Air France-KLM SA (AFRAF) Q1 2023 Earnings Call Transcript

Air France-KLM SA (OTCPK:AFRAF) Q1 2023 Earnings Conference Call May 5, 2023 2:15 AM ET

Company Participants

Benjamin Smith - Chief Executive Officer

Steven Zaat - Chief Financial Officer

Erik Swelheim - Chief Financial Officer, KLM

Conference Call Participants

Harry Gowers - JPMorgan

Sumit Mehrotra - Societe Generale

Muneeba Kayani - Bank of America

Sathish Sivakumar - Citigroup

Alex Irving - Bernstein

Stephen Furlong - Davy Research

Neil Glynn - Air Control Tower

Andrew Lobbenberg - Barclays

Jarrod Castle - UBS

Johannes Braun - Stifel

Achal Kumar - HSBC

Operator

Ladies and gentlemen. you are currently on hold for the Air France First Quarter 2023 Conference Call. We had some technical difficulties with the speaker line, and we appreciate your patience, and we will start shortly. Thank you.

Benjamin Smith

[Technical Difficulty] Here at our headquarters in Central Paris. As usual, I'll start by presenting this quarter's highlights, then I will give the floor over to Steven for a detailed presentation of our results and the outlook for the coming quarters. I'll conclude the presentation and open the Q&A session. First of all, I'd like to thank all my colleagues around the world. They have worked tirelessly throughout the quarter to ensure we continue on our path to sustained profitability.

Now, moving on to Slide 3. In the first quarter of 2023, Air France-KLM enjoyed positive commercial momentum as the airline industry continued to recover. Compared to the same quarter in 2022, the number of passengers carried was up 35%, and the group's revenues, 40% driven by vigorous market demand in a high-yield environment. We've recorded strong summer ticket sales pointing to a busy upcoming summer holiday season. These forward sales have helped to generate a positive adjusted operating free cash flow of €700 million.

Overall, this quarter, we posted improved operating results compared to Q1 of 2022 when furlough schemes were still in effect and contributing favorably to our performance. The 3-point margin increase constitutes a positive development that reflects our improved organic performance. We've also pursued efforts to reduce our net debt, which fell by almost €1 billion during the quarter, bringing our net debt-to-EBITDA ratio to 1.6 by the end of March 2023.

Our liquidity remains strong as well with close to €10 billion in cash on hand, even after fully settling the French state guaranteed loans. Speaking of which, last but not least, we have now fully repaid all government aid as planned. This releases us from the restrictions attached to the aid and gives us back our full strategic autonomy moving forward.

I'll now give the floor over to our CFO, Steven, who will go into more detail about our results for the quarter.

Steven Zaat

Thanks a lot, Ben. Good morning, everybody. Thanks for being with us so early and apologies for that, but we try to schedule [indiscernible] you can also listen to the earnings call of IAG. And as we know, the first quarters in our industry, always the most off-season of the year as the travel demand is lower than actually in the other quarters. When I started as a controller in finance at KLM, we had to have it to start actually always with the second quarter.

If we go to Page 5. And that being said, it is good to see that our passengers are coming back. We kept the revenue growth. It was, as Ben already stated, 42%. We grew our capacity with 20%, which was actually bringing 0.9 billion. And at the same time, we could increase further our load factor almost to the 2019 levels. It grew from 74% to 86%, which is 12% additional feed in terms of revenues, bringing another €800 million to our top line.

And ahead with that, we could further increase the yield, which bought another 200 million. And I think the graph on the right shows it quite well. If you take out the furlough effect which we had last year, you see actually that we are improving our results by 254 million. It's coming almost 1 billion from our unit revenue development. So that was up 20.1%, including actually the cargo revenues are, let's say, at the lower level in this quarter than we did in 2022. And you see that we were hit by the fuel price.

Actually, there's $300 million coming actually more from the hedge as fuel price start to decrease actually over the course of the quarter. And unit cost, as we guided, stable, just 0.7%. So, you see that the inflation is kicking in. But at the same time, we can absorb it with the growth of our capacity. So, comparing year-over-year, just looking at the operational result, we see an improvement of 254 million.

If you then go actually to the results per business, let's start with a very strong performance of our passenger business. We increased our capacity with 18%, unit revenue of 38% or 40%, which is coming from the load factor. But in the passenger revenues, we have a 20% increase of yield. So, very strong dynamics on our passenger business network, which is bringing an increase of 64% in terms of revenues.

On the cargo side, it's a little bit different. It is exactly what we already expected. So first, there is a mechanical impact because we grow the capacity of the valleys on our passenger planes, so that will bring a load factor down actually with 12% and we see a yield down of 18% year-over-year. Still, it is a 60% higher than what we had in 2019. So, yields are coming down, but we are still significantly higher than in 2019, which brings that actually our network performance is already improving year-over-year and even absorbing there the further impact, which we had in 2022.

Then on Transavia. On Transavia, we see a strong capacity growth, 39%. And the good news is it goes hand-in-hand with a very strong load factor. So the load factor at Transavia is already at the same level as 2019. We increased the load factor from 78% to 91% in the first quarter 2023. Yield is down, 37%, but that is still 20%, more than 20% up compared to 2019.

