WEX Inc. (OTCPK:AFRAF) Q1 2019 Results Earnings Conference Call May 3, 2019 2:30 AM ET
Frédéric Gagey – Chief Financial Officer
Steven van Wijk – Commercial Director Eastern Africa
Conference Call Participants
Savi Syth – Raymond James
Jarrod Castle – UBS
Daniel Roeska – Bernstein
Neil Glynn – Credit Suisse
Andrew Lobbenberg – HSBC
Jaime Rowbotham – Deutsche Bank
Michael Kuhn – Societe Generale
James Hollins – Exane
Nuala McMahon – A&L Goodbody
Good day, and welcome to the Air France-KLM Q1 2019 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Frédéric Gagey, Chief Financial Officer. Please go ahead, sir.
Thank you. Good morning to everybody and thank you for attending this conference call of 2019 first quarter of the Air France-KLM Group. So I suppose you have the press in front of you. I propose to go to the first slide, which is just giving the global and what are the main returns from the first quarter. I'd say that as everybody know and following also some indication shared with the market by some of our colleagues. You know that we were a bit under pressure considering the unit revenue, which is not a surprise for us as already in the last year presentation for the full year result, we had indicated to you that we were expecting a negative unit revenue for this first quarter due mainly to the relatively large development of capacity by the industry and in fact it is what happened.
If you look to the slide, you see that the passenger unit revenue, which is the unit revenue for both the networks Air France-KLM and Transavia, we are at minus 1.9. This is negative. We consider it is probably a bit better compared to some of our competitors and it sounds that if it is negative, we also think that we have shown in the market indication of worse evolution of unit revenue for some of members of the competition. In spite of that, you see that activity has been growing. In terms of number of passenger, we are at plus 3%.
If you add also the fact that the fuel bill increased by roughly EUR 140 million over the quarter, we have the main explanation of the drop in operating results. Last year was minus 100. This year, it is minus 300, so a reduction of 185. If you go like-for-like, in spite of this reduction of the operating result, which is contained I will say, we have been able to continue the deleveraging of the company, and net debt is down EUR 400 million. This is net debt according to the new IFRS 16 standards and the free cash according to the old standard is also positive. I will come back to that at the end of the presentation.
Two other elements. One I suppose that you know that we successfully launched convertible bond for EUR 500 million with interest coupon of 0.1%, and we are also discussed with Ben Smith who will be very happy to welcome you in the Capital Markets Day that we plan in November 2019. I go Slide number 4, where you have the main result for this quarter. Revenue is up Q3 and Q2 if you correct for the currency effect. The fuel expenses as I told you before EUR 140 million more compared to last year, which is explained mainly by the fact that we had last year a very positive result of the hedging.
This year, we are still positive result for the hedging, but which is far less than in 2018 and this is our main explanation for the increase of the fuel bill. Operating result, minus EUR 300 million, operating margin minus 5%, negative of course but we are in winter. And the net income Group part is minus EUR 300 million, adjusted free cash flow, positive EUR 241 million and as a consequence net debt-on-EBITDA ratio stands below 1.5 at 1.4 for the first quarter.
Slide 5 shows you the development business unit. Network, which is both the passenger network activity and the cargo, it is the main explanation behind reduction in terms of operating result. It explain minus 193 of the chance, this is explained by the fact that we have, as I told before, negative unit revenue minus 1.6% for the passenger network activity, but you also see that in terms of cargo, we are back in a period with negative unit revenue. As you know, the year 2017, 2018, we were relatively dynamic in terms of cargo, and we shared recently with our colleagues of the business unit cargo that we are now facing more difficulty due to a weakening market in terms of international exchange.
Transavia, also unit revenue negative, minus 3.5%, not really a concern. As you know, Transavia is still planning to grow a lot during the summer. In order to grow, you have to prepare that a bit in advance. It explain why the capacity is pushed 11% also during this the first quarter, which is the weakest period, of course, in terms of demand. Also, Easter shift in 2019 is also explaining the unit revenue in Transavia.
As you can imagine, the Easter period is very important for a low-cost company, but in terms of the departure out of Schiphol, in total, we have a small reduction of the margin to Transavia, but again, it is not a concern. Good news is coming from the Martinair announced last year. We are a bit concerned about the reduction of the margin in the Martinair business unit. You see, as a contrary, during this quarter, the margin increased by 1.5.
Last year, we suffered from some one-off, one of them very important was the loss of the contract with Alitalia, which had a significant impact in this first quarter. Now for the first quarter 2018, we have a clean sheet in terms of accounting, and we have seen a good margin of 4%, which will be even a bit higher over the 12 months 2019. So all in all, this reduction of 185 for the operating result and negative margin of 105%, but again, we are in winter and again also, we are expecting this evolution due to the increase fuel bill will expand during the presentation of the full year 2018 and also because we were expecting negative unit revenue during the first quarter.
