Prospectus dated 12 December 2012
Air France-KLM € 500,000,000 6.250 per cent. Notes due 18 January 2018 unconditionally and irrevocably guaranteed by Société Air France and KLM acting as several but not joint guarantors (cautions conjointes) (ISIN: FR0011374099)
Issue Price: 99.451 per cent. of the aggregate principal amount of the Notes
This document constitutes a prospectus (the "Prospectus") for the purposes of Article 5.3 of Directive 2003/71/EC of the European Parliament and the Council dated 4 November 2003, as amended (which includes the amendments made by Directive 2010/73/EU of the European Parliament and the Council dated 24 November 2010). The € 500,000,000 6.250 per cent. notes due 18 January 2018 (the "Notes") of Air France-KLM (the "Issuer") will be issued outside the Republic of France on 14 December 2012 (the "Issue Date") with the benefit of an irrevocable and unconditional guarantee (the "Guarantee", as described in the section "Description of the Guarantee" below) of Société Air France and Koninklijke Luchtvaart Maatschappij N.V. ("KLM") (the "Guarantors", as described in the section "Description of the Guarantors" below) acting as several but not joint guarantors (cautions conjointes), to the extent of 60% and 40%, respectively, of any amounts due by the Issuer under the Notes. Each Note will bear interest on its principal amount from (and including) the Issue Date to (but excluding) 18 January 2018 at a fixed rate of 6.250 per cent. per annum payable annually in arrear on 18 January in each year and commencing on 18 January 2014 with a long first coupon in respect of the period, from and including, the Issue Date up to, but excluding 18 January 2014, as further described in the section "Terms and Conditions of the Notes – Interest" of this Prospectus. Payments in respect of the Notes will be made without deduction for or on account of taxes imposed or levied by the Republic of France to the extent described under "Terms and Conditions of the Notes – Taxation". Unless previously redeemed or purchased and cancelled, the Notes will be redeemed in full at their principal amount on 18 January 2018. The Notes may, and in certain circumstances shall, be redeemed, in whole but not in part, at their principal amount together with accrued interest in the event that certain French taxes are imposed (See "Terms and Conditions of the Notes - Redemption and Purchase"). Noteholders (as defined in "Terms and Conditions of the Notes") will be entitled, in the event of a change of control of the Issuer or in the event that a third party comes to hold (i) more than 50% of the share capital of Société Air France and/or the economic rights relating to shares in the capital of KLM or (ii) more than 50% of the voting rights relating to shares in the capital of Société Air France and/or KLM (subject to certain exemptions), to request the Issuer to redeem their Notes at their principal amount together with any accrued interest as more fully described in "Terms and Conditions of the Notes – Change of Control". Application has been made for approval of this Prospectus to the Autorité des marchés financiers (the "AMF") in France in its capacity as competent authority pursuant to Article 212-2 of its Règlement Général which implements the Directive 2003/71/EC of 4 November 2003 as amended (which includes the amendments made by Directive 2010/73/EU) (the "Prospectus Directive"). Application has been made to Euronext Paris for the Notes to be listed and admitted to trading on Euronext Paris ("Euronext Paris"). Euronext Paris is a regulated market for the purposes of the Markets in Financial Instruments Directive 2004/39/EC, appearing on the list of regulated markets issued by the European Commission. The Notes will be issued in dematerialised bearer form (au porteur) in the denomination of €100,000 each. Title to the Notes will be evidenced in accordance with Articles L. 211-3 and R.211-1 of the French Code monétaire et financier by book-entries (inscription en compte) in the books of account
holders. No physical document of title (including certificats représentatifs pursuant to Article R. 211-7 of the French Code monétaire et financier) will be issued in respect of the Notes. The Notes will, upon issue, be inscribed in the books of Euroclear France, which shall credit the accounts of the Account Holders (as defined in "Terms and Conditions of the Notes - Form, Denomination and Title"), including Euroclear Bank SA/N.V. ("Euroclear") and the depositary bank for Clearstream Banking, société anonyme ("Clearstream, Luxembourg"). The Notes have been accepted for clearance through Euroclear France, Euroclear and Clearstream, Luxembourg. The Notes and the Guarantee have not been and will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act") and are not being offered or sold in the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act ("Regulation S") or pursuant to an exemption from the registration requirements of the Securities Act. The Notes are not expected to be assigned a rating. At the date hereof, neither the Issuer nor the Guarantors are rated. An investment in the Notes involves certain risks. Potential investors should review all the information contained or incorporated by reference in this Prospectus and, in particular, the information set out in the section entitled "Risk Factors" before making a decision to invest in the Notes.
In accordance with Articles L. 412-1 et L. 621-8 of the Code monétaire et financier and its General Regulations (Règlement général), in particular Articles 211-1 to 216-1, the AMF has granted to this Prospectus the visa n°12-595 on 12 December 2012. This Prospectus has been prepared by the Issuer and its signatories assume responsibility for it. In accordance with Article L. 621-8-1-I of the Code monétaire et financier, the visa has been granted following an examination by the AMF of "whether the document is complete and comprehensible, and whether the information in it is coherent". It does not imply that the AMF has verified the accounting and financial data set out in it and the appropriateness of the issue of the Notes. So long as any of the Notes remain outstanding, copies of this Prospectus and all documents incorporated by reference in this Prospectus will be available free of charge (i) on the website of the AMF (www.amf-france.org) and (ii) on request at the registered office of the Issuer during normal business hours.
Joint Lead Managers Crédit Agricole CIB HSBC ING Natixis Rabobank International The Royal Bank of Scotland
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The Issuer, having made all reasonable enquiries, confirms that this Prospectus contains or otherwise incorporates by reference all information with respect to (i) the Issuer, (ii) the Issuer and its subsidiaries and affiliates taken as a whole (the "Group") and (iii) the Notes which is material in the context of the issue and offering of the Notes; such information is true and accurate in all material respects and is not misleading in any material respect; any opinions or intentions expressed in this Prospectus with regard to the Issuer and the Group are honestly held or made, have been reached after considering all relevant circumstances and are based on reasonable assumptions; there are no other facts in relation to the Issuer, the Group or the Notes the omission of which would, in the context of the issue and the offering of the Notes, make any statement in this Prospectus misleading in any material respect; and all reasonable enquiries have been made to ascertain and verify the foregoing; each of the Guarantors, in relation to itself only, having made all reasonable enquiries, confirms that this Prospectus contains or otherwise incorporates by reference all information with respect to itself and its Guarantee, which is material in the context of the issue and offering of the Notes. The Issuer and, in relation to itself and its Guarantee only, each of the Guarantors, accepts responsibility accordingly. This Prospectus does not constitute an offer of, or an invitation or solicitation by or on behalf of the Issuer, the Guarantors or the Joint Lead Managers (as defined in "Subscription and Sale" below) to subscribe or purchase, any of the Notes in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. The distribution of this Prospectus and the offering of the Notes in certain jurisdictions, including, without limitation, the United States, the United Kingdom and the Republic of France, may be restricted by law. The Issuer and the Joint Lead Managers do not represent that this Prospectus may be lawfully distributed, or that any Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Issuer or the Joint Lead Managers which is intended to permit a public offering of any Notes or distribution of this Prospectus in any jurisdiction where action for that purpose is required. Accordingly, no Note may be offered or sold, directly or indirectly, and neither this Prospectus nor any offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this Prospectus comes are required by the Issuer, the Guarantors and the Joint Lead Managers to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers and sales of Notes and distribution of this Prospectus, see "Subscription and Sale" below. The Notes and the Guarantee have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"). Subject to certain exceptions, the Notes may not be offered or sold within the United States, as defined in Regulation S under the Securities Act (the "Regulation S"). This Prospectus is for distribution only to, and is only directed at, persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any securities may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This Prospectus is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this Prospectus relates is available only to relevant persons and will be engaged in only with relevant persons. No person is authorised to give any information or to make any representation not contained in this Prospectus and any information or representation not so contained must not be relied upon as having been authorised by or on behalf of the Issuer, the Guarantors or the Joint Lead Managers. The delivery of this Prospectus at any time does not imply that the information contained or otherwise incorporates by reference in it is correct as at any time subsequent to its date. The Joint Lead Managers have not separately verified the information contained in this Prospectus. Accordingly, no representation, warranty or undertaking, express or implied, is made and no
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responsibility or liability is accepted by the Joint Lead Managers or any of them as to the accuracy or completeness of the information contained or incorporated by reference in this Prospectus or any other information provided by the Issuer in connection with the Notes or their distribution. Neither this Prospectus nor any other information supplied in connection with the offering of the Notes is intended to provide the basis of any credit or other evaluation and should not be considered as a recommendation by any of the Issuer or the Joint Lead Managers that any recipient of this Prospectus or any other financial statements should purchase the Notes. In making an investment decision regarding the Notes, potential investors should rely on their own independent investigation and appraisal of the Issuer, its business and the terms of the offering, including the merits and risks involved. The contents of this Prospectus are not to be construed as legal, business or tax advice. Each prospective investor should consult its own advisers as to legal, tax, financial, credit and related aspects of an investment in the Notes. Potential investors should read carefully the section entitled "Risk factors" below for certain information relevant to an investment in the Notes and before making a decision to invest in the Notes. In this Prospectus, unless otherwise specified or the context requires, references to "euro", "EUR" and "€" are to the single currency of the participating member states of the European Economic and Monetary Union and references to "dollars", "USD" or "$" are to the single currency of the United States of America. References to "Air France" and "KLM" are respectively to Air France and KLM and their respective subsidiaries, unless the context otherwise requires. In connection with the issue of the Notes, Crédit Agricole Corporate and Investment Bank (the "Stabilising Manager") (or any person acting on behalf of any Stabilising Manager) may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager (or any persons acting on behalf of any Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days after the date of the allotment of the Notes. Any stabilisation action or over-allotment must be conducted by the relevant Stabilising Manager (or any person acting on behalf of any Stabilising Manager) in accordance with all applicable laws and rules.
FORWARD-LOOKING STATEMENTS This Prospectus contains certain statements that are forward-looking including statements with respect to the Issuer’s or the Guarantor’s business strategies, expansion and growth of operations, trends in its business, competitive advantage, and technological and regulatory changes, information on exchange rate risk and generally includes all statements preceded by, followed by or that include the words “believe”, “expect”, “project”, “anticipate”, “seek”, “estimate” or similar expressions. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. Potential investors are cautioned not to place undue reliance on forward- looking statements, which speak only as of the date hereof.
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TABLE OF CONTENTS
RESPONSIBILITY STATEMENT ...... 6
INCORPORATION BY REFERENCE ...... 8
RISK FACTORS ...... 14
TERMS AND CONDITIONS OF THE NOTES ...... 33
USE OF PROCEEDS ...... 44
DESCRIPTION OF THE ISSUER ...... 45
DESCRIPTION OF THE GUARANTEE ...... 47
DESCRIPTION OF THE GUARANTORS ...... 50
RECENT DEVELOPMENTS ...... 84
TAXATION ...... 102
SUBSCRIPTION AND SALE ...... 104
GENERAL INFORMATION ...... 107
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RESPONSIBILITY STATEMENT
Air France-KLM I declare, after taking all reasonable measures for this purpose and to the best of my knowledge, that the information in relation to Air France-KLM contained or incorporated by reference in this Prospectus is in accordance with the facts and that it makes no omission likely to affect its import. The historical consolidated financial statements of Air France-KLM as of and for the nine-month period ended 31 December 2011, and as of and for the twelve-month periods ended 31 March 2011 and 2010, a free English language translation of which is incorporated by reference herein, have been audited and were the subject of statutory auditors’ reports, a free English language translation of which is presented on pages 245-246, 224-225 and 217-218 of the DR 2011, the DR 2010-2011 and the DR 2009-2010 (as defined in "Incorporation by reference" hereafter), respectively. The statutory auditors’ report on the consolidated financial statements of Air France-KLM for the years ended 31 March 2011 and 2010 include an emphasis paragraph relating to a change in accounting principles with respect to implementation of new IFRS standards and interpretation effective 1st April 2010 and 1st April 2009 respectively. Air France – KLM 2, rue Robert Esnault-Pelterie 75007 Paris France Duly represented by: Jean-Cyril Spinetta Chief Executive Officer Duly authorised on 12 December 2012
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Société Air France I declare, after taking all reasonable measures for this purpose and to the best of my knowledge, that the information relating to Société Air France contained or incorporated by reference in this Prospectus is in accordance with the facts and that it makes no omission likely to affect its import. The historical consolidated financial statements of Société Air France as of and for the nine- month period ended 31 December 2011 and as of and for the twelve-month periods ended 31 March 2011 and 2010, a free English language translation of which is incorporated by reference herein, have been audited and were the subject of statutory auditors’ reports, a free English language translation of which is presented on pages 1-4 of each of the AF 2011 Audit Report, the AF 2010-2011 Audit Report and the AF 2009-2010 Audit Report (as defined in "Incorporation by reference" hereafter). The statutory auditors’ report on the consolidated financial statements of Société Air France for the years ended 31 March 2011 and 2010 include an emphasis paragraph relating to a change in accounting principles with respect to implementation of new IFRS standards and interpretation effective 1st April 2010 and 1st April 2009 respectively. Société Air France 45, rue de Paris 93290 Tremblay en France France Duly represented by: Alexandre de Juniac Chief Executive Officer Duly authorised on 12 December 2012
KLM I declare, after taking all reasonable measures for this purpose and to the best of my knowledge, that the information relating to KLM contained or incorporated by reference in this Prospectus is in accordance with the facts and that it makes no omission likely to affect its import. The historical consolidated financial statements of KLM as of and for the nine-month period ended 31 December 2011, and as of and for the twelve-month periods ended 31 March 2011 and 2010, incorporated by reference herein, have been audited and were the subject of the statutory auditors’ reports presented on pages 174-176, 172-174 and 159-160 of the KLM 2011 AR, the KLM 2010-2011 AR and the KLM 2009-2010 AR (as defined in "Incorporation by reference" hereafter), respectively. KLM Amsterdamseweg 55 1182 GP Amstelveen The Netherlands Duly represented by: Peter Hartman Chief Executive Officer Duly authorized on 12 December 2012
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INCORPORATION BY REFERENCE
This Prospectus should be read and construed in conjunction with the following documents which are incorporated in, and shall form part of, this Prospectus and :
have been filed with the AMF and are available on the website of Air France-KLM S.A. (www.airfranceklm-finance.com):
(a) the free English language translation of the Issuer’s First half financial report "Rapport Financier Semestriel" for the six-month period ended 30 June 2012 (the "H1 2012 FS") which includes the free English language translation of the Issuer’s unaudited interim condensed consolidated financial statements for the six-month period ended 30 June 2012 prepared in accordance with IAS 34, the standard of IFRS, as adopted by the European Union, applicable to interim financial statements, and the free English language translation of the statutory auditors’ review report thereon;
(b) the free English language translation of the Issuer’s 2011 Registration Document "Document de Référence" which was filed with the AMF on 19 April 2012 under the reference D.12-0367 (the "DR 2011") except for the third paragraph of the section "Certification by the person responsible for the Registration Document" on page 288. The DR 2011 includes the free English translation of the audited consolidated financial statements of the Issuer for the nine- month period ended 31 December 2011 prepared in accordance with IFRS as adopted by the European Union and the free English language translation of the statutory auditors’ report thereon;
(c) the free English language translation of the Issuer’s audited consolidated financial statements for the year ended 31 March 2011 prepared in accordance with IFRS as adopted by the European Union and the free English language translation of the statutory auditors’ report thereon contained in the free English language translation of the Issuer’s 2010-2011 Resgistration Document "Document de Référence" (the "DR 2010-2011") which was filed with the AMF on 15 June 2011 under the reference D.11-0579;
(d) the free English language translation of the Issuer’s audited consolidated financial statements for the year ended 31 March 2010 prepared in accordance with IFRS as adopted by the European Union and the free English language translation of the statutory auditors’ report thereon contained in the free English language translation of the Issuer’s 2009-2010 Registration Document "Document de Référence" (the "DR 2009-2010") which was filed with the AMF on 10 June 2010 under the reference D.10-0520;
are available on the website of Société Air France S.A. (http://airfrance.momentys.com):
(a) the free English language translation of Société Air France’s unaudited interim condensed consolidated financial statements for the six-month period ended 30 June 2012 prepared in accordance with IAS 34, the standard of IFRS, as adopted by the European Union, applicable to interim financial statements (the "AF H1 2012 FS") and the free English language translation of the Statutory auditors’ review report thereon ;
(b) the free English language translation of Société Air France’s audited consolidated financial statements for the nine-month period ended 31 December 2011 prepared in accordance with IFRS as adopted by the European Union (the "AF 2011 FS") and the free English language translation of the auditors’ report thereon (the "AF 2011 Audit Report");
(c) the free English language translation of Société Air France’s audited consolidated financial statements for the year ended 31 March 2011 prepared in accordance with IFRS as adopted by
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the European Union (the "AF 2010-2011 FS") and the free English language translation of the auditors’ report thereon (the "AF 2010-2011 Audit Report");
(d) the free English language translation of Société Air France’s audited consolidated financial statements for the year ended 31 March 2010 prepared in accordance with IFRS as adopted by the European Union (the "AF 2009-2010 FS") and the free English language translation of the auditors’ report thereon (the "AF 2009-2010 Audit Report");
are available on the website of KLM N.V. (http://www.klm.com/corporate/en/publications/index.html):
(a) KLM’s 2011 annual report which includes KLM’s audited consolidated financial statements for the nine-month period ended 31 December 2011 prepared in accordance with IFRS as adopted by the European Union and the auditors’ report thereon (the "KLM 2011 AR"), excluding the proforma financial information of KLM for the twelve-month period ended 31 December 2011; and
(b) KLM’s 2010-11 annual report which includes KLM’s audited consolidated financial statements as at 31 March 2011 prepared in accordance with IFRS as adopted by the European Union and the auditors’ report thereon (the "KLM 2010-2011 AR");
(c) KLM’s 2009-10 annual report which includes KLM’s audited consolidated financial statements as at 31 March 2010 prepared in accordance with IFRS as adopted by the European Union and the auditors’ report thereon (the "KLM 2009-2010 AR"); save that any statement contained in a document which is incorporated by reference herein shall be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein modifies or supersedes such earlier statement (whether expressly, by implication or otherwise).
Copies of the documents incorporated by reference are available free of charge: (i) on the website of the Issuer and the Guarantors as mentioned above and (ii) on request at the registered office of the Issuer during normal business hours so long as any of the Notes is outstanding, as described in "General Information" below.
For the purposes of the Prospectus Directive, information can be found in such documents incorporated by reference or in this Prospectus in accordance with the following cross-reference table. Any information not listed in the cross-reference list but included in the documents incorporated by reference is given for information purposes only.
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CROSS-REFERENCE LIST
Document incorporated by Rule Prospectus Regulation – Annex IX Page(s) reference 1. PERSONS RESPONSIBLE N/A 2. STATUTORY AUDITORS N/A 3. RISK FACTORS N/A 4. INFORMATION ABOUT THE ISSUER 4.1. History and development of the Issuer 4.1.1. the legal and commercial name of the issuer the place of registration of the issuer and its 4.1.2. registration number the date of incorporation and the length of 4.1.3. life of the issuer, except where indefinite 4.1.4. the domicile and legal form of the issuer, DR 2011 269 the legislation under which the issuer operates, its country of incorporation, and the address and telephone number of its registered office (or principal place of business if different from its registered office 5. BUSINESS OVERVIEW 5.1. Principal activities 5.1.1. A brief description of the issuer’s principal 46-64, 166- activities stating the main categories of DR 2011 175 products sold and/or services performed The basis for any statements in the 5.1.2. registration document made by the issuer DR 2011 37-41 regarding its competitive position 6. ORGANISATIONAL STRUCTURE If the issuer is part of a group, a brief 6.1. description of the group and of the issuer's DR 2011 279 position within it 7. TREND INFORMATION N/A 8. PROFIT FORECASTS OR ESTIMATES N/A 9. ADMINISTRATIVE, MANAGEMENT,
AND SUPERVISORY BODIES 9.1. Names, business addresses and functions in the issuer of the following persons, and an indication of the principal activities performed by them outside the issuer where these are significant with respect to that issuer: DR 2011 6-31 (a) members of the administrative, management or supervisory bodies; (b) partners with unlimited liability, in the case of a limited partnership with a share capital.