Now for Transavia, with the growth, we always know that this first quarter is quite – it's not a leisure month. So, we see always, let's say, in this sector of, let's say, of our low-cost industry, you see always that the first quarter is usually a negative result quarter. And of course, as we grow further this business, you see that this schedule in the first quarter is deteriorating compared to the year before, but we will catch that up in the next quarter when the profitability will also grow with the increase of our capacity.

And we have to keep in mind for Transavia, we had 36 million in referrals and also the fuel and the dollar together had an impact of 40 million on their results. And on top of it, there were some operational difficulties. There were some maintenance at Transavia in the Netherlands side and where the ATC strike in funds. So, all-in-all, it is promising to see that the load factor is up, despite the growth in our capacity, and we will catch-up further there in the quarter to come.

Then on the maintenance side. Maintenance side, we've seen an increase of 24%. So there is a big demand on maintenance. The problem is actually that we are holding back by, let's say, the logistics situation, especially on the engines and the component side and we are also hampered by the tight labor conditions, especially at KLM. So that brings that we cannot actually fully exploit the vote, which we want.

There's a lot of demand from our customers in this area, and we will get back on that in the quarters to come. This logistics situation, we see that everywhere in our industry, and we have to ensure that, that will be solved in the quarters to come to further increase the revenue increase there. The demand is there. We signed contracts, and let's say, in the quarters to come, we expect a better result. Then if we take a deeper dive on Air France and KLM.

So, Air France increased their capacity with 23%, very strong ASK of above 20%. So that drove the revenues over 46% and broadly the result is better actually than 2022, where there was a furlough of 70 million in the result. So, an improvement of the results on the Air France side year-over-year, also driven by the transformation. We see however that especially on the French domestic side, we need to further optimize our network. We already cut it by 50%, but there is lower corporate demand and that needs further optimization.

On KLM, it's good to see that the situation at Schiphol is improving. We have seen also that in May, the situation is much better than what it was last year. We still have, let's say, capacity adjustment due to the tight labor market, which is impacting KLM and Schiphol and we see that there are further complications due to the supply chain.

There is, for instance, an issue with the deployability of the Embraer 195. And you have to keep in mind, last year, there was a furlough of 140 million. So both in terms of revenue growth doing very well compared to 2021 with rest above 20%.

Then let's take a look at the world net. If you look at the total, you see an increase, as I already stated, of 20% in terms of capacity. We are very close to the 2019 load factor. So, it is up 12%, and it goes hand-in-hand with a yield improvement of 18%. In the premium segment, you see that despite the fact that there is less corporate traffic, you see that the load factor is up again above the 2019 levels and still with an increase of the yield in this current sector.

So, despite the fact that corporate traffic is not fully back, if you look at the long haul, it is around 85% in terms of revenues compared to 2019. On the medium haul and domestic, it's more in the range of 75%. So, you see that despite the fact that this corporate traffic is not yet fully back, we are able to fill our premium segment. The long haul, which you can see on top is holding very strong with yields up 23%.

If we go to North America, we know that there's a strong market demand over there. We are already 12% higher than 2019. So, we grew 19% in terms of capacity with a yield increase of 23%. South America is still holding very [Technical Difficulty] capacity of 23% with even a yield up with 33%. And the load factor is already above the month of 2019 at 19% for the first quarter, very strong performance on our South American network.

If we go to the Caribbean, you see we reduced the capacity over there because we see that there are better opportunities in the rest of our network. The load factor is up to 90% higher than what it was in 2019 and going hand-in-hand with a very strong yield development of 27%. And Africa, always holding strong also during the crisis, we will further develop our network over there. So, we grow with 21%, and we are already 3.5% higher in terms of load factor than where we were in 2019. So, on that side, everything is going very well.

Then on Asia and the Middle East, we are gradually now increasing our capacity. So, we grew our capacity with 47%, which is still 37% lower than where we were in 2019. Load factor is getting more to the normal levels, close to 90%, 87%, and the yield is also increasing. You have to keep in mind that the yield also a year ago was very strong because we had very tight capacity. So, it was quite difficult to travel. So the yields in this market segment were very high.

If you compare the yield versus 2019, you see that the yield is up in Asia with 42%. Then on the short and medium haul, you see increase of 12%, quite a strong performance, especially on the medium haul in-line actually with our long haul with embarked in terms of yield by the domestic, which was only up 5%, but the yields on the medium haul was above the 20%. And then Transavia, as already explained, a high increase of capacity, a very high load factor but at the cost of the yield. But again, the yields are above 2019 with 20% if you compare that with the situation pre-COVID.

If we then go to Page 9, you see a very strong cash flow development, 1.5 billion change in working capital, which is fully coming from the very strong ticket sales, which we had in this quarter. So, we see strong yields. We see strong demand. I'll come back on that later when I show you the current forward load factors. You see we are actually going faster than what we have seen last year and also with very strong yields at the same time.

So this additional cash flow of 900 million are after the payments of lease of 683 million. You see that we could further reduce our net debt to 5.5 billion, bringing actually our leverage from 1.8% to 1.5%, which is at the low range of the guidance. We guided that we want to be between 1.5% and 2% and it's good to see that we are already there. And that goes hand-in-hand with a very strong cash, 9.7 billion, where we paid 1.5 billion in terms of state guaranteed loan from our cash.

So, if you include that 1.5 billion, you see actually that you would be even above the 2022, but it is now time to pay-off our debt with the solid cash positions we have. If we then go to Page 10, you see – I think everybody is already aware, as we promised in our previous presentation, we delivered completely what we have said.

