have to consider that this over hedge is something like the pure [catered] speculation or financial operations and according indeed to IFRS, which has recognized it’s fully logical, we have been not for, but we have been led to take in financial result as a 2-day value of the fuel hedge portfolio we consider to be over hedged compared to expected consumption. During the rest of the year and at the price of today, it has been estimated at minus EUR 455 million. Of course, if in the future, we see the fuel cost going a bit up, we can now partly revert of this loss at the first quarter, and then we will take some benefit during the next quarter, but we have to wait for that.

Other impact to be noted is the deferred income tax. Something correctly also that due to the COVID-19 crisis, we are considering the future a bit in a less optimistic way than before, no surprise. And due to that economic to the rule of the recognition of the deferred tax asset, we are now considering that some part of this tax asset will not be recognizable anymore or recuperated in the next 7 years according to the IFRS rule, which means that we have depreciated a bit part of this asset, which is in our balance sheet.

I move Page 7 to give per business, what is the situation. No surprise, all the numbers are in red. There is only one, which is for a bit spurious reason, the unit revenue in Transavia, which is a bit technical in the sense that there is a lot of nonrefundable ticket into Transavia, which means that when there is flight canceled, people cannot recuperate fully the price of the ticket, and then you have a revenue a bit less ASK, which is explained, this grew 13%. But for the rest, you see, of course, the impact of the crisis with the unit revenue negative concerning the network activity, minus 8%, the cargo at minus 10%. Even concerning the cargo, the things are a bit moving in the right direction. In the sense that if you look today, the demand concerning the cargo activity, the level is relatively high due to the fact that a lot of the passenger aircraft, not only from France-KLM but for any airlines in the world. On my own part, it means that because there’s the absence of billings available for cargo, the demand for full freighter is extremely high, which means that in the recent weeks, we see a, let’s say, recovery of the cargo activity and of the unit revenue for the cargo. But for the rest, if you look at the result of the first quarter, it is clearly the absolutely terrible impact of the crisis, mainly in March, which means indirectly and it won’t be a surprise. But probably the result in Q2 will be, of course, worse than what you see today concerning the first quarter.

I move to the next slide concerning the unit revenue. We have considered it was probably more interesting for you to separate the unit revenue evolution between the period up to the end of February, and after that, the full quarter when you integrate March. Let us say that the first 2 months were okay. You see that the total RASK was at stable, at 0%, with some difference between the various subnetwork, to be noted that France domestic and medium-haul hubs networks were relatively going well, with unit revenue close to 4% in the France domestic, which is one of the consequences of already launched restructuring plan for the France domestic networks. The medium-haul also was okay, with plus 2.5% of unit revenue, even if the capacity have increased by 1.4%. On the long-haul, 2 things also to be noted, concerning Asia during this period, Jan, Feb, you see already the deterioration of the Asian network, mainly due to the beginning of the crisis in China during this period. You see the ASK already negative, minus 5.2. The traffic, even more negative, minus 10. And the RASK, not a surprise being at minus 5%.

On the other side of the world, if I can say, or going to west, you see that North America where we have redeployed part of the fleet when we reduced capacity to Asia. So North Atlantic is characterized by a growth relatively significant, plus 10%, which has even a bit above what we have planned initially due to the redeployment of the fleet. Traffic has followed or well answered, which is that traffic that reached 11%, so in line with the capacity. And due to that, probably relatively, a slight reduction of the RASK at minus 2%. Latin America is not yet totally recovering, but at least the number a bit better compared to the last 2 years and good development, partly pushed by the price of the oil, which was increasing during the beginning of the year. You see Africa recovering with the RASK, at 3.6% in positive traffic. And the same is true for Caribbean and Indian Ocean, probably also explained by the reduction of the competition due to the bankrupt of (inaudible), mainly.

Of course, on the left, on the slide, you see that when you look at the first quarter, not a surprise, the results are not at all aligned with what we have seen up to the end of Feb. The RASK is negative, minus 8%; traffic, minus 10% — sorry, minus 17%. For capacity, minus 10%. So clearly, quite strong and negative impact from the month of March.

Next slide, #9. Not a surprise impact per carriers of the crisis. I will say, very similar for Air France and KLM, a drop in margin of around 11 points, which is, of course, extremely significant. Revenue, minus 17% for Air France; minus 10% for KLM; and minus 15%, all in all, for the group. You also see some difference concerning the net debt evolution. In Air France, the net debt increased by EUR 400 million. In KLM, it is almost stable at EIR 317 million, partly explained by the fact that, of course, these 2 carriers or the 2 teams have engaged very quickly some measures in order to save cash and rationalize the cash out. There has been the possibility in KLM to apply immediately a strategy consisting to extend the supplier payment terms up to 90 days, which in France is not legally possible as we have not to go beyond 60 days. So it is clearly a short-term impact, which has been favorable for KLM, which is a good news, but part of that will be compensated in the second quarter.

I move then to Page 10 to see the evolution of the net debt during the quarter. So a cash flow before change in working capital at minus EUR 180 million, a change in working capital, of course, which is less positive than last year. Last year, it was [EUR 800,680,462] which is both the combination of the fact that you are selling less tickets, not a surprise, but also that you try to compensate that by your cash savings, the measures and strategy into the 2 companies, which has been, I think, relatively successful. And thanks to that, we have been able to limit the drop in the contribution of the [WCR] to the cash flow evolution. CapEx were totally in line with the budget. You see that on the quarter, where we have invested EUR 800 million. As we told you at the beginning of the year that the CapEx would be in the range of EUR 3.6 billion. I see that we have totally — we were totally aligned in terms of CapEx flow during the beginning of the year. Immediately at the beginning of the crisis, we have adopt that strategy far more strict in terms of CapEx, which means that should (inaudible), in March, the level of CapEx has been reduced to EUR 82 million. So clearly, lower compared to what we have done in Jan and Feb. So we have reacted, I would say, extremely rapidly to adjust the level of CapEx. And for the time being, we plan CapEx at EUR 2.4 billion compared to the EUR 3.6 billion we had in the previous guidance, and EUR 2.4 billion given the fact that we have already spent EUR 800 million in the first quarter is clearly the sharp reduction since the beginning of the crisis. Then operating cash flow is at minus EUR 576 million. I have to pay amount of least debt to apply the IFRS 16, and we have an adjusted free cash flow of minus EUR 825 million. You’ll find it back on the right of the slide with the calculation of the net debt, and it is mainly the 2 determinant of the evolution of the net debt, payment of lease debt, adjustment operating free cash flow and also some additional new lease debt, but relatively limited at EUR 100 million.