Next slide, 6. Geographical area, you see that the medium-haul point-to-point content and the medium-haul connecting hubs are existing not too bad. If I refer to some evolution of unit revenue for some of our competitors, it is minus 2.7 in the medium-haul point-to-point content minus 2.1 for the medium-haul connecting hubs to total medium-haul as a unit revenue minus 2.4 with capacity developing at 1.4%.
Gross long-haul, it is slightly negative, minus 0.9 with some weakest part in the global network. Of course, one clearly is Latin America where we increased capacity a lot, mainly to the Andean countries but due to the crisis in Zillah, Argentina and Venezuela, you see the unit revenue at minus 7%, which is really a very weak result. North America minus 2.5. And for the rest we are all stable all increasing, increasing in Caribbean and Indian Ocean at 1.3, Asia also is still continuing to develop correctly at 1.7 and Africa is stable after a period where it was, to be honest, a bit weaker due to the low fuel price and the impact on oil countries.
So in total, long-haul existing relatively well with an reduction of unit revenue of minus 0.9. Of course, all this development impacted by events in France. We have considered after some – as we can calculations that the impact is around €10 million during the first quarter 2019. Two other elements. First, premium is better than economy. The RASK ex currency for premium is at minus 0.6, for economy it is minus 2.2. And second element, ancillary revenues continued to grow very dynamically. You are at – for the quarter at €161 million and the growth is above.
Next slide, Page 7, If you go to the unit cost where the unit cost, which is continuing to give us comfort about full year guidance so we still maintain the guidance and unit cost will be between minus 1 and 0% and it is what we have today in the reforecast we made in March. For the quarter, it is at minus 0.4. The reason for the improvement, we estimate at plus 1.7%.
However, the staff costs are increasing under – as a consequence for the two wage agreements signed in 2018 in Air France. And I will say that the impact of EBIT increased due to some timing effect on numbers, for example, in Air France, the merger concerning the 2018 agreement has been distributed to employees by the end of the year, which means that for the like-for-like comparison, there is a bias because the 2% of the wage increase to Air France has been paid by the end of year.
So now when you consider Q1 2019 to Q1 2018, there is a pure timing effect increasing the evolution of the staff costs, which means that over the full year 2018 we expect staff costs happily below 6.4% in terms of increase. If I go next slide, we have, I think, a very clear explanation of the [indiscernible] 2018 Q1 and 2019 Q1, when you look out to explain evolution of the operating results. So it's a big impact of the unit revenue minus EUR 150 million. Also an impact was the fuel price ex currency is minus 44, so there's a net currency impact, which is a combination of the currency impact on both the revenue and the cost.
And of course, it is negative due to the impact of the allowance of fuel cost and mainly on the leases and also currency impact on the revenue side. And these three elements that are partly, but very partly I would say, compensated by the contribution of the reduction in unit cost of minus 4%, which has an impact of EUR 22 million over the quarter like-for-like, which means that we have clearly a very simple explanation why we move from minus 100 last year to minus 300 in 2019.
If you look to the operational performance, as you know for Ben Smith and Anne Rigail mainly in Air France, a lot of focus has been given to the improvement of the operational performance, and we see during this first quarter a relatively significant evolution concerning the time performance – on-time performance and concerning the Net Promoter Score given by all clients. Concerning the on-time performance, Air France was very, very low in the ranking of flights stats in the middle of 2018, 31 July, 22 in August and you see that since the beginning of January 2019, you see an improvement for February and March 2019, the company Air France only because KLM found better on-time performance, which is a big company is ranked the sixth and seventh, which is really the first signal of the effort driven by Frédéric Gagey on the evolution of the operational performance as a company.
Concerning the Net Promoter Score also, we see an improvement during the last year. We had a very large gap between the KLM performance and the Air France One. But you see that on the beginning of 2019, the NPS has increased from 12, which was the level of 2018 to 24, which is a relatively sharp increase. And you see that when you look at the first two weeks of April, it is at 26, so clearly, a very good evolution in order to restore two big issues into Air France, which have been observed in 2017 and 2018.
I move to the next slide, Slide 10, where you see, as usual, the comparison in terms of economic performance between Air France and KLM. At this time, I will say KLM margin is going down minus 4.5 points, which is more than the performance of Air France, which is going only by 1.9. But of course, there are main explanation, in that you have to take into account the [indiscernible] 2018. Of course, the first quarter impacted by the strike at Air France, and we have estimated the impact at negative EUR 75 million.
When you correct for that, you see that it says evolution of performance so evolution of margin into [indiscernible] of the same order of magnitude. Important also to see that the two companies continued to reduce their net debt from minus EUR 76 million into Air France, minus EUR 255 million for KLM, and that net debt and EBITDA we sure are not solely Air France, especially if you correct for Air France the strike effect of the last year.