So we started with a successful issuance of a sustainable bonds of 1 billion, then we paid in March, the full back to PGE, the state guarantee loan in France for 2.5 billion where we used 1.5 billion of our own liquidity and we repaid 300 million of the outstanding 600 million hybrid held by the French state. We paid the other 300 million in April. And in April, we signed the two RCS for an amount of 2.2 billion where KLM could cancel the remaining direct loan and the existing credit facility guaranteed by this state.

So, out of all – let's say, out of the framework agreement with the Dutch date and out of the recapitalization state measures related to COVID. So, we are totally out of the COVID situation. And at the same time, we are further improving actually our equity. So, we announced yesterday, yesterday evening that we are going into exclusive discussions with Apollo.

That will be for an amount of another 500 million in quasi-equity financing where we use our own MRO assets at Air France. And at the same time, we are working further on, let's say, the loyalty program. We received several non-binding offers, and we are actually in current discussions to find the right potential investor for that one. So, moving further in improving our equity, moving further in getting a release of all the state aid and improving our debt situation.

Let's then go to the outlook. So if we go to the first quarter, you see we had a guidance of – sorry, we had a capacity of 92%, which was exactly into the guidance that we guided 90% to 95%. We will keep that for the second quarter, so 90% to 95%, and we will ramp-up to 95% in the third quarter, and we will further ramp-up also in the first quarter above the 95%. So that will bring us on average, on 95%, we are on the right track actually to be at 100% in 2024 when we will be at circa 95% for 2023.

On Page 13, as I already explained, you see the very strong forward bookings. It's actually in all our business segments. It is above the months which we had last year. So, we sold already 76% of the tickets for the long haul, 67% for the short and medium. And even with the increase of Transavia, you see that we sold already three-fourth of that capacity.

So, very strong demand going hand-in-hand with a very strong yield. We see yields above the 20% in the domain holding still despite the fact that fuel is coming down. So that is very good news because it is promising for the results to come. And also for the third quarter, actually in all segments, we are ahead of everywhere in 2022.

Then to the fuel, you can find it on Page 14. So you will give you all the elements to calculate the fuel bills we used the fuel price and the oil price of last Friday and you see that we are moving from a jet fuel of 1,000 per metric ton to a level closer to $800 per metric ton. So, keeping the yields high and at the same time, reducing our fuel bill will of course improve the results in the quarters to come.

So, the development over there is going in the right direction. And it's good to know that we have now already hedged 62% of the 2023, and we're starting to, let's say, fixing the prices also for the first two quarters in 2024 at levels below let's say related to an oil price of below $80 per barrel.

Then on Page 15, you'll see our outlook. So, the group capacity, as I already said, will be around 95%. We keep the guidance for the unit cost versus 2022 to be stable and that we keep the CapEx on 3 billion. So, probably no surprise over there.

So, with that, I will hand it now over then to do the final conclusions before we're going to answer all kinds of questions.

Benjamin Smith

Okay. Thanks, Steven. Moving to Slide 17. As I said in my introduction, the upcoming summer season promises to be particularly dynamic for all our airlines. As you can see on the map on the left, except for the Caribbean and the Indian ocean areas, all our areas are seeing capacity growth compared to last summer. Both the new routes we keep opening from Paris, including Ottawa and Dar es Salaam ongoing bolstering of capacity to fit market opportunities will help drive our summer performance, in particular, capacity on both Air France and KLM flights to Asia will continue to recover, especially to India, Japan and China.

Transavia's momentum grows unabated, thanks to increases in capacity on strategic routes to Greece, Spain and Portugal from the Netherlands, while Transavia France will add new destinations from several French regional cities. In summer 2023, as you can see in the graph to the left on this next slide, capacity in all long-haul cabins will rise compared to this past summer, with a particularly strong increase in business and premium economy cabins.

Overall, we have grown the share of non-economy seats by 1.7% compared to summer of last year. On top of these positive capacity developments compared to last summer, the booking load factor for summer 2023 and all our long-haul cabins is also up with a yield that remains solid. All of these factors emphatically point to the dynamic demand we are able to capture, thanks to all of our assets, such as our diversified and leverage network, our strong brands and our agile teams. Collectively, they support our strategy and our premium positioning as illustrated in particular by the launch of KLM's new premium comfort cabin.

Moving on to the next slide. To conclude this presentation, I'd like to briefly highlight some of the group's major achievements during this quarter and touch on the challenges ahead. During this quarter, we have again made significant progress in restoring our balance sheet. As Steven mentioned, first, we have fully repaid all state aid received during the COVID-19 pandemic. This is an important milestone that resulted in the lifting of the operating and strategic restrictions tied to this funding, bringing us to conduct business as usual and retain control of our destiny.

We just entered, as Steven mentioned into exclusive discussions with Apollo Global Management for a €500 million quasi-equity financing of engineering and maintenance assets. We've also continued our deleveraging in-line with our objectives. We stayed the course of preparing our future with innovative financial instruments by securing ESG-linked bonds and revolving credit facilities indexed to sustainability targets. These tools are helping align our financing strategy with our decarbonization plan.

