Air France - Klm S.A.: Long-Term Financial Analysis

Air France-KLM S.A.: Long-Term Financial Analysis

Shan Gao, 301243845

BUS 320 D100: FINANCIAL ACCOUNTING: ASSETS

PROFESSOR DENNIS CHUNG

Date Submitted: November 26, 2015

TABLE OF CONTENTS

ABSTRACT        1

INTRODUCTION        2

Overview of Air Transport/Airline Industry        3

Overview of Air France-KLM        3

Competitors        4

Deutsche Lufthansa AG        5

FINANCIAL ANALYSIS OF AIR FRANCE-KLM        5

Profitability        6

Net Profit Margin        6

Return-on-equity (ROE)        6

Operational Ratio        7

Liquidity and Solvency        8

Current Ratio        8

Solvency Ratio (Asset Based)        8

Cash Flow Analysis        9

Financial Leverage        9

Debt to Equity Ratio        9

Share Valuation        10

Price Earnings Ratio (P/E Ratio)        10

REFERENCES        12

APPENDIX A        14

Table 1        14

Table 2        14

Table 3        15

Table 4        15

Table 5        15

Table 6        16

Table 7        16

Table 8        16

ABSTRACT

This paper will analyze the viability of a long-term investment in Air France-KLM S.A. (referred to as Air France-KLM throughout the body of the paper). Within the analysis is research into qualitative and quantitative variables, including financial ratios and an examination of recent world events affecting Air France-KLM’s operations. In addition to quantitatively analyzing Air France-KLM, Deutsche Lufthansa AG is also looked at in depth, which is Air France-KLM’s main competitor as well as other companies within the industry to comprise an industry benchmark to properly analyze their financial records. After this thorough analysis, we highly recommend against investing in Air France-KLM due to its sub-par performance in comparison to its industry as well as recent events in Paris, which have greatly decreased the overall flight volume in France.

INTRODUCTION

This report will assess the relevant measures of Air France-KLM’s financial standing to determine whether it is fit for investment. The current climate of the industry, as well as the effect of recent news events on the company’s future, will be taken into consideration. The firm’s standing relative to its peers will be discussed by comparing its ratios to the industry benchmark in the following categories: profitability, operations, liquidity and solvency, cash flow, and share valuation. We will be taking into account all of the aforementioned information in order to make an informed recommendation on whether or not Air France-KLM is fit for a long-term investment.

Air France-KLM is one of the world’s largest air passenger and cargo transportation companies in the world. Its widespread global presence and the wide range of services make it a lucrative target for investors. The industry as a whole and its segments are trending upwards, which bodes well for the growth of the company (Marketline, 2015a). The increasing demand of its services allows Air France-KLM to hold a larger share of the market.

OVERVIEW OF THE AIR TRANSPORTATION INDUSTRY, AIR FRANCE-KLM & CLOSE COMPETITORS

        The following section will break down and analyze the air transportation industry and its effect on local, regional, national, and international economies. In addition to this, we will take an in-depth look at Air France-KLM and its largest competitor, Deutsche Lufthansa AG, along with other competitors within the industry.

Overview of Air Transport/Airline Industry

        According to PricewaterhouseCoopers, “The         global airline industry continues to grow rapidly, but consistent and robust profitability is elusive” (2015). When looking solely at profitability, it is evident that companies within this industry are suffering, as they have been “hampered by slim profit margins, forcing carriers to focus on both cost reduction and revenue growth through better customer interactions” (PricewaterhouseCoopers, 2015). Not only would it be a risky investment if looking for substantial income through dividends, but it would also be risky to invest due to unstable profitability causing fluctuations in stock price. In regards to investing in the airline industry, we also see legendary investor Warren Buffett speaking despairingly of it. At Berkshire Hathaway’s annual meeting, Buffett stated, “It’s been a death trap for investors”, in reference to investments in the airline industry (Reed, 2013).

        In addition to the historical aspects mentioned above, when looking at the air transportation industry, current events must also be taken into account. With the recent terror attacks in Paris, we have seen a decrease in air traffic around the Paris region, which has greatly affected not only Air France-KLM but also the entire industry (Mutzabaugh, 2015). When looking at this industry, we also see that share prices of large carriers within the European Union have taken a hit as evidenced in Alex Longley’s article written for Bloomberg Business, with Deutsche Lufthansa AG and Air-France KLM both falling more than 3.8% (2015).

Overview of Air France-KLM

        As mentioned above, Air-France KLM is one of the world’s largest air passenger and cargo transportation company. Initially independent of one another, both companies were founded on October 7, with KLM being founded in 1919 and Air France founded in 1933 (Air France-KLM, 2015). These companies announced their plans for a merger in 2003, with the merger completing on April 5, 2004 (Air France-KLM, 2015). Since this merger, Air France-KLM has gone on to become one of the largest airline carriers in the world.