Next slide, Page 11, evolution of the leverage. So you know that we have introduced from presenting seasonal elements since the adoption of IFRS 16. So you have the cash before working capital, same level of working capital compared to last year, 806 versus 807. Not a big deal. Concerning the investment, investment in 2019 Q1, a bit lower or significantly lower by EUR 200 million if you compare that to the first quarter of 2018 and it explained partly the operating free cash flow, which collected from payment of the debt gives you a positive adjusted operating free cash flow, which is, I remind you, the free cash flow as it was before the adoption of IFRS 16.
Now if you move to the net debt, you have on the right of the slide, the duration of seasonal debt from 6.1 to 5.7 so this is reduction of the net debt pushed by the free cash and balance between the repayment of this debt and the new lease, which are added to the global debt of the group. So again, the net debt on EBITDA ratio is end of March 2018 at 1.4.
I go now Page 13 to first try to describe a bit what is the situation? So clearly, winter has been characterized at the very high level of development of capacity also compared to last year and mainly on the medium-haul. What is happening for the summer 2019? First, on the left of the slide, you can see that the group has relatively cautious development in terms of capacity. It will be 4% for Air France and 3.2% for KLM, but the 4% in Air France is not corrected for the strike so which means that we continue to maintain or guide on that over the year.
The growth of the group in terms of ASK would be between 2% and 3%. Second, you see that the development in the capacity operated by the industry is a bit uneven, significantly slower than last year. Last year in terms of number of seats long-haul of the industry, from and to Europe, developed a growth of 7.6% in 2019. We have a growth of 5.2%, which is, I will say, significantly less than in summer 2018.
Where are the most growing destination? It's still in Latin America with number of seats increasing by 12% and Asia, where you have the number of seats increasing by 7%. But also seat growths are less than the share mainly in Asia. Last year, it was 9% and it is 7%, the same in North America. Last year, the growth in terms of number of seats was 7%. Now, it is 3.6%. And Middle East, it was 11% last year, it is 5% in 2019.
Secondly, the amounts of the compartment of the players are a bit changing. If I try to summarize that, I will say that the legacy carriers are slowing down the growth compared to last year. The Gulf carrier also increasing far less than what it is years ago and also the long-haul aircrafts are clearly also growing less actively than in 2018.
So all in all, we're at the picture, which seems to be a bit more favorable compared to last year. Then I go to Page 14, how does it translate in terms of long-haul forward booking load factor for Air France-KLM so as usual we show you long-haul forward booking load factor for the next five months. What do you see? You see that for May and June, we are above last year in spite of the increase of capacity.
So if there is a load factor in terms of number of bookings and for the time being from July, August, September, we are more stable compared to the last summer 2018, which if you remember well was a relatively good summer. So stable for the summer up to now and booking load factor a bit higher for the month of May and the month of June. On top of that, you have to also keep in mind that last year concerning the point-to-point unit for the new developed collectively and quickly plus 2.9%, as the point-to-point network was helped/supported by the strike in the French airways company, which means that taking into account all these element, what we think is that for the second quarter, the unit revenue collected for the currency is expected slightly improved compared to last year with clearly something positive of the long-haul and which will be largely offset by the negative point-to-point unit revenue. So this is where today we are looking at the unit revenue for this second quarter 2018.
I move Page 15 should be not surprised. We give you – it should be estimate for the year based on the forward curve at the 26, April 2019, which is last week, since as you know, the fuel grant wasn’t going down, which means that there is no risk for the time being due to the – maybe loss of the fuel cost development, and we are confident with this stood at that, that the fuel bill will increase by €650 million, compared to 2018 with the fuel ranging over the year, which is expected at $200 million to be compared to the $800 million of the edge result in 2018, which means that all in all, for the time being, a part of the slight evolution of our estimate for the fuel bill, we continue to keep the same guidance we shared with you at the beginning of the year.
Capacity for the passenger business Q2 to Q3 at Transavia plus 9 to plus 11, so it should be I just told plus 650 million. Currency seems to be neutral for the time being, but there is some, to be honest, variability when you look, for example, to the dollar, but this is an estimate we have today. Unit cost, as I told before, are still expected between minus 1 to 0, so in that trend. CapEx in terms and net debt on EBITDA in terms also, so thank you.
Now I give the floor for your question, and I’m happy to answer with close to me Erik Swelheim, who is CFO of KLM; Marie-Agnès, that you know of course, and Valerie Coulon of course and I am also with our Chief Accounting and our Chief Controller for the group, Steven van Wijk. So I give the floor to your questions.
[Operator Instructions] We’ll take our first question from Savi Syth from Raymond James. Please go ahead. Your line is open.
Hi, good morning. Thank you. Could you please elaborate just a couple of questions from me? And first one is if you could elaborate what you generally expecting from the various regions that’s driving that passenger unit revenue up slightly in 2Q. Just somewhat similar to what you –from a demand perspective, what you’re seeing. I know you can highlighted a lot on the capacity side. And then just on the second one, with premium down year-over-year in 1Q, just wondering what your – what’s driving if it’s that across the region or if it’s kind of any specific area that’s driving that and what you might expect as you kind of go through 2019. Thank you. Hello?
