AFRAF - Air France-KLM SA (AFRAF) Q4 2022 Earnings Call Transcript

Air France-KLM SA (AFRAF)

Q4 2022 Earnings Conference Call

February 17, 2023, 02:30 AM ET

Company Participants

Benjamin Smith - CEO

Steven Zaat - CFO

Marjan Rintel - CEO, KLM

Anne Rigail - CEO, Air France

Conference Call Participants

Jarrod Castle - UBS

Ruxandra Haradau-Doser - Kepler Cheuvreux

Satish Sivakumar - Citigroup

Jaime Rowbotham - Deutsche Bank

Alexander Irving - Bernstein

Stephen Furlong - Davy

James Hollins - BNP Paribas

Sumit Mehrotra - Societe Generale

Harry Gowers - JPMorgan

Johannes Braun - Stifel Europe

Achal Kumar - HSBC

Presentation

Operator

Good morning, and welcome to the Air France-KLM Conference Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Ben Smith, CEO; and Stevens Zaat, CFO. Please go ahead, sir.

Benjamin Smith

Good morning, and thank you for joining us for this presentation of the Air France-KLM results for the full year of 2022. I am here with our CFO, Steven Zaat; CEO of KLM, Marjan Rintel; and our CEO of Air France, Anne Rigail. They are ready to take your questions at the end of this presentation.

I'll start by presenting the highlights of the year, then I will give the floor to Steven for a detailed presentation of our results and the outlook for the year to come. Then we'll be open to answer your questions.

First and foremost, I'd like to express my thanks and congratulations to all our colleagues across all of our airlines and business units. Their commitment has made the performance of this year truly remarkable.

Before driving into the Group's performance, let's start by looking at the big picture of the airline industry at a macro level. The graph on Slide 3 shows the evolution of Air France-KLM's capacity since January 2020 compared to that of our main competitors IAG and Lufthansa Group as well as the world average.

Air France-KLM has led the capacity restoration faster and stronger than its competitors and this has been possible because we have better anticipated the recovery in air travel and we were well prepared for the return of our customers.

Despite volatile market conditions, successive waves of COVID-19 variants and exceptional geopolitical conditions, we've gradually and steadily increased our capacity to best accommodate a surging demand. As I mentioned before, this demand has put the entire airline industry under pressure causing numerous tensions in the value chain for key industry players and airport service providers in particular, last summer.

Despite these operational difficulties across our global network, we stayed very close to our customers, anticipated disruptions as much as we could and were able to limit the number of late cancellation.

Turning on now to Page 4. In addition to being one of the most dynamic airline groups in the recovery period, we have also worked hard on our profitability to try and bridge the gap with our competitors. The graph on this slide shows that back in 2019, we were almost 2x less profitable than our European peers, but also than the average of the global airline industry.

But the crisis has reshuffled the cards and the latest IATA forecast show a great deal of disparities in the recovery across the industry with North American and European carriers at the forefront of the recovery led by a dynamic environment.

Even more importantly during this period, Air France-KLM managed to close its profitability gap with its European peers generating a 2022 EBIT margin close to our competitors according to the forecast. This promising performance is essentially the result of the deep transformation we have been implementing throughout all our airlines and businesses over the past few years.

On to Slide 5, all in all, Air France-KLM delivered a very strong set of results in 2022, making it a new reference year for our group. We have welcomed almost twice as many passengers in 2022 as in 2021, 83 million passengers had almost doubled our revenue compared to last year, all the way up to €26 billion This exceptional commercial momentum coupled with strong cost discipline and the gains generated by our transformation plan enabled us to record an operating result of €1.2 billion above its 2019 level before that pandemic.

Our strong operational performance and a solid cash flow generation allowed us to post a positive net result of more than €700 million which will contribute to the further strengthening our balance sheet. We've also reduced our net debt by €1.9 billion bringing our net debt to EBITDA ratio to 1.8% -- sorry, 1.8x, while our cash position remains very solid with €10.5 billion cash at hand.

Moving on now to Slide 6. I'd like to give you an update now on our passenger network this year. The recovery of air travel demand is reflected in our indicators, which are a very positive trajectory throughout the year for the Group's load factors which were above 2019 levels in our premium cabin.

Q4, although our overall corporate traffic is at an index, 62 versus Q4 2019, it has proven to be resilient on our long haul markets or continues to recover. Also, and observed in the past few months, high yield leisure demand remained strong and contributed in our strong premium cabin load factors.

Meanwhile, the performance acceleration can be found across all levers within the Group such as first revenues from partnerships have increased by 1.6 points compared to what it was in 2019. Second, ancillary revenues have gone up by 7% compared to 2019 levels now at €800 million and much have been achieved thanks to a very flexible and reactive network and resources allocation tactics that were put in place throughout the year.

Slide 7, to conclude, let's now take a look at the achievements of our activities beyond our passenger networks. Transavia continued to build on its momentum with capacity well above 2019 levels with the fleet approaching 100 aircraft and more than 40 new destinations compared to 2019, Transavia now has a real critical mass and a powerful network with further potential to unfold. The overall financial trajectory is in line with the roadmap with an improving operating result after a major phase of strong growth investment, which we will continue.

On the cargo, in 2022, we continue to renew our full freighter fleet with a firm order for 8 new Airbus A350 full freighter aircraft. We will also design a strategic partnership -- we've also already signed a strategic partnership with CMA CGM to strengthen and expand our cargo offering.

Our maintenance business unit delivered a solid performance with revenues increasing by 28% and producing a higher operating margin. Air France-KLM's engineering and maintenance signed a CFM branded service agreement for LEAP 1A and LEAP1B engine providing the Group with the full scope of LEAP maintenance, repair and overhaul services for operators worldwide. This agreement reinforces the Group's position as a world leading engine MRO provider.

I'd like now to hand over the floor to Steven who will take us through in more detail our financial results for 2022.

Steven Zaat

Thank you, Ben. Good morning, everybody. Thanks for taking the time.

As you can imagine, I'm very satisfied with the results which we announced today. When I started in this position in July 2021, there was a very small light at the end of the tunnel. We closed 2021 with a better perspective and we were talking actually about a light at the end of the tunnel. And when we started 2022, we started in a quite difficult environment but still covering the place of war in Ukraine and an oil price above $125 per barrel.

So I'm very happy that we can say now that 2022 ends better than where we ended before the pandemic. The full year is better than 2019 -- last quarter is better than 2019. And last but not least, and I will walk you through it, we are aiming to get out of all the state aid regimes in the next quarter.

So let's start on Page 9, where we will go through the results for the fourth quarter. So the most remarkable part of the Q4 is actually the top and the bottom. If you look at the top line, you see that the revenues increased by €2.3 billion compared to 2021, 50% coming from the capacity increase and 50% coming from the log factor increase. And what is remarkable is that we are already above to 2019 levels despite the fact that we had 11% less capacity in the fourth quarter.

Then we were, of course, tremendously hit by the fuel bill. It went up with more than €1.1 billion. If you take a look at it, around €700 million is related to the price effect, the jet fuel price increased significantly since Ukrainian war and now actually coming back at lower levels, but we are still not at the levels of 2021. We were benefiting with an hedge impact of €80 million with all in all, we had a severe impact on our fuel bill.

Then on the salary cost, that is an increase of €500 million. If you - first of all we had still big furlough schemes in place in 2021. So if you compare apple over apple, you will have to take out €155 million, we get €159 million of furlough schemes in 2021 and we had only €4 million in this quarter.

So that brings -- actually, if you take that out, then there is actually €350 million to explain. There is - we have 2,200 FTEs increase especially on the KLM side, where we increased on the ground to ramp up for the activity and where we increased also the cabin staff. On top of it, we had the CLA increase. So in total, that was €160 million of which €50 million is one-time payment at the Air France side. So €160 million coming actually from the CLA increases. And then of course, we increased our activity which brings around €100 million in increase of salaries.