Concurrently, we keep delivering on our strategic road map, thanks to the very encouraging summer ticket sales, the group continues to show strong revenue growth, as well as robust cash flow generation. Our maintenance business continues to grow, driven in particular by the industrialization of our engineering and maintenance CFM LEAP engine capabilities, and we are confident that the strategic air cargo partnership we signed with CMA CGM and entering into as of April 1, will create significant value for both our groups.

Finally, I would like to emphasize the high degree of trust we enjoy with employee representatives and the stability of guarantees as demonstrated recently by Air France Cabin Crew’s signing of a new five-year collective agreement. Looking ahead, we will continue our efforts to further consolidate our balance sheet. As previously announced, we are exploring initiatives to restore our equity by means of non-dilutive funding, such as quasi-equity financing backed by our loyalty program.

From an operational point of view, we are now fully focused on the summer season that is about to begin. Our teams are getting ready to welcome our customers and offer them the best experience on the ground and on board our aircraft. The renewal of fleet is accelerating, and we will soon welcome our first aircraft with the Airbus A320neo family.

This aircraft not only meet the latest standards of technology and comfort that will also spearhead our decarbonization road map. Our Compass remains focused on operational improvements, we are relentlessly pursuing all our transformational projects at all levels of the organization in order to further strengthen our competitiveness.

Thank you. And we are now opening the floor to your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We take our first question from Harry Gowers with JPMorgan.

Harry Gowers

Hi, good morning everyone for taking the time. First question is just on, if everything goes well, if summer yields stay elevated, fuel stays relatively stable and you execute on the ex-fuel unit cost guidance as well, would you say that it's pretty feasible that you could already reach your 7% EBIT margin target in 2023 ahead of schedule? That's the first one. And then the second one, fairly forward bookings, the environment looks very strong. So, would you expect the yield rate to accelerate in Q2 relative to 2019 compared to Q1? Thanks a lot.

Benjamin Smith

[Technical Difficulty] Again, apologies to everyone on the line. We are having trouble hearing your questions, so they are being typed over to us. So, we've just got this question here. Sorry, we're not quite sure who's asked, but we've got the question, summer yields elevated when would we reach 7% COI margin and are yields accelerating?

Yeah. Thanks a lot for the question. Let's say, if you see the yields, you see that they are indeed very strong. They are above the 20%. We saw an acceleration actually when the summer bookings are getting in. So, we see indeed the yields are holding strong and getting better even during this quarter when we saw the bookings. Then if we go for the margin, of course, with this fuel price and with this very strong yield, we are getting closer to, let's say, what we guided for the midterm – what is our midterm guidance is 7% to 8% in the years, 2024 to 2026.

So, in this current climate, we are getting there, and we are on the right track actually to reach them. I hope it answers your question. It's a little bit difficult, and I apologize for that because we have to read the question here because the sound system is not working. So, there's a little bit of a delay of our answers compared to your question, but we will give a full answer, of course.

Operator

Thank you. And we take our question from Sumit Mehrotra from Societe Generale.

Sumit Mehrotra

Thank you. My question is on Transavia. I've seen the elements of 36 million from furloughs, 40 million from fuel and USD. Could you please help us guide with the expectations for 2023 for Transavia why we haven't seen a stronger improvement in Transavia yet? Secondly, KLM operating profit. Even though we remove the support from furlough schemes from last year, we still see the KLM operating profit lagging? Could you please explain that what could lead to an improvement from here on? Thank you.

Benjamin Smith

Hi, Sumit. Thanks for joining. Yeah. So, let's first – if we go back to the first quarter, I tried to explain that. We see, as we grow our business, so that also grow the losses because the first quarter is always a loss-making quarter and we were also holding back by, let's say, the operational climate where we were operating in. So, we had the strikes, ATC strikes in France. We had at the same time, we had maintenance aircraft on maintenance on the ground at Transavia in the Netherlands, and we still have the [indiscernible] situation.

So, we will improve our results offer that we don't guide the results per business for the full-year 2023. So, I cannot say, but as I show you, the load factor is high. We see that the bookings are coming in and also the yield is improving and the fuel is coming down. So that's very promising in the quarters to come. Erik, can you take them.

Erik Swelheim

Yeah. It’s Erik Swelheim from KLM. Regarding the question of the operating result of KLM, so the first quarter our clear priority was to get the operations stable, and we succeeded quite well in that. So we had a very good operational results. So you remember last year, we had the difficulties at Schiphol Airport. That's now solved. We are very happy with that. And indeed, if you correct for the furlough schemes, it is more or less the same result.

Last year, we had a result which was close to breakeven this year. It was a loss. But if you correct that for deferral schemes, it's more or less the same result and we are quite optimistic as Air France-KLM for the rest of the year, the summer look well, forward bookings are extremely good. So, you will see the result for the full-year improving.

Benjamin Smith

Perhaps I'll just give a little bit more color as to how we're doing on the Transavia France plan, strategic plan. So, as you know, we are transforming the bulk of our Orly operation from Air France's regional operator, [ops] [ph], and some Air France services that were extremely loss making prior to the crisis, and we're converting those slots over to Transavia operator flights, and we're moving that capacity away from the domestic market into medium-haul European services.

So, as we're getting the airplanes in there as quickly as possible. So Transavia is hiring pilots, training pilots as fast as possible, and we are moving that capacity extremely, as quickly as we can. So far, so good. It is a transition period. We are on track. As you may know, we did have to deal with some air traffic controller strikes and the bulk of them in Paris were at Orly Airport. So, those were mitigated, but still caused, I would say, a lot of the operational challenges at that particular airport.

