Air France Fsa

AIRFRANCE FINANCIAL STATEMENT ANALYSIS
Based on 2015 annual reports

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Sailesh KRISHNAN

Mimoh JOSHI

Fahad FAYYAZ

About the company

Air France–KLM is a Franco-Dutch airline holding company incorporated under French law with its headquarters at Charles de Gaulle Airport in Tremblay-en-France, near Paris. The group has offices in Montreuil, Seine-Saint-Denis, Paris, and in Amstelveen, Netherlands. Air France–KLM is the result of the merger in 2004 between Air France and KLM. Both Air France and KLM are members of the SkyTeam airline alliance. The company's namesake airlines rely on two major hubs, Amsterdam Airport Schiphol and Paris–Charles de Gaulle Airport. Air France–KLM Airlines transported 87.3 million passengers in 2014. As of 30th September 2015, the breakdown of capital/ownership is:

• Floating: 74.4%
• French State: 17.6%[21]
• Employees: 6.6%
• Treasury stock: 1.4%

Company Strategy:

In 2015, Air France-KLM successfully returned to a European leadership position. 2015 marked a historic step for Air France-KLM: with operating income of €816 million and net income of €118 million, the Group posted its first set of positive results since 2008. Both Air France and KLM are now profit-making and their debt has been reduced by more than €1 billion. Two-thirds of this performance can be attributed to their productivity gains realized due to changes in their company strategy and one third to the economic environment and the decline in the oil price. There were 3 main strategies of the company –

1. Move up-market – A product and service move up-market targeting the highest international standards.
2. Selective development in growth markets – Introducing long-haul, intra-European low-cost, aeronautics maintenance.
3. Improved efficiency and productivity – An on-going improvement in productivity and efficiency within the framework of strict capacity and capex discipline.

Industry Analysis – Porter’s 5 Forces Model

     Industry competition: HIGH

The big airlines essentially fly to the same places out of the same airports for about the same prices. The amenities, or lack of amenities, they offer are similar, and the seats in coach are just as cramped no matter which airline you choose. AirFrance 's traditional rivals include Lufthansa and British Airways, but the company also faces major competition from the growing popularity of value carriers, most notably Ryanair. Because the air travel experience for a customer is remarkably similar no matter which airline he takes, airlines are constantly threatened by the prospect of losing passengers to competitors. AirFrance is no exception. If a customer is planning to book a flight from Paris to Delhi on AirFrance but a third-party price aggregator, such as Priceline, reveals a better deal from Emirates, the customer can make the switch with a simple click of the mouse.

    Bargaining power of buyers: HIGH

Buyers have immense bargaining power over airlines because the cost and effort required to switch from one carrier to another is minimal. The emergence and raging popularity of third-party trip-booking websites, and smartphone apps, exacerbates this issue for the airlines. Most travelers do not contact an airline, such as AirFrance, directly to book a flight. They access sites or apps that compare rates across all carriers, enter their trip itineraries and then choose the least expensive deal that accommodates their schedules.

     Bargaining power of suppliers: LOW

The list of airline suppliers is quite long. The list of airlines for suppliers to sell to, however, is short. This asymmetry places the bargaining power directly in the hands of the airlines. Bargaining power is particularly strong for AirFrance, given its position as the Europe’s second largest airline by revenue. Put simply, AirFrance's suppliers have a strong incentive to keep the relationship on good terms. AirFrance can likely find a replacement supplier without problem if the relationship goes bad. The supplier, by contrast, is unlikely to find another buyer capable of replacing the sales volume represented by AirFrance.

     Threat of substitutes: LOW

A substitute, as defined by the Five Forces model, is not a product or service that competes directly with the company's offerings but acts as a substitute for it. Thus, a Luftansa flight from Paris to Los Angeles is not considered a substitute for a AirFrance flight with the same start and end points. Examples of substitutes are making the trip by train, car or bus. Unless a trip is very short, such as traveling from Paris to Lille, no methods of travel rate as viable substitutes for air travel. Until a new technology comes along that supplants air travel as the fastest and most convenient way to travel long distances, AirFrance faces little threat from substitute methods of travel

     Threat of new entrants: LOW

Potential new entrants to the marketplace represent a minimal threat to AirFrance. The barriers to entry in the airline industry are remarkably high. The operating costs are massive, and the government regulations a company must navigate are numerous and exceedingly complex. There is not a single airline founded during the 21st century that has even 2% market share. Jet2, founded in 2003, represents the newest airline to make a dent in the industry, and its market share is still less than one-third of AirFrance's

The airline industry exists in an intensely competitive market. In recent years, there has been an industry-wide shakedown, which will have far-reaching effects on the industry's trend towards expanding domestic and international services. Due to this reason we feel that the operating margins for Air France would be low.

Profitability Analysis

To measure the profitability of the company, we calculate the Net profit margin and Gross Profit Margin.