So that explains actually the increase of the salary, but mainly coming actually from the furlough scheme so operating results better than 2019, not better than 2021 because we're still benefiting from a strong furlough scheme. Then if you go to the bottom line and you look at the net income, you see that we have a positive net income of €500 million part is coming from the operating result and the part is also coming that we are now recording our tax assets that in total has an impact of €200 million we did it now on the Air France and on the KLM side.

So the tax assets loss, which we had, in the past, we start to recognize fully at KLM and we start partly on Air France. There's still €3 billion, which we didn't fully recognize yet. And then on top, we had a currency impact in the third quarter. Actually, there's now positive tailwind coming from the currency results related to the balance sheet, which is an amount of €300 million. So that explains while we have a contribution of €500 million to our equity to further restore the equity position of our group.

If we then go to Page 10 then you'll see that we had still a very dynamic business climate. So in total, our yields, increased by more than 20% premium is already in load factor up compared to 2019. We were a bit worried when we entered Q4 on November because that's usually really a corporate month and the corporate traffic is not fully back, but you see that we can restore it with or lesser even in these months over November so more than 20% more than 20% increase over our whole network.

If you go to the long haul, we are even at 29% still very strong results on, let's say, the West side of this world, but also in Europe and Transavia, which even increased the capacity by 42% we were able to reach almost 20% yield increase. So a very dynamic environment of course still, a lower capacity into Asia. We are at minus 44%, but with the yield up 41% and also here, load sector getting closer and closer to the 2019 level.

If we then go to - airlines let's first start with Air France. Air France had a very strong result actually they have now a margin of 3.2%, they are profitable, which was not the case in 2019 when I was myself CFO over there. So we have an increase of margin of 3.7% fully driven by the very strong transformation at the Air France side.

At the KLM side, the picture is a bit different. Let's say there's a breakeven results that we are still hampered by, let's say the situation around Schiphol. So in total, we are doing better than 2019, Air France is taking a step forward in their results and KLM had to take it a bit of a step back, but we expect that to come back in the year to come.

Let's then take a look at the full year results. If you take the full year results, we ended the full year with a €1.2 billion operating results, which is again better than what we had in 2019 and of course, significantly better than what we had in 2021, a €12 billion increase in revenues which is, let's say, for €6 billion to explain by the capacity increase. We increased the capacity year-over-year is 44% and €8.7 billion related to the load factor in case. So the planes are fuller driving up also our yield and the capacity will increase so all in all that contributes significantly to our revenues.

Again the fuel bill €4.5 billion higher, of which €3.4 billion actually is coming from the jet fuel price. We had a jet fuel price of around €60 million in 2021 and we are now above $1,000 per metric ton in 2021. So 83% up we had a hedges in place which brought at the end €900 million a question, so that helped, but we were significant by this increase of aircraft fuel. But the good news is we could compensate it fully by our revenues. So an operating results of €1.2 billion and net income of €700 million actually securing further the restoration of our equity.

Then if we take a deeper dive per business so let's first go to the network, our passenger business, very strong performance. We increased the capacity close to 40% compared to 2021 unit revenues of the remarkable 56% of which 75% is actually coming from the load factor and 25% of that increase is related to a yield so. And load factor increase, yield increase and a capacity increase drives up that we are more than doubled actually our revenues.

On the cargo side, the picture is a bit different. So on the cargo side, we increased capacity, but we increased the capacity to let's say more cargo instantly destinations. So that is actually in the belly of our passenger planes that is the biggest part of our capacity. And what you see actually is that the load factor is then dropping because of course, you cannot fully fill those, cargo capacity onboard. So if you look at the minus 19.5% minus 20% rounded. Actually, that is all coming from the load factor drop in the belly. The yield is still up compared to 2021 if you look at the full year results.

Then on Transavia, a steep increase of capacity 86% with also maintenance with the unit revenue in case of 20% bringing our results at minus €100 million which is a €50 million better than what we did in 2021. We need to ramp up further our capacity and it takes some time that we see the full profitability of those new routes to be installed. But all in all, we improved our results over there with €50 million.

And last but not least my dear maintenance baby they are actually at the margin of 4.5% this year in 2019, we were at 5.5% so we're getting close to the margin in this business. And actually for the - years to come, we need to increase further and to restore our order book to make sure that we have, let's say and a strong operating contribution from our maintenance activity. So all in all, all business is restoring and significant restoration at our passenger business activity, which is the main activity of the group.

Then quickly on the unit cost, so we increased unit cost with 2% but we still have 15% less capacity compared to 2019. There are CLA effects at Air France and KLM, but airport charges went up more than 20% at Schiphol. So despite all the inflation and despite the fact that we have 15% less capacity, the unit cost increased only with, let's say, close to 2%. Staff still - the staff bill is down with 10% minus 60% at Air France in terms of FTEs and still minus 9% at KLM despite the fact that we now have to ramp up our activity also there, so strong transformation in place at the moment.

Then - and that is even if I would have said at the beginning of the year also your free cash flow prediction, it would not have been €1.9 billion. So we have seen a strong increase in our EBITDA and then of course, we see also that the change in working capital contributed for €2 billion, €1 billion coming from the sales tickets, we increased capacity, we increased the load factor and we increased the prices. So that brings to a stronger contribution in our working capital related to the tickets. And €1 billion is actually related to the fact that when you grow your activity, then you also grow your supplier bills.

So it is almost €2 billion of free cash flow. We use our debt to €6.3 billion which is very close to where we ended 2019. And what is the very good news with the increase also of EBITDA you see now that we have a net debt EBITDA of 1.8. And as you know, our guidance was actually that we will go from 2 to 2.5 in 2023. So we are one year earlier, but we even beat our own target. So, very good results on the net debt EBITDA target.

Then let's walk you through on Page 17, what we all did in terms of repaying the liquidity support of the state. Actually, we did it in a very short period of 13 months. It started in December 2021. We redeemed €500 million of the perpetual, which was €4 billion which was standing out at that moment. We did a right issue of €2.3 billion which we used €1.6 billion to pay back French state on the perpetual hybrid and KLM fully redeemed the €900 million which was outstanding to the state loan and RCF they have drawn. So, KLM was fully free out of any loans at that moment.

Then in July 2022, we signed deal with Apollo, we received €500 million which we also used to pay back our hybrid instruments. And then in November, we paid payback €1 billion on the treasury and we redeemed €300 million by putting in hybrid convertible in the market successfully and we use it to pay further back the hybrid instruments. So if you all count it together in 13 months, we paid back almost €5 billion in let's say, it is impressive.

But the good news is and then we go to Page 18, there is more to come. So - and we did a successful sustaining billing bond issue in January. We got €1 billion that was 2.7 times it was overwritten. This €1 billion as we indicated, we will use to payback part of the treasury and we will use €1.5 billion of the Air France equity - sorry, of the Air France cash to pay back the remaining part of the treasury. So the full treasury of €4 billion is repaid in March 2023.

Then we will start to launch a new sustainable link RCF both on Air France and Air France KLM combined and KLM. This is very important because it will release KLM from the framework agreement so that we have also that behind us and we are aiming actually to realize that in April 2023. And we continue to work on the equity restoration. We are working actually at two projects at the moment one related to the loyalty program and one related to the MRO assets. So still, we did a lot in 2022, but there is still more to come in 2023.

So if you then go to Page 19, there you see actually an overview where we end in April where we are exiting actually all the current state support. So let's first start at the state at the Air France side in which we had - where we were in the EU temporary framework. So there was a total of €3.6 billion, €3 billion mainly converted actually the direct loan into a hybrid and €600 million related to the capital increase of the French state. So we paid back of that already €2.4 billion so there is €1.2 billion go, €600 million on these hybrids.