Operator

Thank you. And we take our question from Muneeba Kayani from Bank of America. Please state your name before posing your question.

Muneeba Kayani

Good morning. This is Muneeba Kayani from Bank of America. Thanks for taking my questions. If I actually could go back to the first question that was asked in the call because I don't think the answer was very clear. Do you think you could reach that 7% to 8% EBIT margin target this year is the first question. And then secondly, just on yield. So, you're saying it's accelerating. Could you help us quantify kind of what sort of yields you're seeing in 2Q and an early read on 3Q as well? I understand it's still early days for 3Q at this point.

Steven Zaat

Hi Muneeba. Thanks for joining. So, as you know, we don't guide for the full-year. So, we give a guidance for the mid-term. And again, if the fuel price is going into this direction and with a strong yield environment, we are very well on the right track to reach those 7% to 8% margin, but we are not guiding for 2023. So sorry for that. For Q2 and Q3, if I understand your question well, you asked, actually, we are seeing an improvement in Q3 further than what we see in Q2 or is that not a question, Muneeba?

Muneeba Kayani

If you could quantify what 2Q yields versus 2019 and also an early read on 3Q yields versus 2019, please?

Benjamin Smith

Yes, we see yields above the 20%. So, that is what we can say about it. But of course, the yields came and we all know that will be actually always flat in the last weeks also of the bookings. So, that's very crucial. But we see very strong yields. And with this high forward load factor, we can, of course, squeeze more these yields a part. As you know, that is the booking curve where you have, let's say, the bid price and the bid price will go up further if you have these kind of load factors already in, but we see very strong yields above the 20%.

Muneeba Kayani

Thank you.

Operator

Thank you. And we take our next question from Sathish Sivakumar with Citigroup. Please state your name before posing your question.

Sathish Sivakumar

Yeah, thanks. This is Sathish Sivakumar from Citigroup. So, I've got two questions here. So first, actually, on Slide 18, where you compare booking load factor evolution. And basically, you talk about summer 2022 versus summer 2023. And out of this look versus summer 2019, any color on that be really helpful? And then second question is around the capacity outlook. Obviously, now you're saying it will be lower end of the guide around 95%, and it's mainly driven by short and medium-haul segment. Is the demand softening is the key constraint there to take capacity? Or is it more about labor/capacity bottleneck that's driving the lower capacity in short and medium haul segment? And maybe the third one actually, do you have any disruption cost in Q1 related to the strikes? Thank you.

Benjamin Smith

So, I'll take questions 2 and 3. So, regarding the strikes, the air traffic controller strikes in France, very limited impact at [indiscernible] below 10 million, below 5 million. And then at Orly, yes, there was an impact. But I would say we're still calculating that amount, but it's probably below 10 million as well. But in terms of disruption and focus, it did take an enormous amount of effort from our operational teams to mitigate those losses.

So, we expect those to continue in the near term. What we're understanding is those will continue 1 to 2 days a week for the foreseeable future. But after 2 months of experience now, I think we can significantly limit those losses even further down to where they were. On the slight reduction in capacity outlook, we've had some delays that we're forecasting on some new aircraft delivery.

So, we are making up for that with a couple wet-leased airplanes in the medium haul that are coming in. However, we expect by Q4 to be back on track with aircraft deliveries. From a pilot perspective, both at KLM and Air France we are at our projected numbers.

Steven Zaat

And can you repeat the first question because I didn't get the exact question is?

Sathish Sivakumar

Yes, sure. On Slide 18 of your presentation, like your booking load factor evolution, you compare versus 2022 summer. Just wondering if you have any data on how does it look versus 2019 summer?

Benjamin Smith

Now we see the [2022 numbers] [ph] actually more as the new normal. So, I don't have these figures compared to 2019, but we see what is actually the direction is especially this is premium segment is doing very well also in the premium eco sector. So that is actually what it shows. And if we show you, let's say, the comparison with 2019 in the appendix. So, if you look at the appendix, you see that the premium is already 4% higher in terms of load factor than where we were in 2019 with an increase of yield to 15%.

So, the premium was strong. This is the first quarter. We know that there is less corporate traffic and it's a more difficult to fill with leisure premium in this quarter. So we, for sure, will see an increase further in Q2 and Q3 when the lesser premium is also coming back further in our plans. But the load factor is strong, we can feel all the capacity [demand is] [ph] there.

Sathish Sivakumar

Thank you.

Operator

Thank you. [Operator Instructions] We take our next question from Alex Irving with Bernstein.

Alex Irving

Hi, good morning gentlemen. Alex Irving from Bernstein. Hope all is well. Two from me, please. First, on corporate travel. Could you please tell us how the recovery has evolved over the course of Q1, both in terms of volumes and in terms of revenues relative to 2019? And how do you see that evolving as we go through the rest of 2023? Second question, you talked about the strength in premium leisure demand, but what evidence are you seeing that suggests this is either a permanent change in behavior? Or alternatively, this is still the temporary aftermath of the pandemic, the demand patterns should return closer to the pre-pandemic mix? Any color on that would be much appreciated. Thank you.

