Air France-KLM Reports Best Quarter Since Start of Crisis as Recovery Gains Traction

Signs of a recovery are visible as no-moat Air France-KLM reported the best quarter since the start of the pandemic. Second-quarter 2021 revenue of EUR 2.7 billion was the highest, while an EBITDA loss of EUR 248 the lowest since March 2020. The group generated EUR 210 million of free cash flow in the quarter, largely thanks to advanced ticket sales, which contributed to the approximately EUR 300 million reduction in net debt to EUR 8.3 billion, from the end of first-quarter 2021. Liquidity of EUR 9.4 billion should be sufficient to cover the roughly EUR 3 billion in near-term restructuring, capital expenditures, and debt repayments. The key development for investors to follow is the second round of capital restructuring, which could include a combination of fresh equity up to EUR 3.5 billion (current market value of EUR 2.6 billion) and/or the restructuring of the Dutch state loans. No target date has been given for the restructuring. We maintain our EUR 6.10 fair value estimate, which suggests attractive upside, but caution investors of the extreme uncertainty due to risk of equity value destruction as a result of the group’s high financial gearing.