If I look on your first question, which is how to split the Q2 assumption in terms of unit revenue per region, I will say, normally, we don’t share such precise, that I would say for the second quarter for the time being, in our own goal, everything is positive except South America, which means that we are positive unit revenue for Indian Ocean, Caribbean, Middle East, Africa, Asia and North America, but there is still significant drop for the South America. Second question is the premium per region and that, sorry, so we are not going at that level of granularity, and we just give elements in the unit revenue for the global traffic per region.
Okay. I wonder if maybe I can ask at a different ways. From a business and corporate demand standpoint, are you seeing kind of a trend change or – is there kind of any softening in the business demand side of things?
For the time being, as you know, you don’t know, we call for another new meeting, and the element we have in mind following the last meeting. So we show that, normally, as there is no big change concerning the demand, big change in behavior concerning the demand for the premium segment, the demand level seems to remain relatively solid. And as you see when we split the unit revenue between premium and between economy. It was so that which is into the slide, that’s a reduction of the unit revenue in premium is far less than in economy, so it was a good resilience for the business on the premium traffic.
Helpful. Thank you.
We will now take our next question from Jarrod Castle from UBS. Please go ahead, your line is open.
Thank you and good morning. Three, if I may. One, just from the full year result, the load factors of weakened a little bit for May and June. I think you were plus two rather than the plus one. So is there any comment around that? Secondly, just Page 15, the quarterly progression of the fuel though. But the quarters don’t seem to add up to the total or it is the different kind of metric for constant currency, et cetera. But just don’t seem to add up. And then lastly, in any kind of commentary at the moment in terms of corporate governance on the perspective of the new shareholder or the Dutch government. Thanks.
Okay. I will – Steven will take the second one, and I will answer the new shareholder. As you know, it has been a decision for us that we are not, and I will say this is a decision we are not ready to comment. We will announce during the AGM if it is changing the composition of the Board. And I will say at this stage, we have nothing we need to add. But I will say from the day-to-day business of the company it doesn’t change a lot as the way we are working, it seems that Ben Smith [indiscernible] Peter Elbers after 10-year concentrated and focused to the management of the company and that’s it. We are business people first above everything, and this is what we are doing every day.
As concerning the fuel bill, I suppose you refer to 2019 in the quarters.
It has tried.
Okay, okay. And then just – was the first question, but the one on the load factors that going from plus two and enter into plus one.
On that question, it’s true that if you take the presentation of February Page 18, you add for April, May June. April, May, June plus 2, plus 2, plus 2. When you have now plus 1, plus 1. I think that the more you are close to the months that data because, of course, when you are three or four months in advance booking load factor is relatively limited, yes. So – and what is important when you speak to the team of the volume management is to be sure that you are at least the delivery of the year before. So from that point of view, as a plus 1, plus 1 for May and June give us a level of relative comfort concerning the size of the unit revenue for the long-haul will be positive, as I talked before. However, this effect of last year on the point-to-point, which explained why we have seen outputs consisting to tell that unit revenue in Q2 compared to last year, will be slightly improved but positive for the long-haul.
Okay. Thank you very much.
We will now take our next question from Daniel Roeska from Bernstein. Please go ahead, your line is open.
Thanks, so much. Good morning, gentlemen. Three also for me. Number one on the SNPL, Frédéric, could you just remind us kind of your roadmap for the remainder of the year, kind of what are the topics you want to discuss with the union as we look towards 2020? I assume it takes considerable amount of time to get the discussions going, but what would be the main points you'd like to achieve? Maybe in that context, number two, priorities for HOP! and Transavia this year? How do you think smaller ones mentioned the capacity growth? Maybe any color on the kind of top items on the HOP! management and Transavia management agenda? And lastly I'll keep asking fleet order on short-haul anything to expect as Max kind of issue right now delay that process. And can we expect any news on fleet order before the Capital Markets Day? Or is that kind of the big reveal for November?
Okay. Thank you. Seem to have three questions. For Air France, because you probably heard about the strike announcement, but it was a national union for the French pilot, which is absolutely not the Air France organization. That said, but it is mainly topics which are to be discussed with the French. So we are not really involved and we support, of course, any solution. In order to avoid such strike for the time being, which has been postponed and even called as a technical priority by the national union of the pilots in France.
Concerning more precisely as a union pilot in Air France, as you know, there is other ways in any airlines continuing and continuous discussion in order to keep them as high as possible. And one is the topic, which is discussed for the time being, is of course, the Transavia fleet the possibility to go well above 40 aircrafts, which is today a limitation for Transavia. Concerning – there was a lot of work, of course, which is managed now by the management of the domestic point-to-point network.