Benjamin Smith

Okay. On the corporate traffic front, we continue to see a return to no normal, but not definitely not back to 100% where we have a significant reduction in corporate traffic still in place in the French domestic market. As I mentioned, we are pulling capacity as quickly as we can to redeploy that capacity with Transavia to European routes on the transatlantic and the rest of our network, including the medium haul. It's well above 70%, 75%, in-line with what we're seeing with our major competitors. This corporate or that's corporate this, what we call high-end leisure demand, especially on the transatlantic.

It is as strong as last year and in summer, it's actually even stronger. We've had in the last 3 or 4 months, the highest load factors in the history of Air France in our La Première cabins, very strong in our business cabins, historically, Air France would put in a modified business cabin with reduced number of seats in the summer before the crisis because of the decrease in demand for business class seats. We are not doing that this summer based on forward bookings. So we will have more capacity in business class in the summer than we did have in 2019. So high end leisure, especially into Paris is very strong.

Alex Irving

Thanks very much.

Operator

Thank you. We take our next question from Stephen Furlong with Davy Research.

Stephen Furlong

Good morning. Stephen Furlong from Davy. Okay. Question is on the cargo business. Obviously, it's normalizing from high levels in the pandemic. And I just remember in the distant past, cargo was kind of a leading indicator for the passenger business. I think that correlation is broken down many years ago. Maybe, Ben, you could talk about what you think of that?

And then the second just question on the passenger business. One, I guess it's an issue, but it's definitely benefiting unit revenue and yields in the industry is the supply constraints in the industry, whether it's delivery delays or employment issues in building back up from the pandemic. I'm just wondering in your view, Ben, how long you think these supply chain issues are going to last? That would be great. Thank you.

Benjamin Smith

Okay. On your second question regarding tight capacity. If you see the delays at both Airbus and Boeing are forecasting for deliveries, we foresee that continuing for the next few years. When we look at the capacity of our major competitors coming into both Amsterdam and Paris, we don't see, first of all, by most of them, they return to 2019 levels, and we don't see any growth in many of our major markets.

As you may know, the biggest long-haul low-cost or lower-cost carrier that was at Paris CDG in 2019 Norwegian, it's been replaced. They had [eight 787s] [ph] based at CDG in 2019. We have one new 787 by [indiscernible], which is the first new lower-cost entrant into Paris. But to date, we don't see any major growth in that area. So, tight capacity, we're enjoying that period, and we expect it to be in place at least for the short-term, we do know eventually it will actually continue on our medium- to long-term plan with the type of aircraft that we're bringing in to give us more flexibility.

As you know, we have our Airbus A380s that are now out, and that's really helpful when we start to see our competitors move into routes that are important so we can move capacity around in a relatively quick way without completely disrupting our bank structure. These new 787-10 at KLM are proving to be the right choice of airplanes. So, we're very happy with those.

Steven Zaat

Yes. And then on the cargo side, let's say we are coming from a very specific period out of COVID. So, if you compare Q1 2022 versus 2023, there, you know there was this tight, let's say, there was a lot of demand and there was tight supply. Now, we are bringing back, let's say, the cargo capacity to a more normal levels, and that is coming actually on our belly. So, there's a mechanical impact, as I tried to explain. But still, the yields are still 60% higher than in 2019.

So the relationship between, let's say, decrease in unit revenue on the cargo and a recession, I don't see that so much because we are still much higher than in 2019. We still see, again, both on the passenger and Transavia and also on the car side that the demand is there just that we are moving our planes more to, let's say, passenger-friendly destination than cargo friendly destinations.

Stephen Furlong

Got it. Thank you.

Operator

Thank you. And we take our next question from Neil Glynn with Air Control Tower.

Neil Glynn

Good morning everybody. Neil Glynn from Air Control Tower. If I could ask two questions, please. The first one with respect to a potential future dividend given the strength of recovery. At Investor Day 2019, you mentioned a threshold operating result of €1.9 billion. I'm just interested in terms of whether that's still valid today, but also how do you weigh the potential role of a future dividend versus deploying capital in M&A as a validator of a new era for Air France-KLM?

And then second question, your partner in South America, GOL has now become part of the Abra Group with Avianca, whereas at the same time, Delta's joint venture with LatAm has kicked off. So, I can see logic in you expanding your relationship with GoL/Abra, as well as logic in potentially switching allegiances to LatAm to join Delta's side there effectively. So could you explain how you think about your position in South America and those potential options, assuming there might be options? Thank you.

Benjamin Smith

Thanks, Neil, for those questions. In South America, we're still studying what best way forward for medium, long-term positioning. First you start from the base, we are the number 2 operator in terms of capacity already between Europe and South America, we're starting from a high base. There are options both in Europe and in South America, how we could partner up with in a more strategic way to improve our position. So we are still heavily focusing on what we can and can't do.

I don't have anything to share as of today. It is a bit early. As you said, there are options. We do have a historical relationship with GOL, we had. I think we may still have a very, very small investment in GOL that was put together just to solidify the relationship many years ago, but the relationship with GOL is solid. As you mentioned, LatAm does have now an immunized JV with our partner Delta. So discussions and potentials with LatAm are now available to take place in a very different context.

Steven Zaat

Yes. And then your question about operating results versus dividends. So, we are still on the path to, let's say, restore our equity. So that is the path which we are heading to. So, we are heading to a positive equity, let's say, in the period to come. And then we are going to define the dividends. And so that's not, let's say, the topic for the moment. Let's restore our equity first before we get to that topic.

