R'sR: IAG versus Air France-KLM: a tale of contrasts

Robert Boyle writes:

Air France-KLM (AF-KL) entered the COVID crisis in decent shape from a balance sheet point of view. Even before the injection of funds from the French government, the March 2020 cash position was €6.4 billion, equivalent to 23% of 2019 revenues, almost matching the 26% ratio at well capitalised IAG. Net debt of €6.6 billion was actually lower than IAG’s €7.5 billion.

However, it was much less profitable than IAG, with operating margins in 2019 of 4.4% compared to IAG’s 14.8%. This meant that as a ratio to EBITDA, a standard measure of debt affordability, net debt levels were a little higher at 1.6x compared to 1.4x at IAG. But still pretty solid and much better than Lufthansa which had cash levels of only 9% of revenue and net debt / EBITDA of 3.3x.

AF-KL’s profitability had lagged behind IAG’s for many years. So how did it come to be in such a relatively solid position from a balance sheet perspective? To answer that, we need to look back at the last few years of history, because the two companies have been on very different tracks.

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You may also want to read this: “You don’t know what you’ve got till it’s gone“.