First of all, we have already indicated that the development of capacity will be negative for the domestic network. And for the year 2000, you saw that already in the slide, Page 6. You see that in the medium-haul point-to-point for the first quarter, we are at minus 3% in capacity. It will be even less for the full year. We are more targeting minus – yes, minus 6% for the full year 2019. So clearly, there is a continuous effort consisting to secure the point-to-point network mainly by operating lower capacity for this domestic network.
Second, we are also working in Air France to – as a possibility to launch a voluntary departure plan concerning the domestic network and mainly some ground stations in France. This is a normal effect of the realization of capacity. As you know, we are still hit by the development of the high-speed railways. Last year, it was [indiscernible] which had, of course, a very strong impact in terms of demand for the air travel, and we have just to follow the situation in order to adjust the Air France network to the new economic environment characterized mainly by the development of the trend in domestic France.
Third question on the MAX and the short-haul fleet. So just three remarks. One, we’ve not order for the time being any 727 MAX. It is just a matter of fact. And of course, we are now looking extremely carefully to the development and the announcement made by Boeing and all the bodies, which are involved in the management events and we will see later what to do. But for the time being, there is no orders made by Air France or KLM or by Transavia concerning aircraft.
Second, concerning the existing medium-haul fleet to announce one, in KLM, the short-haul fleet is relatively young, which means that there is no urgency to move or to launch big order. It is just a normal replacement year-on-year basis, but there is no – there is no on view to the relatively low age of the medium-haul fleet of KLM. Concerning Air France, the medium-haul fleet or the short-haul fleet is older. There is no urge on but clearly, there will be a need for replacing some aircraft after the year 2020. So we are right now considering all the possibility, all the choice, which are offered to us in order to prepare assistant, but no big decision to be taken, I will say, in the next quarter.
All right. Thanks.
We will now take our next question from Neil Glynn from Credit Suisse. Please go ahead. Your line is open.
Good morning. If I could start, first of all with the – you've touched on premium traffic, premium demand in earlier questions. But on the leisure side, as we progressed into the summer, clearly, you said touch on stuff continues, but also clearly, across Europe, macro concerns are certainly relevant. Are you seeing any change in consumer behavior and appetite to book whether short-haul or long-haul leisure trip for the summer owns?
Second question, it might sound small, but I noticed that the Kemp’s headcount has fallen year-on-year for the second quarter in a row. Is that's correct. Just in contrast, does that actually suggest any change in approach in terms of managing headcount as you progressed? And if you could give us some insight in terms of how headcount should actually grow through the rest of that year – the rest of this here, that would be helpful, following a 1% growth off the total group level for the first quarter.
And then the third question, obviously LATAM challenges continue. Can you give us an update on your expectations as to the timing of the launch of the Air Europa joint venture and give us some insight in terms of how you think that structural changes your returns or at least your operations within the LATAM market, which is all was volatile. Thank you.
Concerning the organization, is a big difficult first to make estimate on the impact on the current year, but now we are asked our new management team to look at it. And for the time being, we consider that for the period November to December it was something between €15 million and €20 million. And for the first quarter 2019, we have an estimate which is between €11 million and €13 million, so clearly a difficult to estimate, but there is some impact. So I will say, that we search estimation as a impact, it is difficult to say that it is changing the behavior of two regions of the non-playground traffic. It's clear that it cannot be positive for the time being. We consider that it is of course negative, but the order of magnitude is relatively limited based on the numbers I just to give you. Concerning the headcount, I give the floor on to Steven.
Steven van Wijk
Yes. If you look at the headcount figures, there is – first of all, there were a lot of training needed for our pilots related to the growth. So actually we don't have any strategy change and it may increase with the FTEs is coming from our E&M business, where we try to in-source more and also to support our external turnover growth. So that's actually the main reasons for our FTE growth. And there you see a little bit of mismatch because that is not linked to the capacity growth because there's, of course, the capacity growth is just our passenger business in Transavia activity.
Concerning your last question, which is Air Europa, we continue to walk, of course, with Air Europa in order to fulfill full obligation vis-a-vis the competition in South America. So we walk in British country which is concern in order to get unnecessary antitrust immunity, and we still hope to launch the JV between Air France-KLM and the Spanish partner, before the end of the year. Clearly, we have not yet given full estimate of the impact of this project, but it's clearly seen by years of their impact on step concerning the organization of opposition on the LATAM market.
And I will also take the numbers, right now concerning both the capacity and the unit revenue a bit cautiously. The capacity, again, it is not that we fly to Brazil or to Argentina, it's more that we are developing new capacity to serve Andean countries. And concerning the unit revenue, I think that it's mainly the impact of the crisis in both Brazil and Argentina. Since JV is a step in terms of increasing all market share together with Virgin to the South Atlantic, we will expect that probably we will reach something around 20% of capacity in the [indiscernible] with Air Europa.
We will now take our next question from Andrew Lobbenberg from HSBC. Please go ahead. Your line is open.