Then I move Page 20 — sorry, Page 12. Just to share with you what has been — again, has a quick — sorry — so I give the floor to Ben. Sorry.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [4]

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Okay, Frédéric. So continue on Page 12. As said at the beginning, the crisis is obviously extremely great, unprecedented. It is devastating to the airline industry, and we’ve seen travel restrictions imposed around the globe, including the closure of the EU Schengen borders and lockdown measures implemented in our 2 home markets.

First and foremost, I must point out that our highest priority is the safety of our employees and our customers. To this end, we have been ruthless in implementing strict health and safety measures at all touch points. To name a few, modification of customer channels on the ground, reinforcement of daily cleaning procedures and adaptation of in-flight service. In addition, our crew are wearing masks onboard and wearing a mask will also be made compulsory for our customers on all flights operated by Air France and KLM from May 11.

Working in close coordination with the French and the Dutch governments, all airlines at the group have contributed to maintaining both a national medical supply, as we call them Air Bridge, as well as a means of repatriation for European citizens, including preservation of essential links with the overseas territories of France.

Second, we have drastically adjusted our business activities. Our network and schedule has been adjusted downwards with strong capacity reductions. In March, activity was down, as I mentioned, 35%. And overall, in the second quarter, it was down 95%, with Transavia to be expected to be fully grounded.

On a positive note, the cargo demand has proven to be resilient in response to which we strictly deployed additional freighter capacity. Thanks to quick work by the team, the revenue impact on our cargo operations is expected to be only modestly negative for the second and third quarter of 2020.

In our engineering and maintenance business, the third-party activity is continuing when and where possible. We currently foresee an activity level for the second quarter around 45% compared to last year.

So moving to Page 13. And the group has implemented stringent cash preservation measures in response to the COVID-19 crisis. I will let Frédéric speak further on these measures and the liquidity situation of the group, also for the outlook of the month ahead.

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Frédéric N. P. P. Gagey, Air France-KLM SA – CFO [5]

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Thank you, Ben. You have on the Page 13, 2 things. First, we try to make simple how we see the cost evolution or the capacity to manage the cost in such a non (inaudible) month. So clearly, I think, that, that we are — you have all taken that into account, I call the need to ask when we look at your model. The fact that globally speaking, when you lose capacity, we can apply the firm rule, which is that approximately 50% of the costs are variable. And we have a look at that and checked that during the last weeks, and we — it seems to us that it is a good approximation. On top of that, of course, we have asked 2 — the 2 airlines to think about additional savings even compared to the budget. What have immediately launched together with the businesses and for the time being, we are estimating that the global impact of these cost measures is totaling EUR 500 million for the year 2020. And of course, there was a permanent work. It’s not an easy period, of course, for controllers and financial people in order to continue to improve this possibility to reduce the cost. On top of that, of course, we have been supported in the 2 countries, I will say, both France and the Netherlands concerning the fact that we have to manage the fact that we had a lot of people which are today to be paid but not having an activity. For example, people working at airports, of course, which have a bit — without any activity due to the evolution for — of capacity. And for that, the group has many other corporate — are beneficiated of in France, a system, which is called activity partial, when people are working less, paid a bit less, but a part of the salary is paid thanks to payment coming from the government. And as for KLM, there is a Dutch system, which is called (inaudible), which is also a contribution coming from the government to the corporate, which are hit by an external crisis and in which people have less activity than before. We consider for the time being that these 2 measures, which is, of course, relatively significant as contributing for EUR 350 million per month in the second quarter.

Concerning the CapEx reduction, I have already discussed a bit that part. Immediately, after the beginning of the crisis, we have launched a new plan consisting to reduce CapEx. Already EUR 900 million were already spent in Jan and Feb. So the CapEx still at stake was EUR 2.7 billion. And on this EUR 2.7 billion, we have launched a plan and taken decision, which are providing a reduction of EUR 1.2 billion. We will, of course, continue to work on it. The rule is for the trust be delivered relatively soon, I mean, in the next month for which we have a financing, which have been already committed by bank. We will take the aircraft, and our delivery will be as expected. But for the aircraft supposed to be delivered by the end of the year for the time being, we are trying to postponing some of them, and it is already the case for the delivery of 3 Embraer 350s, which will be delivered not in 2020, but in 2021 and et cetera, we will work later on. On the expected delivery for 2021, when the new fleet plan taking into account the new economic context environment will be finalized. Of course, there have been a last or third way to work on the cash protection, which is to negotiate delays in terms of payment. It is a case, for example, concerning some tax and social charges when we got approval from French or Dutch administration with a possibility to postpone this payment over various timing. Sometimes it is delayed into the year 2020, but there is also some other for which the possibility to delay the payment goes up to 2021 and even 2022. We have also, of course, negotiations with some suppliers. I think about lessors, about airport and various suppliers with whom we have also negotiated some delays of payment. When you take all that together, and you look at the evolution of the operational cash burn, we have made our own estimates. And we consider that if we apply first the rule of the variable cost at 50%, the additional cost measures we have taken and the fact that we continue to work on cost reduction measures, we are considering that if, in normal operation, we will have cost about EUR 2 billion, which is more or less the case, if you look at the budget for the second quarter, so EUR 2 billion per month. We are considering now that with all the adjustment and taking into account the variable cost, the pure operational cash burn can be estimated per month for the second quarter 2020 to around EUR 400 million. Of course, on top of that, you have to take the CapEx, the reimbursement of some debt, et cetera. But let us say that it is, we think, quite important KPI to have an idea of what is the operational cash burn, and we can give you this value for the next 3 months of the second quarter.

The last word on the liquidity position and its evolution during the first quarter, liquidity end of December was at EUR 4.7 billion, not taking into account the undrawn facility — treasury facility, RCF, for EUR 1.7 billion. In fact, we have drawn these 2 credit lines during the quarter. But if I don’t take that into account, the level of cash at the end of the quarter is at EUR 4.6 billion, which means that there is not a big deterioration of the cash level during this first quarter in the form that the negative adjusted operating free cash has been compensated by the sale of Amadeus shares we had still in the Air France portfolio and the new net financing, including the fact that in Jan, we issued, as you know, a bond issue of EUR 750 million. So all in all, we are entering this second quarter with a level of cash of EUR 4.6 billion, excluding the 2 RCF. In the meantime, as you know, we have also opened the distribution with the states, both in France and in the Netherlands in order to negotiate state support, but I will dispute that a bit later on.