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9.2. Administrative, Management, and Supervisory bodies conflicts of interests Potential conflicts of interests between any duties to the issuing entity of the persons referred to in item 9.1 and their private DR 2011 19 interests and or other duties must be clearly stated In the event that there are no such conflicts, a statement to that effect 10. MAJOR SHAREHOLDERS 10.1. To the extent known to the issuer, state whether the issuer is directly or indirectly owned or controlled and by whom, and DR 2011 270-274 describe the nature of such control, and describe the measures in place to ensure that such control is not abused 10.2. A description of any arrangements, known to the issuer, the operation of which may at DR 2011 273 a subsequent date result in a change in control of the issuer 11. FINANCIAL INFORMATION CONCERNING THE ISSUER’S ASSETS
AND LIABILITIES, FINANCIAL POSITION AND PROFITS AND LOSSES 11.1. Historical Financial Information Audited historical financial information covering the latest 2 financial years (or such shorter period that the issuer has been in operation), and the audit report in respect of each year If the audited financial information is prepared according to national accounting standards, the financial information required under this heading must include at least the DR 2011 150-151 following: H1 2012 FS 4-5 (a) the balance sheet DR 2010-2011 140-141 DR 2009-2010 132-133 AF 2011 FS 4-5 AF 2010-2011 FS 4-5 AF 2009-2010 FS 4-5 AF H1 2012 FS 4-5 KLM 2011 AR 64 KLM 2010-2011 AR 64 KLM 2009-2010 AR 54
DR 2011 148 H1 2012 FS 2 (b) the income statement DR 2010-2011 138 DR 2009-2010 130 AF 2011 FS 2 AF 2010-2011 FS 2 AF 2009-2010 FS 2 AF H1 2012 FS 2 KLM 2011 AR 65 KLM 2010-2011 AR 65
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KLM 2009-2010 AR 55
DR 2011 156-244 H1 2012 FS 8-17 (c) the accounting policies and explanatory DR 2010-2011 145-223 notes DR 2009-2010 137-216 AF 2011 FS 8-79 AF 2010-2011 FS 8-69 AF 2009-2010 FS 8-72 AF H1 2012 FS 8-25 KLM 2011 AR 70-160 KLM 2010-2011 AR 69-158 KLM 2009-2010 AR 59-146
11.2 Financial statements If the issuer prepares both own and DR 2011 247-260 consolidated financial statements, include at DR 2010-2011 226-240 least the consolidated financial statements in DR 2009-2010 219-232 the registration document. KLM 2011 AR 162-173 KLM 2010-2011 AR 160-171 KLM 2009-2010 AR 148-158
11.3. Auditing of historical annual financial
information 11.3.1. A statement that the historical financial information has been audited. If audit DR 2011 245-246 reports on the historical financial DR 2010-2011 224-225 information have been refused by the DR 2009-2010 217-218 statutory auditors or if they contain AF 2011 Audit Report 1-4 qualifications or disclaimers, such refusal or AF 2010-2011 Audit Report 1-4 such qualifications or disclaimers, must be AF 2009-2010 Audit Report 1-4 reproduced in full and the reasons given KLM 2011 AR 174-176 KLM 2010-2011 AR 172-174 KLM 2009-2010 AR 159-160
11.5. Legal and arbitration proceedings Information on any governmental, legal or arbitration proceedings (including any such proceedings which are pending or DR 2011 79-80, 209- threatened of which the issuer is aware), 212 during a period covering at least the AF 2011 FS 53-56 previous 12 months which may have, or KLM 2011 AR 138-144 have had in the recent past, significant effects on the issuer and/or group's financial position or profitability, or provide an appropriate negative statement 12. MATERIAL CONTRACTS N/A 13. THIRD PARTY INFORMATION AND STATEMENT BY EXPERTS AND N/A DECLARATIONS OF ANY INTEREST 14. DOCUMENTS ON DISPLAY A statement that for the life of the 33, 269, registration document the following DR 2011 289 documents (or copies thereof), where
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applicable, may be inspected: (a) the memorandum and articles of association of the issuer; (b) all reports, letters, and other documents, historical financial information, valuations and statements prepared by any expert at the issuer's request any part of which is included or referred to in the registration document; (c) the historical financial information of the issuer or, in the case of a group, the historical financial information of the issuer and its subsidiary undertakings for each of the two financial years preceding the publication of the registration document. An indication of where the documents on display may be inspected, by physical or electronic means.
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RISK FACTORS
Prior to making an investment decision, prospective investors should consider carefully all of the information set out and incorporated by reference in this Prospectus, including in particular the following risk factors. Prospective investors should be aware that this section is not intended to be exhaustive and that the risks described herein may combine and thus modify one another. They should make their own independent evaluations of all risk factors and should also read the detailed information set out elsewhere in this Prospectus. Terms defined in "Terms and Conditions of the Notes" below shall have the same meaning in the following section.
RISK FACTORS RELATING TO THE ISSUER AND THE GUARANTORS
Risks linked to the air transport industry
Risks linked to the seasonal nature of the air transport industry
The air transport industry is seasonal, with demand weakest during the winter months and a higher probability of operational risks linked to bad weather during the winter months. Consequently, the operating results for the first and second halves of the financial year are not comparable.
Risks linked to the cyclical nature of the air transport industry
Local, regional and international economic conditions can have an impact on the Group’s activities and, hence, its financial results. Periods of crisis or post-crisis, such as the one being traversed currently with an unstable economic environment, are liable to affect demand for transportation, both for tourism and business travel. Furthermore, during such periods, the Group may have to take delivery of new aircraft or be unable to sell unused aircraft under acceptable financial conditions. The Group also monitors demand closely so as to adjust capacity thanks to flexible management of the fleet.
Risks linked to terrorist attacks, the threat of attacks, geopolitical instability, epidemics and threats of epidemics
The terrorist attacks of 11 September 2001 in the United States had a major impact on the air transport sector. Airlines experienced falling revenues and rising costs notably due to the fall in demand and to higher insurance and security costs. Certain aircraft also saw a decline in their value. The SARS epidemic resulted in a sharp fall in air traffic and revenues generated in Asia.
In 2011, the geopolitical situation resulting from natural disasters occurring in Japan and political events (Arabic and African countries) significantly impacted the Issuer’s operations to and from these regions.
In terms of safety, the airlines in the Group comply with European and international regulations and submit regular reports to the competent authorities of the measures and procedures deployed.
The Group has also developed emergency plans and procedures enabling it to adapt to changing environments and ensure that it can respond effectively to different situations were an epidemic, geopolitical or other type of event to occur. The aim of these plans is the effective protection of passengers and staff, operational and service continuity, and the preservation of the long-term viability of the Group’s businesses. These plans are regularly adjusted to take into account the lessons learnt from events experienced.
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The occurrence of political instability, attacks, threat of an attack, military action, epidemic or perception that an epidemic could occur (eg. Influenza A/H1N1) could have a negative impact on both the Group’s passenger traffic, and thus its revenues, and on the level of operating expenses. The Group is not insured for operating losses but is insured for the consequences of an attack on one of its aircraft.
Risks linked to changes in international, national or regional regulations and legislation
Air transport activities remain highly regulated, particularly with regard to the allocation of traffic rights for extra-community services and the conditions relating to operations (standards on safety, aircraft noise, CO2 emissions, airport access and the allocation of time slots). Within this context, the EU institutions notably adopt regulations which may be restrictive for airlines and are liable to have a significant organizational and/or financial impact. The European Commission has published its White Paper entitled Roadmap to a Single European Transport Area which emphasizes the need to reduce the transport sector’s impact on the environment while avoiding any unnecessary constraints on its development. In terms of its content, the main positive measure is the Commission’s commitment to developing bio-fuels as well as the implementation of the Single European Sky. The White Paper also, however, envisages introducing a tax on air transportation, levying VAT on international flights, stepping up initiatives in the passenger rights area, pursuing a pro-active policy on rail development and reviewing the regulation governing the allocation of time slots in the European platforms.
The Air France-KLM Group actively defends its positions with the French and Dutch governments and European institutions directly or through industry bodies such as the Association of European Airlines (AEA) regarding both changes in European and national regulations and a reasonable and balanced allocation of traffic rights to non-European airlines.
Any changes to regulations and legislation could increase the Group’s operating expenses or reduce its revenues.
Risk of loss of flight slots or lack of access to flight slots
Due to the saturation at major European airports, all air carriers must obtain flight slots, which are allocated in accordance with the terms and conditions defined in Regulation 95/93 issued by the EC Council of Ministers on 18 January 1993. Pursuant to this regulation, at least 80% of the flight slots held by air carriers must be used during the period for which they have been allocated. Unused slots will be lost by this carrier and transferred into a pool. The regulation does not provide for any exemptions for situations in which, due to a dramatic drop in traffic caused by exceptional events, air transport companies are required to reduce activity levels substantially and no longer use their flight slots at the required 80% level during the period in question. The European Commission did, however, decide to temporarily suspend Regulation 95/93 governing the loss of unused flight slots as was recently the case in 2009.
In 2010, the European coordinators accepted that the closure of the airspace following the volcanic eruption constituted, in respect of the community regulation, an exceptional circumstance justifying the suspension of the "use it or lose it" regulation at the airports concerned.
As a general rule, the Group manages this risk at the preventive and operational level. At the preventive level, two months before the beginning of a season, the Group analyzes the reductions to be considered for commercial reasons (holidays, long weekends and bank holidays, for example). As a result, so as to avoid the underutilization of this portfolio of flight slots, it does not request the slots corresponding to these flights. At operational level, the Group uses tools shared by the Schedule regulation unit and by the operations control center which warn of any under-utilization risk.
Any loss of flight slots, or lack of access to flight slots due to airport saturation could have an impact in terms of market share, results and development.
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Risks linked to the consumer compensation regulations
Within the European Union, passenger rights are defined by Regulation no.261/2004 which came into force in 2005, applying to all flights, whether scheduled or unscheduled, departing from an airport located in a Member State of the European Union and establishing the European rules for compensation and assistance on denied boarding, substantial delay, flight cancellation and class downgrading.
On 19 November 2009, the European Court of Justice ruled (Sturgeon ruling) that passengers on delayed flights could be assimilated with those on cancelled flights for the purposes of the application of the right to financial compensation. They could thus invoke the right to financial compensation provided in article 7 of this Regulation when arrival at their final destination was subject to a delay of at least three hours relative to the arrival time initially foreseen.
French jurisprudence is, however, very clear in this regard: EC Regulation no.261/2004 provides for no financial compensation in the event of a flight delay. This means that only a legislative redrafting of the overall framework of the Regulation could make such financial compensation mandatory in the event of delay. At the request of IATA and three airlines (British Airways, easyJet and TUI) who are challenging the application of this ruling by the UK Civil Aviation Authority, the UK High Court of Justice has referred a number of questions back to the European Court of Justice aimed at clarifying the application of the compensation in the event of substantial delay.
Since 2004, in addition to the rulings from the European Court of Justice, there have been a number of events with an impact on the application of regulations. This is notably the case for the adoption of new regulations governing passenger rights in other forms of transportation. Furthermore, a series of weather-related events have highlighted the need to limit the responsibility of carriers in terms of assistance and care for passengers. In April 2011, the European Commission announced its intention of revising the regulation and including new provisions on delayed, lost or damaged baggage and the rescheduling of flights.
Meantime, the European Parliament has also published a draft report on passenger rights which may influence the European Commission’s work concerning the revision of Regulation 261/2004. Furthermore, in the event of an airline going bankrupt, the extension of the protection due to passengers having purchased a travel package to air transport passengers purchasing only a flight is currently being studied. Insurance already exists in the market to cover this risk and the airlines and their representative bodies are in favor of an information initiative to encourage passengers to subscribe to such policies. The recent cases of European airlines going bankrupt have revived the concern of the Commission and Members of the European Parliament regarding this subject.
The ever-stricter regulations applying to the European airlines but only partially applicable to airlines of third-party countries only increases the existing distortions to competition.
The improved US airline passenger protection regulation came into effect on 23 August 2011 (the deadline for its application by the airlines being delayed until 24 January 2012). It mostly aims to strengthen the disclosure requirements, particularly in terms of advertised fares and baggage policy, but also cover the banning of any post-purchase price increases, the possibility of cancelling a reservation with no penalty for 24 hours after the reservation is made and the notification of any changes in flight status.
On 26 September 2011, the US department of Transportation also issued a Supplemental Notice of Proposed Rulemaking, proposing to require airline websites aimed at the US public and automated airport kiosks in the United States to be accessible to individuals with disabilities.
These US regulations, aimed at strengthening passenger rights, cannot be compared with European Regulation 261/2004 since they do not have the same rationale, including with regard to compensation. They provide for compensation for passengers involuntarily bumped off over-booked flights which is proportional to the price of the ticket and the final delay on arrival. Only the reimbursement of the ticket is mentioned in the event of flight cancellation or a major delay whereas,
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in the event of flight cancellation or involuntary bumping of a passenger, the European Regulation proposes a flat rate of compensation with no correlation to the ticket price or the delay on arrival.
The US regulations in terms of passenger rights apply to all airlines operating in the US territory and/or marketing flights to/from the United States which means that the Air France-KLM Group is concerned by these new US protections.
Generally speaking, the industry is seeing ever-stricter regulations and, with each country having its own requirements in terms of consumer rights, the accumulation of stricter and increasingly detailed provisions can sometimes prove contradictory or inconsistent. This is increasing the obligations of airlines, together with their expenses and procedural risks.
Risks relating to the environment
The air transport industry is subject to numerous environmental regulations and laws relating, amongst other things, to aircraft noise and engine emissions, the use of dangerous substances and the treatment of waste products and contaminated sites. Over the last few years, the European and US authorities have adopted various regulations, notably regarding noise pollution and the performance of aircraft, introducing taxes on air transport companies and obligations for them to ensure the compliance of their operations.
The aviation sector is now included in the European Union Emissions Trading Scheme (EU ETS) pursuant to European Directive no. 2008/101/EC of 19 November 2008, in force since 1st January 2012.
The principle of the European Emissions Trading Scheme consists of setting an annual budget of quotas or CO2 emission rights (key figure: one ton of fuel burned = 3.15 tons of CO2 emitted), with each airline being allocated a number of personalized quotas (one quota corresponding to one ton of CO2). At the end of each year, companies must return an amount of emission allowances that is equivalent to the tons of CO2 they have emitted in that year. Depending on their emissions, they can also purchase or sell allowances (exchangeable quotas). For the aviation sector, the free quotas were distributed to each operator on a prorata basis based on their revenue ton-kilometers (RTK) generated in 2010. In 2010, for the first time, air transport operators were thus required to declare their CO2 emissions together with their traffic data (revenue ton-kilometers). On the basis of these declarations, the Air France-KLM Group obtained, for 2012, nearly 23 million free quotas. Since the Group’s emissions for 2012 should be slightly below 30 million tons of CO2, 6 to 7 million quotas are likely to be purchased at an estimated cost of between €50 million and €100 million depending on the price of a ton of carbon and the actual emissions. From this perspective, on 12 January 2012, Air France became the first airline partner of the Bluenext emissions trading exchange.
The European directive applies to all European and non-European airlines flying into and out of the European Economic Area something which has raised strong opposition from non-European countries and their airlines. This unilateral approach has been contested by third-party countries since its inception and this confrontational situation has resulted in continued uncertainty even after the coming into effect of the directive. It is likely to lead to serious distortions in competition between European and non-European airlines due to the threats of retaliation from, for example, China, Russia and the USA.
The United Nations Climate Change conferences held in Copenhagen in December 2009 followed by those held in Cancun in 2010 and Durban in 2011 did not result in the expected world-wide agreement. However, consistent with the proposals for an overall sector approach supported by the air transport industry, a global response looks to be taking shape under the aegis of the United Nations with the adoption of an International Civil Aviation Organization resolution during its meeting in October 2010. The ICAO has committed to presenting an overall approach for the aviation sector before the end of 2012, in time for the World Climate Summit in Doha.
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The Air France-KLM Group is constantly seeking ways to reduce its fuel consumption and carbon emissions: - at its own initiative: modernization of the fleet and engines, improved fuel management, fuel savings plan, reduction in weight carried, improved operating procedures; - in cooperation with the authorities: SESAR project (Single European Sky, optimization of traffic control), operating procedures. The Group supports and calls on research into the development and use of new more environmentally-friendly fuels (biofuels).
The Group also acts with the relevant national, European and international authorities and bodies (EU, DGAC, French Ministry of Ecology, Energy and Sustainable Development) and participates in the work of the airline industry (AEA, ICAO, IATA) to promote effective solutions for the environment which are also balanced in terms of competition.
Risks linked to the oil price
The fuel bill is the second largest cost item for airlines. The volatility in the oil price thus represents a risk for the air transport industry. In effect, a sharp increase in the oil price, such as seen since early 2011, can have a negative impact on the profitability of airlines, particularly if the economic environment does not enable them to adjust their pricing strategies by introducing new fuel surcharges or if they are unable to implement effective hedging strategies.
Lastly, for the European airlines, any appreciation in the dollar relative to the euro results in an increased fuel bill.
Operating risks
Natural phenomena leading to exceptional situations
Air transportation depends on meteorological conditions and can be affected by other natural phenomena (earthquakes, volcanic eruptions, floods, etc.) which can lead to operational disruption such as flight cancellations, delays and diversions. Generally speaking, the duration of such adverse natural events tends to be short and their geographical range limited but they may require the temporary closure of an airport or airspace. They can, however, represent a significant economic cost (repatriation and passenger accommodation, schedule modifications, diversions, etc.). On the other hand, the closure of an airspace over several days, as was the case in April 2010 in Europe following the eruption of an Icelandic volcano, has very major commercial, human and financial consequences for the airlines and their passengers. Similarly, the bad weather in late 2010 at a number of European airports had significant operational and financial repercussions for the activity of the Air France-KLM Group given the regulations requiring the company to assist passengers in the European Union territory.
Within this context, the Air France-KLM Group is lobbying, either directly or through representative bodies, both the French and European authorities to develop robust crisis management tools and, secondly, to obtain an adjustment in the rule regarding the Issuer’s responsibilities vis-à-vis passengers in exceptional circumstances. The Group is not insured for operating losses.
Risk of food poisoning
The in-flight service policy provides for food to be served to passengers during most long and medium-haul flights. These meals are prepared in catering facilities belonging either to the Group entities responsible for airline catering or to independent service providers.
As with all food preparation, there is a risk of food poisoning. To limit any potential damage to its reputation arising from the materialization of this risk, the Air France-KLM Group has taken preventive measures requiring suppliers, whether internal or external, to contractually guarantee the respect of regulatory obligations (granting of the relevant approvals, traceability, ISO 9001 Quality Management certification, etc.). Furthermore, bacteriological analyses based on random sampling
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carried out by approved laboratories and audits of compliance are regularly conducted at service provider premises.
The materialization of this risk could have a reputational, legal or financial impact. This risk is covered by the aviation insurance policy.
Airline accident risk
Accident risk is inherent to air transportation which is why airline activities (passenger and cargo transportation, aircraft maintenance) are heavily regulated by a series of European regulatory procedures, transposed into French law. Compliance with these regulations governs whether an airline is awarded the CTA (Certificate of Air Transport) which is valid for three years.
The civil aviation authority carries out a series of checks on a continuous basis covering notably the: - designation of a senior executive and managers responsible for the principal operating functions; - appropriate organization of flight, ground, cargo and maintenance operations; - deployment of a Safety Management System; - implementation of a quality system.
In addition to this regulatory framework, the IATA member airlines have defined and comply with the IATA Operational Safety Audit certification which is renewed every two years.
The Independent Safety Review Team, created in September 2009, produced its final report in January 2011, formulating 35 recommendations covering the organization and operating modes with an impact on flight safety. Given its commitment to the highest possible standards of flight safety, Air France immediately implemented these recommendations. The Flight Safety Committee within the Air France Board of Directors thus meets every quarter to analyze the flight safety indicators for the Air France Group. The results of the in-flight observations campaign, the LOSA (Line Operations Safety Audit), a practice already used by other airlines in the United States, Asia and Australia, were presented in December 2011 and are the subject of an action plan which forms part of the ongoing process to improve safety.