As the announcement of yesterday, you heard that there is a new framework on which we applied for and this framework is actually without any statement. So what we will do, we will pay in March 2023, we will be leading €300 million of the French State perpetual loans to the French State and we will replace it and refinance it by a new hybrid with the same conditions. We will - are then at the 75% redemption threshold.

So we are released from the banks related to debt threshold. So we are able actually to be released also for the M&A band. And we will do the next range in April, the other €300 million so we have to repay then fully the hybrid and we will actually settle all our final obligations at that moment. So we are fully exiting the current state export related to the French State in a new one where there are no strings attached.

On the treasury as already explained, we went from €4 billion to €2.5 billion in December and we will pay back this full amount in the coming period. So we are exiting also that one. And last but not least, we are working on the commercial RCF as already explained. So when KLM has signed that, we are also released we will replace the current Dutch state facility with the banks and the Dutch state and we will replace it by commercial SAF, which will be sustainable linked like we did actually for the bond. So we are executing Air France in Netherlands all our state aid support.

Let's then go to the outlook, so the intention is actually to that we will further increase our capacity in 2023 and that we will reach leading 2019 levels by the end of the year. So if you look at our network, our let's say passenger network excluding Transavia, we will ramp up from Q1 90% up to 95% in the second quarter and on Transavia, we are already at 114% compared to 2019 and we will end up that from 135% to let's say over 135% in the second half. So we will reach close to for the full year 95% to 100% of the 2019 levels.

On Page 22, you'll find actually that the current booking environment is still very strong. You'll see that the load factors are very close to the one as of 2019. On the long haul, the short and medium haul, but also on Transavia. And also on Q2, you see that we know that the booking pattern is a little bit slower since COVID, but still you see we are very close to actually the 2019 levels. We had of course, already the full load factors of January and also of the first two weeks of February. And you'll see that load factor is very close to the 2019 levels, plus it goes hand-in-hand with a yield above 20%. So still a very strong and dynamic environment in terms of load factor and in terms of yield in this winter quarter.

On Page 23, you will find actually our fuel bill based on let's say the forward curve of last Friday. As you can see, we have already hedges in place of 50% the current hedge portfolio is, let's say, more or less breakeven is we have a small negative result because of course we already implemented hedges for this year at the beginning of 2022. And what you see is that the fuel price in the market is slowly decreasing to levels below [$1,000] payroll, but that's the current forward price. But you see also that in Q1, we are already below the full year 2020 to jet fuel price.

Then on the outlook, as we are turning the page and we get closer to the 2019 levels. We actually don't guide anymore on the profit. I think it's to insecure for the moment. Of course, we know the fuel, we give you the fuel bill, we give you the capacity and we will give you also the unit cost the unit cost will be stable, if you're excluding the furlough, so you can do - all the analysts can do their own math. And we will have a CapEx as earlier indicated of around €3 billion. So with that, with the fuel, with the capacity and knowing that, let's say, the booking dynamics are very strong, you can do your own math. But for the moment, we got back to what we did in 2019. We are not going to guide for a full year result, because there is still a long time to go.

For the midterm, we update our midterm outlook. First, the capacity and that is staying there because we are still on the track to restore our capacity back to the 2019 level. So from 2024, we are back on those levels. We will decrease the unit cost compared to 2020 with 1% to 4%. If you -- let's say, if you look at the unit cost definition it's our usual unit cost definition that we will exclude for the emission trading scheme cost. As you know, the emission trading scheme has been changed in Europe, so actually nobody will know what will be the outcome or actually on our pricing of this emission trading right, which we have to come, because we don't get any free rides anymore probably at the end of 2026.

Then we will keep our debt EBITDA ratio at the current level, so between 1.5% and 2% and we keep the guidance that we will have a positive operating free cash flow. If you exclude the exceptionals, we still have to pay back the social charges in France and we still have to pay back the wage taxes in the Netherlands and we still have a cargo claim to pay. But if you just look operational result, we have a positive free cash flow in the years to come.

That was it from my side. I hand it over to our group CEO, Ben Smith.

Benjamin Smith

Okay, thanks, Stephen.

So moving now to Page 27 in 2022, we have continued our transformation efforts throughout the group working towards securing our place as a leader in sustainable aviation while always offering the best experience to our customers. And of course, these efforts started with the renewal of our fleet between 2019 and 2022, we have added 50 new aircraft offering up to 25% reduction in carbon emissions compared to the previous generation and reducing further our noise footprint.

As you can see, new generation aircraft now represents 16% of our fleet compared to only 5% in 2019 and growing as we plan to achieve 40% in 2025 and up to 64% in 2028. These new aircraft offer state-of-the-art cabins with enhanced comfort and onboard experience.

Moving on now to the next slide, in addition to our fleet renewal, we will continue to invest in our cabins for an enhanced and further harmonized experience across the Group. Looking at our long haul business cabins, at Air France's the new business class seat was launched in January and be available on selected Boeing 777-300 and Airbus A350-900 aircraft. At KLM, we are installing direct our business class seats on all KLM 777s harmonizing the business product that's already onboard the KLM 787 fleet.

We're also investing in our mid cabin product now offering premium comfort at KLM, which is being progressively introduced and we are installing enhanced seats in our premium economy cabins at Air France. Our flagship Air France La Première service offered onboard select aircraft will be further enhanced beginning in mid-2024.

Moving now on to Slide 29. In addition to fleet and cabins, we are making investments through all stages of the customer journey. Onboard experience will be upgraded with the introduction of a common WiFi portal as well as a new inflight entertainment offer by the end of the year. On the ground, additional customer enhancing benefits and services are being introduced at Paris, [Boise] and Amsterdam, Schiphol and at Paris all the airports.

On Slide 30, I'm extremely proud to announce that all these efforts have been recognized by our customers. Both our main airlines have moved up several ranks in the Skytrax's global rankings this year compared to 2018. Air France has moved up 17 positions and has now ranked number 8 Best Airline in the world and KLM has moved up 2 positions. Skytrax also awarded Air France Best Airline in Western Europe for the second year running. In addition, Air France KLM is the only Group with two airline certified 5 star by Apex. I'd like to express my gratitude to all our colleagues across all our airlines and business units without whom these achievements would not have been possible.

Moving now to Slide 31. Before concluding this presentation, I'd like to focus for just a few moments on the key milestones that our group has achieved on a path to sustainable excellence. As you know our CO2 emissions reduction targets have been validated by [CVTI], which means that they are in line with the Paris agreement.

In addition to fleet renewal, we have secured long term SAF agreements for 3% out of our 10% objective for 2030. We've also issued sustainability linked bonds for an amount of €1 billion conditioned on our 2025 and 2030 CO2 reduction targets.

This operation is a premier in Europe for the aviation industry and links the company's financial trajectory with its environmental objectives. It is an additional milestone in Air France-KLM's ambition to achieve its decarbonization targets.

Finally, we continue our efforts to improve air and train connectivity with a full seamless digital offering for both ways of transport and more intermodal connections to make transfers easier for everyone traveling on our airlines. These milestones are all concrete steps that shape our road to sustainability. I want to reiterate our full commitment to being a pioneer of a more sustainable aviation.

Moving on to the next slide. To conclude, we have turned the page of COVID with landmark results and achievements in 2022. We've experienced an exceptional rebound in our activity driven by all our airlines and businesses with a historic 2022 full year operating margin above our 2019 reference.

We've completed major financial operations to both restore equity and consolidate our balance sheet. The successful execution of these transactions reflects the confidence of investors and shareholders in our profitability prospects and in our ability to further exit from the state aid support and deleverage.

Over the last two years, we've redeemed more than €4.9 billion of state aid. On the business front, we have signed landmark deals with major industrial players such as CMA CGM, our ability to sign this type of agreement as a testament to the quality of our assets, our expertise and our people and our true commitment combined commitment to CMA CGM to be full participants in the French economy.