So I go on the next slide, Page 15. When we have today a vision on the capacity for the second and the third quarter. Of course, to be honest, there is a high level of uncertainty. I think that we are all plunged in a scenario in a very specific environment, depending on what will be the reaction of the epidemic in the next weeks. And progressively, in some countries, you see that the strict measures imposed by the government are made step-by-step a bit lighter, concerning the capability to — for people to circulate and to travel. So we are still totally in a full uncertain environment. Let’s just say that for the time being, what we consider as a scenario or central scenario is that for the second quarter, we expect a reduction in capacity in the range of minus 95%.

For the third quarter, and here, of course, the level of uncertainty is even bigger, we have, for the time being, a plan in our capacity with a reduction of minus 80% compared to what we had in the budget. So taking all together, I think that we have to take position concerning the full year 2020 outlook. And there were 3 parts, I think, we can make quite clear in spite of the uncertainty. First, okay, not really necessary to say that, but I think it is normally to do it, of course, we withdrew earlier 2020 guidance, not really a surprise for you. Second point, I think that clearly, now, we foresee for the year a significant negative EBITDA, which is, really, I think it never happened since the merger between Air France and KLM. And third point, but I think that here, we joined what has been told by Lufthansa Group and all colleagues of IAG, we expect current operating income for the second quarter worse than what we are presenting today, concerning the first quarter, which is not also really a surprise because, again, you know that the first quarter has been hit with this 3 weeks only or 1 month to simplify. By the month of March, went early for the third — the second quarter, sorry, April, May, June, for the time being, will be — all bringing a negative contribution in terms of current operating income.

I move Page 16, just to indicate where we are concerning the negotiation with the 2 states, French and Dutch, concerning the state aid package under discussion. Concerning the French package, just to remind you, but we have already provided some information to the market last week. We expect to pass this package organized with 2 elements. One is the EUR 4 billion bank loan provided to Air France-KLM in order to support Air France, and it will be provided by 9 French and international banks. One of the characteristics of this loan, of course, is that it is guaranteed by the French state. And second element is a EUR 3 billion shareholder loan, again, to Air France-KLM but to support Air France, which will becoming direct from the French state with the term of 4 years plus 2x the possibility to have one extension of 1 year. The important characteristics of this loan by the shareholder is that it’s subordinated to the bank loan. So I think that we are very into the process concerning these 2 elements, and we expect to have all the documentation to be signed in the very, very next — sorry, very, very negative.

And concerning the package to KLM, it is now under discussion in the kingdom of the Netherlands. There were yesterday, a long discussion in the Dutch Parliament, and we explained that progressively, since the negotiation will come to an end that the package will be ready to support KLM.

And I give back the floor to Ben.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [6]

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Okay. (foreign language), Frédéric. Moving to Page 17. Before going any further, I would just like to emphasize the progression we have already made on our strategic plan that was presented to you during the Investor Day presentation that we made last November. The strategic direction we outlined has been the basis for several ongoing projects, some of which are already starting to deliver concrete results. I’m pleased to note a structural savings in unit costs, particularly at Air France, with unit cost down 1.8% in Q4 of last year and down 2.9% through the end of February of this year. The improved labor relations that helped us over the last 18 months has been remarkable, and over 37 new union agreements were signed in 2019. So I’d like to thank all unions and employee groups for their willingness to work so closely with us in a trusting, respectful and most transparent way.

These agreements were starting to deliver concrete value and flexibility before the onset of COVID-19. And we expect this new relationship to significantly help us weather this storm that is so grave. Nevertheless, in view of the current crisis, we have to drastically accelerate and intensify important elements of the strategic plan. The optimization and simplification of our internal airline processes is a key part of the strategy, and all actions we intended to do over the next 5 years will need to be realized much more quickly.

Another important element is the revision of the scope of the French domestic market at Air France. We have previously indicated the loss of spending from the French domestic network. Accelerating this transformation program, combined with the environmental transition goals, which I’ll go to later, drive an enhanced opportunity for structural improvements toward profitability.

The third element I would like to highlight today is the opportunity to speed up and intensify the transformation of the Air France Paris-Orly strategy, including a much larger role for Transavia at Orly as well as the introduction and development of Transavia in other French cities. The main pilot union at Air France, the SNKL, has received a positive mandate from their counsel to start discussions on this, which is an extremely vital first step in the process, very good news for us.

Page 18. First, I’d like to once again thank our employees for their rapid and effective response to this unprecedented crisis. The Air France-KLM Group has clearly demonstrated its ability to adapt to the unknown and the unforeseeable in a very, very quick time line.

Second, I would like to emphasize the mutual acknowledgment of management and our elected employee representatives that there is a shared responsibility among all employees to reduce costs and increase the profitability of the airlines at the Air France-KLM Group. Improved operational processes, adjustment of the scope of unprofitable activities and greater flexibility are all tools we will use to reshape our business and emerge from this crisis as stronger than ever. Our group and airline management will engage in discussions with the elected employee representatives for all staff categories, looking to amend agreements where necessary in order to find increased flexibility and added cost savings to help achieve the objectives of this restructuring plan. The group and the airlines must adapt, including adapting staffing levels to our new reality and the inevitable lower activity levels that will follow even post-crisis.

Turning to Page 19. Like I mentioned, we will have to adapt to a new reality post-COVID-19. We do not believe the airline sector will be the same in the short term, and we do not see — we do not foresee demand returning to pre-crisis 2019 levels before several years. This will require a global resizing of our long- and medium-haul networks, and we envisaged the capacity plan for 2021 being at least minus 20% below 2019 levels.

As a first step, we have decided on the early phase out of the Boeing 747s at KLM and Airbus A340s at Air France and the retirement of the remaining Airbus A380s at Air France is also under study. Secondly, there are the earlier mentioned revisions to our short- and medium-haul strategy. Finally, we will reassess new fleet orders in view of the new market reality as well as the group’s future investment capacity. This will all be integrated into our restructuring plan.