The implementation process for the Safety Management System, launched in 2009, was completed by 1st January 2011 pursuant to the decree of 22 December 2008. This system has four pillars: Policy and Objectives, Safety Risk Management, Safety Assurance and Safety Promotion which have all been deployed across the operating divisions. On this occasion, the Corporate Safety Policy – a priority for the Air France Group – was reaffirmed and the members of the Executive Committee made a personal commitment to implementing an "equitable" management policy aimed at reinforcing the functioning of the feedback system, a key element of any safety policy. Safety Management System training modules, adapted to each user group, are currently deployed in all areas of the company. Although it is not subject to the same regulatory requirements, KLM deploys a similar approach to that of Air France.
The materialization of this risk could have an impact on the Group’s image and legal or financial consequences. This risk is covered by the aviation insurance policy.
Risks linked to the Group’s activity
Risk of failure of a critical IT system and IT risks
The IT and telecommunications systems are of primordial importance when it comes to the Air France-KLM Group’s day-to-day operations. They comprise the IT applications in the operating centers and used through the networking of tens of thousands of micro-computers.
The IT systems and the information they contain can be exposed to risks concerning continuity of functioning, security and regulatory compliance. These risks have diverse origins both inside and outside the Group.
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The Air France-KLM Group consistently ensures the allocation of the resources required to ensure the secure operation of the IT systems. Dedicated help centers and redundant networks guarantee the accessibility of data and IT processing in the event of major incidents.
The access controls to IT applications and to the computer files at each work station together with the control over the data exchanged outside the company all comply with rules in line with international standards. Campaigns to raise the awareness of all staff are regularly carried out. Specialized companies, external auditors and the IT specialists within internal audit regularly evaluate the effectiveness of the solutions in place.
The Group’s IT division implements security rules aimed at reducing the risks linked to new technologies, particularly mobile data terminals.
Data security is a priority for the Air France-KLM Group, particularly when it comes to protecting data of a personal nature and complying with the laws and regulations regarding strict confidentiality. Specialists within each company ensure that the processing of personal information complies with the relevant law (IT and Data Protection Officer within Air France and Privacy Officers within KLM).
The materialization of one of these risks could have serious consequences for the Group’s activity, reputation, revenues, expenses and results. The risk of damage to the IT facilities is covered by an insurance policy but not the operating losses that this damage could entail.
Risks linked to non-respect of the competition rules
Following the inquiries conducted by the anti-trust authorities in a number of States concerning alleged anti-competitive agreements or concerted actions involving 25 companies in the air freight sector including the Air France-KLM Group, Air France-KLM has reinforced its procedures to prevent any breach of competition law. Since 2007, Air France-KLM has developed its policy to prevent anti- competitive practices by circulating the Air France and KLM Manual Relating to the Application of the Competition Rules which is available in three languages. This Manual was updated at the end of 2010 and is available to all employees.
A number of other prevention-based tools are available to the Group’s employees including a hotline dedicated to competition law. In late 2010, a second online training module on the application of the competition rules was introduced to supplement the first module created in 2008. Having followed this training and passed an evaluation test, employees sign an individual declaration promising to respect the competition rules applying to their function. Lastly, a manual reiterating the guidelines to be followed in the event of an inquiry by the competition authorities will shortly be posted online and made available to all employees.
Cases of non-respect of the competition rules can have an impact on the Group’s reputation, together with legal and financial repercussions (see also Notes 30.2 and 30.3 to the consolidated financial statements).
Risks linked to competition from other air and rail transport operators
The air transport industry is extremely competitive. The liberalization of the European market on 1 April 1997 and the ensuing increased competition between carriers has led to a reduction in airfares. Furthermore, the Open Skies agreement between the European Union and the United States has been in force since end-March 2008 meaning that European airlines are authorized to operate flights to the United States from any European airport. While this agreement partially opens the way to increased competition for Roissy-Charles de Gaulle and Schiphol, it has also enabled Air France and KLM to extend their networks and strengthen cooperation within the SkyTeam alliance, particularly within the framework of the implementation of a trans-Atlantic joint-venture with their partners Delta and Alitalia.
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On its short and medium-haul flights to and from France, the Netherlands and other European countries, the Group competes with alternative means of transportation. In particular, the high-speed TGV rail network in France competes directly with the Air France Navette, a shuttle service between Paris and the French regionl capitals. Air France and KLM’s flights to London are in direct competition with the Eurostar train service. An extension of high-speed rail networks in Europe is liable to have a negative impact on the Group’s activity and financial results. Air France and KLM also face competition from low-cost airlines for some European point-to-point traffic and, between Europe and Asia, from the Gulf State airlines who are obtaining new traffic rights granted by European governments.
To respond to the competition from other airlines and railway networks, the Group constantly adapts its network strategy, capacity and commercial offer. Furthermore, the Air France-KLM Group regularly raises with the French, Dutch and European authorities the need to establish and maintain fair competition rules.
Risks linked to the regulatory authorities’ inquiry into the commercial cooperation agreements between carriers
Alliance operations and commercial cooperation are subject to the competition legislation in force. The airlines are required, particularly in Europe, to ensure that their operations comply in full with the applicable competition rules. At any time, the European Commission also has the right to open inquiries into any suspected cases of cooperation it considers of interest to the European Community. In January 2012, the Directorate General for Competition announced the closure of the inquiry dating back nearly a decade concerning the SkyTeam alliance, together with the opening of a new procedure concerning only the members of the trans-Atlantic joint venture (Air France-KLM, Delta, Alitalia) and limited to a few services.
The European Commission departments are thus adopting a consistent approach by successively examining the effects on the European market of the three existing trans-Atlantic joint ventures. This new procedure does not call into question the continued implementation of cooperation between the partners on the trans-Atlantic routes. For their part, the US authorities have already published their conclusions, recognizing the benefits for competition of this joint venture. In this regard, the joint venture between Air France-KLM, Delta and Alitalia has benefited from antitrust immunity (ATI) out of the United States since 2008.
The parties in the joint venture plan to continue their discussions with the DG Competition. In the event that the European Commission were to maintain its position, Air France-KLM and its partners could be required to make a number of concessions, notably in making slots available to competitor airlines at certain airports.
Risks linked to commitments made by Air France and KLM to the European Commission
For the European Commission to authorize Air France’s business combination with KLM, Air France and KLM had to make a certain number of commitments, notably with regard to the possibility of making landing and takeoff slots available to competitors at certain airports. The fulfilment of these commitments should not have a material negative impact on the activities of Air France and KLM. Note that no request for slots has, to date, been made.
Risks linked to the implementation of the three-year Transform 2015 plan
Within the framework of the priorities set by the Air France-KLM Board of Directors on 9 November 2011, the Group has established a three-year plan to enable the generation of €2 billion of free cash flow aimed at reducing its debt. The achievement of this target largely depends on an improvement in the productivity of all employee categories. Negotiations with the organizations representing the employees are under way to define a new collective agreement framework. Any strike or stoppage of work linked to these negotiations could have a negative impact on the Group’s activity, financial results and reputation. Furthermore, the final terms of these collective agreements may not prove sufficient to achieve the objective set.
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Risk linked to pension plans
The Group’s main commitments in terms of defined benefit schemes are the three KLM pension funds for ground staff, cabin crew and flight deck crew based in the Netherlands.
In December of each year, the Dutch Central Bank indicates the parameters to be used to calculate the solvency levels of the funds. As a function of the results of these regulatory calculations, the company is required to submit to the Central Bank a plan to return to the required level of solvency. Such a plan comprises commitments from the company and temporary or structural proposals from the Board of Directors of the fund. For example, the company may commit to increasing its contribution and the Board of Directors of the fund may recommend temporarily suspending the inflation-indexing of current and future benefits.
The regulatory solvency levels of the three KLM funds were calculated at the end of December 2011 and, on the basis of the results obtained, the company’s contribution should not see a significant increase in 2012.
The impacts of the revised IAS 19 on retirement benefit obligations are presented in Note 4.1.2 to the consolidated financial statements. The sensitivity analysis regarding the rate of return on the pension plan assets is presented in Note 30.1 to the consolidated financial statements.
Risks linked to the use of third-party services
The Group’s activities depend on services provided by third parties, particularly air traffic controllers and public security officers. Furthermore, the Group increasingly uses sub-contractors over which it does not have direct control. Any interruption in the activities of these third parties (as a result of a series of strikes), or any increase in taxes or prices of the services concerned could have a negative impact on the Group’s activity and financial results or damage its reputation.
To secure supplies of goods and services, the contracts signed with third parties provide, whenever possible, for service quality and responsibility clauses. In some cases, sustainable development partnerships are signed with suppliers. Furthermore, business continuity plans are developed by the Group’s different operating entities to ensure the long-term viability of the operations through alternative arrangements.
Market risks and their management
Organization of the Air France-KLM group
The aim of the Air France-KLM Group’s risk management strategy is to reduce its exposure to market risks and their volatility. Market risk coordination and management is the responsibility of the Risk Management Committee (RMC) which comprises the Chairman and Chief Executive Officer of Air France-KLM, the Chairman and Chief Executive Officer and Chief Financial Officer of Air France and the President and Chief Financial Officer of KLM.
The RMC meets each quarter to review Group reporting of the risks relating to the fuel price, the principal currency exchange rates, interest rates and counterparties and to decide on the hedging to be implemented: targets for hedging ratios, the time periods for the respect of these targets and, potentially, the types of hedging instrument to be prioritized. The decisions taken by the RMC are formalized then implemented by the cash management and fuel purchasing departments within each company, in compliance with the procedures governing the delegation of powers. Each company centralizes the management of the market risks of its subsidiaries.
Regular meetings are organized between the Fuel Purchasing and Cash Management departments of the two companies on the hedging instruments used, strategies planned and counterparties. In order to implement the strategy most appropriate to each circumstance, any type of instrument may be used so
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long as it is qualified as hedging within IFRS. Any exception to this rule must be approved by the Risk Management Committee. As a general rule, no trading or speculation is allowed.
The Cash Management departments of each company circulate information daily on the level of cash and cash equivalents to their respective General Managements. The level of the Air France-KLM’s consolidated cash is communicated every week and at the end of the month to the Group’s General Management.
Every month, a detailed report including, amongst other information, the interest rate and currency positions, the portfolio of hedging instruments, a summary of investments and financing by currency and the monitoring of risk by counterparty is sent to the General Managements.
The policy on fuel hedging is the responsibility of the fuel purchasing departments which are also in charge of purchasing fuel for physical delivery. The General Managements receive a weekly fuel report, mainly covering the transactions carried out during the week, the valuation of all the positions, the percentages hedged as well as the breakdown of instruments and underlyings used, the average hedge levels and the resulting net prices. All this data covers a rolling 24 months. Furthermore, a weekly Air France-KLM Group report (known as the GEC report) consolidates the figures from the two companies relating to fuel hedging and includes a budget update.
Currency risk
Most of the Air France-KLM Group’s revenues are generated in euros. However, because of its international activities, the Group incurs a currency risk. The management of the currency risk for the subsidiaries of the two companies is centralized by each company.
The principal exposure relates to the US dollar. Since expenditure on items such as fuel or aircraft operating leases and components exceeds the amount of revenues in dollars, the Group is a net buyer of US dollars, which means that any significant appreciation in the dollar against the euro could result in a negative impact on the Group’s activity and financial results.
Conversely, Air France-KLM is a net seller of other currencies, the level of revenues in these currencies exceeding its expenditure. This exposure is far less significant than with the US dollar and the risks principally concern Sterling and the Yen. As a result, any significant decline in these currencies against the euro would have a negative effect on the Group’s financial results.
The management of the Group’s exchange rate risk is carried out on the basis of the forecast net exposure for each currency. Currencies which are highly correlated to the US dollar are aggregated with the US dollar exposure.
Operational exposure
For each currency hedged, the time span of the hedging is a rolling 24-month period, the first four quarters having more hedging than the following four. The RMC sets the hedging targets for the dollar, sterling and the yen.
The maximum impact on income before tax of a 10% currency variation relative to the euro is shown in the following table. These results cannot be extrapolated due to the use of option-based contracts.
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Investment exposure
Aircraft and spare parts are purchased in US dollars, meaning that the Group is exposed to an appreciation in the dollar relative to the euro in terms of its investment in flight equipment.
The hedging strategy provides for the implementation of a graduated level of hedging between the date aircraft are ordered and their delivery.
The net investments figuring in the table below reflect the contractual commitments at 31 December 2011.
Exposure on the debt
The exchange rate risk on the debt is limited. At 31 December 2011, 85% of the Group’s gross debt, after taking into account derivative instruments, was euro-denominated, thereby significantly reducing the risk of currency fluctuation on the debt. The exchange rate risk on debt denominated in other currencies mostly concerns the yen (6%), the dollar (6%) and the Swiss franc (3%).
Interest rate risk
At both Air France and KLM, debt is generally contracted in floating-rate instruments. However, given the historically low level of interest rates, Air France and KLM have used swap strategies involving the use of derivatives to convert a significant proportion of their floating-rate debt into fixed rates in order to limit its volatility. After swaps, the Air France-KLM Group’s debt contracted at fixed rates represents 73% of the overall total. The average cost of the Group’s debt after swaps stood at 3.80% at 31 December 2011 (3.87% at 31 March 2011).
The Group’s net interest rate exposure amounts to €1.59 billion. Given the nature of the hedging (swaps and tunnels), a 1% increase in interest rates over twelve months would have a negative impact of €21.3 million.
Fuel price risk
Risks linked to the jet fuel price are hedged within the framework of a hedging strategy defined by the RMC for the whole of the Air France-KLM Group.
The hedging strategy, approved by the Board of Directors, sets the time span of the hedges at two years (a rolling 24 months) and the target hedging ratio at 60%. The underlyings used can be Brent, preferred due to the level of forward prices and liquidity, or middle distillates (fuel oil and jet fuel) enabling the core risk to be hedged but more expensively. Furthermore, the hedging is based on the
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use of simple instruments that are either un-capped (collars, swaps, calls, etc.) or capped (four ways, call spread, etc.). These hedging instruments must also be compatible with IAS 39.
Within the framework of a dynamic approach, the Group has implemented the monitoring of indicators capping the potential maximum loss and the potential maximum gain (value of the portfolio prompting its restructuring). Lastly, an indicator enabling the extreme risk of the portfolio to be measured has been deployed. The level of this Value at Risk indicator is calculated and analyzed every week and may also trigger a restructuring of the portfolio.
At 1st January 2012, the Air France-KLM Group’s fuel exposure, based on futures prices at 30 December 2011 ($105.21 a barrel for 2012 and $100.77 a barrel for 2013), was as follows:
Based on the forward curve at 30 December 2011, an increase of $10 per barrel over 2012 (average price of $115.21 per barrel in 2012) would lead to a $674 million increase in the fuel bill after hedging, ie. a fuel bill of $10.15 billion for the Air France-KLM Group. Symmetrically, a fall of $10 per barrel over 2012 (average price of $95.21 per barrel in 2012) would lead to a $634 million reduction in the fuel bill after hedging to an expense of $8.84 billion.
Counterparty risk
The Group applies rules for managing counterparty risk under the authority of the RMC which reviews the Group’s counterparty portfolio quarterly and, if necessary, issues new guidelines.
Except in the event of express dispensation from the RMC, counterparties must benefit from a minimum rating of A- (S&P) with the exception of mutual funds where the risk is considered negligible. The maximum commitments by counterparty are determined based on the quality of their ratings. The RMC also monitors the trend in the respective share of each counterparty in the overall hedging portfolio (fuel, currency and interest rate). The positions of both Air France and KLM, together with those of the holding company, are taken into account in the assessment of the overall exposure. A monthly report is established and circulated to the members of the General Management in the two companies. It is supplemented by real-time information in the event of any real risk of a rating downgrade for counterparties.
Equity risk
Air France and KLM cash resources are not directly invested in the equity market or in equity mutual funds. However, at 31 December 2011, Air France-KLM directly or indirectly held a portfolio of shares in listed companies worth a net €901 million, principally comprising Amadeus shares. An overall fall of 1% would represent a risk of €9 million.
Liquidity risks
At 31 December 2011, Air France had an undrawn, fully-available credit facility of €1.06 billion, negotiated with an expanded pool of 15 banks. This credit facility matures on 4 April 2016.
This credit facility is subject to the Air France Group respecting the following financial covenants: - EBITDAR must amount to more than 2.5 times net interest charges added to one third of operating lease payments; - non-current assets in the balance sheet, not pledged as collateral, must be at least equal to unsecured net debts.
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These ratios are calculated every six months and define certain conditions for the interest payments on the loan. They were respected at 31 December 2011.
KLM has a fully-available €540 million credit facility maturing in July 2016, negotiated with a consortium of international banks.
This credit facility is subject to the KLM Group respecting the following financial covenants: - EBITDAR must amount to more than 2.5 times net interest charges added to one third of operating lease payments; - non-current assets in the balance sheet, not pledged as collateral, must be at least equal to the unsecured net debts.
These ratios are calculated every six months and were respected at 31 December 2011.
For its part, in October 2007, the Air France-KLM holding company put in place a €250 million ten- year financing facility, undrawn at 31 December 2011. This credit facility is reduced by €50 million per year as of 2013.
This credit facility is subject to the Air France-KLM Group respecting the following financial covenants: - net interest charges added to one third of operating lease payments must not represent more than two-thirds of adjusted EBITDAR; - non-current assets in the balance sheet, not pledged as collateral, must be at least equal to unsecured net debts.
These ratios are calculated every six months and were respected at 31 December 2011.
Given the conditions for access to the financial market for its two principal subsidiaries, Air France and KLM, cash resources of €2.9 billion at 31 December 2011 and the available credit facilities (a total of €1.85 billion), the Group considers that it incurs no liquidity risk. It does, however, closely monitor its cash flows and the structure of its traditionally negative working capital requirement. Note that the Group has granted €628 million of pledges to financial institutions in respect of the guarantee given to the European Union on the anti-trust litigation and the swap contract signed with Natixis on the bonds convertible into new or existing shares ("OCEANEs"), issued in 2005.
Financing risks
Financing strategy
The two subsidiaries are responsible for their own fi nancing policies. This strategy effectively enables each company to take full advantage of its relationships with partner banks. Furthermore, this segmentation enables the different companies in the Group to benefit, if applicable, from export credit financing. This does not stop the two companies exchanging information on their financing strategies and the type of operations planned.
In view of its investment program, particularly in the fleet, the Air France-KLM Group plans to be active in the fi nancing market. Since the current conditions in the financial markets do not call into question the access to long-term financing for aircraft, the Group plans to finance new aircraft using collaterialized debt and to refinance some unsecured assets (aircraft and real estate). These financing or refinancing operations will, as usual, be the subject of requests for proposals. Furthermore, the Group already has commitments from the export credit agencies to support the financing of a number of aircraft deliveries.
Ahead of the application of the Basel III prudential standards and in view of the deterioration in their results, the European banks are expected to reduce their balance sheets in the coming years and, consequently, offer a more limited volume of lending to companies. This risk is increased for financing denominated in US dollars.
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The Group is preparing to contend with this risk by adapting its financing strategy: - Debt contracted with the four leading French banks who are major players in asset financing represents less than 20% of the Air France-KLM Group’s gross debt. - Financing operations including the financing of aircraft are virtually exclusively denominated in euros. - The number of banking counterparties remains high with particular attention being paid to establishing long-term relationships with Asian financial institutions which will not be subject to the same prudential ratios.
Air France Group
The Air France group prioritizes long-term resources for its investment by financing new aircraft with conventional bank debt and (mostly secured by these assets) and, since 2008, by export credit for its Régional and Brit Air subsidiaries.
It also diversified the sources of its principally bank funding through the securitization of flight equipment in July 2003, by issuing €450 million of OCEANEs in April 2005 and, in September 2006, €550 million of euro-denominated bonds, with a 4.75% coupon, maturing on 22 January 2014. An additional €200 million was raised in April 2007, fully fungible with the first tranche.
KLM Group
To finance its aircraft, KLM is able to access the export credit system, which enables the company to take advantage of guarantees from the leading export credit agencies for financing Boeing aircraft in the US and Airbus aircraft in Europe. KLM has also concluded several financing deals in the banking market for the refi nancing of existing aircraft.
Air France-KLM holding company
The Air France-KLM holding company launched two successful bond issues in 2009, with its subsidiaries Air France and KLM as guarantors, comprising €661 million of convertible bonds with a six-year maturity in June 2009 and €700 million of plain vanilla bonds in October 2009, maturing in October 2016.
