Air France-KLM Remains Challenged by the Slow Recovery in Air Travel

The slow recovery in air travel continues to challenge no-moat Air France-KLM as the group reported an operating loss of EUR 1.2 billion in first-quarter 2021, slightly ahead of previous guidance. Free cash outflow of EUR 1.3 billion remains affected by the lack of advanced sales and high level of ticket refunds. The net debt position after quarter-end of EUR 8.6 billion improved from the 2020 year-end EUR 12.3 billion figure, largely due to the EUR 4 billion initial capital restructuring announced in April (details of the restructuring are contained in our note published on April 6). We believe available liquidity of approximately EUR 9.5 billion is sufficient to fund group operations and obligations over the short term, but further restructuring is required to fully restore the balance sheet, details of which are expected to be announced at the group’s AGM later on May 26. The short-term outlook lacks visibility, especially given the group’s high exposure to Europe, which is lagging other developed regions with the coronavirus vaccine rollout. We maintain our EUR 6.10 fair value estimate, but caution investors of the extreme uncertainty due to risk of equity value destruction as a result of the group’s high financial gearing.