To Page 20. This strategic repositioning to the current crisis aligns well with the objectives of our ambitious enviromental road map, including reducing the volume of CO2 emissions from French metropolitan flights by over 50% by the end of 2024. We also foresee a dramatic reduction in the number of French domestic routes on which there is an alternative by train less than 2.5 hours, with the exception of regional flights, exceeding our Charles de Gaulle hub in Paris. Overall, by 2030, we envisage a 50% reduction in CO2 emissions per passenger kilometer across our entire network compared with 2005 levels.

On Page 21. As a conclusion for today, the key takeaways regarding the COVID-19 implications and our decision-making to secure the group’s future are as follows: one, we had a promising start to 2020, and the strategic plan unveiled in November 2019. We’re seeing impressive early results; two, the entire airline industry, including the Air France-KLM Group, have been hit incredibly hard by the unprecedented COVID-19 crisis; three, we have demonstrated our ability to adapt by implementing quick and thorough measures related to both health and safety as well as cost savings; four, uncertainties remain regarding the evolution of COVID-19, and we must be cautious in our assumptions of recovery in the coming months. The quick support of the French government and ongoing discussions with the Dutch government, essential for our group to get through this major crisis and to rebuild itself is a testament to their confidence in the future of the group. Five, we are working full steam ahead on our renewal plan to ensure that the Air France-KLM Group regains its competitiveness in a deeply shaken world and reaffirms its leadership role in the sustainable transition of the air transport industry. A new transformation plan will be presented in the coming months.

So I would now like to hand it over to the moderator to start with the questions and our answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Daniel Roeska of Bernstein Research.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division – Research Analyst [2]

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3, if I may. Number one, on the kind of restart of operations and maybe a view on the next kind of 12 to 18 months, which are the additional health and safety protocols you’re considering currently putting in place to get people comfortable flying again? And do you think it will be possible to reach an industry consensus on this, or will this rather be an individual approach of airlines in the beginning?

And then secondly, on the transformation plan, not going into details, but how would you balance the need between investing into the transformation? And we kind of looked at that in the Capital Markets Day that there was quite a bit of CapEx involved, against the requirements to kind of work on free cash flow quite drastically in the next couple of quarters to reduce the net debt levels again? How do you balance kind of that investment versus free cash flow requirement in the transformation plan?

And just lastly, a short comment, maybe, if you will, on your North Atlantic joint venture, kind of how would further development scenarios of Virgin Atlantic impact your Delta joint venture on the North Atlantic?

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [3]

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Okay. Daniel, it’s Ben. So on the sanitary measures that we are taking and will continue to put in place over the coming months, already over the last few weeks, we have significantly increased, like many of our partners, the cleaning of our aircraft and our gate areas as well as any other areas where our customers come into contact in the airports and onboard our aircraft. We are working very closely with Aéroports de Paris at Charles de Gaulle and eventually Orly once the airport reopens to ensure that Air France is in front and ahead of the market on that aspect and as well in Amsterdam at Schiphol. We’re also working with Delta to ensure the same is the case in the United States as well as our other partners around the world.

As I mentioned, effective May 11, it will be mandatory to wear a mask, all customers to wear masks onboard all KLM and Air France flights. You may have read a few days ago that Alexander de Juniac, the Head of IATA, did come out strongly with a message that representing over 200 airlines that the view is that masks are the best protection onboard aircraft. And the A4E organization has the same approach. So we are hoping that an industry-wide approach to wear that masks onboard is the way forward.

I’ll let Frédéric answer the second question, but I’ll quickly move to the third question regarding our North American joint venture with Delta and also recently, added Virgin Atlantic. Our view is we will continue with this joint venture as negotiated and as implemented since the beginning of the year. And obviously, we’ll hopefully regain its prominence as quickly as possible.

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Frédéric N. P. P. Gagey, Air France-KLM SA – CFO [4]

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Yes. On the second, just to remind you what we did already for the year 2020. So we had a CapEx of EUR 3.6 billion. We spent EUR 900 million before the beginning of the crisis in Jan and Feb, which means that the we resolve to be invest in the — a year to go was around EUR 2.8 billion, and we have been able to already save EUR 1.2 billion, which is 40%, 43%. So clearly, we have been able to reduce the CapEx plan. And I want to say here that it is exactly what we’ll do in the next year to be very focused on the CapEx with a higher ROI. And by progressively eliminating all the CapEx, we don’t consider (inaudible) to support the channel shuttle sustainability of the group. And to be frank, I think that all airlines will be in the same situation, of course, which means that probably as some CapEx we considered before as absolutely essential to be in the right position, there is a competition will become less urgent than can be easily postponed because we will observe that in the market, all colleagues are not investing in some specific domain because they will be, of course, distributed to the same constraint. So I think that first, we have to see first part, what will be the development of the crisis. After that, how much it will have impacted the balance sheet of the airlines industry. And after that, David, as you say, clearly, it will be a CapEx savings approach over the next years in order to progressively recover.

As we did already after the crisis of 2008, of course, our balance sheet, which is — which will be progressively more acceptable, vis-à-vis, at the bank and the financial market. And to be honest, I don’t see any other solutions.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division – Research Analyst [5]

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If I could follow up on your first comment, Ben, on the kind of cleaning and active-access measures. Do you think it’s possible that in the longer term, so kind of beyond 18 months from today, we’ll see some residual measures remaining in place? When you think back to September 11 very vividly, a lot of the security protocols that were designed and developed after that remained in place and are in place today.

So is there something where you think preventive measures, health screening, kind of health path forward, in some way, would you expect some of those — or what is the risk or the likelihood of those elements coming into the industry over the next 2 years and actually staying for the future?

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [6]

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Daniel, for sure. I think it’s a bit early for us to predict 18 months from now what the new norm will be. Obviously, around in 2001, and obviously, at the beginning, immediately after 9/11, it was quite an impact on airlines and customers to have to adapt to the new rules and regulations put in place in various forms in countries and eventually became standard.

So our view is at this moment in time, with the crisis, in a way that it is playing out that masks are the way forward. In the short term, medium and longer term, I think, to be determined.

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Operator [7]

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

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division – Airlines Analyst [8]

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I’ll limit mine to 2. Just first on the financing side. Following the — kind of the financing packages from the French state and likely Dutch government, how do you view your financial needs? And just kind of wondering what your kind of unencumbered assets are and what you’re seeing in the market in terms of kind of secured debt or sale-leaseback opportunity.

And on the second question, I was wondering what you’re seeing in terms of refunds, if it’s going to completely vouchers and just a little bit more color on the kind of the working capital risk that you noted.