Investment risks
The cash resources of Air France, KLM and the holding company are invested so as to maximize the return for a very low level of risk. They are thus invested in money market mutual funds and in debt securities and term deposits with highly-rated banks.
A portion of KLM’s liquid assets is invested in foreign-currency AAA-rated bonds, in order to reduce the currency risk on the debt.
Legal risks and arbitration procedures
In connection with the normal exercise of their activities, the Issuer and its subsidiaries are involved in disputes which either result in provisions being booked in the consolidated financial statements or information being included in the notes to the consolidated fi nancial statements as to the possible liabilities.
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RISK FACTORS RELATING TO THE NOTES
Notes may not be a suitable investment for all investors
Each potential investor in the Notes must determine the suitability of that investment in light of such investor’s own circumstances. In particular, each potential investor should: (i) be experienced with respect to transactions on capital markets and notes and understand the risks of transactions involving the Notes; (ii) reach an investment decision only after careful consideration of the information set forth in this Prospectus and general information relating to Notes; (iii) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained or incorporated by reference in this Prospectus; (iv) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact such investment will have on its overall investment portfolio; (v) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes; (vi) understand thoroughly the terms of the Notes; (vii) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the relevant risks; (viii) make their own assessment of the legal, tax, accounting and regulatory aspects of purchasing the Notes; and (ix) consult its legal advisers on legal, tax and related aspects of investment in the Notes.
Some potential investors are subject to restricting investment regulations. These potential investors should consult their legal counsel in order to determine whether investment in the Notes is authorised by law, whether such investment is compatible with their other borrowings and whether other selling restrictions are applicable to them.
No Limitation on Issuing Debt
There is no restriction on the amount of debt which the Issuer may issue or guarantee. The Issuer may incur additional indebtedness or grant guarantees in respect of indebtedness of third parties, including indebtedness or guarantees that rank senior in priority of payment to the Notes. If the Issuer's financial condition were to deteriorate, the Noteholders could suffer direct and materially adverse consequences, including non-payment of the interest and, if the Issuer were liquidated (whether voluntarily or involuntarily), loss of their entire investment.
Redemption Risk
The Notes may at the option of the Issuer, and shall in certain circumstances, be redeemed, in whole but not in part, at their principal amount together with accrued interest for certain tax reasons (see "Terms and Conditions of the Notes – Redemption and Purchase"). There can be no assurance that, at the relevant time, Noteholders will be able to reinvest the amounts received upon redemption at a rate that will provide the same return as their investment in the Notes.
Furthermore, the Issuer may be unable to redeem the Notes at the maturity date. The Issuer could also be compelled to redeem the Notes if an event of default, Change of Control or Share Transfer (as defined in "Terms and Conditions of the Notes – Change of Control") were to occur. If the Noteholders, upon an event of default, a Change of Control or a Share Transfer, were to require from the Issuer the redemption of their Notes, the Issuer cannot guarantee that it will be able to pay the whole required amount. The Issuer’s capacity to redeem the Notes will in particular depend on its financial situation at the time of the redemption and may be limited by any applicable legislation, by the conditions of its indebtedness and also by any new financings in place at that date and which shall
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replace, add or modify the existing or future debt of the Issuer. Furthermore, the Issuer’s failure to redeem the Notes may result in an event of default pursuant to the terms and conditions of another loan.
Long-term securities
The Notes will be redeemed on 18 January 2018. The Issuer is under no obligation to redeem the Notes at any time before this date. The Noteholders have no right to call for their redemption except in the event of a Change of Control or Share Transfer as provided in Condition 9 ("Change of Control") of the Terms and Conditions of the Notes or upon the occurrence of an Event of Default as provided in Condition 10 ("Events of Default") of the Terms and Conditions of the Notes. The Notes may, and in certain circumstances shall, be redeemed, in whole but not in part, at their principal amount together with accrued interest in the event that certain French taxes are imposed as provided in Condition 6 ("Redemption and Purchase") of the Terms and Conditions of the Notes.
Exchange rate risk and exchange controls
The Issuer will pay principal and interest on the Notes in euro. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit other than euro (the "Investor’s Currency"). These include the risk that exchange rates may significantly change (including changes due to devaluation of Euro or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. As a result, investors may receive less interest or principal than expected.
Fixed Rate
The Notes bearing interest at a fixed rate, investment in the Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Notes. While the nominal interest rate of a fixed interest rate note is fixed during the life of such a note or during a certain period of time, the current interest rate on the capital market (market interest rate) typically changes on a daily basis. As the market interest rate changes, the price of such note changes in the opposite direction. If the market interest rate increases, the price of such note typically falls, until the yield of such note is approximately equal to the market interest rate. If the market interest rate decreases, the price of a fixed rate note typically increases, until the yield of such note is approximately equal to the market interest rate. Noteholders should be aware that movements of the market interest rate can adversely affect the price of the Notes and can lead to losses for the Noteholders if they sell Notes during the period in which the market interest rate exceeds the fixed rate of the Notes.
An active trading market for the Notes may not develop (liquidity risk)
There can be no assurance that an active trading market for the Notes will develop, or, if one does develop, that it will be maintained. If an active trading market for the Notes does not develop or is not maintained, the market or trading price and liquidity of the Notes may be adversely affected. The Issuer is entitled to buy and sell the Notes for its own account or for the account of others, and to issue further Notes. Such transactions may favourably or adversely affect the price development of the Notes. If additional and competing products are introduced in the markets, this may adversely affect the value of the Notes.
Market Value of the Notes
The market value of the Notes will be affected by the creditworthiness of the Issuer and a number of additional factors, including, but not limited to, market interest and yield rates and the time remaining to the maturity date. The value of the Notes depends on a number of interrelated factors, including economic, financial and political events in France or elsewhere, including factors affecting capital markets generally and the stock exchanges on which the Notes are traded. The price at which a Noteholder will be able to sell the Notes prior to maturity may be at a discount, which could be substantial, from the issue price or the purchase price paid by such Noteholder.
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Modification of the Terms and Conditions of the Notes
Noteholders will be grouped automatically for the defence of their common interests in a Masse, as defined in Condition 12 ("Representation of the Noteholders") of the Terms and Conditions of the Notes, and a general meeting of Noteholders can be held. The Terms and Conditions of the Notes permit in certain cases defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant general meeting and Noteholders who voted in a manner contrary to the majority.
Change of Law
The Terms and Conditions of the Notes are based on French law in effect as at the date of this Prospectus. No assurance can be given as to the impact of any possible judicial decision or change in French law or the official application or interpretation of French law after the date of this Prospectus.
No Legal and Tax Advice
A Noteholder's effective yield on the Notes may be diminished by the tax impact on that Noteholder of its investment in the Notes.
A Noteholder's actual yield on the Notes may be reduced from the stated yield by transaction costs. Each prospective investor should consult its own advisers as to legal, tax and related aspects of an investment in the Notes.
Taxation
Potential purchasers and sellers of the Notes should be aware that they may be required to pay taxes or other documentary charges or duties in accordance with the laws and practices of the country where the Notes are transferred or other jurisdictions. In some jurisdictions, no official statements of the tax authorities or court decisions may be available for financial notes such as the Notes. Potential investors are advised to ask for their own tax adviser's advice on their individual taxation with respect to the acquisition, sale and redemption of the Notes. Only these advisors are in a position to duly consider the specific situation of the potential investor. This investment consideration has to be read in connection with the taxation sections of this Prospectus.
EU Savings Directive
On 3 June 2003, the European Council of Economics and Finance Ministers adopted a directive 2003/48/EC regarding the taxation of savings income in the form of interest payments (the "Directive"). The Directive requires Member States, subject to a number of conditions being met, to provide to the tax authorities of other Member States details of payments of interest and other similar income made by a paying agent located within their jurisdiction to an individual resident in that other Member State, except that, for a transitional period, Austria and Luxembourg impose instead a withholding system on interest payments unless the relevant beneficial owner of such payment elects otherwise and either authorises the paying agent to disclose the above information or presents to his paying agent a certificate drawn in the name of a competent authority of his Member State of residence. The rate of this withholding tax is currently 35% until the end of the transitional period.
If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. If a withholding tax is imposed on a payment made by a Paying Agent, the Issuer will be required to maintain a Paying Agent in a Member State that will not be obliged to withhold or deduct tax pursuant to the Directive.
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Change of Control
In the event of a change of control of the Issuer or in the event that a third party comes to hold (i) more than 50% of the share capital of Société Air France and/or the economic rights of KLM or (ii) more than 50% of the voting rights of Société Air France and/or KLM (subject to certain exemptions, all as more fully described in "Terms and Conditions of the Notes – Change of Control"), each Noteholder will have the right to request the Issuer to redeem all or part of its Notes at their principal amount together with any accrued interest. In such case, any trading market in respect of those Notes in respect of which such redemption right is not exercised may become illiquid. In addition, investors may not be able to reinvest the moneys they receive upon such early redemption in securities with the same yield as the redeemed Notes.
French insolvency law
Under French insolvency law as amended by ordinance no.2008-1345 dated 18 December 2008 which came into force on 15 February 2009 and related order no.2009-160 dated 12 February 2009 and law no.2010-1249 dated 22 October 2010 which came into force on 1 March 2011 and related order no.2011-236 dated 3 March 2011, holders of debt securities are automatically grouped into a single assembly of holders (the "Assembly") in order to defend their common interests if a safeguard procedure (procédure de sauvegarde), an accelerated financial safeguard procedure (procédure de sauvegarde financière accélérée) or a judicial reorganisation procedure (procédure de redressement judiciaire) is opened in France with respect to the Issuer. The Assembly comprises holders of all debt securities issued by the Issuer (including the Notes), whether or not under a debt issuance programme (EMTN) and regardless of their governing law. The Assembly deliberates on the proposed safeguard plan (projet de plan de sauvegarde), accelerated financial safeguard procedure (procédure de sauvegarde financière accélérée) or judicial reorganisation plan (projet de plan de redressement) applicable to the Issuer and may further agree to:
increase the liabilities (charges) of holders of debt securities (including the Noteholders) by rescheduling due payments and/or partially or totally writing off receivables in form of debt securities;
establish an unequal treatment between holders of debt securities (including the Noteholders) as appropriate under the circumstances; and/or
decide to convert debt securities (including the Notes) into securities that give or may give right to share capital.
Decisions of the Assembly will be taken by a two-third majority (calculated as a proportion of the amount of debt securities held by the holders attending such Assembly or represented thereat). No quorum is required to convoke the Assembly.
For the avoidance of doubt, the provisions relating to the representation of the Noteholders described in this Prospectus would not be applicable with respect to the Assembly to the extent they are not in compliance with compulsory insolvency law provisions that apply in these circumstances.
Rating
Neither the Notes nor the long-term debt of the Issuer and the Guarantors are rated. One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A rating or the absence of a rating is not a recommendation to buy, sell or hold securities.
RISK FACTORS RELATING TO THE GUARANTEE
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Several and not Joint Guarantee
The obligations of the Guarantors under the Guarantee are several, but not joint (cautions conjointes), and will be divided between them in accordance with the ratio described hereafter. If the Guarantee is called, each Guarantor will be obliged to fulfil its payment obligations under the Guarantee only to the extent of its proportional commitment set out in the Guarantee, ie. 60% in respect of Air France and 40% in respect of KLM, and will not be required to increase its payment to account for any shortfall in the payment of the other Guarantor.
The Noteholders will also have to divide any steps or proceedings to enforce their rights under the Guarantee between each of the Guarantors taken individually.
The rank of the Guarantee does not affect in any way the capacity of the several but not joint Guarantors to dispose of their assets or to grant any security over such assets
The guarantee of payment of all sums, agreed by each Guarantor in the form of a several but not joint guarantee (cautions conjointes), which may become due by the Issuer in relation to the Notes, according to the terms of the Guarantee, constitutes, for the Guarantors, a direct, general, unconditional, unsubordinated and unsecured obligation, and ranks pari passu (subject to such exceptions as are from time to time mandatory under applicable laws) with any other unsubordinated and unsecured obligations, present or future, of the several but not joint Guarantors.
The rank of the Guarantee does not affect in any way the capacity of each of the several but not joint Guarantors to dispose of its assets or authorise any security over such assets under certain circumstances (see "Terms and Conditions of the Notes - Guarantee" "Description of the Guarantee" below).
A withholding tax may be imposed on the payments made in relation to the Guarantee
Payments made in relation to the Guarantee do not currently give rise to the enforcement of French withholding tax.
The Guarantors may be unable to perform their payment obligations under the Guarantee
Société Air France and KLM guarantee irrevocably and unconditionally, as several but not joint Guarantors (cautions conjointes), the payment of all sums due by the Issuer in relation to the Notes (see "Description of the Guarantee" below). If the Guarantee should be enforced, Société Air France and KLM cannot guarantee that they will be in a position to pay all of the sums due. The ability of Société Air France and KLM to pay the sums due will depend in particular on their financial situation at the moment of payment and may be limited by applicable legislation (in particular in the event insolvency proceedings are brought against them), by the terms of their indebtedness as well as by the terms and conditions of new financings in place at that date and which could replace, increase or change their current or future debt.
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TERMS AND CONDITIONS OF THE NOTES
The issue outside the Republic of France of the € 500,000,000 6.250 per cent. Notes due 18 January 2018 (the "Notes") by Air France-KLM (the "Issuer") with the benefit of an irrevocable and unconditional guarantee (the "Guarantee") of Société Air France and Koninklijke Luchtvaart Maatschappij N.V. ("KLM") (the "Guarantors") acting as several but not joint Guarantors (cautions conjointes), has been authorised pursuant to a resolution of the Board of Directors (Conseil d’administration) of the Issuer dated 30 October 2012 and a decision of its Président Directeur général dated 6 December 2012, and the Guarantee has been authorised (i) by Société Air France pursuant to resolutions of its Board of Directors (Conseil d’administration) dated 30 October 2012 and (ii) by KLM pursuant to a resolution of its Management Board dated 6 December 2012. The Notes are issued with the benefit of a fiscal agency agreement dated 14 December 2012 as amended and supplemented from time to time (the "Fiscal Agency Agreement") between the Issuer, the Guarantors, CACEIS Corporate Trust as fiscal agent, paying agent and put agent (the "Fiscal Agent", the "Paying Agent" and the "Put Agent" which expressions shall, where the context so admits, include any successor for the time being as fiscal agent, paying agent and put agent). Copies of the Fiscal Agency Agreement are available for inspection during normal business hours at the specified offices of the Paying Agent. References below to "Conditions" are, unless the context otherwise requires, to the numbered paragraphs below. In these Conditions, "holder of Notes", "holder of any Note" or "Noteholder" means the person whose name appears in the account of the relevant Account Holder as being entitled to such Notes.
1. Form, Denomination and Title
The Notes are issued in dematerialised bearer form (au porteur) in the denomination of € 100,000 each. Title to the Notes will be evidenced in accordance with Articles L.211-3 and R.211-1 of the French Monetary and Financial Code (Code monétaire et financier) by book-entries (inscription en compte). No physical document of title (including certificats représentatifs pursuant to Article R.211-7 of the French Monetary and Financial Code (Code monétaire et financier)) will be issued in respect of the Notes.
The Notes will, upon issue, be inscribed in the books of Euroclear France, which shall credit the accounts of the Account Holders. For the purpose of these Conditions, "Account Holders" shall mean any authorised financial intermediary institution entitled to hold, directly or indirectly, accounts on behalf of its customers with Euroclear France, and includes Euroclear Bank S.A./N.V. ("Euroclear") and the depositary bank for Clearstream Banking, société anonyme ("Clearstream, Luxembourg").
Title to the Notes shall be evidenced by entries in the books of Account Holders and will pass upon, and transfer of Notes may only be effected through, registration of the transfer in such books, and only in the denomination of € 100,000.
2. Guarantee
The payment of all sums in principal, interest (including delay interests), fees and other ancillary costs (accessoires) due in relation to the Notes is irrevocably and unconditionally guaranteed by Société Air France and by KLM, acting as several but not joint Guarantors (cautions conjointes), up to the amount of their quota, which is established for Air France and KLM at respectively 60% and 40% of all sums in principal, interest (including delay interests), fees and other costs due in relation to the Notes.
The Guarantee is reproduced on pages 47 to 49 of this Prospectus.
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3. Status of the Notes and the Guarantee
(a) Status of the Notes
The Notes and the interest thereon constitute direct, general, unconditional, unsubordinated and unsecured obligations of the Issuer and rank and will rank all times pari passu without any preference among themselves and (subject to such exceptions as are from time to time mandatory under French law) equally and rateably with any other unsubordinated and unsecured obligations, present or future, of the Issuer.
(b) Status of the Guarantee
The Guarantee constitutes a direct, general, unconditional, unsubordinated and unsecured obligation, and ranks pari passu (subject to such exceptions as are from time to time mandatory under applicable laws) with any other unsubordinated and unsecured obligations, present or future, of the Guarantors.
4. Negative Pledge
(a) Issuer
The Issuer undertakes, until all the Notes have been redeemed, not to grant to holders of other present or future notes (obligations), any mortgage (hypothèque) over its present or future assets or real property interests, nor any pledge (nantissement) on all or part of its business (fonds de commerce), nor any other security (sûreté réelle, gage or nantissement) on its present or future assets or income, unless the Issuer’s obligations under the Notes are equally and rateably secured so as to rank pari passu with such other present or future notes (obligations) so secured. Such undertaking is given only in relation to security interests given for the benefit of holders of notes (obligations) and does not affect in any way the right of the Issuer to dispose of its assets or to grant any security in respect of such assets in any other circumstance.
(b) Guarantors
Each Guarantor undertakes, until all payments due in connection with the Guarantee have been paid, not to grant to holders of other present or future notes (obligations) which are issued or guaranteed by it, any mortgage (hypothèque) over its present or future assets or real property interests, nor any pledge (nantissement) on all or part of its business (fonds de commerce) nor any other security (sûreté réelle, gage or nantissement) on all or part of its present or future assets or income, unless the Guarantor's obligations under the Notes are equally and rateably secured so as to rank pari passu with such other present or future notes (obligations) so secured. Such undertaking is given only in relation to security interests given for the benefit of holders of notes (obligations) and does not affect in any way the right of the Guarantors to dispose of their assets or to grant any security in respect of such assets in any other circumstance.
5. Interest
(a) Interest Payment Dates
The Notes bear interest from, and including, 14 December 2012 (the "Issue Date") to but excluding 18 January 2018 at the rate of 6.250 per cent. per annum payable annually in arrear on 18 January in each year (each an "Interest Payment Date"), commencing on 18 January 2014. There will be a long first coupon in respect of the period, from and including, the Issue Date up to, but excluding 18 January 2014.
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(b) Interest Payments
Each Note will cease to bear interest from the due date for redemption, unless payment of principal is improperly withheld or refused on such date. In such event, interest on such Note shall continue to accrue at such rate until, and including, whichever is the earlier of (i) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the relevant holder and (ii) the day of receipt by or on behalf of Euroclear France of all sums due in respect of all the Notes.
Interest shall be calculated on an Actual/Actual – ICMA basis, as follows:
(i) if the Accrual Period is equal to or shorter than the Determination Period during which it falls, the Actual/Actual-ICMA basis will be the number of days in the Accrual Period divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Periods normally ending in any year; and
(ii) if the Accrual Period is longer than one Determination Period, the Actual/Actual- ICMA basis will be the sum of:
(a) the number of days in such Accrual Period falling in the Determination Period in which it begins divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year; and
(b) the number of days in such Accrual Period falling in the next Determination Period divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year
where
"Accrual Period" means the relevant period for which interest is to be calculated (from and including the first such day to but excluding the last); and
"Determination Period" means the period from, and including, the Issue Date to, but excluding, the first Interest Payment Date and each successive period from, and including, an Interest Payment Date to, but excluding, the next succeeding Interest Payment Date.
6. Redemption and Purchase
The Notes may not be redeemed otherwise than in accordance with this Condition and with Conditions 9 and 10.
(a) Final Redemption
Unless previously redeemed or purchased and cancelled as provided below, the Notes will be redeemed by the Issuer at their principal amount on 18 January 2018.