The coming year will be a pivotal one for our Group as we intend to fully exit from all types of state support and from the EU temporary framework constraints by April 2023. We will regain our full financial flexibility and strategic autonomy. We will continue our efforts to restore our equity and strengthen our balance sheet using several levers including non-dilutive measures.

Building on our strong commercial momentum, we will continue ramping up capacity, which are expected to reach their pre-crisis level by the end of 2023. The continued implementation of our internal transformation should enable us to gain further operational efficiency and generate substantial cost savings and ultimately to make our organization more competitive in line with our best-in-class peers.

Last but not least, we are firmly committed to the concrete implantation of our decarbonization roadmap. We have designed a consistent approach with the goal of CO2 emissions reduction based on three main pillars: fleet renewal, sustainable aviation fuels, and operational measures.

So, thank you. And we are now available to answer your questions. As a reminder, Marjan Rintel, Anne Rigail, and Steven Zaat are all here with me to answer any questions you may have on our two airlines and the rest of our major business units. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first quest today comes from Jarrod Castle of UBS. Please go ahead.

Jarrod Castle

Thank you, and good morning, everyone. Three from me. Firstly, do you have any comments on April or summer bookings, I know it's sometime away, but interested in pricing trends, especially in the context of the performance versus Q4?

Secondly, just on M&A, any comments there? You were talking a bit in Q4 about TAP, so just an update on how you're thinking about M&A. And then just lastly, excellent progress in terms of repaying government debt, et cetera. But where do things stand now on the shareholders' deficit in Air France? Thanks.

Benjamin Smith

Thanks, Jarrod. So summer trends early trends for the beginning of our summer season look very good. We're quite pleased with what we see and we're especially pleased with the reopening, the fast reopening of China. So yes, we're cautiously optimistic and pleased with what we see as of today.

On the M&A front, we're - as we said, all of the releases we put out today, we are really pleased that the constraints have been removed so that we can negotiate with I'd say confidence and more legitimacy with any of the opportunities that may present themselves.

So as you know, there are a few independent airlines in Europe that could be interested in either closer cooperation or perhaps a outright sale. I did mention in the past that TAP is of interest to us strategically like the base in Lisbon and we like their position in the Brazilian market. So that is of interest, but nothing to report further than that.

And Steven can take your third question here.

Steven Zaat

Yes. We don't disclose the share of the deficit - the equity deficit on Air France. What is - you've seen we are now at €2.5 billion negative equity. So we are restoring our equity and the good news is that the Code of Commerce which was actually related to French GAAP equity. And as you know, we have a positive French GAAP equity at Air France KLM. We had a negative one on Air France but there is no risk of any dissolution anymore, that went or anymore, it needs still to become in the cult of commerce, but it went through parliament and through the Senate.

So we wait when it is fully implemented on the Code of Commerce and it's just let's say an internal gap measurement to restore the French GAAP equity, but there will be no legal regulation in terms of dissolution or any kind of risk.

Jarrod Castle

Thanks. And sorry, can you give any indication of pricing trends in Q1 versus Q4 similar levels? Or can you give any color?

Benjamin Smith

So far, it's following the trends we've been seeing. We don't see any major change. The fares that are at the market are quite reasonable. We don't see any irrational pricing in our main markets as of now.

Jarrod Castle

Great. Okay. Very clear. Thanks very much.

Benjamin Smith

Thanks, Jarrod.

Operator

Our next question comes from Ruxandra Haradau-Doser of Kepler Cheuvreux. Please go ahead.

Ruxandra Haradau-Doser

Yes, good morning. Congratulations on the impressive Skytrax performance and the improvement of passenger satisfaction levels. Could you please talk also about how the satisfaction levels of employees at Air France and KLM compared to French and Dutch companies in general?

Second, we are a few weeks ahead of the Eastern holidays. So could you please talk about operations at Amsterdam Airport? If I remember correctly cargo load factors at KLM decreased last year due to the operational problems at the airport. Shall we expect some improvement for this year?

Then two questions for Steven, please. How should we think about interest costs this year as you are replacing state support with other types of financing. And to which extent does your medium term guidance account for planting staff into jet fuel? Is it in line with the quota proposed by the EU Commission starting with 2025? Thank you very much.

Benjamin Smith

Okay. Thanks, Ruxandra. Marjan will take your -- the first part of -- your first question.

Marjan Rintel

Yes. So the first question about EPS, COVID hit is hard and it was very difficult and we had difficult years for all the KLM employees. As you know, we had a difficult summer last summer due to all the operational disturbances. So EPS is quite low.

But luckily, we see it's rising again from 11% to nearly 35% and we are quite positive that because of the stable operation and we hire 500 extra employees within KLM at ground that it will be back to normal levels. The first question.

The second question is we expect improvement in our capacity because we hired all the people the airports are hiring people. We expect to be back at 100% and at the end of 2023. And back in the summer at 95%. And therefore, we will have all the flights back in place. We will not block seats anymore as less as possible and there will be room for cargo as well.

Anne Rigail

Regarding EPS in Air France, we had a measurement every week. As Marjan mentioned for KLM, we had a lot of pressure on the operation last year, but we saw a lot of engagement in people. We're really enthusiastic to welcome again our customers on board. What we have seen lately is that the EPS is recovering because we've seen that the business is coming back And we work a lot on all the working conditions. We have answered to the inflation subject also in the autumn.

So - and we have resumed, as Marjan mentioned for KLM, the hirings in all the operations, pilots and mechanics as of 2021, but also in our cabin crew, in our station at the hub. So we are very happy to welcome young energies and it's really increasing EPS.

Steven Zaat

Yes, hello Ruxandra. Let's first start on the interest cost. So the interest cost will be - just if you look at the operational leases, which we also take the interest cost and the normal financial interest cost in IFRS. They will be below the 2022 levels, of course, with now all the repayments which we are doing.

If you refer to the hybrids, so which we will replace on the Air France side, so this, let's say, the €600 million we will do that at the same conditions. So there's no increase in that sense in our interest course. And depending on softness in our guidance, yes, we take that fully into account.

Ruxandra Haradau-Doser

Thank you very much.

Operator

Our next question today comes from Satish Sivakumar of Citigroup.

Satish Sivakumar

Thank you again. So I've got three questions here. So on the corporate traffic side, obviously, you've given color of the group level. Can you share some color again? What are you seeing in terms of trends on medium and long haul? And with Asia coming back where you've actually seen more momentum in corporate traffic? And the second one is actually around the €300 million French State perpetual bonds, is it fair to think that the hybrid instruments that you would likely to replace will be at a similar coupon rate around 7% to 7.25% or it will be slightly lower? Any color on that?

And the third one is actually around the MRO. Given the contracts are like inflation linked, is it fair to think the pricing will be up or on mid-single digit percentage? And also within MRO, what is your backlog in terms of the order book? Historically you used to give the order book versus previous quarter? Any color on that will be helpful too. Thank you.

Benjamin Smith

Okay. Thanks, Satish. On the corporate traffic, long haul is leading the recovery versus short haul and medium haul. But as we've said in previous calls, the increased level of premium leisure is really outstanding and that can continues. And our La Première business class premium economy and now we're seeing premium comfort at KLM, we're really pleased with the demand - strong demand for those services despite not being quite back up to 100% recovery on the pure business traffic.

And I wasn't quite clear the order book or the -- are you talking about airplanes or you're talking about MRO?

Satish Sivakumar

MRO actually because you used to give like the contract backlog or the order book, how it has focused quarter-on-quarter. Any color on that? And also the -- what -- or should we think about the MRO pricing?

Steven Zaat

Yes, Satish. Good morning. If we go to the order book, you see that we are restoring now our order book. And maybe we will bring that also back, let's say, in our presentations, which we are usually doing on the MRO.

So we are restoring this part. So especially on the engine side, there's a lot of demand, but also on the components we see - on the new technology, a lot of demand in the market and we closed some agreements. So I can give you more color during the year.