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Frédéric N. P. P. Gagey, Air France-KLM SA – CFO [9]

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Concerning the financing package and what is the situation of the financial market today, I would say, for airlines. So it’s clear that the financing package for both Air France and what we expect for KLM will be a significant amount. Uncumbered, I will not give you exactly the period, but we think it is a long period in terms of cash needs for the group as a whole.

On top of that, of course, the market is not totally closed for airlines, I think, in the sense that if I take the case of Air France, for example, we have 3 deliveries of Airbus 350s in the next, let’s say, 6, 7 months. And for all these deliveries, we have now financing, which has been negotiated and fully committed by banks, which means that the secured market is not close today. And I will say that the condition are a bit higher compared to what we had in the next 3, 4 years.

Of course, we have a situation where extremely favorable to the corporate, but still possible to finance plenty new aircraft. On top of that, we have, of course, some unsecured assets. I will just give you the example of KLM when there is approximately, if I am correct, 7 to 8 aircraft, plenty new, which have been delivered in the next 1 or 2 last years and which are an unconverted from any financing, so which are available, if needed, for financing of — if needed, to be used as a corridor for some new financing.

And in Air France, we have a level of uncumbered asset, I think, around EUR 1 billion, if I am correct. I can’t say the number if it is wrong. I will call you later on. But I think is more or less the numbers I think we have seen recently, which are more some asset, some engines, some — et cetera, which can be, for example, through WTC, either used as a collateral for a new financing. So there is some margin for future financing on both deliveries of aircraft and unsecured — unencumbered assets, sorry, which can be used for financing on top of the financing package coming from the 2 states.

Concerning the working capital, it is probably the most complex question. It’s true that — and by the way, I noticed this morning that IAG was not giving a lot of information and even indicating that they will not give a clear number concerning the impact of the working capital. It is, in fact, extremely difficult. We know that we have some unflown ticket. For many of them, we have provided voucher. We propose that the voucher will be possibly [long gone] after 12 months. And based on that, based on the evolution of the regulation, we can have more or less a positive or negative impact in terms of working capital.

So it is where we are today. There is a global order of magnitude of the air-flown ticket likely to be 1 day be one both or by voucher for a certain given period or give it in cash, which is around EUR 2 billion. But clearly, the timing of the reimbursement in — or the cash-ization of these ticket is, for the time being, not totally known because it’s still linked to the various regulation. You know that the DOT in the U.S. took recently, I think, 3 weeks ago, a bit more strict position requesting the airline to onboard immediately cash when the client was asking for. In Europe, there is still some uncertainty. Personally, we consider, or at least not personally, but okay, personally, I consider or at least not personally, but, Okay.

Personally, I go through there that it is with sharing with the passenger in the sense that when you bought the ticket 6 months ago, you asked us to be prepared to making — flying in the next month, which is that we have — we have buy aircraft, prepare its operations, et cetera, et cetera. Suddenly, because of the crisis, we have engaged a lot of cost or CapEx to be sure that we’ll be able to fly or to operate the flight for the passenger who bought the ticket. Suddenly, we are not possible to do that. So there is something like a risk-sharing between us and/or beloved customers by asking them to wait some months before to be onboard or before to fly with their ticket. So this is the situation for the time being.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [10]

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And last, I’ll just add one more. Point to what Frédéric has just mentioned about the unflown tickets. The majority of the European states are lobbying the European Commission to take a formal stance on this, and we’re hoping to get an official view on this shortly.

But I believe, as Frédéric said, all our European states are taking — or about the majority of European states are taking a view that this is an exceptional circumstance and that a voucher is a reasonable way for airlines to move through this crisis.

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Operator [11]

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Our next question comes from Jarrod Castle from UBS.

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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 hope everyone is well on the call. 3 as well, if I may. You’ve given some indications of 2Q and 3Q capacity. Would you care to give any kind of view on 4Q? And I guess for 2021, it seems like the starting block is minus 20%. I wasn’t quite sure if that’s capacity or kind of fleet as well, et cetera, all fleet and capacity.

Secondly, just in terms — coming back to the question about the government support, are there any kind of elements to it, which might impact your ability to undertake your new strategy, I guess? So is there any kind of elements, which you are unable to execute on given the financing involved?

And then you’ve touched on some of it. But just on the fuel hedging, I mean, any change in thinking about hedging going forward? I mean Air France-KLM, coming out of the GSE, there was a lot of hedging losses. Now there’s been a lot of hedging losses. I know it’s quite formulaic, your current approach. But any changes, and going forward, how are you thinking about fuel hedging?

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [13]

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Okay. Thanks, Jarrod. I’ll answer questions 1 and 2, and I’ll leave the third question for Frédéric. Of course, our forecast of capacity is changing every week based on new information and rules and regulations and policies of countries around the world. So we do not foresee the European borders opening at least until the end of Q3. And based on that assumption and the reopening of some of our major markets toward the end of the year, if we’re to be optimistic, we foresee approximately 60% of our capacity being flown at the end of the year. Now we’ve given — what is that? It’s an approximate number. It’s a more optimistic number. We hope to have flexibility with our staff and aircraft to be able to scale down or up depending on information that we receive over time, but that’s what we’re looking as of today for Q4.

And then conditions attached to the support we’ve received from the French state. There is a large condition surrounding the improvement or the increase in our ability or our impact on the environment. So as you heard, we must eliminate service, whether the train option under 2 hours and 30 minutes in Gare de l’Est, France. And we have to ensure that Air France has a 50% net reduction in CO2 emissions by 2023, ’24. This does align our environmental goals and the rest of the financial strategy that we have is in line with what the French government would like us to do. However, we are to do this in a much more accelerated way.

So as we mentioned earlier, we are to present a restructuring program taking into account the new conditions that have been imposed on the group, not only Air France and the market, and present that to the French state in the middle of the summer.

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Frédéric N. P. P. Gagey, Air France-KLM SA – CFO [14]

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Concerning hedging, we know that there is a different approach around the world and that, for example, in the U.S., where the market is already — some more consolidated than in Europe. Normally, today, the U.S. carriers are engaged in almost a no-hedge policy. In Europe, it’s different.

You will see that the 3 big legacy carriers have all today hedging strategy, which is, I would say, almost comparable. If I make it that short, it is — volume of hedging is around 1 year of (inaudible) over 2 years. Okay, it is. And when we compare the situation in Air France-KLM to what we have in Lufthansa and IAG, we have the idea that we have to let it aligned.