(b) Redemption for Taxation Reasons
(i) If, by reason of a change in any law or regulation of the Republic of France or any political subdivision or authority therein or thereof having power to tax, or any change in the official application or interpretation of such law or regulation (including a holding by a competent court), becoming effective after the Issue Date, the Issuer would, on the occasion of the next payment of principal or interest due in respect of the Notes, not be able to make such payment
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without having to pay additional amounts as specified in Condition 8, the Issuer may, at its sole discretion, at any time, subject to having given not more than sixty (60) nor less than thirty (30) days' prior notice to the Noteholders in accordance with Condition 13 (which notice shall be irrevocable), redeem all, but not some only, of the Notes outstanding at their principal amount, together with all interest accrued to the date fixed for redemption, provided that the due date for redemption of which notice hereunder may be given shall be no earlier than the latest practicable date on which the Issuer could make payment of principal or interest without withholding for French taxes.
(ii) If the Issuer would on the next payment of principal or interest in respect of the Notes be prevented by French law from making payment to the Noteholders of the full amount then due and payable, notwithstanding the undertaking to pay additional amounts contained in Condition 8, then the Issuer shall forthwith give notice of such fact to the Fiscal Agent and the Issuer shall, subject to having given not less than seven (7) days' prior notice to the Noteholders in accordance with Condition 13 (which notice shall be irrevocable), redeem all, but not some only, of the Notes at their principal amount, together with all interest accrued to the date fixed for redemption of which notice hereunder may be given, provided that the due date for redemption shall be no earlier than the latest practicable date on which the Issuer could make payment of the full amount of principal or interest payable in respect of the Notes or, if such date has passed, as soon as practicable thereafter.
(c) Purchase
The Issuer may at any time purchase Notes in the open market or otherwise (including by way of tender or exchange offer) at any price. Notes so purchased by the Issuer may be cancelled or held and resold in accordance with Articles L.213-1-A and D.213-1-A of the French Code monétaire et financier for the purpose of enhancing the liquidity of the Notes and the applicable provisions of the Règlement général of the Autorité des marchés financiers.
(d) Cancellation
All Notes which are purchased for cancellation by, or on behalf of, the Issuer pursuant to this Condition 6 or redeemed by the Issuer pursuant to Conditions 9 and 10 shall be immediately cancelled (together with rights to interest any other amounts relating thereto) by transfer to an account in accordance with the rules and procedures of Euroclear France and may not be re-issued or resold.
7. Payments
(a) Method of Payment
Payments of principal, interest and other amounts in respect of the Notes will be made in euro, by credit or transfer to an account denominated in euro (or any other account to which euro may be credited or transferred) specified by the payee with a bank in a city in which banks use the TARGET System (as defined below). Such payments shall be made for the benefit of the Noteholders to the Account Holders and all payments made to such Account Holders in favour of Noteholders will be an effective discharge of the Issuer and the Fiscal Agent, as the case may be, in respect of such payment.
Payments of principal, interest and other amounts in respect of the Notes will be made subject to any fiscal or other laws and regulations or orders of courts of competent jurisdiction applicable thereto, but without prejudice to the provisions described in Condition 8. No commission or expenses shall be charged to the Noteholders in respect of such payments.
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(b) Payments on Business Days
If the due date for payment of any amount of principal or interest in respect of any Note is not a Business Day (as defined below), payment shall not be made of the amount due and credit or transfer instructions shall not be given in respect thereof until the next following Business Day and the relevant Noteholder shall not be entitled to any interest or other sums in respect of such postponed payment.
For the purposes of these Conditions, "Business Day" means any day, not being a Saturday or a Sunday, (i) on which foreign exchange markets and commercial banks are open for business in Paris, (ii) on which Euroclear France, Euroclear and Clearstream, Luxembourg are operating and (iii) on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (known as TARGET2) system (the "TARGET System") or any successor thereto is operating.
(c) Fiscal Agent, Paying Agents and Put Agent
The name and specified offices of the initial Fiscal Agent, initial Put Agent and other initial Paying Agent are as follows:
FISCAL AGENT, PAYING AGENT AND PUT AGENT CACEIS Corporate Trust 14 rue Rouget de Lisle 92862 Issy les Moulineaux Cedex 9 France The Issuer reserves the right at any time to vary or terminate the appointment of the Fiscal Agent, the Put Agent or any Paying Agent and/or appoint a substitute Fiscal Agent or Put Agent and additional or other Paying Agents or approve any change in the office through which the Fiscal Agent, the Put Agent or any Paying Agent acts, provided that, so long as any Note is outstanding, there will at all times be (i) a Fiscal Agent having a specified office in a major European city, (ii) so long as the Notes are admitted to trading on Euronext Paris and the rules applicable to such stock exchange so require, at least one Paying Agent having a specified office in a European city and ensuring financial services in the Republic of France (which may be the Fiscal Agent).
Such appointment or termination shall be notified to the Noteholders in accordance with Condition 13.
8. Taxation
(a) Withholding Tax
All payments of principal, interest and other revenues by or on behalf of the Issuer in respect of the Notes shall be made free and clear of, and without withholding or deduction for, any taxes or duties of whatever nature imposed, levied or collected by or on behalf of France or any authority therein or thereof having power to tax, unless such withholding or deduction is required by law.
(b) Additional Amounts
If any French law or regulation should require that any payment of principal or interest in respect of the Notes be subject to deduction or withholding with respect to any present or future taxes, duties, assessments or other governmental charges of whatever nature imposed or levied by or on behalf of the Republic of France or any political subdivision or authority therein or thereof having power to tax, the Issuer will, to the fullest extent then permitted by law, pay such additional amounts as may be necessary in order that the Noteholders, after such deduction or withholding, receive the full amount provided in such Notes to be then due and payable; provided, however, that the Issuer shall not be liable to pay any such additional amounts in respect of any Note to a holder (or beneficial owner (ayant droit)):
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(i) who is subject to such taxes, duties, assessments or other governmental charges, in respect of such Note by reason of his having some connection with the Republic of France other than the mere holding of such Note; or
(ii) where such deduction or withholding is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments or any other European Union Directive implementing the conclusion of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income, or any law implementing or complying with, or introduced in order to conform to, such Directive.
Any reference in these Conditions to principal and/or interest shall be deemed to include any additional amounts which may be payable under this Condition 8.
9. Change of Control
In the event of a Change of Control, as defined below, or in the event that a person, other than an entity controlled directly or indirectly by the Issuer (within the meaning of Article L.233-3 of the French Commercial Code (Code de commerce)), came to hold (via purchase, subscription or any other means) (i) more than 50% of the share capital of Société Air France and/or the beneficial rights of KLM or (ii) more than 50% of the voting rights of Société Air France and/or KLM (a "Share Transfer"), each Noteholder may at its sole option require the early redemption of all or part of its Notes, subject to the conditions set out below.
The Notes will be redeemed at their principal amount plus interest accrued since the last Interest Payment Date (or, as the case may be, since the Issue Date).
In the event of a Change of Control or Share Transfer, the Issuer will inform the Noteholders, no later than thirty (30) calendar days following the effective Change of Control or Share Transfer, by means of a notice in accordance with Condition 13. This notice will remind Noteholders that they are entitled to require the early redemption of all or part of their Notes and will indicate (i) the date which has been set for the early redemption, such date should fall between the twenty-fifth (25th) and the thirtieth (30th) Business Day following the date of the publication of the notice, (ii) the redemption amount and (iii) the period of at least fifteen (15) Business Days, during which early redemption requests and the corresponding Notes should be transmitted to the Put Agent.
The Noteholders seeking early redemption of their Notes must make such request to the financial intermediary through whose books the Notes are held. Once received by the financial intermediary through whose books the Notes are held, the request for early redemption will be irrevocable.
Redemption requests and the corresponding Notes shall be submitted to the Put Agent between the 20th and the fifth (5th) Business Day before the early redemption date.
A form of redemption request will be obtainable from the specified office of any Paying Agent.
The date of the early redemption request shall correspond to the Business Day during the course of which the last of conditions (1) and (2) below is met, at the latest at 5 p.m. Paris time or the next following Business Day if such condition is met after 5 p.m. Paris time:
(1) the Put Agent would have received the early redemption request from the financial intermediary through whose books the Notes are held; (2) the Notes would have been transferred to the Put Agent by the relevant financial intermediary.
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For the purposes of this Condition 9, "Change of Control" means, for one or more individuals or entities acting alone or in concert, acquiring the control of the Issuer, being specified that "control" means, for the purpose of the present definition, the holding (directly or indirectly via entities controlled by the relevant person(s)) of (x) the majority of the voting rights of the shares of the Issuer or (y) more than 40% of such voting rights if no other shareholder of the Issuer, acting alone or in concert, holds (directly or indirectly via entities controlled by such shareholder(s)) a percentage of voting rights in excess of the above stake.
10. Events of Default
The Representative (as defined in Condition 12 below), acting on behalf of the Masse (as defined in Condition 12 below), may, upon written notice to the Issuer (copy to the Fiscal Agent) before all defaults shall have been cured, cause all, but not some only, of the Notes to become immediately due and payable, at their principal amount together with any accrued interest thereon, upon the occurrence of any of the following events:
(a) the Issuer fails to make payment of any sum due in respect of the Notes and if the Issuer or any of the Guarantors does not remedy such default within fifteen (15) calendar days from such due date; or
(b) the Issuer or any of the Guarantors breaches any of the other provisions relating to the Notes or the Guarantee, as the case may be, and does not remedy such breach within thirty (30) calendar days from the date the Issuer receives written notice of such breach from the Representative; or
(c) a payment default by the Issuer or any Guarantor occurs in relation to any payment of any other borrowed money or loans guaranteed by the Issuer or any of the Guarantors for an amount equal to or in excess of €125 million, or its equivalent in any other currency, on their due date, or on such date as may have been extended by any applicable grace period, unless the Issuer or any of the Guarantors challenges such default in good faith before a competent court, in which case an early redemption of the Notes will be mandatory only if the court has decided on the merits of the case (statué au fond); or
(d) the Guarantee ceases to be valid or to be in full force and effect for any reason; or
(e) judgment is rendered ordering the liquidation or transfer of the entirety of the assets of the Issuer or any of the Guarantors, or any equivalent procedure; if the Issuer or any of the Guarantors are subject to a conciliation procedure (procédure de conciliation) as provided under Articles L.611-4 et seq. of the French Commercial Code (Code de commerce), or any equivalent procedure, are in a state of suspension of payments (cessation de paiements) or any similar state, or subject to judicial liquidation proceedings (procédure de liquidation judiciaire) or any equivalent procedure.
11. Prescription
Claims against the Issuer or, as the case may be, any of the Guarantors, for the payment of principal and interest in respect of the Notes shall become prescribed 10 years (in the case of principal) and 5 years (in the case of interest) from the due date for payment thereof.
12. Representation of the Noteholders
The Noteholders will be grouped automatically for the defence of their respective common interests in a masse (hereinafter referred to as the "Masse").
The Masse will be governed in accordance with Article L.228-90 of the French Commercial Code (Code de commerce) (the "Code") by the provisions of the Code applicable to the Masse (with the
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exception of the provisions of Articles L.228-48, L.228-59, L.228-65 I 1°, L.228-71, R.228-67, R.228- 69, R.228-72 and R.228-79 thereof), and by the provisions set out below:
(a) Legal Personality
The Masse will be a separate legal entity, by virtue of Article L.228-46 of the Code, acting in part through a representative (the "Representative") and in part through a general assembly of Noteholders.
The Masse alone, to the exclusion of all individual Noteholders, shall exercise the common rights, actions and benefits which now or in the future may accrue with respect to the Notes.
(b) Representative
The office of Representative may be conferred on a person of any nationality. However, the following persons may not be chosen as Representative:
(i) the Issuer, the members of its Board of Directors (Conseil d’administration), its general managers (directeurs généraux), its statutory auditors, its employees and their ascendants, descendants and spouses;
(ii) the Guarantors, the members of their respective Board of Directors (Conseil d’administration) or Managing Board as the case may be, their general managers (directeurs généraux), their statutory auditors, their employees and their ascendants, descendants and spouses;
(iii) companies guaranteeing all or part of the obligations of the Issuer, their respective managers (gérants), general managers (directeurs généraux), members of their board of directors, executive board (directoire) or supervisory board (conseil de surveillance), their statutory auditors, employees and their ascendants, descendants and spouses;
(iv) companies of which the Issuer possesses at least ten (10) per cent. of the share capital or companies possessing at least ten (10) per cent. of the share capital of the Issuer; or
(v) persons to whom the practice of banker is forbidden or who have been deprived of the right of directing, administering or managing a business in whatever capacity.
The Representative shall be Edouard Lemardeley c/o Crédit Agricole Corporate and Investment Bank domiciled at 9 Quai du Président Paul Doumer, 92920 Paris La Défense, France.
The alternative representative (the "Alternative Representative") shall be Ousseynou Diagne c/o Crédit Agricole Corporate and Investment Bank domiciled at 9 Quai du Président Paul Doumer, 92920 Paris La Défense.
The Representative will not be remunerated with respect to its duties.
In the event of death, incompatibility, resignation or revocation of the Representative, such Representative will be replaced by the Alternative Representative. The Alternative Representative shall have the same powers as the Representative.
In the event of death, incompatibility, resignation or revocation of the Alternative Representative, a replacement will be elected by a meeting of the general assembly of the Noteholders.
The appointment of the Representative shall terminate automatically on the date of final redemption in full of the Notes. Such appointment shall, if applicable, be automatically extended until the final
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resolution of any proceedings in which the Representative may be involved and the enforcement of any judgements or settlements relating thereto.
All interested parties will have the right to obtain the names and the addresses of the Representative and Alternative Representative at the head office of the Issuer and at the offices of any of the Paying Agents.
(c) Powers of the Representative
The Representative shall, in the absence of any decision to the contrary of the general assembly of the Noteholders, have the power to take all acts of management to defend the common interests of the Noteholders.
All legal proceedings against the Noteholders or initiated by them, in order to be valid, must be brought against the Representative or by it.
The Representative may not interfere in the management of the affairs of the Issuer.
(d) General Assemblies of Noteholders
General assemblies of Noteholders may be held at any time, on convocation either by the Issuer or by the Representative. One or more Noteholders, holding together at least one-thirtieth (1/30) of the outstanding principal amount of the Notes may address to the Issuer and the Representative a demand for convocation of the general assembly; if such general assembly has not been convened within two (2) months from such demand, such Noteholders may commission one of themselves to petition the competent court in Paris to appoint an agent (mandataire) who will call the meeting.
Notice of the date, hour, place, agenda and quorum requirements of any meeting of a general assembly will be published as provided under Condition 13 not less than fifteen calendar days prior to the date of the general assembly.
Each Noteholder has the right to participate in general assemblies of the Masse in person, by proxy, correspondence, or, if the statuts of the Issuer so specify1, videoconference or any other means of telecommunications allowing the identification of the participating Noteholders. Each Note carries the right to one vote.
(e) Powers of General Assemblies
A general assembly is empowered to deliberate on the fixing of the remuneration, dismissal or replacement of the Representative and the Alternative Representative and may also act with respect to any other matter that relates to the common rights, actions and benefits which now or in the future may accrue with respect to the Notes, including authorising the Representative to act at law as plaintiff or defendant.
A general assembly may further deliberate on any proposal relating to the modification of the Conditions of the Notes including any proposal, whether for arbitration or settlement, relating to rights in controversy or which were the subject of judicial decisions, it being specified, however, that a general assembly may not increase the liabilities (charges) of the Noteholders, nor establish any unequal treatment between the Noteholders, nor decide to convert the Notes into shares.
1 At the date of this Prospectus, the statuts of the Issuer do not contemplate the right for a Noteholder to participate in general assemblies of the Masse by videoconference or any other means of telecommunications allowing the identification of the participating Noteholders.
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Meetings of a general assembly may deliberate validly on first convocation only if Noteholders present or represented hold at least one fifth (1/5) of the principal amount of the Notes then outstanding. On second convocation, no quorum shall be required. Decisions at meetings shall be taken by a simple majority of votes cast by the Noteholders attending such meeting or represented thereat.
In accordance with Article R.228-71 of the Code, the right of each Noteholder to participate in a general assembly of the Masse will be evidenced by the entries in the books of the relevant Account Holder of the name of such Noteholder as of 0:00, Paris time, on the third business day in Paris preceding the date set for the meeting of the relevant general assembly.
(f) Notice of decisions to the Noteholders
Decisions of the general assembly must be published in accordance with the provisions set out in Condition 13 not more than ninety (90) calendar days from the date thereof.
(g) Information to the Noteholders
Each Noteholder or representative thereof will have the right, during the fifteen (15) calendar day period preceding the holding of each meeting of a general assembly, to consult or make a copy of the text of the resolutions which will be proposed and of the reports which will be presented at the meeting, which will be available for inspection at the principal office of the Issuer, at the offices of the Paying Agents and at any other place specified in the notice of the general assembly.
(h) Expenses
The Issuer will pay all duly evidenced and reasonable expenses incurred in the operation of the Masse, including expenses relating to the calling and holding of general assemblies and the expenses which arise by virtue of the remuneration of the Representative, if any, and more generally all administrative expenses resolved upon by a general assembly of the Noteholders, it being expressly stipulated that no expenses may be imputed against interest payable on the Notes. Accordingly, the second sentence of the first paragraph of Article L.228-71 of the French Commercial Code shall not apply to the Notes.
13. Notices
Any notice to the Noteholders will be valid if delivered to Euroclear France, Euroclear and Clearstream, Luxembourg for so long as the Notes are cleared through such clearing systems, provided that, so long as the Notes are admitted to trading on Euronext Paris and the rules applicable to that stock exchange so require, such notice shall also be published in a leading daily newspaper having general circulation in the Republic of France (which is expected to be Les Echos or such other newspaper as the Fiscal Agent shall deem necessary to give fair and reasonable notice to the Noteholders).
Any such notice shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the first date on which such publication is made.
14. Further Issues and Assimilation
The Issuer may from time to time without the consent of the Noteholders issue further notes to be assimilated (assimilables) with the Notes as regards their financial service, provided that such further notes and the Notes shall carry rights identical in all respects (or in all respects save for the amount and date of the first payment of interest thereon) and that the terms of such further notes shall provide for such assimilation.
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In the event of such an assimilation, the Noteholders and the holders of such further notes will be grouped together in a single Masse for the defence of their common interests.
15. Governing Law and Jurisdiction
(a) Governing Law
The Notes and all matters arising from or connected with the Notes, and the Guarantee, are governed by, and shall be construed in accordance with, the laws of the Republic of France.
(b) Jurisdiction
Any legal action or proceeding against the Issuer arising out of or in connection with the Notes or the Guarantee will be irrevocably submitted to the exclusive jurisdiction of the competent courts in Paris.
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USE OF PROCEEDS
The net proceeds of the issue of the Notes will be used by the Issuer for its general corporate purposes and to diversify its sources of financing.
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DESCRIPTION OF THE ISSUER
The information relating to the Issuer is incorporated herein by reference, as described in "Incorporation by Reference". See also "Recent Developments" for additional information on the Issuer. The following description contains summarized overview of the business of the Issuer:
Overview Air France-KLM, the result of a merger between Air France and KLM in 2004, is a global leader in air transport, with €24.4 billion in revenues in 2011. More than 102,000 employees contribute to the dynamism of the business, of which the main activities are passenger transport, cargo transport and aeronautical maintenance. As of 30 September 2012, the group’s fleet comprises 590 aircraft in operation, including 176 regional aircraft operated by its partners Brit Air, City Jet, Regional and KLM Cityhopper. The passenger business is Air France-KLM’s principal business, contributing some 77% of the group’s revenues, with 75.8 million passengers carried in 2011. Its network covers 254 destinations in 105 countries from its hubs at Paris-Charles de Gaulle and Amsterdam-Schipol. Air France and KLM are members of the SkyTeam alliance which has 18 member Airlines, offering customers access to a global network of over 14,800 daily flights to 993 destinations in 186 countries. SkyTeam is the second largest alliance with 19% of market share. With their partners Delta and Alitalia, Air France and KLM operate the biggest transatlantic joint venture with more than 250 daily flights. The Flying Blue frequent flyer programme is leader in Europe and has over 21 million members. The cargo business is the second of the Group’s activities, representing some 13% of total revenues in 2011, with 1.4 million tons of cargo transported. It regroups the Air France-KLM Cargo and Martinair Cargo activities and is part of SkyTeam Cargo alliance Aircraft maintenance is the Air France-KLM Group’s third business. In addition to the services provided to the Group fleets, this activity generated more than one billion euros of revenues with third party customers in 2011. The main other activities are catering business and Transavia Leisure business. They contributed to 6% of the group’s revenues in 2011.