Then on the deploying of capital over, we just have a very, let's say, stringent approach to it. Every euro we invest, it should have return on capital. So, we will use the same for M&A. We use the same for planes. We will look at the returns on equity or capital that we put in. And if we talk about M&A, it should bring synergies to them to us that brings a return because it's important that we invest in profitable business in our industry.

Operator

Thank you. And we take our next question from Andrew Lobbenberg with Barclays.

Andrew Lobbenberg

Good morning, guys. Can I ask for an update on what happens in the pantomime, I think, the [skip-off] [ph] in terms of the capacity planning and the potential capacity reductions. I think there was a successful legal challenge to the government's plans to cut capacity, but then I think they're repeating that. So, what's your latest understanding and how do you manage through the uncertainty?

Second question would take us back to China. And at the full-year results for 2022, Ben, you spoke pretty confidently about potential profitability on those routes. But then we think some press reports most recently that you're looking at trying to establish a more level competitive playing field relative to the Chinese [who are overflying] [ph] Russia. So, how optimistic are you that you guys can make money flying to from China? And how do you think that market or that political situation might develop? Thanks.

Benjamin Smith

Okay, thanks a lot Andrew. So, in terms of the situation at [indiscernible] the Dutch state is looking to reduce the number of slots for a number of reasons for noise, certain types of pollution. We're working hard to find other solutions to be able to do that as opposed to a strict slot reduction. So, it's a major effort that we have in place also have to be a European emission union approval of the Dutch State's proposal, which has yet to be heard and then after that to be ruled on.

So, we're cautiously optimistic that something we put in place that does not derail our medium-term plans. As it relates to our summer capacity and any impact on that. No, we are going to be able to plan and fly our entire summer capacity. We're not going to restrict the number of move-ins because the full return of 2019 activity by other airlines and even by ourselves, is not back to the 500,000 move-in that we had in place in 2019. So for this year, it's not blocking any of our capacity growth.

When it comes to China, the yields are very strong because capacity is extremely tight. In terms of profitability, there's no issue today between China and France or the Netherlands. As you just mentioned, the playing field is not level. So, we're not directly involved in the negotiations. This is done by the [indiscernible], which is similar to the Department of Transport in France, it does the negotiations with their counterparts in Russia, and they will do their best to create a level playing field.

So, until that's done, the bilateral stays in the temporary levels that were in place during the crisis, which limited the number of flights for us, it was 4%, similar for the Chinese airlines. So that's under demand. We are looking to increase that in a way that is on a level playing field. So right now, the groups are no issue. We're not losing money on China. We have plenty of other areas in the world where we can put that capacity, we plan to put up to five 777 in the China in summer of 2023. We have two scheduled for right now and the rest of those aircraft, which is most of them on the Atlantic. So, it's not a concern as of yet.

Andrew Lobbenberg

Okay. Thanks.

Operator

Thank you. And we take our next question from Jarrod Castle with UBS.

Jarrod Castle

Good morning, everyone. Hopefully, everyone can hear me. Three, if I may. One, any update on thoughts around the Portuguese carrier, TAP? Secondly, obviously, this memorandum on the quasi-equity deal with Apollo. And I think you said on the call, you'd also be looking to potentially do something with the loyalty program. Just interested in, kind of, I guess, the implied cost of these deals, the cost of capital for doing these deals versus let's say, other sources of funding?

And then just lastly, over the medium term, I guess, around the E in ESG, we've had the EU pass the 2% SAF and then the ramp-up to what will be 70%, I guess, by 2050. We've got a big step down in pre-ETS certificates coming next year and then the following years. So, just in principle, I mean, will you pass these costs or tri-party costs on to customers or do you try mitigate through other areas of cost cutting? Thanks.

Benjamin Smith

Okay. Thanks, Jarrod. So, on your first question regarding TAP, so as I've mentioned before, we do find it a very interesting opportunity. It's not yet an opportunity but one that we expect to come into play. There still needs to be a government motion passed in Portugal to open formally the sale process, which the Portuguese government has publicly stated they do plan to start. So, it's before summer or during summer. So, if it is put in the format that we think is interesting, then we plan to participate in that process. As you know, TAP has a very strong position geographically at the southernmost point in Europe towards South America, and they do have a very strong network to Brazil with 11 cities online nonstop out of Lisbon.

So, it's very interesting and could be potentially eventually accretive to our bottom line performance. However, we are not going to enter any type of M&A that puts risk to 7% to 8% margin we've committed to in the next 2 to 3 years. So, if we believe that it fits within our risk profile, we'll move forward and we'll put as much effort as we can into it. But keeping in mind that the margin is much more important for us that [indiscernible] in the market, we don't want to grow just for the sake of growing.

Steven Zaat

I'll answer your other two questions. So first on the quasi equity. We don't, let's say, publish now the cost of capital, but let's say, I can tell you it is quite close to what we had, let's say, on the previous deal. So it looks for us, let's say, quite good, but we will get to there if we have the full agreement. On the ETS side, of course, we will pass this cost to our customers. It's not only for us. It is for all the European carriers.

So low cost, everybody who operate in Europe, they have to pay this cost and this cost needs to pass through to our customers. So, I think that is clear. It will be impacting, of course, more the low-cost segment than, let's say, the more legacy carriers because there's a bigger impact, let's say, on their cost levels than it is for the other one. So these costs will be passed to the customer.