Then I think this is a big question. Why are you hedging? We are hedging, first, not to make money, but to absorb and to smooth the shock in the fuel price, both shock, by the way, up or down. If you look at the hedging policy result of the group over the last, I don’t remember, but we made a study on a long period. It is, in fact, neutral, but slightly positive. But all in all, it is neutral, which means that it has paid exactly what’s — for what it’s done, which is not to make money, but to smooth the variation of the fuel price.

And there is a second element we have to take into account is that what is done by your competitors. Because if you are the only one not to hedge when the 2 competitors or there was more than that, but to simplify in Europe, the 2 competitors are hedging. You can be in a bit iterated situation where suddenly, why — what we observed some years, of course, you see the fuel price going up, and you are totally exposed to the variation of the fuel price when your competitors are not.

And I think this is all the questions. And it is all the purpose of the hedging strategy, to smooth, not to make money and to be more or less aligned with a part of the competition. And it is a strategy we are exactly following today, being relatively stable because all competitors are stable. Is there another model? Yes, probably. But as long as you see that there is some competitors playing differently, you cannot move along. So it is a bit of a situation where we are.

And I recognize that it is a bit complex, both for the teams and for the people in charge of the accountings. But for the time being, I will say this is what we do. I just noticed in the publication of IAG this morning, I am liking the report of one of you that — comment that the exceptional charge will rise to EUR 1.5 billion mark to first of May. So I suppose it is comparable to what I have made or tried to make clear during the presentation.

I also remember that you would check yourself that in the Lufthansa pre-result publication, the 23rd of April, it was also indicated an impairment negative coming from the fuel hedging. So I think that we are all in the same situation, in the sense that for time being, we have almost aligned position because it is the work also of the hedging, be sure that you are not too different from your competitors.

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Operator [15]

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We will now take our next question from Neil Glynn from Crédit Suisse.

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Neil Glynn, Crédit Suisse AG, Research Division – Head of the European Transport Team and Global Transport Sector Coordinator [16]

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If I could ask, firstly, just with respect to the process and the mechanics of agreeing the next phase of labor support from the French and the Dutch governments. You’ve obviously highlighted this morning, I guess, the down in capacity plans for the third quarter. So I’m keen to understand how you agree additional support and the timing of that.

And also, your capacity plans for next year suggest, I would think, maybe a 20% reduction in headcount being necessary. So how does that actually influence your decisions ongoing at the moment?

And then following on that, clearly, some of your major suppliers are also partially owned by at least the French state and somewhat influenced by the French state. Just interested, does the French state actually play a role in negotiations, whether cash flows and payment terms or bigger decisions with Airbus Aéroports de Paris at the moment? And do you foresee a bigger role from the French state in those talks in the future?

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [17]

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Okay. Thank you, Neil. The — obviously, for our employees and for our group, question about the employment levels is a top topic and extremely important. So here in France, there is this Activity Partial (sic) [Partial Activity] program, which Air France applied for, and the application was accepted relatively early. So that program was to go through Q3. We have now requested and applied for an extension of that program through the end of the year.

And as Frédéric mentioned, there is the NOW program in place in The Netherlands for the KLM side of our business. And this program as well, we are trying to keep that in place as long as possible. So saying that, we have — in France, there is a requirement as we work through the plans for the level of activity at Air France at the end of this year and into next year, how we go into consultation with the representative unions in a process called JPEC, and that will take place in June where we will have made good progress on the level of activity, the level of capacity that we plan to operate toward the end of the year or between now and the end of the year as well as next year and present a plan to this group and start working out in a mutual way.

The mutual way is not a requirement, but we plan to do this to find and come to an agreement with how best to approach the much lower activity. So that mandatory discussion starts place — to take place in June. We’re hoping it’s not just to repeat that the activity elsewhere will go through to the year and that the NOW program in The Netherlands will continue.

On the second question, regarding discussions with either state on conditions in terms with 2 of our major partners. And I don’t think you mentioned Schiphol, but Airbus, Aéroports de Paris and Boeing. Right now, we have many airplanes on order from both manufacturers. We are working on a — as a normal public enterprise with the regular Board of Directors, and we make appropriate business decisions, and same goes with Aéroports de Paris and Schiphol. Obviously, we are doing everything we can to ensure that we can get the best possible terms or improved terms as we go forward, but we are operating as a regular business — listed business company.

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Operator [18]

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So then now we’ll turn our next question from Muneeba Kayani from Bank of America.

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Muneeba Kayani, BofA Merrill Lynch, Research Division – Director & Head of European Transport [19]

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This is Muneeba Kayani from Bank of America. Couple of questions. Firstly, you had mentioned in your press release earlier about possibly an equity raise later on. Can you talk a little bit about the timing and process? And do you still maintain, in the longer term, a target net debt-to-EBITDA of 1.5 max is my first question.

Secondly, just following up on some of the questions earlier on the return to service. What’s your view on leaving the middle seat empty? And Delta has said that they would leave the middle seat empty, so kind of where are you in terms of your thoughts on that?

And then just as you think over the next couple of years, and you’ve said the recovery would be slow, what’s your outlook on short-haul versus long-haul demand in the next couple of years?

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

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Yes. First, on the famous 1.5, what are — what my thoughts are on the topic. If you look the way we manage the post-crisis 2008 year, I think that the group for many other companies, it has been a long step or a longer story to progressively come back to level of leverage, which are comparable to what we call investment-grade like, yes? after some discussion with credit analysts during the last year, we have been more or less convinced that the 1.5 was okay.

And by the way, up to now, if I look at the year 2019, given these various calculation, but let us say that the 3 big legacy in Europe were around 1.5, probably Air France can be a bit higher and 2 others to be better than that, but we were relatively comparable concerning these metrics. So we still consider that this metric is extremely important. This metric also is even more meaningful after the adoption of IFRS 16 because it is a global treatment of the lease and the full-owned aircraft. So clearly, this is a metric on which we put a lot of attention, and which we have put a lot in attention during the last year.

So what will be the situation post crisis? So first, I don’t know when the crisis would finish and when and what to be the intensity during all this crisis. But it’s still #1, all airlines will be probably with a high-deteriorated balance sheet until we exit, so it will not be at 1.5, I think. Second, the market will have to be — would have to accept that at least for a given period.