Sustainable Development The Air France-KLM Group’s sustainable development approach has won plaudits and awards on numerous occasions. Amongst these many awards, in 2012 the Group was named airline sector leader in the DJSI indices for the eighth consecutive year. The Group intends to pursue this commitment aimed at consolidating the reputation of its brands with, amongst other objectives, a very high level of operational safety, establishing an ongoing dialogue with stakeholders like customers, suppliers and local residents, contributing to combating climate change and applying the best corporate governance principles.
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New partnership In October 2012, the Air France-KLM Group, Etihad Airways, and Air Berlin announced a commercial partnership, in order to offer their customers more destinations thanks to mutual code- share agreements.
Transform 2015 In the current environment where the oil price remains high and the pressure on revenues is strong, Air France-KLM Group has launched in January 2012 a transformation plan over three years (2012-2014), called "Transform 2015" with three main targets: restoring competitiveness through cost-cutting, restructuring the short- and medium-haul operations and rapidly reducing debt, with a target of reduction of net debt of €2 billion by the end of 2014. Phase 1: immediate measures Given the uncertain economic environment, it was decided to opt for quasi stable capacity for the Air France-KLM Group in both passenger and cargo. This led to a shrinkage of the Group’s fleet with a reduction in the investment program, with the exception of spending targeted at the ongoing improvement in operational safety and client service. New cost-saving measures amounting to more than €1 billion over three years have been implemented including a freeze on general pay rises in 2012 and 2013 at Air France and a policy of wage moderation at KLM, and a continuation of the hiring freeze introduced in September 2011. Phase 2: improving productivity Negotiations with the relevant union organizations representing the various employee categories started in mid-February. Air France submitted for signature, at the beginning of July, collective agreement projects to its three categories of employees. As of today, the agreements with ground staff and pilots have been signed and are applicable at 1 January 2013. The project agreement for cabin crew has not received approval by unions representing over 30% of votes and the current collective agreement in force until 31 March 2013 will instead be replaced by a text in the terms of remuneration and working conditions will be less favourable than the initially-proposed agreement. These agreements, together with the measures of wage moderation and the reduction in headcount via voluntary departures announced in June should enable Air France to reach its target of a 20% improvement in economic efficiency in 2014 compared with 2011. Negotiations with Air France subsidiaries have begun in September 2012. On its side, KLM is pursuing negotiations in line with the initial timetable, and seeks to arrive at new collective agreements in the fourth quarter in order to achieve its target of a 15% improvement in economic efficiency in 2014 compared with 2011.
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DESCRIPTION OF THE GUARANTEE
SOCIETE AIR FRANCE AND KLM GUARANTEE
Société Air France ("Air France"), a French société anonyme with a share capital of €1,901,231,625 whose registered office is at 45 rue de Paris, 93290 Tremblay en France. and
Koninklijke Luchtvaart Maatschappij N.V. ("KLM"), a Dutch naamloze vernootschap, whose registered office is at Amsterdamseweg 55, 1182 GP Amstelveen, The Netherlands, and whose corporate seal is at Amstelveen, The Netherlands (Air France and KLM acting severally but not jointly, the "Guarantors").
1 Introduction
Air France-KLM (the "Company"), a French société anonyme with a share capital of €300,219,278, whose registered office is at 2 rue Robert Esnault Pelterie, 75007 Paris, France, has, pursuant to the decision taken by its chairman and managing director (Président Directeur général) dated 6 December 2012 which was taken pursuant to the resolution of the Company’s board of directors (Conseil d’administration) dated 30 October 2012, decided the issue on 14 December 2012 of its 6.250 per cent. notes due 18 January 2018 of a maximum principal amount of € 500,000,000 (the "Notes").
2 Several but not Joint Guarantee
The Guarantors, pursuant to this agreement, confirm that they have received the final version of the prospectus submitted to the AMF on 12 December 2012, and confirm that they have full and complete knowledge of the terms and conditions of the Notes.
The Guarantors hereby irrevocably and unconditionally agree to act as several but not joint guarantors (cautions conjointes), pursuant to Article 2288 of the French Civil Code (Code Civil), prior to the issue of the Notes, each to the extent of its quota indicated in Article 3.1 below, for the benefit of the Noteholders grouped together in a single Masse, in connection with all sums that may be due and payable by the Company, including any early payments, in relation to the Notes, including principal, interest, expenses and any other ancillary sums (the "Guarantee"), for the entire duration of the Guarantee as provided in Article 5 below. Acceptance of this Guarantee by the Masse of Noteholders will result from the mere subscription or subsequent acquisition of the Notes.
3 Terms
3.1 Quotas: Notwithstanding the provisions of Article 2302 of the French Civil Code (Code civil), each of the Guarantors hereby guarantees the payment obligations of the Company up to the amount of its quota, which is established at 60% and 40% of all sums that may be due and payable under the Guarantee, respectively, for Air France and KLM.
This quota shall be understood to apply both to (a) the payment obligations of the Company under the Notes and (b) the call of the Guarantee which shall be made by dividing each amount due under the Guarantee equally between the Guarantors.
3.2 Benefit of division and benefit of discussion (bénéfices de division et de discussion): The Guarantors, given the fact that each of the Guarantors guarantees the payment obligations of the Company up to its quota only, retain the bénéfice de division, provided for under Article 2303 of the French Civil Code (Code civil). The Guarantors hereby expressly, irrevocably and unconditionally, waive the benefice de discussion provided for under Article 2298 of the French Civil Code (Code civil). The Masse representing the Noteholders
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may therefore enforce its rights in relation to this Guarantee, up to the total amount of sums due under the Notes, against the Guarantors (up to their respective quota) without first taking any steps or proceedings against the Company. It will however have to divide any steps or proceedings to enforce its rights under this Guarantee between each of the Guarantors taken individually and up to the amount of their quota described under Article 3.1.
3.3 Recourse and subrogation: The Guarantors expressly, irrevocably and unconditionally waive any right to assert the benefits of Articles 2305, 2309 and 2316 of the French Civil Code (Code civil) prior to the full fulfilment of all rights of Noteholders. The Guarantors therefore waive any recourse (including subrogation) that they may have against the Company in connection with the Guarantee until all the Notes have been redeemed.
3.4 Set-off: The Guarantors expressly, irrevocably and unconditionally waive any right to the benefit of any set-off as provided under Article 1294 of the French Civil Code (Code civil) vis-à-vis the Noteholders.
3.5 Rank of the Guarantee: The guarantee of payment of all sums which may become due by the Company in connection with the Notes, according to the terms of this Guarantee, constitutes, for the Guarantors, a direct, general, unconditional, unsubordinated and unsecured obligation, and ranks pari passu (subject to such exceptions as are from time to time mandatory under applicable laws) with any other unsubordinated and unsecured obligations, present or future, of the Guarantors.
3.6 Negative pledge in respect of the Guarantee: Each Guarantor undertakes, until all payments due in connection with the Guarantee have been paid, not to grant to holders of other present or future notes (obligations) which are issued or guaranteed by it, any mortgage (hypothèque) over its present or future assets or real property interests, nor any pledge (nantissement) on all or part of its business (fonds de commerce) nor any other security (sûreté réelle, gage or nantissement) on all or part of its present or future assets or income, unless the Guarantor’s obligations under the Notes are equally and rateably secured so as to rank pari passu with such other present or future notes (obligations) so secured. This undertaking is given only in relation to security interests given for the benefit of holders of notes (obligations) and does not affect in any way the right of the Guarantors to dispose of their assets or to grant any security in respect of such assets in any other circumstance.
3.7 Withholding tax: Under current Dutch legislation, the payment of any sums which may be due in connection with the Guarantee are not subject to Dutch withholding tax. Under current French legislation, there exists no firm authority with respect to the tax treatment of payments made under a guarantee such as the Guarantee, but it is generally expected that the payment of any sums which may be due in connection with the Guarantee should not be subject to French withholding tax.
If any French law or Dutch legislation or regulation should require that any amount due under the Guarantee be subject to deduction or withholding with respect to any present or future taxes, duties, assessments or other governmental charges of whatever nature imposed or levied by or on behalf of the Republic of France or the Kingdom ot the Netherlands, as the case may be, or any political subdivision or authority therein or thereof having power to tax, the Guarantors will, to the fullest extent then permitted by law, pay such additional amounts as may be necessary in order that the Noteholders, after such deduction or withholding, receive the full amount provided in the Guarantee to be then due and payable; provided, however, that the Guarantors shall not be liable to pay any such additional amounts in respect of the Guarantee to a holder (or beneficial owner (ayant droit)):
(i) who is subject to such taxes, duties, assessments or other governmental charges, in respect of such Guarantee by reason of his having some connection with the Republic
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of France or the Kingdom of the Netherlands, as the case may be, other than the mere holding of a Note;
(ii) where such deduction or withholding is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments or any other European Union Directive implementing the conclusion of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income, or any law implementing or complying with, or introduced in order to conform to, such Directive.
4 Notices
All notices and demands relating to this Guarantee and in particular in relation to the payment of sums under the Guarantee, will be deemed effective if delivered by the representative of the Masse of the Noteholders, at the representative’s initiative or upon request of any Noteholder, to:
Société Air France 45 rue de Paris 93290 Tremblay en France Telephone: +33 (0)1 41 56 68 32 Fax: +33 (0)1 41 56 68 79 Attention: Chief Financial Officer
KLM Amsterdamseweg 55, 1182 GP Amstelveen The Netherlands Telephone: +31 20 64 93 748 Fax: +31 20 64 93 001 Attention: Chief Financial Officer
Any change in the above notification details shall be notified to the representative of the Masse of Noteholders as soon as possible.
Any sum due under this Guarantee shall be payable at the latest fifteen (15) calendar days following receipt of such a written notice, by wire transfer to the Principal Paying Agent (currently Caceis Corporate Trust) on behalf of the Noteholders.
5 Duration
The Guarantee applies as of the Issue Date of the Notes and shall remain in effect until the Company has been discharged of all payment obligations under the Notes.
6 Governing law and jurisdiction
This Guarantee is governed by French law. Any dispute as to its validity, interpretation or performance, will be submitted to the courts of the competent jurisdiction in Paris.
SOCIÉTÉ AIR FRANCE KLM Air France-KLM certifies that the Guarantee has been granted by Société Air France and KLM at its initiative. AIR FRANCE-KLM
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DESCRIPTION OF THE GUARANTORS
Description of Société Air France
For the purposes of this section, the term "Air France" means Société Air France, and the term "Air France group" or "group" means the group of companies made up by Société Air France and its subsidiaries.
Air France and its parent company Air France - KLM decided to change their financial year (originally from 1 April of each year to 31 March of the following year) to a calendar year from 1 January to 31 December, to bring their fiscal year in line with majority of the other airlines. The proposed change has been approved at Air France's Extraordinary Shareholders’ Meeting on 7 July 2011. As a consequence, the 2011 fiscal year was a "short" financial year comprising of a 9 month period starting from 1 April 2011 and ending on 31 December 2011 (the "2011 financial year"). Because the 2011 financial year does not cover a full 12 month period, the financial statements for this period are not comparable to the financial statements for the year ended 31 March 2011 (the "2010/2011 financial year") and the year ended 31 March 2010 (the "2009/2010 financial year"). To facilitate comparison, Air France presented in addition financial information published as of December 31, 2010 for the 9 month period then ended (9 months) (the "2010 financial year (9 months)") and proforma financial information related to 31 December 2010 (12 months) (the "2010 proforma financial year (12 months)") and 31 December 2011 (12 months) (the "2011 proforma financial year (12 months)"). See note 2 to the consolidated financial statements of Air France for 2011, a free English language translation of which is incorporated by reference herein for further information on the change of financial year and on proforma financial information.
Since the business combination of Air France and KLM, which took place in 2004, Air France, based in Roissy-Charles de Gaulle, is one of the airline companies of the Air France-KLM group, one of the world leaders in air transport.
During the 2011 proforma financial year (12 months), Air France carried 50.7 million passengers (as compared with 48.2 million passengers during the 2010/2011 financial year and 48.9 million passengers during the 2009/2010 financial year). As at 31 December 2011, the Air France group had a fleet of 402 aircraft, of which 387 in operation.
During the 2011 financial year, the Air France group had a turnover of €12.3 billion and recorded an operating loss of €229 million.
AUDITORS
Deloitte et Associés KPMG Audit 185, avenue Charles de Gaulle Department of KPMG S.A. 92524 - Neuilly sur Seine Cedex 1, Cours Valmy 92923-Paris La Défense Represented by Dominique Jumaucourt Represented by Valérie Besson and Michel Piette
Date of first mandate: 19 May 2004 Date of first mandate: 19 May 2004
Deloitte & Associés and KPMG Audit are registered as Commissaires aux Comptes (members of the Compagnie Nationale des Commissaires aux Comptes).
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INFORMATION ABOUT AIR FRANCE
(a) History and development of the company
Founded in 1933, Air France assembled the network of airline companies after the nationalisation of French civil aviation in 1945. In 1974, Air France established its base in the new airport of Roissy- Charles de Gaulle, which became its hub in 1996. After merging with UTA in 1992, then with Air Inter in 1997, Air France was floated on the stock exchange in 1999, and then in 2003/2004, coordinated a business combination with KLM, which resulted in the creation of Air France-KLM, the leading European air transport group.
At as the date of the Prospectus, Air France-KLM holds 100% of the share capital and voting rights of Air France.
(b) Investments
At 31 December 2011, the total amount of fixed assets amounted to €8.645 billions, including €6,925 billion in flight equipment. The total of purchase of tangible and non-tangible assets increased from €1,387 million in the 2010 proforma financial year (12 months) to €1,807 million in the 2011 proforma financial year (12 months), ie. an increase of 30.3%. This €420 million change mainly refers to the aircraft purchases (€341 million) and €22 million for intangible assets.
In the 2011 proforma financial year (12 months), the Air France group took delivery of 2 Airbus A380 (for Passenger business), 3 Boeing B777, six Airbus A320 and an Airbus A321 (for Passenger business). With respect to the regional companies, the Air France group took delivery of 10 CRJ1000 and 1 Embrear 170.
There were no significant acquisitions of subsidiaries and holdings during these financial years.
Sales of tangible and intangible assets amounted to €975 million in the 2011 proforma financial year (12 months), compared to €815 million in the 2010 proforma financial year (12 months). This amount came from operations of sale and lease back for €724 million and sales of aircraft and flight equipment for €221 million.
There were no sales of subsidiaries and holdings in the 2011 proforma financial year (12 months), compared to an amount of €193 million in the 2010 proforma financial year (12 months) due to sales of Amadeus shares.
Dividends received increased to €26 million in the 2011 proforma financial year (12 months) from €6 million in the 2010 proforma financial year (12 months). This is mainly due to the dividend received from Amadeus IT Holding SA for €20.4 million compared to no distribution in 2010.
The increase in financial assets of between 3 months and one year amounted to € 587 million in the 2011 proforma financial year (12 months), against a decrease in financial assets of between 3 months and one year of €17 million in the 2010 proforma financial year (12 months).
In total, cash flows linked to investment transactions amounted to €1,030 million during the 2011 financial year and €1,423 million in the 2011 proforma financial year (12 months), compared to €366 million in the 2010 proforma financial year (12 months).
As part of its firm aircraft orders, over the first half of 2012, the Air France group took delivery of two Airbus A380, three Boeing 777, two Airbus A320 and two CRJ1000. The number of aircraft on firm order as of 30 June 2012 decreased by nine units compared with 31 December 2011 to 24 units,
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including an order of B787 that has been jointly placed with KLM. Discussions are ongoing with Airbus and Rolls Royce to finalize the contract for Airbus A350 order.
The investment undertakings of the Air France group are mainly firm orders of aircraft. The maturity dates applicable to firm orders of aircraft and flight equipment are set out below:
As of 30 June As of 31 As of 31 2012 December 2011 March 2011 € million 2nd semester Y (6 months) 20 - - Y+1 366 623 768 Y+2 439 384 556 Y+3 218 385 334 Y+4 29 115 328 Y+5 17 17 91 > Y+5 1,463 1,458 - Total 2,552 2,982 2,077
These commitments relate to amounts in US dollars, converted into euros at the closing date exchange rate. Furthermore, these amounts are hedged: Air France follows the Air France-KLM hedging guidelines, by hedging progressively the US dollar exposure between the order and delivery of the aircraft.
The aircraft of which Air France group is taking delivery could be financed upon delivery or at a later date. (c) Financing
The table below sets out the structure of net debt for the Air France group as at 31 December 2011:
As of 30 June As of 31 2012 December 2011
€ million Financial debt (current and non-current portion) 5,465 5,594 Deposits on aircraft under capital lease (478) (435) Accrued interest not yet due (32) (67) Gross financial debt 4,955 5,092 Cash and cash equivalents (930) (844) VMP > 3 months (796) (710) Short-term bank facilities 135 157 Net cash (1,591) (1,397) Net financial debt 3,364 3,695
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The financial debt of the Air France group can be broken down as follows:
As of 30 As of 31 As of 31 June December March € million 2012 2011 2011 OCEANE (convertible bonds) 419 383 450 Bonds 750 750 750 Capital lease obligations 2,133 1,826 1,325 Other long term debt 1,618 1,795 1,902 Financial debt (non-current portion) 4,920 4,754 4,427 OCEANE (convertible bonds) - 67 - Capital lease obligations 202 163 298 Other long term debt 311 543 846 Accrued interest 32 67 41 Financial debt (current portion) 545 840 1,185
Between 30 June 2012 and 30 September 2012, the total of the financial debt of the Air France Group has increased by €81 million.
OCEANEs
On 22 April 2005, Air France issued 21,951,219 bonds with a right of conversion and/or exchange for new or existing Air France-KLM shares (OCEANE) with a maturity of 15 years in a total amount of €450 million. These bonds have a nominal value of €20.50 each. As at 31 December 2011, the conversion ratio was 1.03 Air France-KLM share for one bond.
The maturity date of the bonds is 1 April 2020. Bondholders may request early repayment of their securities on 1 April 2012 and 1 April 2016. On 6 December 2011, to optimize its debt repayment schedule by neutralizing the exercise of the OCEANE repayment option on 1 April 2012, Air France signed a swap agreement relating to these OCEANEs (total return swap) with Natixis expiring on 1 April 2016 at the latest. In order to hedge this contract, Natixis launched a contractual acquisition procedure on the OCEANEs, and purchased 85.16% of the amount initially issued at a fixed price of €21. Natixis is the owner of the acquired OCEANEs and has not exercised its early repayment option of 1 April 2012. This contract and its impact on the financial statements is more fully described in the notes to the consolidated financial statements of Air France for the year ended 31 December 2011 (note 29.1) incorporated by reference herein.
Furthermore, other Bondholders have exercised in April 2012 their early repayment option in respect of 1,500,784 OCEANEs, representing a total principal amount of €30.8 million.
Air France can impose the repayment in cash for these securities, by exercising a call option as from 1 April 2010, and in certain conditions prompting the OCEANE holders to convert their bonds into Air France-KLM shares. The annual coupon of the bonds is 2.75%, payable on 1 April of each year.
The conversion period of the bonds runs from 1 June 2005 until 23 March 2020, except in the event of early repayment.
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Other bond issues
On 11 September 2006 and 23 April 2007, Air France issued euro-denominated bonds in a total amount of €750 million with a maturity date of 22 January 2014 and bearing interest at an annual fixed rate of 4.75%.
Capital lease commitments
The breakdown of total future minimum lease payments related to capital leases debt are as follows:
As of 31 As of 31 December March € million 2011 2011 Aircraft Future minimum lease payments – due dates Y + 1 163 303 Y + 2 220 141 Y + 3 235 198 Y + 4 179 197 Y + 5 203 134 Over 5 years 705 441 Total 1,705 1,414 Including: Principal 1,521 1,296 Interests 184 118 Buildings Future minimum lease payments – due dates Y + 1 57 41 Y + 2 56 39 Y + 3 55 37 Y + 4 55 37 Y + 5 39 37 Over 5 years 223 109 Total 485 300 Including: Principal 389 246 Interests 96 54 Other property, plant and equipment Future minimum lease payments – due dates Y + 1 9 9 Y + 2 9 9 Y + 3 9 9 Y + 4 9 9 Y + 5 8 8 Over 5 years 89 96 Total 133 140 Including: Principal 79 81 Interests 54 59
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Lease expenses over the periods concerned do not include contingent leases. Deposits on purchase options are presented in note 21 to the consolidated financial statements of Air France for the 2011 financial year incorporated by reference herein.