Jarrod Castle

Thanks very much.

Operator

Thank you. We take our next question from Johannes Braun with Stifel.

Johannes Braun

Yes. Hi, good morning. Thanks for taking my questions. Actually, I only have one topic. Your main competitor is talking a lot about bottlenecks in the broader travel ecosystem. I mean you already mentioned the aircraft delivery delays that you're also experiencing. But I think the narrative is that the bottlenecks go deeper than that. So, also engines, airport labor, spare parts, business classes, laboratories, everything seems to be in short supply currently. And therefore, this keeps capacity growth in the industry low despite strong demand, which, of course, will keep supply/demand in the industry in a favorable position for years to come, which obviously will be very positive for yields. So, do you agree that that this is the case? Do you see the same, kind of positive outlook for supply/demand in the industry for the coming years? That would be my question.

Steven Zaat

Hi, Johannes. Good morning. I get your vision on the supplier side, and I think you are quite well. I think I stressed the point when we talked about our maintenance activity. We see that there is indeed on the engine side and the component side, there is, let's say, the logistics is not fully, let's say, there where it was before the COVID crisis. We expect that this will be restored. But of course, that will not restore all the planes because there's a lot of planes, which has been phased out during the crisis.

So, there will still be tight supply. I see a point that the delays of new planes getting in due to these logistic problems will even tighter further the supply side, which is good for our industry, so to say, from a profitability standpoint. So that is your question, I can see your view. We had these issues also in Q1, both on [MRO] [ph], but also on the [indiscernible], we see it.

Benjamin Smith

Perhaps I can give a little bit more color. We have predicted the retirement of up to 41 wide-body airplanes late last year and moving into throughout 2023 and early 2024. So, 30 777-200s [indiscernible] at Air France, 15 A330-200 Air France and up to 11 A330s at KLM. So, many of these aircraft are owned. So, if we can keep these aircraft longer than planned to ensure that we balance out the capacity demand balance to maximize profits.

So, we're happy we've got those airplanes available if necessary, these are not A380s, some of our competitors need to activate midsized airplanes, 250 seats to 300 seats, very flexible airplanes, and I think it better positions us versus some of our competitors in terms of being more agile when it comes to how slow and how late some of these important items are ensure that our business runs.

Johannes Braun

Thanks.

Operator

Thank you. [Operator Instructions] We take our next question from Achal Kumar with HSBC.

Achal Kumar

This is Achal from HSBC. So first of all, going back to the cargo business, of course, you said that you are sort of shifting planes towards more passenger side, and cargo remains very strong versus 2019. But is there any color you can provide going ahead in terms of cargo yields in Q2 and Q3, if you could please give us a bit of a color on cargo, that would be very helpful.

Secondly, in terms of your quasi equity going back to this thing, the loyalty one, I'm not sure if you can give a bit more color in terms of what kind of valuation you're looking at for loyalty business and all that, sort of thing. So, if you could please give us a bit more color there, it will be helpful.

And finally, on the fuel cost going down, I mean, fuel prices going down. Of course, at the moment, demand-supply equation is very, very favorable and hence, the yield remains strong. But do you think at some point of time, you'll start passing on the falling fuel price to the customer? And if you see that when do you think in next year, especially or would it be very selective on the route wise in the short haul rather than long haul? Thanks.

Steven Zaat

Good morning, Achal. We lost a bit you on the cargo. So, if you can repeat that question. I will give the answer on the...

Achal Kumar

Yes, sure. I was asking for a bit of color on cargo volumes and yields going into Q2 and Q3. Of course, you mentioned that you are shifting planes more towards passengers. But on the cargo side, you said the yield still remains very strong versus 2019 in Q1. But what about Q2 and Q3, if you could give us a bit of a color on yields and volume going into Q2 and Q3, that will be very helpful?

Steven Zaat

Okay. So, I indeed give an illustration also compared to 2019, I would say, we see more or less the same figures for Q2 and Q3 as what we see in this quarter, but we already saw a drop in the unit revenue of the cargo in the fourth quarter. So, they will be less impacted in the fourth quarter, which is always, by the way, a very strong season in the cargo market. But with the deployment of more passenger planes, we will see the impact on the unit revenue for the cargo, especially coming from the belly side, of course, in the same kind of range.

On the quasi equity, yes, I cannot announce that at this moment. We have, let's say, offers on the table. We will work on it. And when we are ready, we will announce the amount like we did today for the MRO, and we expect that, that will come in the coming period.

So, just wait and you will see the value equation. And then on fuel, I think, of course, there is a relationship usually between fuel and yields, but we have seen in the past that due to the fact that actually the supply and demand is still, let's say, more demand than supply that we can still keep these yields at this level.

We see that actually everybody knew already that the fuel price will drop in the second and the third quarter, you saw that actually already coming, and we still could keep the high yields into place. So, for the moment, we don't expect there to be an impact.

Achal Kumar

Thank you.

Operator

Thank you. And that concludes our Q&A session today. With this, I would like to turn the call back over to your host today for any additional and closing remarks.

Benjamin Smith

Okay. We would like to thank all of you for taking the time to listen to our call today. I appreciate it.

Operator

Thank you. That concludes today's conference call. You may now disconnect.