Hi, Frédéric. Hi, everyone. Can I just, come back to my comments about cautious point-to-point revenues in the second quarter. I mean is that all focused purely on the domestic markets? Or is it point-to-point international? And how should we read for the Transavia as well in that regard? Then can I ask about the partnership with Jet, because up until very recently, you guys were very positive about the scale of connections that you were getting in the collaboration, you were getting with jet and it was driving quite a lot of traffic on the U.S. market, I think for both and Schiphol. So to what extent is that a loss, and how can you mitigate that? And then a third question might come to your approach towards and their proposal for the next regulatory review with a remarkably low cost of capital and drop and yet the doubling of their CapEx plans. How are you engaging with that consultation process?
Concerning upward, when I speak point-to-point, I speak about point-to-point, which means that this is really domestic, short-haul domestic, which means that if I look at what we have in mind today in terms of unit revenue between point-to-point domestic HOP is really different. When I speak with something negative, it is really limited to the point-to-point domestic partly explained by the big effect due to the railway strike in 2018 Q1. Second question, Jet Airways. First, of course, it is not a good news. We have agreed that for colleagues of Jet Airways with who we used to work with for a long period. It is, of course, a disappointment because we work with them in order to establish which was a very important project.
And now at least for the time being, as you know, the company is just grounded for the time being. It is not good. So we have to manage the situation. So economically, what we can say is that there is one – off negative effect, we estimate, around EUR 10 million, EUR 15 million due to the fact that there is some ticket booked in one of those and you have [indiscernible] et cetera et cetera. So it is a normal effect of any situation where one of your partner is not flying and that you have to take the economic consequence for that.
So it is something not very large, but it is significant, I will say. Then, concerning the normal impact on a year-on-year basis, we have considered that the impact of the loss of the partnership with Jet Airways could be around EUR 20 million per annum but, of course, progressively, we'll find a way to compensate and will find another way continue to increase our presence to the Indian market and also to offer to Indian passengers a good connection to the U.S. So first, this is not a good news. And we work with that. Of course, for the time being, the company is grounded not bankrupt, and third, a short-term impact something that would EUR 10 million, EUR 15 million per year before we find the remedy in order to compensate so I'm seeing which can be an estimate of EUR 20 million per year.
Then your last question is you can repeat it because we will I answer. It's a low cost of capital and sorry, Andrew?
The doubling – proposed doubling of CapEx.
Sorry. We will now take our next question from Jaime Rowbotham from Deutsche Bank. Please go ahead. Your line is open.
Good morning, Frédéric. You may want to come back on Andrew’s last question. But I’ll just give you mine as well, four hopefully quick ones, two on the guidance, two on the nonfuel unit costs. On the guidance, just firstly on fuel, is it really the case that spot going up, say, 4% or 5% since 28, February, the impact of that in the 40% of your requirement that’s unhedged, has no impact on the full year guidance?
And secondly on cash generation despite the EUR 200 million CapEx reduction in Q1, you’ve maintain your guidance it’s rise by EUR 600 million year-on-year in the full year, and you also maintain your view that net debt to EBTIDA can come down from 1.5. I think with that guidelines to be flat is best, I would have thought, what do you see offsetting the step up in CapEx to leave the net debt lower in the full year? Then just turning to costs, on the nonfuel unit cost the non-recurrence strikes must have been a material tailwind in Q1 yet the nonfuel unit cost reduced by 40 bps and you’ve given some helpful reason is to why that was? When it strikes tail wind goes away in the second half, it’s a not risk at the nonfuel unit cost going out cost lot year-on-year.
And lastly on employee costs, you've mentioned in today's press release the additional hirings that took place in Q1 to the parts of the business where you're growing capacity, but obviously alongside guys encouraging to hear about potential voluntary departs your plan the employees in the domestic network. If that plan something you might be able to have in place and be able to update us on by the time of the Capital Markets Day in November. And is there anything you can say at this stage on the associated costs and benefits? Thanks.
Your first question is guidance on fuel, correct?
Ys, please. Yes.
And we have not increase it and it should be compared to what we said at the beginning of the year.
In fact during the last week you saw the fuel price increasing significantly and I have to say that that we have to the same price as yours when we look at the forecast given by fuel department. But I would like to give you some explanation. The first one is that if the fuel price increase, so it’s a brand price increased significantly. It is not exactly the same price of fuel in the sense of the margin have reduced over the last week. Second element, we are exactly at the range, where the fuel hedging effect is extremely efficient and that sounds that we have taken some barrier, some collar that there is no more options and when we look at the efficiency of the hedging when you are in the neighborhood of $70 or $71 per barrel, it is exactly where the efficiency of our portfolio is for the time being maximized. And so there is a way to illustrate that, which is that in February we told you that [indiscernible] will be 100 million and in the last figures we have in this presentation, it is EUR 200 million. Now just to indicate that we [indiscernible] in terms of jet fuel where the hedging is extremely optimal.