If you look at the pricing, you see that the pricing, we can pass through, let's say, the MRO pricing. So there is a tightness in capacity, which is of course favorable for our MRO business. It is more important now also that we get the supply chain on order so that we have -- that we can generate more revenues by doing more shop visits in our engine shop in Amsterdam and in Paris. So -- but the pricing on the MRO side is quite good. It is now more, let's say, the delivery which is becoming a more important part.

And on the hybrid, as just already said to Ruxandra, we have exactly the same pricing as we had on the current hybrid. So no change in that one.

Satish Sivakumar

Thank you.

Operator

Our next question today comes from Jaime Rowbotham of Deutsche Bank. Please go ahead.

Jaime Rowbotham

Good morning, guys. Thanks for taking my questions. I have three. First one, I'm afraid, goes back to the yield question. So network yields were 22% above pre-crisis in Q4. Having been 24% above in Q3. You've said you still see a robust environment going into 2023. Do you think it would make sense for us to think about further narrowing of the yield premium in Q1, for example, followed by a return to perhaps wider premiums again as we move towards peak summer?

And second question, clearly most things look very, very well set now to move in the right direction for the group in 2023. The exception probably within it is cargo. Have you done any analysis to consider what might be the profit headwind from lower air cargo volumes and yields in 2023 year-on- year? And finally, just a clarification so and - of the update on Air France negative equity complying under French GAAP with the rules, so the change is not giving French companies more time to comply. I think you said it just removes the requirement to have positive equity altogether? Perhaps you could just clarify. Thanks.

Benjamin Smith

Okay, good morning Jamie. On our outlook for yield short and medium haul versus long haul. I mean since the beginning of the crisis, we've seen the booking curves especially on short and medium haul to have evolved to the point where people are booking much closer in. So to give a forecast out to what we expect Q2 or Q3, not in a position to do that like we may have been in previous years.

Long haul, as I already mentioned, were cautiously optimistic. We'll continue to see positive - improvement versus previous years. But I think one thing I should I should point out is at Schiphol, despite all of these problems, capacity is very tight. So the yield benefits obviously trickle down to us. And then we had a very aggressive transatlantic competitor in 2019 called Norwegian. As you know, we've had - and they had, I believe, eight 787s based at CDG.

We now have one flight operated by North that is flying to North America. So - with that airline now not in place and there was another low cost carrier called XL Airways, the XL Airways that were flying to some of the biggest volume markets in the French overseas territories. So that's a lot of low cost capacity, long haul, low capacity that is now out of - in Paris. So that we're seeing especially on the markets where they were operating already today a positive yield environment? And then for your second question there, perhaps Steven can answer that one.

Steven Zaat

Yes if you - let's go to your question on the cargo. So on the cargo, we have seen now, of course, a stabilization of the load factors with more belly capacity in it, so that has an impact in 2022, but that will stabilize at this moment, a little bit difficult to say what it will be exactly in the year between, if you talk about yields, about minus 15% to minus 25% we take that into consideration actually for what we expect for the year to comment, we'll not stay at the 2022 levels, that is for sure, but it is still more double than 2019.

And so, we still have a very strong cargo contribution on our P&L. And on the French GAAP side, just to come back on it, this - it went through Parliament and the Senate. So there is no risk anymore for a, dissolution and actually, we have now for two years, you have to discuss it, let's say, in the shareholders meeting, but it is only on the Air France side so, we have an internal discussion, how we will restore that. So the dissolution risk is totally gone, which is very good news, of course, for us.

Jaime Rowbotham

Thanks guys.

Operator

Our next question comes from Alex Irving of Bernstein. Please go ahead.

Alexander Irving

Hi, good morning. Three from me please. So first of all, on corporate travel, on your Slide 6, you've seen this quite slow recovery in traffic in Q4 and rather 2019 levels. But how do you see your corporate trends evolving in 2023 and what does that look like so far in the first half of Q1, please? Secondly, on unit costs, so you're targeting your unit costs flat on 2022 at constant fuel and currency and ex deferral effects.

But given that there is restoring capacity by another approximately 10 percentage points. Should there not be a reduction in your unit costs and what's more than against you to prevent that from happening? And then finally, can I pick up on your sales channels, please? You mentioned an increase of 10 percentage points in the share of flight segments sold through direct online channels.

Is that just a business to leisure mix shift or is there a more permanent change, say, in how corporate covers it booking and how material is the potential reduction in your average distribution costs and state effects? Thank you.

Benjamin Smith

Okay. All right and how we're going to convince you to go from sell to buy. So let's start here. 2023, the corporate traffic what we're seeing is in France, I mean, I'll be realistic here. We're seeing a shift to train, which is not new. Especially on flights or on routes where there is a train option on flight segments of less than less than hour 15. So I would say, Marseille, where there's a good train option of three hours.

Although, we'd already stopped all of our flights from - the flights to CDG are still in place. So domestic France, corporate traffic is not back to where it was and we're seeing a shift. However, in 2019, the domestic market was our biggest money losing market. So we made a significant transformation in domestic. This is having a positive effect on unit cost. We've halved the size of our regional carrier op.

We removed op all operations out of Orly and all those slots are now being used by Transavia, much lower unit cost than the 50 to 100 seat regional aircraft that we had operating in there before. Predominantly on low cost - sorry, on short haul domestic flying. So we're in a big transition mode with Transavia. We're really pleased with the idea or the fact that we have 50% of the slots at Orly. It is very close in airport to Central Paris.

It's going to be connected shortly to the Line 14 metro where we think the combination of the unit cost of Transavia with our position at Orly, with the benefits that we could offer to - in a meaningful light way to some customers, our yielding customers at Transavia. We think the combination of those three should enable us to return only after many, many years of losses to profit.

Transition though with the growth, maintaining the slots, bringing in the new aircraft type, of course, it's a big transition period, but I don't think there's another carrier that got that opportunity at a close in airport that is saturated. So we're super happy about that unit cost, the transformation at both Air France and KLM, in particular, with the fleet simplification benefits of pulling the A380s out of the Air France fleet.

We've been able to do that on a permanent basis unlike some of our competitors, because of late deliveries of example 777-9s. We have not been dependent on that airplane. So replaced all of those airplanes much more fuel efficient A350s. We've done a lot of cabin work to lower the unit cost by having more optimized cabins in some cases - we've decreased the cabin unit cost by up to 9% that's without doing any work or having to make any change to union contracts.

And we've got much more efficient I would say work rules with some of our work units such as our pilots. And I'm really pleased to say that the pilot relationship at Air France is extremely positive. As you know, that is key, for most airlines and you have a positive relationship with your pilots you can put in transformation projects that normally would not be available. At KLM, the relationship with pilots took a beating throughout the pandemic. And I can say it's moving in the right direction.

I believe we can get that relationship to a better spot, even better to ensure that the unit cost of KLM, are able to decrease as well. Of course, as we get back to full capacity, we'll see further unit cost reduction. But overall, I think when you look at the unit cost that Air France had before the pandemic, what these transformation fleet simplification and improved work rules - have really helped us on that front.

So - I can't be more pleased with how that's working out. On sales channels, this is not new. I mean, we've been working for over a decade like most other airlines to shift as much of our traffic online as possible. And all the - we don't have - like we've got some brand new projects that's going on. It's just a big, big push to attract our customers direct. Of course, we have through Flying Blue.

We've - got a great ability to use the data - customer data that we have to penetrate directly offers that we're not offering via other channels. And with the ease of all the features we're putting on our app, more and more of our customers are getting comfortable making bookings changes on - our applications, either on their mobile phones or online. So nothing new just the continued push and we're seeing marked difference.

I think perhaps people had time throughout the pandemic to actually figure out other ways to buy tickets. They had time to figure things out - on the IT side - a little bit of joke there but no, this is not new. But I think the big - item that we're hoping you focus on is we expect the unit cost to continue to outperform those of our main competitors.

Alexander Irving

Thank you very much.

