Air France cries while Airbus laughs

After a recession, the dollar continued its upward march against the euro. The greenback has appreciated 1.7% in a month against the common currency and more than 8% since the start of the year. And currently at 1.05 euro. This evolution is far from anecdotal for the air transport and aviation industry; the first is structurally a buyer in dollars, and the second is a seller. At both ends of the spectrum are Air France-KLM and Airbus: No two giants in the industry experience this price evolution in the same way. That didn’t stop them from agreeing to direct coverage for an order of 100 A320 NEO family aircraft and four A350Fs without a third-party financial institution.

A structural risk for Air France

Mainly located in France and Europe, Air France-KLM’s revenues are mostly in euros, up to 60% in 2021. Thanks to the group’s market presence, the dollar is in second place with 20%.North America. Before the health crisis, the distribution was around 55% and 25%, respectively. The rest consists of other currencies, of which the group has not provided details, but the yen has traditionally been very present in receipts. However, it hit its historic low against the dollar since 1998.

Conversely, a significant portion of operating costs are in dollars. In 2021 this represented 25% compared to 75% for other currencies, mostly euros. Before the crisis, the weight of the dollar even exceeded 35%. Expenditure in dollars therefore tends to exceed income. This is why Air France-KLM’s 2021 annual report “a persistent structural risk. As a result, a significant rise in the US dollar against the euro could have a negative impact on the group’s financial results”.

Weight of refining margins

Purchases in dollar terms are related to fuel oil, which has also seen a sharp increase with very high crude oil prices and refining margins. The latter started with a combination of strong recovery and lack of capacity after two years of idleness. As IATA managing director Willie Walsh explained at the end of May, refining margins have returned to around 40%, representing 60% of the cost of crude oil in recent months. However, they seem to be starting to rise again as the price of crude oil tends to stabilize between $110 and $120 per barrel.

While hedging measures are quite common at oil prices, they are rare at kerosene prices. KLM has certainly managed to hedge directly from these refining margins, but relatively modestly in the face of this dual impact, which combines the increase in kerosene costs with a negative exchange rate effect.

Maintenance is also heavy

Another operational expense item in dollars is the maintenance of the fleet, parts purchases there are also made in dollars. Here, in addition to the exchange rate effect, a double effect is possible with the increase in raw material and energy costs, which affect part prices.

Finally, capital expenditures are also affected: planes, seats, cabins… everything is also in dollars. Even if the deal between Airbus and Air France-KLM allows KLM to pay for its final orders in euros, the effect is not entirely neutral as we know the group is involved in a one billion investment plan for its fleet. euros per year.

Air France-KLM will therefore have to play on its commercial revenue to counter this negative exchange rate effect. As one analyst explained, the group can thus adapt its network to sell more in the dollar zone where it has done well in the past. The current closures of China, Japan and Korea allow it to have significant capacity in North America, whose supply this summer exceeded 2019.

If one of these countries completely reopens, the issue of capacity redeployment will arise. This is especially true in Japan, where currently only Japanese are allowed into the area.

Airbus must be patient

Conversely, an increase in the dollar is good news for Airbus, as it is structurally a seller of dollars. However, in the fence game, the European aircraft manufacturer clearly didn’t make the right bet. Airbus took action against the risk of volatility to reduce its exposure to the dollar. Therefore, it will not be able to immediately take advantage of the strong dollar, as financial director Dominik Asam explained last month.

If the conversion rate stays between the euro and the dollar, the aircraft manufacturer should take advantage of it by gradually renewing its existing hedges with new ones with more attractive rates, but it will likely have to wait until 2024 to see that. take full advantage of..