Other debt breaks down as follows:
As of 31 As of 31 December March € millions 2011 2011 Sale with retention of title and mortgages 1,942 2,104 Other debt 396 644 Total 2,338 2,748
Sales with a reservation of ownership clause and mortgages are debts secured by aircraft. The mortgage is filed at the national civil aviation authority (the DGAC in France) in order to be publicly available to third parties. A mortgage grants to the mortgagee a right to enforce the security (by order of a judge), the sale of the asset and a priority claim on the sale proceeds in line with the amount of the loan, the balance reverting to the other creditors.
Other debt corresponds mainly to bank borrowings.
The financial debts maturities break down as follows:
Maturities in 31 December 31 March € million 2011 2011 Y + 1 1,046 1,372 Y + 2 861 1,039 Y + 3 1,403 1,513 Y + 4 502 553 Y + 5 840 407 Over 5 years 1,786 1,471 Total 6,438 6,355 Including: Principal 5,594 5,612 Interest 844 743
As at 31 December 2011, the amount of expected financial interest amount to €205 million for the 2012 financial year, €438 million for the 2013 to 2016 financial years, and €201 million beyond that.
As of December 31, 2011, it has been considered that the perpetual subordinated loan stocks, the OCEANE and the bonds would be reimbursed according to their most probable maturity: Second date of the period of the investor put being April 1, 2016 for the majority of OCEANEs first issued in 2005 Maturity date for the repayable bond issued in 2006 and 2007
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Currency analysis
After taking into account derivative instruments, the long term debt denominated in euro amounted to €5.1 billion as at 31 December 2011 and 31 March 2011.
Credit lines
On 4 April 2011, Air France renewed its credit facility maturing on 7 April 2012 with a €1,060 million revolving credit facility maturing on 4 April 2016, subject to the following financial covenants based on the Air France consolidated financial statements: - EBITDAR must not be lower than two and a half times the net interest charges increased by one third of operating lease payments; - Non-current assets in the balance sheet, not pledged as collateral, must be at least equal to unsecured financial net debts.
These ratios are calculated every six months and were respected at 31 December 2011 and 30 June 2012.
The cash level was at €1,397 million at 31 December 2011 and increased to €1,591 million at 30 June 2012, including €393 millions pledged for convertible bond swap operation, and €183 millions of available cash pledges (within the framework of the appeal filed with the European Court of Justice regarding the amount of the cargo fine, the group chose to set up bank guarantees pending the final ruling, held as available cash pledges, Air France having the option to rapidly substitute other assets).
An undrawn credit line of €1,060 million and €684 million of intercompany facility with Air France- KLM were also available as at 30 June 2012.
(d) Recent events
As described in section 5.3.1 of the DR 2011 incorporated by reference herein, in view of the loss for the 2011 financial year, Air France’s stockholders’ equity amounted to less than 50% of the issued capital at 31 December 2011. In accordance with applicable legal requirements, the general assembly of the shareholders has rejected the voluntary liquidation of Air France and the board of directors of Air France intends to convene an extraordinary general meeting on 17 December 2012 to vote on a reduction of the issued share capital of Société Air France to reduce the issued share capital down to €126,748,775, which will not have any impact on Société Air France’s shareholder’s equity.
Restructuring plan
The Group has initiated in the first half of 2012 a restructuring plan concerning Air France and some of its affiliates. This plan mainly comprises two parts: an adjustment in the fleet and a plan to reduce the number of staff. Based on the measures presented to Air France in June 2012, the Group has made its best estimate of the costs involved and has recorded a provision for restructuring as of 30 June 2012.
Disposal of a portion of the shares held in Amadeus
On 1 March 2012, Air France launched a private placement of 33.6 million Amadeus IT Holding SA shares, corresponding to 7.5% of the capital. Following this transaction, the Group's holding decreased from 15.2% to 7.7%. The net proceeds from this transaction amounted to €467 million which generated in the income statement, a gain on disposal of €98 million.
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Hedging transaction on the shares held in Amadeus
On 13 November 2012, Air France has entered into a hedging transaction to protect the value of 12,000,000 ordinary shares it holds on Amadeus IT Holding S.A., representing about a third of its stake. This transaction will allow the Group to protect the value of these shares, while continuing to benefit from the potential upside of the price of its remaining shares (ie. 5% of Amadeus IT Holding S.A.).
BUSINESS OVERVIEW
Air France Group is a pure player of air transportation with passenger activity (82%), cargo activity (9%), aircraft maintenance (5%) and any other activity related to air transport (mainly leisure and catering 4%) in 2011 proforma financial year (12 months).
Air France transported 50,7 million passengers over the course of the 2011 proforma financial year (12 months), with a fleet of 402 aircraft (of which 387 in operation) as of 31 December 2011, of which 135 in the regional fleet.
Over the course of the 2011 financial year, the Group posted revenues of €12.3 billion and achieved a loss of €229 million. On the 2011 proforma financial year (12 months), the revenues amounted €15.8 billion and the operating result was negative of €567 million.
Principal Activities
Air France’s three main businesses are passenger transportation, cargo operations and maintenance operations. Air France’s other activities are related to air transport, and include principally catering.
Passenger: Passenger operating revenues primarily come from passenger transport services on scheduled flights with the Air France’s airline code, including flights operated by other airlines under code-sharing agreements. They also include commissions paid by SkyTeam alliance partners, code- sharing revenues, revenues from excess baggage and airport services supplied by the Air France Group to third party airlines and services linked to IT systems.
Cargo: Cargo operating revenues come from freight transport on flights under the Air France codes, including flights operated by other partner airlines under code-sharing agreements. Other cargo revenues are derived principally from sales of cargo capacity to third parties.
Maintenance: Maintenance operating revenues are generated through maintenance services provided to other airlines and customers globally.
Business
Passenger business
After a 6.3% increase in passenger business capacity and traffic in 2011, Air France Group posted during the six month period ended 30 June 2012 a 1.6% increase in passenger business capacity and a 4.5% increase in traffic, resulting in a 2.2 point increase in the load factor to 80.8%.
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ASK(1) RPK(2) Passenger load factor Millions Variation(3) Millions Variation(4) % Variation 2012 half year (6 81,799 +1.6% 66,056 +4.5% 80.8% +2.2 months) 2011 proforma 167,720 +6.3% 135,145 +6.3% 80.6% - financial year (12 months) (1) ASK: Available Seat Kilometer (2) RPK: Revenue per Passenger Kilometer (3) in comparison with 2011 half year (6 months) (4) in comparison with 2010 proforma financial year (12 months)
The passenger revenue amounted to €12,912 million for 2011 proforma financial year (4.2% increase on 2010 proforma financial year) and €6,518 million for six month period ended 30 June 2012 (6.5% increase on the six months period ended 2011). Over the same period, the unit revenue per RPK increased by 1.7%.
2012 2011 Variation 2011 2010 Variation half half proforma proforma year year financial financial year (12 year months) (12months) Total passenger revenue 6,518 6,118 +6.5% 12,912 12,387 +4.2% (€ millions) Scheduled passenger 6,166 5,808 +6.2% 12,252 11,722 +4.5% revenue (€ millions) Unit revenue per ASK 7.54 7.21 +4.6% 7.31 7. 43 -1.7% (€ cents) Unit revenue per RPK 9.34 9.18 +1.7% 9.07 9.23 -1.7% (€ cents)
Split by network
The turnover of all networks has increased for the six months period ended 30 June 2012. In 2011, activity had been affected in Africa and Middle East by political crisis and in Asia by the consequences of the earthquake and tsunami in Japan.
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2012 half year (6 months) 2011 proforma financial year (12 months) Scheduled € millions % of total Variation € millions % of total Variation flights in in comparison comparison with 2011 with 2010 half year (6 proforma months) financial year (12 months) Europe, North 2,328 37.8% +1.9% 4,644 37.9% +5.7% Africa Caribbean, 547 8.9% +0.2% 1,131 9.2% +9.7% French Guiana, Indian Ocean Africa, Middle 780 12.7% +9.4% 1,530 12.5% -5.1% East Americas, 1,614 26.2% +11.2% 3,179 25.9% +7.2% Polynesia Asia, New 897 14.6% +10.3% 1,768 14.4% +2.9% Caledonia Total 6,166 100% 6.2% 12,252 100.0% +4.5%
Cargo business
With a turnover of €695 million for the 6 months ended 30 june 2012, the Cargo business suffered a decline in activity of 4% compared to the same period in 2011. The freight industry experienced a slowdown from the second half of 2011 with a decrease in Chinese exports and the uncertainties surrounding the euro zone.
2012 half 2011 half Variation Proforma Proforma Variation year year financial 2010 year 2011 financial (12 year (12 months) months) Total cargo revenue (€ 695 724 -4% 1 467 1 442 +1.7% millions) Freight transport 634 667 -4.9% 1 346 1 323 +1.7% revenue (€ millions) Unit revenue per ATK 16.76 17.15 -2.3% 16.93 17 -0.4% (€ cents) Unit revenue pet TKT 28.13 27.89 +0.9% 27.74 27.02 +2.7% (€ cents)
In 2011, all networks except for Africa,Middle-East and Americas, Polynesia suffered a decline in revenue.
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Split by geographical turnover
2012 half year (6 months) 2011 proforma financial year (12 months) Freight transport revenue € millions % of total Variation € millions % of total Variation in in compariso compariso n with n with 2011 half 2010 year (6 proforma months) financial year (12 months) Europe, North Africa 20 3.2% - 40 3% -2.4% Caribbean French Guiana, 62 9.8% +1.6% 130 9.7% -12.2% Indian Ocean Africa, Middle East 115 18.1% -3.4% 243 18.1% +2.5% Americas, Polynesia 232 36.6% -2.5% 481 35.7% +11.6% Asia, New Caledonia 205 32.3% -10.5% 452 33.6% -3% Total 634 100% -4.9% 1346 100.0% +1.7%
Maintenance business
Air France is the world's second largest multi-product aircraft maintenance operator. It maintains its own fleet and leverages its expertise through the brand name Air France Industries.
Maintenance business revenue increased during the 2011 proforma financial year (12 months) by 4.2% compared to the 2010 proforma financial year (12 months), to €769 million. In the first half of 2012, the maintenance business realised third-party revenues of €422 million (representing an increase of 15% as compared with the same period in 2011).
Other
For the 2011 proforma financial year (12 months), revenues from other activities increased by 15% to €588 million. This increase resulted mainly from an increase in the revenue of the catering business (operated by Servair) and leisure activity. It decreased by 3% on the first half of 2012 as compared with the six month period ended 30 June 2011, with €261 million and €269 million (proforma) respectively.
CORPORATE GOVERNANCE
Air France is a société anonyme à conseil d’administration (a public limited company with a board of directors). At the date of this Prospectus, the board of directors had 18 members:
- 6 executive directors including a representative of Air France-KLM; - 6 independent directors; - 6 directors representing the employees, including: one elected by flight deck crew; one elected by cabin crew; four elected by other employees including one management representative.
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All of the directors, with the exception of the six employee representatives, were elected by ordinary resolution of the shareholders. Directors are elected for a term of four years. All of the directors have French nationality.
The table below shows the composition of the Board of Directors of Air France as at the date of this Prospectus:
Name Position in the company Date of Date of expiry election/ of term* re-election Directors elected by the shareholders Alexandre de Juniac Chairman of the Board of 2011 2014 Directors and Chief Executive Officer AF–KLM represented by Permanent Representative of 2010 2014 Florence Parly AF-KLM Jean-Pierre Aubert - 2010 2014 Alain Bassil Executive Vice President for 2010 2014 flight operations Xavier Broseta Executive Vice President, 2012 2014 Human Resources and Labour Relations Philippe Calavia - 2010 2014 Jean-Louis Chambon - 2010 2014 Dominique-Jean Chertier - 2010 2014 Rose-Marie van Lerberghe - 2010 2014 Bruno Matheu Chief Commercial Officer 2010 2014 Jean Peyrot - 2011 2015
Pierre Weill - 2010 2014
Michel Janot Director representing flight 2010 2014 deck crews Marie Ramon Director representing cabin 2010 2014 crews Director representing salaried 2010 2014 Pascal Mathieu managers Didier Dague Director representing other 2010 2014 employees Michel Fauré Director representing other 2010 2014 employees Pascal Zadikian Director representing other 2010 2014 employees * When the shareholders’ general meeting approves the financial statements closing 31 December 2013. The members of the Board of Directors of Air France are domiciled, for the purposes of this Prospectus, at the registered office of Air France – 45 rue de Paris, 93290 Tremblay en France, France.
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The main activities carried out by members of the board of directors outside Air France and which are significant in comparison to those carried out in Air France are as follows:
- Mr Philippe Calavia is Chief Financial Officer of Air France-KLM. - Mr Jean-Louis Chambon is also managing associate of JLC Stratégie. - Mr Dominique-Jean Chertier is also Senior Vice President for social, legal and corporate affairs at SAFRAN Group. - Mr Bruno Matheu is also an Executive Vice President of Air France-KLM, in charge of Marketing, Revenue Management and Network. - Mr Jean Peyrot is also an advisor to the ADETEF (Agency for the Development of Exchange in the field of Economic and Financial Technologies) and director of Servair. - Mr Pierre Weill is also Chairman of the strategic committee of TNS SOFRES.
There is no family relationship amongst the members of the board of directors.
To the company’s knowledge:
- no member of the board of directors has been convicted of fraud in the last five years; - no member of the board of directors has been involved in any bankruptcy, receivership or liquidation in the last five years; - no member of the board of directors has had any public sanction or incrimination made against him by a statutory or regulatory authority in the last five years; - no member of the board of directors has been disqualified from acting as a member in any supervisory or administrative board or any board of directors of any issuer, or from taking part in the management of any issuer in the last five years.
CONFLICTS OF INTEREST OF THE BOARD OF DIRECTORS, MANAGEMENT BOARD AND SUPERVISORY BOARD
To the company’s knowledge, there are no conflicts of interest between the duties of the members of the board of directors in relation to the company and their private interests, or any other duties.
ORGANISATION OF THE BOARD OF DIRECTORS AND MANAGEMENT
To help in the preparation of its work, the Board of Directors created three specialised committees: an audit committee, a flight safety committee and a strategic committee.
The audit committee has seven members including four independent directors (Mr Aubert, Mr Peyrot, Mr Weill and Mr Chertier), and three employee representative directors (Mr Janot, Mr Dague and Mr Zadikian).
Furthermore, the Air France Board of Directors has decided to create a "Flight Safety Committee", immediately following preliminary recommendations from the Independent Safety Review Team.
The objectives of this committee are to:
- Examine flight safety issues - Guarantee the existence, deployment and management of internal systems and processes put into place to ensure flight safety - Provide follow-up to ensure the suitability of the internal processes that come together to ensure the safety of operations - And, in the case of major events affecting flight safety, to ensure that appropriate action is taken to prevent accidents
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This committee is made up of seven Board Members, designated by the Board itself.
The strategic committee was created on March7, 2012 by the Air France Board of Directors. The objectives of this committee are to examine the strategic orientations of Air France (including evolution of the fleet, the subsidiaries and alliances). This committe is made up of three independent directors, three employee representative directors members and its President is Mr de Juniac.
Corporate governance
The board of directors refers to the prevailing corporate governance practices in France as set out in the AFEP-MEDEF corporate governance code published in 2008. However, given the applicable legislation (provisions of the French Civil Aviation Code) and the ownership of its share capital (100%-owned by Air France-KLM), Air France has adapted some of these recommendations to its own specific needs. In particular, the Air France board of directors, although it includes 6 independent directors, does not comply with the minimum threshold of third parties for the board as recommended by the above-mentioned code.
PRINCIPAL SHAREHOLDERS
Air France-KLM holds 100% of the share capital and the voting rights of Air France. To Air France’s knowledge, no agreement exists which could trigger a change of control.
SELECTED FINANCIAL INFORMATION REGARDING THE SHARE CAPITAL, FINANCIAL SITUATION AND RESULTS OF AIR FRANCE
Selected financial information
The selected financial information reproduced below is extracted from the consolidated financial statements of Air France for (i) the 2011 financial year, the 2010/2011 financial year and the 2009/2010 financial year audited by the statutory auditors, and (ii) the 6-month period ended 30 June 2012 subjet to a review by the statutory auditors.
Extracts from the consolidated income statements
Nine-month period ended Year ended € million except earnings per share in euros Six month 31 31 31 period ended December March March 30 June 2012 2011 2011 2010 Revenues 7,904 12,323 15,226 13,849 Income / (loss) from current operations (482) (229) (265) (987) Income / (loss) from operating activities (762) (250) 575 (1,239) Net cost of financial debt (65) (119) (148) (126) Income / (loss) before tax (918) (511) 389 (1,533) Net income / (loss) of consolidated companies (924) (424) 547 (1,092) Net income / (loss) from continuing operations (922) (419) 551 (1,092) Net income / (loss) (922) (419) 551 (1,092)
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Nine-month period ended Year ended € million except earnings per share in euros Six month 31 31 31 period ended December March March 30 June 2012 2011 2011 2010 Equity holders (920) (423) 554 (1,093) Non-controlling interests (2) 4 (3) 1 Earnings / (loss) per share – Equity holders (in €) (7.26) (3.34) 4.37 (8.62)
Extracts from the consolidated balance sheet Nine-month period Year ended ended € million Six month 31 period ended 31 March 31 March December 30 June 2012 2011 2010 2011 (unaudited) Total non-current assets 11,487 11,965 11,779 11,142
Total current assets 4,252 3,699 4,508 4,481
Total assets 15,739 15,664 16,287 15,623
Equity attributable to equity holders 1,985 2,827 3,460 2,324
Total equity 2,016 2,861 3,492 2,360
Total non-current liabilities 6,666 6,443 5,978 6,122
Total current liabilities 7,057 6,360 6,817 7,141
Total liabilities 13,723 12,803 12,795 13,263
Total liabilities and equity 15,739 15,664 16,287 15,623
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Extracts from the consolidated statement of cash flow Nine- month Year ended period ended € millions Six month 31 period ended 31 March 31 March December 30 June 2012 2011 2010 2011 (unaudited) Net cash flow from operating activities 215 530 849 (533)
Net cash flow used in investing activities 210 (1,030) (821) (636)
Net cash flow from financing activities (319) (198) (279) 894
Effects of exchange rate on cash, cash equivalents and bank overdrafts 2 (3) (16) -
Change in cash and cash equivalents and bank overdrafts 108 (701) (267) (275) Cash and cash equivalents and bank overdrafts at beginning of period 687 1,388 1,655 1,930 Cash and cash equivalents and bank overdrafts at end of period 795 687 1,388 1,655
LITIGATION AND ARBITRATION PROCEEDINGS
Air France is not involved in any material litigation or arbitration proceedings other than those described in the documents incorporated by reference herein.
SHARE CAPITAL
The share capital of the company is €1,901,231,625, divided into 126,748,775 fully paid shares, with a nominal value of €15 each.
COMPANY INCORPORATION AND BYLAWS
Air France is a French société anonyme incorporated on 16 October 1998. The company’s corporate name has been Société Air France since 15 September 2004. The commercial name of the company is Air France.
The Company’s main purpose is to operate the service of air transport as well as take holdings in all companies of any kind.
The Company is governed by the French Civil Aviation Code (Code de l’aviation civile), and to the extent there are no discrepancies with the French Civil Aviation Code, by French legislation governing sociétés anonymes, and all applicable provisions of Law no. 83-675 dated 26 July 1983 in relation to the democratisation of the public sector.
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Its registered office is at 45, rue de Paris – 93290 Tremblay en France, and the telephone number is +33 1 41 56 78 00. The registration number of the Company (RCS) is: 420 495 178 RCS Bobigny.
DOCUMENTS AVAILABLE TO THE PUBLIC
A free English language translation of the bylaws of the company, the consolidated financial statements for the 2011 financial year, 2010-2011 financial year and 2009-2010 financial year and a free English language translation of the related auditors’ reports, and a free English language translation of the half-year consolidated condensed financial statements for the 6-month period ended 30 June 2012 and a free English language translation of the related auditors’ review report, in hard copy, are available for review at the registered office of Air France.