So there are two reasons why we look at it extremely carefully with Stephen because we’re a bit so private, it is the explanation we found in order to explain why the fuel bill seems to be relatively stable in spite of the evolution of the Brent during the last week. Your second question is a cash generation and the CapEx in the first quarter. If I’m correct clearly, for the time being, you can upsell that CapEx level in Q1 is lower than last year. It is a matter of fact. We are not changing today CapEx guidance for the full year, which means that if you are consistent, we should have an acceleration of the CapEx during the next three quarters compared to last year.
In spite of that, however, based on internal calculation and budget plans, we still expect to have net debt on EBITDA below 1.5 as of December 2019. Concerning the strike effect, yes, you’re right. The strike at last year negative impact from the unit cost mainly in Air France, of course. We are in fact two different amount unit cost for the first quarter. In Air France, in fact, there is relatively sharp reduction due to effect of the strike in 2018.
In KLM, on the other hand, we are for the first quarter an increase of the unit cost. So there is – so that’s why you so that don’t see that. That’s a global level but, in fact the strike effect is present into Air France, where the unit cost for the Q1 are negatively oriented and what explains the global Air France-KLM data is due to the fact that in KLM, because KLM developed a relatively limited capacity during this first quarter, KLM has been hit by weather and some technical problems, which reduced capacity similarly compared to the budget, for example, and this is why you don’t see that at the global level.
So to summarize, minus 0.4 for the group, negative for Air France, positive KLM, negative for Air France because we have to correct it for the strike last year and positive for KLM, due, of course, to the CLE of the labor agreement signed last year, which was due to the fact that the capacity in KLM is relatively slow and, in any case follow us on the bridges. You have to repeat the question if you want.
Just any additional color on this potential voluntary departure plan for employees in the domestic network timing associated cost benefit, anything you can say at this stage? Thanks.
As you know or you don’t that there will be a discussion with employees that is mid-May. And as usual, we are not willing to speak before there is dialog between the management and the employee representatives. So I believe it will be discussed for the first time mid-May in Air France, but we will not say more for the time being.
Fine. Thanks a lot, Frédéric
We will now take a question from [indiscernible] Please go ahead. Your line is open.
Hello. Thank you. A little bit on to the unit cost, can give us a lot of guidance on what would you expect for the next quarters, if you can maybe give us a little bit more color. Particularly then what is extra like effects, I mean if you can also clearly reiterate that you are quite confident on reaching the full year guidance of minus 120. And one clarification on the cost, it sounded like it was 11 million to 13 million, not 30 million, just to be sure that it's just 11 million to 13 million on the extra costs. And my final question is on M&A, do you also plan to engage into the consolidation wave to certain degree, are you going to leave it out to your legacy competitors to move their hat and have benefit from the consolidation?
A – Frédéric Gagey
Concerning the unit growth per quarter, I think it's difficult. We will not give the unit cost quarter-by-quarter, to be honest. What I can just tell you is that for the time being in the forecast we made in March we are confident to stay absolutely in the range we get [indiscernible] from unit cost, and I can add little bit. In [indiscernible] good side of the range, but they will not do more than that in the beginning in first quarter, third quarter.
Second question – for the value that we gave you, it is 10 million to 13 million for the most of positive value of the last quarter and from Q1 we added them to 13 million also, which is our own subsidy like 10 million for the time being. It is not a significant amount particularly number but there is positive result. That is positive for us also for the tourist industry in the Paris. Then you asked the third question on M&A?
Yes. If you plan to become more active in the consolidation or if you'd rather leave it to your competitors to drive consolidation, you are also looking at some of the assets in the market.
A – Frédéric Gagey
We are not taking it [indiscernible] of course we are looking as usual what is trending in the market, what I have to add to there is a lot of changes, so big step in terms of consolidation and there is no immediate plan for the moment to participate to the consolidation in Europe.
Okay. Thank you.
We will now take our next question from Michael Kuhn from Societe Generale. Please go ahead your line is open.
Good morning. Also three from my side, firstly on personnel costs, you mentioned that the 6.5% increase in the first quarter was partly influenced by timing effects, would be interested in what we should expect on the personal costs for the whole year.
Then secondly on the Capital Markets Day, I understood earlier that it was rather planned for summer, so some indication what determined the timing of the CMD would be interesting, since union negotiations are also, other topic that’s finally on November 10. And then lastly on financing, you issued the convertible lately, what are your general thoughts on financing and your capital structure at the moment? What elements do you prefer and what is possibly on the agenda here. Thank you.
Okay. Concerning the labor cost, yes, indeed, they will be lower for the full year. Let us say that, there is at least between one and two person in excess for the Q1 compared to the full year, and then I'll let you make your own calculation.
Concerning the timing of the investor update of the market there, there is no [indiscernible] of secret interpretation to give that. We have just consider that probably there will be more content if you postpone that to the month of November.
And also, you have to organize that in the quiet period, so which means that if want to take time to prepare and to be sure that you'll be happy with the content, we understand to put that in November, but there is no other interpretation to give to that.