Operator

We will now move to a question from Stephen Furlong of Davy. Please go ahead.

Stephen Furlong

Hi and hello. And so two questions maybe this is one for Ben or indeed Anne. I remember back in November of 2019 with a lot of the restructuring or planned restructuring to be done that you were kind of focused on rebalancing the Paris network away from kind of non-premium connecting traffic and more to capture the premium traffic out of Paris. And there was some - this gave you more flexibility with ASK growth, et cetera. Maybe just Ben or Anne talk about that?

And then the second thing, it's for Steven. Just maybe to me just on fully get it. Well done on the liquidity position, the leverage position I'll get that. So I was just wondering and I heard your comments about the French GAAP. Why do you still need to do another kind of quasi equity financial I know you have approval for it like the loyalty program MRO given where the liquidity position is and given where the leverage position and given your comments on French GAAP? Thanks a lot.

Benjamin Smith

Okay. On the network, historically, the model we've had in place at KLM has worked extremely well with some of these changes that are being put in place by the Dutch state. We're of course, seeing if we need to evolve that model. But the base model we have at KLM is very solid results have always been very good and we fully expect if necessary to adapt to the new environment, but the base model is the right one for KLM.

We are up gauging on our medium haul fleet at KLM. We've got the Embraer 195 E2s which offering material increase the number of seats that feed our long haul network. We have the Airbus A321neos, which are replacing - eventually our entire fleet of 737 NGs, but of course the 321neo is a larger frame than the 737, 800, 900 and Neo course 700. So in the Netherlands, I would say we're happy with the model.

In Paris, so you asked specifically about CDG, but only we are focusing on trying to get as much O&D traffic on Transavia in the medium haul as possible and leverage our position there. And saying that, we never had a big connection facility or a connection operation at Orly and that will remain the case. At CDG, the bank structure that is - the bank structure options that are open to us in CDG are limited.

We've got - we have inbound morning flights from North America, from most of our South American operation from Africa and now coming back from Asia. So it puts an enormous pressure on our operation at CDG early in the morning right through the midmorning and then those flights feeding the rest of Europe put a big pressure on that, so to optimize our European network similar to what our other European competitors need to do is a challenge.

And of course, what goes around with that is - we require more, infrastructure in the morning period more greater strain on our employees and a more difficult - connection process in a facility that was not designed specifically for connections. So that's one of the reasons we are looking at how, can we better optimize the experience for customers at CDG. And also when you bring in an A380, the size of that A380 with the exception of peak, peak periods in order fill that plane, you need a lot of connections.

So operationally, it's expensive to operate a big hub in CDG with a lot of connection customers. That being said, we still do carry a large number of customers 50% in 2019 and we expect to go down a little bit, but not in a very large way. We only have 48% of the local Paris market which is it's proven to be extremely strong. And we like to change the balance - as most of you know. We follow our industry local O&D flights are usually - they provide more profit, because you don't have - double take off, double landing and you don't have this big cost that we have to transfer customers at CDG.

And with the big catchment area of Paris, unlike Frankfurt, unlike Munich, unlike Zurich, we have this tap of or this pool of customers that we believe we can better penetrate and get a larger market share with the - removal of our A380s. I think the balance of how many customers have to connect versus local is a little easier to manage. And when you look at the balance of premium seats versus the economy, we can much better focus on what makes money for us.

So what does that all mean? You will see us reduce the number of connecting customers focus on higher yielding customers and because of the unique Paris market. We've been able to attract not only business customers, but something very unique in what's - it's gone up in a very big way is the premium leisure, which we've been seeing, which we've seen come back in numbers much above what we saw in 2019.

Steven Zaat

And coming back on the equity side. So we are not doing this, projects for French GAAP equity because hybrids are not equity on the French GAAP. So that is not the reason that we are - doing it. We are still, as you will see, we still have a negative equity of €2.5 billion and we want to get, let's say, we want to repair that whole. But so it's more from a group level perspective than it is from a specific French GAAP regulation.

Stephen Furlong

Understood, thank you.

Operator

We will now take a question from James Hollins of BNP Paribas.

James Hollins

Yes hi, team. Good morning. Few from me first one, I'm no doubt that you're extremely stupid, but what is the mechanics of the €0.6 billion of the French state share ownership being removed? Are you just selling them? Secondly Ben, you've been in the media talking about the Schiphol permanent flight cuts being put in place, like it's guaranteed. Is it guaranteed and is there still some negotiation there and what's your strategy if that comes in? And the third one, that - the Dutch and French wage support, are we still looking at €2.5 billion to be paid back? And what's your timing on potential for doing that? I know you treat as exceptional, but any update would be great? Thanks.

Steven Zaat

Hi James, so I will take the first question and the third question. So the €0.6 billion that is taken into account to define the state-guaranteed. So with these new measures, there is actually - as we mentioned, there's no need to change the capital structure. So there's - that doesn't impact actually the French capital - the French state capital increase in our capital. So it's up to them what to do, but there are no regulations around it that they should go back to any level.

And then on your question about the social charges and on the wage tax, so we start to pay wage tax at KLM that as we started in October 2022 and we had five years to pay back actually from that moment the €1.5 billion which is there. And then on the Air France side, it was €1 billion where we already started in January to payback the social charging and we also had five years over there. So it is spread over five years actually to pay that all back.

Benjamin Smith

Good morning, James. So how are we going to convince you to move up sell as well only the few. So Amsterdam, as I mentioned, the Amsterdam hub is still very strong. The inflation in the Netherlands has been one - of the highest. As Marjan mentioned, we've lost a lot of employees who had appeared, but we've been successful hiring a lot back and the same with Schiphol but there was a lag to that.

But from how we're going to manage it, what's our strategy to avoid the decision that was taken by the Dutch state, reducing the number of movements at Amsterdam. The main goal of that decision is on reducing noise. So our position is there are other ways to reduce noise, new aircraft, the new aircraft that we have on order - not necessarily taken into account when this decision was made.

So it's the beginning of our strategy. We have Delta Airlines, our big partner in the United States, which is helping us as well even that - the Dutch state has taken - there are arguments that it does not comply with the bilateral that's in place between the Netherlands and state and whether the decision can be upheld through it. So we are pushing on all fronts. It is quite early so far for this summer. This reduction in slots will not be affecting the number of flights we wish to operate our entire fleet will be fully operating this summer.

No impact on what we had planned to operate for summer fleet. I'd say Marjan do you have any additional comments?

Marjan Rintel

No, there is charge in the debate with the Dutch government we try to focus not on reduction of movements, but on CO2 reduction and noise reduction. As Ben already mentioned, one of the initiatives is we bought four freight airplanes and we'll remove the 747 immediately reduction is 40% CO2 50% noise and that has a great added value. So we show there are alternatives and that we can reach more CO2 and noise reduction by investing in fleet.

And next to this, we think the stage should focus as well on creating a single European Sky, which will deliver a 10% CO2 reduction as well and that could be great. So there are other ways to reach these goals and we are very committed to this.

Benjamin Smith

I think I'll just add something else here as well. This decision had a major political push behind it. And I think the - now that we're able to at least better heard in this coverage on how this decision may not have been or how the objective of reducing noise and CO2 via reducing slots may not be the only or the best way to achieve those goals.

And also to better balance off the benefits that Schiphol provides to the Netherlands that has not been up until now, part of the debate many of the companies that depend on all the links that KLM provides around the world and thanks to the size of the hub. These could be put at risk, if there was an impact to KLM's ability to operate to all these cities is now starting to be discussed in the larger media.

And this is - I think this is going to help us because KLM is a huge assets, in the Netherlands taken 50, 60 years to build up, big reason why Amsterdam is attractive to many international companies to base their European operations. It is a huge asset provides an enormous financial and economic benefit to the country. And this argument is now coming out media. And I think - that alone, which is not - being pushed by us, but being pushed by our customers, will help change the narrative.