And after that, of course, it will be the role of the management to proactively come back. It can take years, in fact. So to make it short, so 1.5 is the target. The target is — has been put further than us due to the crisis. And then it will be a long path to progressively come back to this level, but I still consider as a good one, but probably a bit far from us for a relatively long period, I suspect.

Second element on equity. I have the question by some of you, you will not reimburse the debt. We will not be able to reimburse the debt of EUR 7 billion. And my answer is, for the time being, I have not increased my debt. First of all, I have not yet received any money. Suppose I receive the money, we have more cash for debt, but net debt has not increased. What will really increase the debt is a loss in EBITDA in the next quarter.

And for that, I cannot tell you right now what will be the reality and the actual numbers by the end of December. So don’t be too quick. Let us wait the development of the crisis. Of course, it won’t be a positive. We know that. How far it will be negative, we have still to wait a bit. And after that, of course, if we have a crisis with such intensity we have today up to the mid of 2021, the situation, I believe, for many, many airlines, if not all around the world, would be extremely difficult. And then it will be necessarily the situation to speak about equity story a bit for everybody.

And this is the sense of — or vision today. We need to solve — to give some comfort to our partners who have to solve the cash — the possible cash crisis. We have a crisis, nobody knows yet how long it will be. And clearly, there is 2 solutions. It is relatively short, and we will come back to a normal path, even a bit deteriorated, of course, in terms of balance sheet.

All the longer it will be — or the crisis will be very long. And then the impact will be absolutely detrimental to all the balance sheet in the industry. And there will be necessary question and, in fact, and project concerning the equity, I think that it is a simple analysis that you also share, I hope.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [21]

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Okay. Thank you, Frédéric. And Muneeba, it’s Ben, again. So we view from a realistic perspective, and what has been stated by IATA as the official position of IATA that reality, breathing masks are the best way forward, mandatory for our customers. And as I mentioned, all KLM and Air France flights, that will be the case in — as of May 11.

In terms of demand, in the short term, we view — first of all, we view our activity on the short-haul. So that’s intra-France and the medium-haul, which is our European network, to come back faster than long-haul, but that’s, in large part, because we do not see all of our major markets having the borders open as quickly as that’s what we can do inside of Europe.

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Muneeba Kayani, BofA Merrill Lynch, Research Division – Director & Head of European Transport [22]

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Just to follow up, like, next year, once — if international borders are opened, do you see a structural change in demand for short-haul versus long-haul? And as you kins of see it?

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

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No.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [24]

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Structural demand at our group, we have short-, medium- and long-haul routes. And we have a very balanced portfolio at both airlines, and we have a good mix of origin-destination flows as well as connecting flows. So we believe with the exposure we have to all regions of the world, we have a balanced network that positions us quite well versus some of our competitors.

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Operator [25]

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We will now move to our next question from Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division – Head of the European Transport Team [26]

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Can I just ask what you see delaying the settlement of the Dutch support? And how relations developed between the Dutch and French governments through this process?

Second question, which I suspect you’ll be constrained on what you can say, but what can you help us understand in terms of the cost to you — in terms of interest costs of the state support on a — in a forward-looking basis?

And then finally, what’s happening in the broader French industry with the secondary French airlines? Do you expect them to be rescued by the government? or do you expect to see failures? And is that potentially an opportunity for Air France as we go forward?

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [27]

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Okay. Thank you, Andrew. First of all, we’re very thankful and happy about how things have played out in France. We’re very thankful to the French government for putting this — a package together in record time and having it approved at the European level so quickly. So that is a very positive thing for the group.

On the Dutch side of our business, also moving relatively quickly. There were debates — a lengthy debate yesterday in the Dutch Parliament. And we are reasonably positive, I’d say, confident that we can get a package put in place for the Dutch side of our business in the short term.

In terms of relations between the Dutch and the French state from where we sit in that — on the management front, it’s — what is positive is both governments, it’s very clear that what they are looking for and what’s important for them, so again, from where we sit is for both airlines to maintain their important position relative to the impact that we have on the economies in both countries.

As you know, in The Netherlands, KLM plays a disproportionate, important — disproportionate importance to the economy is a major component of the transportation infrastructure. And so this, obviously, is key, so The Netherlands’ key to the economy. And similarly so in France, France being the largest tourist market in Europe, ensuring that the transportation market is in place as quickly as possible is a — obviously a major component of the recovery of the French economy.

On aid to other smaller carriers, particularly in France, I can’t speak to that from our end. We know that there are thousands of companies in France that are looking for state support, obviously, affecting millions of citizens. What I can say is that Air France’s operation, that is it’s well diversified, and the bulk, if not all, of the other carriers in France that we operate or we compete against are operating in a very small portion, a very small area of our network.

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Andrew Lobbenberg, HSBC, Research Division – Head of the European Transport Team [28]

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Can you say anything about the price that you’re having to pay for the bank loans and the state — or the shareholder loan from the state?

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

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All the characteristics of these 2 loans will be shared with the market, of course. I think that I’m sure that the press release will be published very soon, and then you will have all the inflow and all the characteristics of these 2 operations.

Just to give you some indication, at least. Not a surprise, shareholder loan will be with an interest higher than the bank loan, at least for 2 reasons. The first one is that the shareholder loan is longer than the bank loan, which is more a bridge to bond so which to equity. So which is a good reason to have an interest rate higher. And second, the shareholder loan is fully subordinated towards the bank loan but also to the others, the bearers bonds into the Air France-KLM Group.

So there is a full subordination of the shareholder loan and a duration which is longer than the loan provided by the banks. So for these 2 reasons, we have a higher interest rate on the shareholder loan. But everything will be made very clear in the press release. We will communicate quite soon concerning these operations.

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Operator [30]

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We will now move to our next question from Jaime Rowbotham from Deutsche Bank.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division – Research Analyst [31]

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Actually, my main question was the same as Andrew’s around the interest rates on the loans. So I guess we will wait for the press release, Frédéric, as you suggested.

Could I just ask, though, should we expect some profitability conditions alongside the environmental ones? I’m not sure if there’s any clues you can give us as to what our expectations should be there.

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

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As you probably heard from both governments, what they’ve said publicly, it’s obviously the main goal in the short term is to ensure that enough liquidity is in place at both airlines to — for us to get through the initial parts of this crisis.

Any other conditions or, I would say, pressure to produce financial — specific financial results, we are being — as part of these conditions is to accelerate the business plan that we had already presented in November of last year, and one of the major components of that business plan was to overhaul the French domestic market and turn it to profitability and also improve our environmental impact.