Concerning the convertible bonds, it is a convertible bond, which has been launched by the group, Air France-KLM, in the two days organization, we try to let every carrier to be responsible for its own financing, which means that at the group level will try to manage the cash situation [indiscernible] of debt.
As you know in 2020, we have to be [indiscernible] but we have in 2020 EUR 400 million to be robust. It is a [indiscernible] which is extremely costly because it has a coupon of 6.25%. And by launching this convertible, we are just preparing the reimbursement, which means that we will exchange a coupon of 6.25%, buy a coupon at 0.1%, which is less expensive and which is good for the unit cost base of the group.
For the rest, as you know, the two company are financing independently from the group their needs in terms of capital, which are mainly to invest in acquisitions of aircraft, developing some secured operation in order to finance aircraft acquisition.
Excellent. Thank you.
We will now take our next question from James Hollins from Exane. Please go ahead. Your line is open.
Hi, good morning. Two for me. Just on the operational performance on time, are we seeing better air traffic control issues year-on-year? And is there any sort of indication that we should be thinking that, overall looking ahead as well, APC might be less of a headwind for you this year?
And then secondly, turning back to some of those questions at the beginning on premium traffic obviously [indiscernible] on premium last year, you were only down a little bit. Are you confident Q2 it's up 6%. Should we be thinking that premium actually being up in Q2? Thanks.
Concerning the improvement of operational performance in Air France. I will say this is performance of ATC because the ranking compared to the global industry. So if it is improving, it is improving for everybody. So that's why we think that this evolution of the on-time performance of Air France is clearly – it's just the beginning. It has to be confirmed. Of course, it is in winter.
So everything has to be looked at quite carefully in the next month, but at least, it is a good beginning. So I cannot give you any complete issuance for the summer concerning the ATC. We know there is still constraint and really tense activity for all the operations in Europe especially during the summer period.
So at that stage, we continue to monitor carefully the situation, but I can really ensure you that for the industry and more specifically for Air France and KLM will have necessarily the capability to maintain the high standard of operation, we want to develop vis-a-vis for passengers.
Concerning the premium traffic, now, as I told before, concerning the forecast, we prefer only to give you a global estimate or view for the unit revenue for the next quarter so I cannot tell you what it is for premium and what it is for economy. However, I just answer different one of the questions that we had no ramp or concerning the development of the premium traffic up to now, but I cannot tell you more about the forecast of the premium mask in Q2, it is a bit – too small granularities, yes.
Okay. Yes, thanks very much.
We will now take our next question from Nuala McMahon from A&L Goodbody. Pease go ahead, your line is open.
Hi Guys. Just two questions from me. The first one on the cargo business, I'm just wondering what trends you're seeing for Q2 in terms of pricing and demand and then is there any areas that remain weak on outlook? And then the second one is just on ancillary, I understand it's a very small proportion of your total revenues nearly less than 3%. I'm just wondering – and if those are coming off a very low base in Q1, but just what was the driver of the result. And has the management set any target in terms of what ancillary could be of overall revenues on a three to five year view? Thank you.
Okay. Concerning ancillaries, we have no, I will say complete target concerning the share of ancillaries in the global traffic revenue of course, what we just know is that there was still a lot of opportunities and when you look at the growth during the last years, it is normally two-digit growth, it is relatively long period, so we have to continue ancillary is always the same as a client it's extremely sensitive to the price of the ticket when he buy it on Internet but after that if you are offering to him a specific service, good quality during his trip, he is able to pay for that.
So it is a combination to be able to offer as low as you can in order to attract the client and after that, thanks to the quality of the service and also offer you're able to develop the ancillary service. So we will continue. I don’t know exactly what is the limit or if there is a golden rule in terms of percentage of ancillary on the total revenue, but I can just tell you that we will clearly continue to develop this type of service. Of course, the new distribution capability is an opportunity by improving the quality of the dialogue between the airlines and the clients we are able, which is new type of distribution to enrich the content of the dialogue we have with the customers.
And this is extremely important because when you are just working with the normal channel with a limited exchange [indiscernible] add new services et cetera with all the potential of the new distribution capability we have at least the possibility to expand this revenue. Again, for the quarter, it is EUR 161 million and the growth is more than 17% which is clearly exit of number.
Your second question was on the cargo. I cannot add anything compared to what I just told you in the presentation. As you know, the predictability of the traffic in the cargo is extremely limited. When we speak with our colleagues from the cargo business unit, we speak to the last – to the next three weeks, that is very difficult to go further that period. So for Q2, we have not yet indication concerning what could be the unit revenue in cargo, only info Q1 is weaker compared to what we have experienced during the year 2018, yes.
Okay. Thanks guys.
[Operator Instructions] We do not have any questions at this time.
I would like to thank you for your participation to this call. And I wish you also a good weekend and the next rendezvous is for the publication of the second quarter. So bye and thanks a lot again.
This concludes today’s call. Thank you for your participation. You may now disconnect.