James Hollins

Okay. Thanks for the thoughts.

Operator

Our next question comes from Sumit Mehrotra of Societe Generale. Please go ahead.

Sumit Mehrotra

Thank you. Good morning. First question would be on your working capital outlook. Do you see any scenario of outflows at some point in time, I mean, we are at very high levels. You see, you're sitting at €3.7 billion in tickets and €2.4 billion at payables on the balance sheet. Something is going to blink eventually. So, yes, I would like to know, Steven, what's your take on this working capital scenario, some point of time. Secondly on Transavia of €100 million of loss in the fourth quarter, a bit of a disappointment, what has had little back actually is Orly - point cost stickiness? Let's know a little bit more about what could be better at Transavia. Lastly, back to Slide 19, following from James' question, am I right in interpreting that the €600 million of French state stake moving out of this chart has got to do with it's not getting categorized as a new temporary framework or what is it? Why does it go down to zero here? Thank you.

Steven Zaat

Let me start - hi Sumit. Let me start with the working capital. So there are several elements. So on the payable side, in general, there's nothing changing except of course that we pay back social charges and we pay back the wage tax, but we are still increasing capacity. So the increase in capacity will also - we will also benefit from that on the working capital. So how it exactly balance out? I don't know, but let's say it should be more or less in sync with each other.

Then on the - yes, so maybe coming back on your - the €600 million question, as you called. So as you said, you said it very well, it is not categorized anymore as state aid. So that is - I think the good news, but it doesn't mean that the French state will change their capital structure. So the capital structure, there's no need to change it at this moment. So it's wiped out, but without any change needed in the capital structure as it's written down in the last sentence.

Benjamin Smith

And on Transavia, Holland is performing as planned. Transavia France as I briefly mentioned on one of the other answers to one of the questions. We've had not something - that we originally we're expecting is a sharper decline in the number of customers flying on domestic France. And because we want to maintain all of our slots at Orly, we've had to operate more services than expected on domestic France may become less profitable. They're becoming money losing.

So the transition of using those slots to medium haul routes in Europe it's not going as fast as planned, or as possible and needing to cover those unprofitable flights in domestic France, while we have not got the full Transavia fleet in place, because we are - we can't introduce many planes - as well with pilots and with the maintenance, with training, with all of that, we'd like to go faster, but I think we're going as fast as we absolutely can.

So - just to give you an example, as I said, we've exited all of our regional aircraft, the routes that - the slots that they were - occupying are now being used by Transavia, some of them. And there's this lag in timing to moving some of that capacity off of domestic onto European flights. So that is one of the big reasons why the results of Transavia are not at the levels that we're expecting.

But midterm, we're still very confident, as I mentioned, that the model of Transavia is going to hold just to get through this transition period. And so, we don't expect any change to the model or the midterm strategy of Transavia.

Sumit Mehrotra

Thank you.

Operator

Our next question today comes from Harry Gowers of JPMorgan.

Harry Gowers

Yes, good morning. Thanks for taking the time. I've got a couple. And the first one would just be on Asia and Middle East capacity. I think it was still down 40% in the quarter. So how do you think that's going to develop over the course of the year? And demand coming out of Asia? Second one, yes. Second one was just the quasi equity measures still to come as well. So can you just confirm what quantity you would expect to embark on this year? And the third one, just on the operating margin target, 7% to 8% mid-term. Obviously, you've given us the unit cost decrease that you expect. But do you have a unit revenue level above '19 or '22 roughly in mind to reach that point? Thanks.

Benjamin Smith

Okay. So thanks Harry. For the demand Asia and Middle East, we're seeing Middle East numbers almost back to 2019, so very strong. Asia, we're very happy to see the fast reopening of China. We weren't expecting it to be announced in the way which was announced. We're putting in capacity quite quickly. We weren't expecting to allocate a number of the amount of capacity that we are now planning to allocate. We are moving some lower performing flights some of the capacity that was operating on the other route over to Asia.

So it is good news for us in Q3. We'll have nonstop -- daily nonstop from both airlines and some of the routes. In some cases, high frequency weekly services to Asia. So Beijing, Shanghai where we had minimal capacity over the last three years. As an example, Air France will be offering daily flights to both KLM, almost daily Hong Kong, daily by Hong Kong, by Air France, every weekly by KLM Japan where the traffic is probably 60% -- sorry, the capacity is 60% to 70% where it was.

Where we're seeing something really positive is India. Our traffic to India is very strong and this is thanks to the inability of North American carriers to fly nonstop because of the Russian overflight ban. So we're enjoying a high demand environment for our services to India. I'm quite pleased with that.

And then one last thing on the Middle East, we've seen one of the carriers significantly reduced their offering to Europe. And we've seen the other two Gulf carriers, their capacity is quite stable. So the demand environment or the capacity environment in to and from Europe and the Middle East is relatively stable in some cases actually lower than what we saw in 2019.

Steven Zaat

And then on the quasi equity, we don't disclose any quantity because we are just -- we have the projects running. We are going to test the market and it all depends on the pricing. So that is very important. There is no rush. So we are looking at the pricing initiative. We've seen the deal we did with Apollo, we had quite a good pricing on those kinds of setups.

The last question I didn't get [Harry], so if you can repeat it because I understand the unit cost, but do you want the guidance in the mid-term on the unit revenues?

Harry Gowers

Yes. On the level that you might have in mind in terms of the building blocks to get there?

Steven Zaat

No. But let's say that all depends, of course, on the fuel development, et cetera. What we see on the mid-term there will be still, let's say, a reduction of supply. So I think the supply in terms of capacity is not coming back from all the carriers, you see that there are still difficulties to deliver for certain planes to deliver the planes. So we still expect that has restricted capacity from the supply side, which is of course good for our unit revenues.

Harry Gowers

Okay. Thank you very much.

Operator

Our next question today comes from Johannes Braun of Stifel Europe.

Johannes Braun

Good morning. Thanks for taking my questions. I have two. First one, just coming back on the China reopening. Can you actually comment how quickly you will ramp up capacities with China? So where do we stand? Currently, I guess, it was 2019 and where will be by the summer end? Also, how does the fact that you have to circumvent the Russian airspace on the way to China, influence your planning here?

And then secondly, just realized that you're now targeting 1 point - sorry, 1% to 4% unit cost reduction in your midterm outlook. How does that compare to the 4.6 - sorry, 4% to 6% reduction if you guided earlier. Is the new target just a reflection of, I guess, general cost inflation? Or is there anything else you should consider here.

Benjamin Smith

Okay. So China, first of all, the increased - the inability to overfly Russia, of course, has an impact on the duration of our flights. So there takes up to 3 hours longer. However, there are some benefits. The charges that we used to pay to the Russian government for overflight were extremely expensive. So today, the profitability and the performance of our flights to China has been quite solid despite the fact we have to fly around Russia.

We had throughout the pandemic very limited services to the flights a week from Air France and four flights a week from KLM. And for crew reasons, we weren't overnighting our crew in either city, Beijing or Shanghai, and we had removed all services to secondary China, very expensive operations having the crew layover in another Asian city and operate circle type trips.

So as I said, we're going to be back to daily or near daily on the main trunk routes to China ramping up over the next - through to Q2. And we will have our most efficient aircraft on there. And with the -- another fact that we're not now paying, we will not be paying the Russia overflight charges and the inability for our main competitors to ramp up in a way that's faster than us because of lack of aircraft. We feel that the - our results for Asia partially optimistic they should be good and demand that we're seeing so far is strong.

We're hoping for something similar to what we saw in the Transatlantic, which is a really, really huge pent-up demand response to travel. So we'll see how that goes. But very optimistic for China especially for this summer.