And as you’ve — as I assume you’ve heard have, this has been stated as a major objective that’s been placed on the group and then with a significantly increased environmental improvement — environmental impact improvement.

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Operator [33]

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We will now move to our next question from Johannes Braun from MainFirst.

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Johannes Braun, MainFirst Bank AG, Research Division – Director [34]

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Firstly, can I come back to the terms of the state aid? There was also some commentary that you are required to remain a good customer for Airbus. Can you just be a bit more specific what that actually means? Will there be hard commitments for future orders or anything to prefer Airbus over Boeing? Or how will that work?

And then secondly, you have that EUR 400 million perpetual that becomes callable, I think, in October. Will that be repaid? Or will you keep it?

And then lastly, how do you expect the current situation to impact the next regulatory periods with Aéroports de Paris? Do you expect fees to be lower to support the airlines to recover from the crisis? Or is it rather the other way around as regulated returns for the airport will be lower, and therefore, they will have more scope to increase fees?

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [35]

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Okay. So I’ll try to do my best to answer your questions. So before the crisis and as of today, all orders and options and purchase rights that are in place at Air France are and were with Airbus, so the A350 Series 900 and the A220 Series 300. So that was the case before this crisis, and it still is the case. On the KLM side of the business, fall orders that were in place, so with Boeing of the 787-9 and -10 and 2 additional 777 300ERs.

And recently, we placed an order for Embraer E2s. So that’s what’s on the books right now. In terms of additional orders, that definitely is not something we are talking about today. So that’s what I can tell you on our plans with respect to fleet.

Aéroports de Paris, we are in discussions with them to amend and come — hopefully come to a shared view and an agreement on how best to react to this crisis and how to move forward. You may be aware that prior to the crisis, there was a very large capital expenditure plan at Charles de Gaulle with the goal of building a new terminal, a large, large terminal, Terminal 4, that was going to produce a cost between EUR 8 billion and EUR 9 billion, of which — to which Air France was going to eventually be the main tenant at that terminal.

So we do not foresee the need in the short and medium term for this terminal. So we are supportive of a — other significant delay in the construction of that terminal and to perhaps do some minor adjustments to Terminal E and Terminal F to get some additional operational improvements and customer benefits.

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Frédéric N. P. P. Gagey, Air France-KLM SA – CFO [36]

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Concerning your second question, yes, of course, we will be on both the hybrid, which is supposed to be on board in fall. If you don’t know that, as you know, the interest is with a step-up, up to 11%. And so the same intention to onboard, it give you a first limit to the cost of the shareholder loans, of course. Yes. In addition, vis-à-vis the 11%, which I will give you to the communication of the press, sorry.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [37]

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Just to mention another point on conditions imposed by the French government and also perfectly aligned with our business plan, and that is on the productivity and unit cost competitiveness. And it’s unfortunate that what was starting out as an excellent year for the group, and in particular, Air France on the unit cost improvement, it is not — we’ll not able to fully — we’ll not be able to fully benefit from that in the coming quarters.

But in terms of a business plan and strategy and the transformation and restructuring teams going forward with that plan, we are putting a — quite an accelerated version of that to ensure that the plan can actually deliver and more. But as I said, the results, we’re actually overproducing and initial results in January and February, which is a strong indication of the strength of that program, and the team working on it.

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Operator [38]

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We will now move our next question from Carolina Dores from Morgan Stanley.

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Carolina Botacini das Dores, Morgan Stanley, Research Division – Equity Analyst [39]

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I have one question left. When you anticipate an 80% reduction in capacity in the third quarter, do you think that’s a proxy for the market? Or do you anticipate that the pricing environment would be so weak that it’s possible that you’d lose share because you don’t want to compete?

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [40]

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Thank you, Caroline. In the third quarter, our intent is to operate at the same relative level as our competitors. Obviously, we’re going to do it in a fashion that maximizes our cash position and profitability.

But we do operate out of some heavily restricted, in terms of availability, of gates and slots, airports, Orly, which is closed, but now Oise and Amsterdam. Despite the slot and moratorium that is in place, we do have privileged positions in those airports similar to British Airways at Heathrow and some U.S. carriers in some of the U.S. airports and many Asian carriers in Asia.

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Operator [41]

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And we will now take our last question in the queue from Malte Schulz from Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division – Equity Analyst of Industrials [42]

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Not a lot left, but I still want to touch on a few points. I mean given that the oil price is very low at the moment, wouldn’t it also make a case to even defer more and more investments of A350s, for example, and 787s and just use your older even A340s or 747s longer given that they’re fully depreciated and with relatively low operational costs, if you have now a very low oil price?

And maybe also on this point, is there a very cheap opportunity to convert the former 747 combis of KLM into full freighters for just Q2 and Q3 for use as a full freighter? Yes. I think that’s for now the notable one.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [43]

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Okay. Thanks, Mark (sic) [Malte]. On the fleet, converting 747 combi into a full freighter is not something you can do in the very short term. However, with the significant main deck capacity of those airplanes, you’ve seen we’ve kept a few of the 747 combis at KLM beyond their original retirement date to take advantage of the demand in cargo.

And also with the demand in cargo being relatively high, we are flying several 777-300ER passenger aircraft without customers and using the customer cabins for cargo as well. We have all the capacity on the seats, underneath the seats, in the aisles and the overhead bins as well as the very large cargo capacity of the airplanes underneath in the bellies. So we do have that capability.

In terms of extending even further the life or the A340s, 747s, [we made] those, keeping those in the fleet longer. These are all lined up to retire with major engine and airframe of which overhaul events, very expensive CapEx. So we were — we’ve pushed these airplanes pretty much to their limit. Of course, they can fly longer, but the ability to do so will require significant increase in CapEx to do that.

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Operator [44]

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Thank you. And as there are no further questions in the queue, I would like to turn the call back to Benjamin Smith for any additional or closing remarks. Over to you, sir.

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Benjamin M. Smith, Air France-KLM SA – CEO & Director [45]

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Okay. We’d just like to thank everyone for participating in today’s call. Obviously, with these extenuating circumstance like, extenuating, is very difficult circumstances,

I appreciate the time that you’ve taken to listen to us today. So please take care of yourself and stay safe.

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Frédéric N. P. P. Gagey, Air France-KLM SA – CFO [46]

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Thank you.

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Operator [47]

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This will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.