Air France-KLM Reports First Positive EBITDA as Travel Resumes; Increase in FVE

The recovery in air travel is flowing through to no-moat Air France-KLM’s bottom line, as the group reported the first positive EBITDA of EUR 796 million since the start of the crisis in March 2020. Free cash flow of EUR 278 was positive for the second quarter running, largely boosted by advanced ticket sales as travel between North America and Europe start opening up over the Christmas period. Net debt decreased by EUR 200 million to EUR 8.1 billion since the end of the second quarter. Liquidity of EUR 10.3 billion should be sufficient to cover the 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 2.5 billion) and/or the restructuring of the Dutch state loans. No target date has been given for the restructuring. We increase our fair value estimate slightly to EUR 6.40, from EUR 6.10, as we incorporate higher traffic for 2021. Shares are trading in discount territory, but we caution investors of the extreme uncertainty due to risk of equity value destruction as a result of the group’s high financial gearing.