Steven Zaat

Yes, Johannes. First of all, it's good that we have clear now the equity situation for you. That is good to know. Coming back on your question on the unit cost. So actually, we don't change our plans on transformation. We keep ongoing on the ambitions which we have disclosed earlier on the midterm, of course, the 4% to 6% was before the Ukraine war. So there is, of course, inflation coming in, but we will offset that with our transformation plan and also with all the new fleet which we are introducing. So on the plan itself, on the cost side, which we, let's say, directly can influence, has nothing changed. We keep the ambition which we have already disclosed earlier.

And Marjan, maybe you can give some color on this transformation.

Marjan Rintel

Yes. On the transformation plan, if we compare our costs to 2019, we can see that our transformation plan has already delivered €930 million of cost decrease. We are in the middle of this transfer plan because we've extended it due to the COVID crisis to 2026. So we have still a lot to deliver, but we have a lot of plans that are identified and we continue with the same energy. And of course, as Steven said, it's totally mandatory at least to offset the supply cost and the inflation cost, but we have to do more.

Anne Rigail

As to start, the reduction of capacity over the last 9 months didn't help in the unit cost. So soon we increase our capacity, it will help the unit cost as well. Of course, the inflation and the labor market is quite difficult in the Netherlands. We hired a lot of people necessary to offer a stable product for our customers. We built a full transformation plan for the next five years with high ambitions and we really focus on structural cost reduction that is needed to do all the investments in new fleet and sustainability.

Johannes Braun

Thanks, guys.

Operator

Our next question comes from Achal Kumar of HSBC.

Achal Kumar

Hi. Good morning, guys. Thanks for taking my questions. So first of all, going back to Asia, broadly. So you mentioned that, of course, the flight length has increased by a few hours. Don't - I mean, so do you see the - do you think - are you able to maintain the profitability versus 2019, especially on Asian flights. You pointed out the Russian airspace was very expensive, but then of course, flight length increased, flight length and increased requirement of the crew would have sort of more than offset that. But is it the strong yields which are helping you to maintain the profitability? So overall, how the equation looks like? And then do you - don't you see any potential risk losing the business to your Chinese counterparts who will have direct access to Russian airspace, so they can fly much, much shorter? So that is my first question.

Secondly, on your negotiation question with Air France crew, who sent you a notice about the strike -- potential strike. So how are you doing there? And do you see any risk of strikes? And could you also update on anything else you are facing in terms of your unions? So that is my second question.

Third one about the fuel hedging. I mean, of course, you mentioned that the fuel prices coming down. So do you have any change? I mean, do you see any change in the fuel hedging policy? Are you sort of taking a break at the moment? Or are you still continuing to increase your hedging levels?

And finally on IATA moving -- potentially moving out of Sky team, do you see any impact from that given that Lufthansa is going to grab IATA soon and that will move out of Sky team. So do you see any impact? So those are my questions. Thank you.

Benjamin Smith

Okay. Achal, let's see if we can answer your questions. So Asia, excellent question. I can't - I mean, I was shocked when I saw the flight, most of them in a wild one before we head this ban on Russian overflight, the charges that we were incurring were just astronomical to the point that the fact that we weren't paying them were more than offsetting the increased costs that we had to incur because of the lengthier flights. So we did get the relief we required from some of our flight crews to be able to fly longer. So there's no tech stops that are required.

We see the ability of our competitors to add back capacity is limited. We're not - what we're seeing in the - and what's loaded in the system is capacity by our competitors is lower than I would have expected. So I think it will be a very tight capacity environment.

The fact that Chinese carriers today do not look like they're going to have an issue flying over Russia. I find the customers that KLM, our main frequent and loyal customers at KLM and Air France really have a strong preference to fly on KLM and Air France and the frequent buyers who are most profitable customers, we don't see a -- which we didn't see throughout the last few months on the non-China routes. We didn't seem to lose those in a big way. So that's not a concern as of yet.

Strikes in France, not new. Air France has to manage through strikes about its entire history. I think if you look at how we've managed the last four years, we've not had a material strike at Air France, but this is not easy. We have a big team at Air France who really improved communication and built upgrade relationships with the major unions we have constructive unions at all major work groups right now. Of course, this is a - we've got many that have - are part of national unions, which are not always easy to manage.

Air France provides a great platform to make a lot of noise. But if you look at how Air France has fared over the last year with all the other transport companies having major shutdowns, I think will hands in front of me. I think the Air France team congratulated and have shown an amazing resilience against some big pressures. So as of today, quite pleased with the way the Air France employees have shown responsibility.

As I said in France, the rights employees have to strike are quite unique relationships with unions. The - as you said, they're quite good and there's the unemployment regime that the French State is overhauling, so that puts pressure on us. But we've been through a lot, you know four years 2014 to 2018, Air France lost €900 million because of strikes, €900 million between 2018 and today that's almost been completely eliminated.

So a lot of effort. The big part of the employees that have asked, they want to support their company and they're becoming more and more responsible. So cautiously optimistic that that trend can continue. But it's not - a lot of work that goes into that.

On the fuel front, I'll let Steven answer that. I'll just maybe answer your last question before going to the fuel. So the fact that as of now that we do not foresee strengthening our relationship, our commercial relationship with IATA. In some cases, it may actually be - benefits will be decreasing and we may be moving apart from IATA. We've managed to get additional slots for both KLM and Air France at Milan, Linate Airport. And this was one of the main objectives of ours to strengthening our relationship with IATA.

So that being said, we are quite pleased with the fact of we had managed to be able to do that. What we were surprised is the unions in IATA become very, very local. They're looking for snapback. They're looking to the return to wages and working conditions that are similar to what Alitalia had because many of the employees did come from Alitalia.

And that is not something that we would -- we've got the bandwidth to manage. We have enough to manage in our two other airlines when it comes to labor relations. So with the benefit of what IATA and its current form, its offering versus some of the risks and the fact that we've gained access to the main market we were looking to further expand our presence, we feel pretty good that we can continue accessing the Italian market in a strong way.

Steven Zaat

Yes, Achal. Coming back on the fuel hedging. Now we continue the current policy. So 70% in the quarter we live then we will -- when we start the quarter, we have 55% building up to 70% and the quarter after we go from 40% to 50% size, and in the fourth quarter we go from 25% to 40%.

The benefit is, of course, that we can -- fixing it now at lower prices, because the market is in backwardation. So with these hedges, we can fix a lower price actually for the future. But we are just protecting our exposure. So we're not going to change every time our hedge policy related to the fuel price. We are protecting our exposure. We're just more on the short term because we sell the tickets and therefore we have an IR, let's say, hedge rate in the quarter to come than let's say over the last two quarters of the year.

I think we will end this session, sorry.

Marjan Rintel

Maybe to give some illustration on your question on the social -- on the Air France part. We have permanent discussions with our unions, and I think that we see some trust in the discussions. Of course, to implement the transformation plan that I mentioned, and you mentioned it, we are adjusting our cabin crew ratio. Regarding our cabin configurations, we have taken a lot of time to discuss and explain it to our cabin crew to adjust the service, to work on it.

We have a lot of processes on the ground that we are also adjusting. And of course, we do it with discussions with all the staff and the unions. We also discuss a lot of work with our pilots given that we had - we need a lot of flexibility. It was a case in summer '22. It's a case for summer '23 given the late delivery of some aircraft, given the ramp up in the training. We really need a lot of flexibility.

So we will very good discussions on it. So I must say it's permanent. Of course, the French social context is not always helping, but we are really going forward and it helps us to implement the transformation plan that I mentioned.

Achal Kumar

Thank you.

Steven Zaat

Sorry, I want to make a closing remark because - besides all the good news, we have a slight negative news is that actually Frederic Kahane will leave our Investor Relations department. He will stay in the company. He will lead our strategic projects. So he will still be very close to us and he will be replaced by Michiel Klinkers as CPIR. We all know actually - in your day-to-day connection with analysts.

So thank you very much. We will go now to the press and we are happy that we could answer all your questions.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

For further details see:

Air France-KLM SA (AFRAF) Q4 2022 Earnings Call Transcript