A free English language translation of the consolidated financial statements for the 2011 financial year, 2010-2011 financial year and 2009-2010 financial year and a free English translation language of the related auditors’ reports, and a free English language translation of the half-year consolidated condensed financial statements for the 6-month period ended 30 June 2012 and a free English language translation of the related auditors’ review report are also available on the website of Société Air France S.A. (http//airfrance.momentys.com).
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Description of KLM
KLM and its parent company Air France - KLM decided to change their financial year (originally from 1 April of each year to 31 March of the following year) to a calendar year from 1 January to 31 December, to bring their fiscal year in line with majority of the other airlines. The proposed change has been approved at KLM's Annual General Meeting of Shareholders on 1 July 2011. As a consequence, the 2011 fiscal year was a "short" financial year comprising of a 9 month period starting from 1 April 2011 and ending on 31 December 2011 (the "2011 financial year" or "financial year 2011"). Because the 2011 financial year does not cover a full 12 month period, the financial statements for this period are not comparable to the financial statements for the year ended 31 March 2011 (the "2010/2011 financial year" or "financial year 2010/2011") and the year ended 31 March 2010 (the "2009/2010 financial year" or "financial year 2009/2010").
Since the business combination of Air France and KLM which took place during the 2004/2005 financial year, KLM, based in Amsterdam Schiphol in the Netherlands, is one of the airline companies of the Air France-KLM group, one of the world leaders in air transport.
During the 2011 financial year, KLM carried 19.7 million passengers (as compared with 23.1 million passengers during the 2010/2011 financial year and 22.4 million passengers during the 2009/2010 financial year). As at 30 June 2012, the KLM group had a fleet of 211 aircraft in operation, 11 of which are dedicated to cargo business.
During the 2011 financial year, the KLM group had a turnover of €6.985 billion and recorded an income from current operations of €275 million.
AUDITORS
Deloitte Accountants B.V. KPMG Accountants N.V. Wilhelminakade 1 Laan van Langerhuize 1 3072 AP Rotterdam 1186 DS Amstelveen Represented by D.A. Sonneveldt RA Represented by T. van der Heijden RA
Deloitte Accountants B.V. and KPMG Accountants N.V. are members of the Koninklijk Nederlands Instituut van Registeraccountants.
INFORMATION ABOUT KLM
(a) History and development of the company
Founded in 1919, KLM, the Royal Dutch airline, started providing international flights in 1924 linking Amsterdam to Indonesia. In 1967, KLM based itself in the new Amsterdam Airport Schiphol. In 1998, KLM bought all the ordinary shares held by the Dutch State in its share capital. Finally, in 2004/2005, KLM coordinated a business combination with Air France, which resulted in the creation of Air France-KLM.
As at the date of the Prospectus, Air France-KLM held 93.41% of the economic rights in KLM and 49% of the voting rights. Air France-KLM is entitled to 99.1 % of any dividend paid on common shares by KLM.
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(b) Investments
During the 2011 financial year (9 months), cash flows from investment activities amounted to €311 million. This includes €288 million gross investments for fleet renewal and modifications. Aircraft sales totalled €156 million, mainly relating to aircraft sale and leaseback operations.
Investments in the fleet related assets amounted to €102 million in the 2011 financial year (9 months), of which €83 million for capitalised fleet maintenance. Other investments amounted to €77 million, including €50 million for capitalised software.
(c) Financing
Financial liabilities
The tables below set out the financial debt, excluding loans from KLM's parent company Air France - KLM and financial leases, of KLM as at 31 December 2011 and 31 March 2011: € million 2011 financial 2010/2011 financial year year (9 months) (12 months)
Carrying amount as at 1 April 1,771 1,590 Loans received (3) 195 Loans repaid (119) (115) Foreign currency translation differences 73 34 Other variations (7) 67 Net movement (56) 181 Carrying amount as at 31 1,715 1,771 December/31 March
Financial liabilities include:
€ million 31 December 2011 31 March 2011
Current Non- Current Non- current current A cumulative preference - 18 - 18 shares C cumulative preference - 14 - 14 shares Subordinated perpetual loans - 625 - 566 Other loans 239 819 143 1,030 (secured/unsecured) Total 239 1,476 143 1,628
The subordinated perpetual loans are subordinated to all other existing and future KLM debts. The subordinations are equal in rank. Under certain circumstances, KLM has the right to redeem the subordinated perpetual loans, with or without payment of a premium.
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Subordinated perpetual loans denominated in Swiss francs, which amounted to €346 million as at 31 December 2011 (€322 million as at 31 March 2011), are listed on the Swiss stock exchange SWX in Zurich.
The maturity of the financial liabilities is as follows:
€ million 31 December 2011 31 March 2011
Less than a year 239 143 Between 1 and 2 years 153 238 Between 2 and 3 years 329 149 Between 3 and 4 years 165 331 Between 4 and 5 years 76 141 More than 5 years 753 769 Total 1,715 1,771
Currency analysis
The carrying amounts of the financial liabilities denominated in a currency other than the euro are set out below:
€ million 31 December 2011 31 March 2011
US dollar 64 24 Swiss franc 344 322 Japanese yen 280 255 Total 688 601
Loans from parent company
The table below sets out the loans from KLM's parent company Air France – KLM.
31 December 2011 31 March 2011
Current Non-current Current Non-current
Air France – KLM S.A. 150 386 - 386 Indirect loans - 1 - 2
Total 150 387 - 388
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Finance leases
The table below sets out the finance lease obligations of the KLM Group:
€ million 31 December 2011 31 March 2011 (9 months) (12 months)
Futur Future Futu e Futu Total minim re Total minim re financi um finan financia um finan al lease ce l lease lease ce lease payme charg liabiliti payme charg liabilit nts es es nts es ies Lease obligations Within 1 365 81 284 482 85 397 year Total 365 81 284 482 85 397 current Between 1 329 70 259 302 71 231 and 2 years Between 2 276 60 216 308 60 248 and 3 years Between 3 325 47 278 283 47 236 and 4 years Between 4 205 33 172 239 39 200 and 5 years More than 5 932 62 870 896 72 824 years Total non- 2,067 272 1,795 2,028 289 1,739 current Total 2,432 353 2,079 2,510 374 2,136
Debt breakdown
As at 31 December 2011, total debt (current and non-current) amounts to €4,331 million, of which €1,880 million is unsecured. Of the total amount of unsecured debt, €657 million of such debt is also subordinated.
The majority of the debt, after hedging through currency swaps, is denominated in Euro (€3,424 million). The remaining (unhedged) debt is denominated in following currencies; USD (€231 million), Japanese Yen (€331 million) and Swiss Francs (€345 million).
KLM pays a fixed interest rate, taking into account hedging through interest rate swaps, on €3,141 million (72%) of the debt. The remaining part of the debt €1,190 million (28%) bears interest at a floating rate.
The average cost of debt (after swaps) is 3.56%.
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Credit lines
KLM has renewed its €530 million syndicated revolving credit facility in July 2011. The facility was originally set to expire in July 2012. The new €540 million revolving credit facility, with a consortium of international banks, will expire in July 2016. As at 31 March 2011 and 31 December 2011, KLM has not drawn on this facility.
Operating leases
The total future minimum lease payments under operating leases are as follows:
Aircraft Buildings and Total Other Equipment
31 31 Mar 31 31 31 31 Dec 2011 Dec Mar Dec Mar 2011 (12 2011 2011 2011 2011 (9 mth) (9 (12 (9 (12 mth) mth) mth) mth) mth)
Operating lease obligations
Within 1 327 278 46 46 373 324 year Total 327 278 46 46 373 324 current Between 291 297 40 41 331 338 1 and 2 years Between 267 269 34 32 301 301 2 and 3 years Between 243 271 29 29 272 300 3 and 4 years Between 247 257 27 24 274 281 4 and 5 years More 1,187 784 219 221 1,406 1,005 than 5 years Total 2,235 1,878 349 347 2,584 2,225 non- current Total 2,562 2,156 395 393 2,957 2,549
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BUSINESS OUTLINE
Introduction
The financial year 2011 began positively on the continuing upward trend that commenced in 2010. KLM's passenger and cargo traffic recovered strongly from the global economic crisis. Demand was again firm enough to redeploy the capacity which KLM had earlier taken out of service. During the second half of 2011 the trend reversed as economic growth in Europe and financial markets, which was recovering, flattened or even declined.
Such developments have a near immediate impact on an international company such as KLM. Cargo transport was the first to be hit by the economic uncertainty. Passenger traffic suffered a slight declined in demand, particularly from southern European countries, and there was renewed pressure on KLM as passengers continued to prefer economy class to business class. Notwithstanding, KLM's passenger load factor is one of the highest in the industry and its Cargo combination with Air France is still one of the largest airfreight carrier in the world. For the financial year 2011, the Group closed the fiscal year with a positive income from current operations of €275 million and a modest net profit of €48 million.
Business Segments
KLM operates in three segments: (1) passenger transport, (2) cargo transport, and (3) aircraft engineering and maintenance.
Breakdown of the revenues per segment for the financial year 2011 is shown below.
(1) Passenger business
KLM’s comprehensive transfer services via Amsterdam Airport Schiphol form the foundation of a high-quality network of direct services for passengers. This network connects almost all of the world’s key economic regions with the Netherlands.
In the financial year 2011, passenger results were impacted, by rising fuel cost and mixed economic conditions. Demand for Business Class improved, but has not yet returned to the level seen before the financial crisis which started in 2008. Economic activity in emerging markets such as South America,
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parts of Asia and several countries in Africa, was dynamic compared to the low growth in the United States and Europe. KLM is pursuing selective growth and identified opportunities for new commercially attractive destinations in these markets in 2011. They include Buenos Aires and Rio de Janeiro. The South American market is developing favourably. A destination such as Panama, which was started three years ago, is now being flown six times a week. In Greater China, KLM has built up a strong position in a relatively short period of time. On the African continent, the cooperation with Kenya Airways was deepened further and KLM is making preparations to serve new destinations in Africa.
Financial year 2011 was also a year with external factors causing flight disruptions. The natural disaster in Japan and the political unrest in the Arab world had an impact on passenger traffic for the most part of 2011.
Some key figures for Passenger business are: Financial Financial year 2011 year (9 months) 2010/2011 (12 months) Total passenger business revenue (€ million) 4,675 5,702 Unit revenue per ASK (€ cts) (1) 6.1 6.0 Unit revenue per RPK (€ cts) (2) 7.1 7.1
Capacity in ASK (in millions) (1) 76,189 96,276 Traffic in RPK (in millions) (2) 65,218 80,453 Load factor (%) 85.6 83.6 (1) ASK: Available Seat Kilometer (2) RPK: Revenue per Passenger Kilometer
In the financial year 2011, there was a slight increase on America and a slight decrease on the Africa- Middle East compared to the financial year 2010/2011.
Revenues per destination Financial year 2011 Financial year for scheduled passenger (9 months) 2010/2011 (12 months) business as % of total as % of total Europe / North Africa 30.7% 30.0% Caribbean and Indian Ocean 3.2% 3.3% Africa-Middle East 15.0% 17.2% America 27.0% 25.6% Asia 24.1% 23.9% Total 100.0% 100.0%
(2) Cargo Business
KLM cargo and Martinair (together, "KLM Cargo") have combined their know-how and networks for cargo services with Air France to form the brand 'Air France – KLM Cargo'.
KLM Cargo is an experienced partner with specific expertise in many sectors, which means that it has the insight and capabilities to tackle any logistical challenge in air transport. The product portfolio extends from general cargo to express consignments and special cargo such as animal transport, temperature-sensitive shipments and oversized cargo.
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The services offered by KLM Cargo are developed in close cooperation with customers, taking into account their transportation needs in the entire logistic chain. Being a customer-driven company, KLM Cargo has established a local presence throughout the world with more than 150 offices worldwide.
In the financial year 2011, KLM Cargo began with a rapid and strong recovery but the economic crisis depressed demand for KLM Cargo in the second half of the year. Since many airlines had taken additional capacity into service in 2010 and early 2011, rates came under pressure from the resultant global overcapacity.
Some key figures for KLM Cargo business are: set out below Financial year Financial year 2011 2010/2011 (9 months) (12 months) Total KLM Cargo business revenue (€ millions) 1,271 1,695 Unit revenue per ATK1 (€ cts) 17.9 18.5 Unit revenue per RTK2 (€ cts) 25.4 25.1 Load Factor 70.4 73.6 (1) ATK = Available Ton Kilometer (2) RTK = Revenue per Ton Kilometer
In the financial year 2011, there was a slight increase on Americas and a slight decrease on Asia compared to the financial year 2010/2011.
Revenues per destination Financial year Financial year for scheduled KLM Cargo 2011 (9 months) 2010/2011 (12 months) business as % of total as % of total Europe / North Africa 1.1% 0.7% Caribbean and Indian Ocean 1.2% 1.4% Africa-Middle East 22.1% 22.2% America 42.9% 41.2% Asia 32.7% 34.5% Total 100.0% 100.0%
(3) Engineering and maintenance business
With approximately 5,000 employees, KLM Engineering and Maintenance ("KLM E&M") is KLM’s third business segment, alongside Passenger and Cargo, and one of the largest maintenance, repair and overhaul ("MRO") outfits in the world. KLM E&M offers a broad portfolio of tailored products and services such as line maintenance, base maintenance, engine overhaul, components, total aircraft care, engineering services and special services such as avionics upgrades, bulkhead repairs and cockpit upgrades. Apart from its primary location at Schiphol Airport, KLM E&M has operations at 50 airports worldwide, offering an international maintenance network. In addition, KLM E&M is full owner of KLM UK Engineering Limited, which provides base and line maintenance services, as well as EPCOR, a company specialised in pneumatic components and auxiliary power units (APUs). One of the key strengths of KLM E&M is engine overhaul, which is the largest segment within the MRO market. At Schiphol Airport, KLM E&M has a state-of-the-art engine overhaul facility. KLM E&M has long-standing ties with General Electric and maintains one of its most successful engines, the CF6 series. KLM E&M has maintenance contracts with over 35 airlines, the largest of which is KLM. Of all engines serviced 75% are for other airlines.
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Another important business segment is Component Services. This Business delivers logistical services and component overhaul for a wide range of aircraft. KLM is the largest customer, but 50% of E&M’s activities are accounted for by other airlines. KLM E&M conducts regular aircraft maintenance (A and C checks) on A330, MD11 and Boeing 737, 777 and 747 aircraft, as well as Line Maintenance (at Schiphol and outstations) on various Airbus and Boeing aircraft types. KLM E&M reported an operating profit and succeeded in reducing KLM's maintenance cost in financial year 2011. These positive results were due in part to improved productivity and a thorough cost saving program. The subsidiaries KLM UK Engineering Limited (mainly Fokker 50/70/100 and Boeing 737 maintenance) and Epcor (pneumatic systems and auxiliary power units) made healthy contributions to E&M's positive results in financial year 2011. The engineering and maintenance business revenue from third parties reached €392 million in the financial year 2011.
KLM's principal subsidiaries
KLM has three principal subsidiaries: (1) transvia.com, (2) Martinair and (3) KLM Cityhopper.
(1) transavia.com transavia.com is a specialist operator of both charter and scheduled flights in the leisure market. Every year it carries passengers to more than 90 destinations in Europe and North Africa, especially to the Mediterranean area and the major winter sports resorts. In the Netherlands, transavia.com is a market leader in the air holiday flight market. Transavia France S.A.S. (which trades as transavia.com France), in which transavia.com has a 40% interest, operates the same business model in the French market (Air France owns the other 60%). Market demand developed positively in 2011. The destination portfolio was increased with new destinations from Amsterdam (to Athens and Lisbon), Rotterdam (to Vienna, Milan, Prague, Madrid, Montpellier, Toulon, Biarritz and Chambery) and Eindhoven (to Barcelona, Ibiza, Palma de Mallorca and Nice). Winter sports destinations were flown from Groningen for the first time. Cooperation within the KLM Group was intensified during the year. Important steps were taken for cooperation in aircraft maintenance. transavia.com started to carry KLM transfer passengers to a number of transavia.com destinations. (2) Martinair
For Martinair, a full member of the KLM Group since the beginning of 2009, 2011 was a turbulent and historic year. On 31 October 2011, the company brought to an end the passenger operations it had first started in 1960. Martinair now concentrates exclusively on airfreight, for which it has 12 aircraft in the fleet. Martinair believes that it will remain a prominent brand in the market. Behind the scenes, it forms an integrated unit with Air France - KLM Cargo and will share offices with the KLM Cargo organisation at Schiphol airport.
(3) KLM Cityhopper
The regional carrier KLM Cityhopper comprises Dutch-based KLM Cityhopper B.V. and UK-based KLM Cityhopper UK Ltd. Both are wholly-owned subsidiaries of KLM. This regional carrier has been in operation since the 1980s and originated from the companies NLM and Netherlines. The latter was acquired in 1988 and merged with KLM subsidiary NLM in 1991. In 1998, KLM acquired Air UK and later merged the Dutch and British regional carriers under the name KLM Cityhopper.
KLM Cityhopper is a feeder airline for KLM and runs a large part of KLM’s European network, carrying 5.5 million passengers a year (35% of KLM’s passengers within Europe) and serving 48 European destinations. About 60% of these passengers board onward connections at Schiphol. KLM
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Cityhopper also offers customised ad hoc flights to third parties. After many years of experience in scheduled flights undertaken on behalf of the Group, KLM Cityhopper also established a charter business. KLM Cityhopper itself does not sell tickets for these flights, but uses the KLM platform.
The KLM group fleet
KLM has made substantial investments in recent years, to renew the fleet with modern fuel-efficient aircraft; its fleet renewal programme has made steady progress in 2011. As at 31 December 2011, the Group's fleet totalled 204 aircraft in operation, 113 of which are in the main fleet and 86 in the subsidiaries (transavia.com, KLM Cityhopper and Martinair) and 5 training aircraft.
During the first half year of 2012, eleven new aircraft joined KLM’s fleet: one Boeing 777-300ER, three Airbus A330-300’s, two Boeing 737-800’s and five Embraer 190’s. In the same period four aircraft left KLM’s fleet: one Boeing 737-800, one MD-11 Freighter and two Fokker 100’s. Overall KLM’s fleet increased from 204 aircraft as at 31 December 2011 to 211 aircraft as at the end of June 2012, with an average age of 11.5 years (excluding operating leases and training aircraft). The average age including operating leases is 9.7 years.
CORPORATE GOVERNANCE
KLM is a Dutch limited liability company (naamloze vennootschap) with a management board (Raad van Bestuur) and a supervisory board (Raad van Commissarissen). As at the date of this Prospectus, the supervisory board was made up of nine members and the management board was made up of four members.
The members of the supervisory board are appointed by the general shareholders’ meeting for four years. The members of the management board are also appointed by the general shareholders’ meeting but upon nomination by the supervisory board.
The table below sets out the composition of the supervisory board and the management board of KLM as at the date of this Prospectus:
Name Position in the First appointment/ Current company term
Members of the supervisory board Kees J. Storm Chairman 2002 (third) Irene P. Asscher-Vonk - 2004 (third) Jean-Didier Blanchet - 2004 (third) Henri Guillaume - 2004 (third) Hans N.J. Smits - 2004 (third) Remmert Laan - 2004 (third) Jean Peyrelevade - 2007 (second) Annemieke J. M. Roobeek - 2011 (first) Philippe Calavia - 2012 (first)
Members of the management board Peter F. Hartman President and Chief 1997 Executive Officer
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Members of the management board Camiel M.P.S. Managing Director of 2011 Eurlings KLM and Executive Vice President of Air France - KLM Cargo Erik F. Varwijk Managing Director of 2011 KLM and Executive Vice President of Air France - KLM International & The Netherlands Pieter J. Th. Elbers Managing Director of 2012 KLM and Chief Operating Officer of KLM
The Chief Financial Officer of KLM is Erik Swelheim. The members of the supervisory board and the management board of KLM are domiciled, for the purposes of this Prospectus, at the registered office of KLM – Amsterdamseweg 55, 1182 GP Amstelveen, the Netherlands.
The main activities carried out by the members of the supervisory board outside KLM and which are significant in comparison to those carried out within KLM are the following:
Mr Kees Storm is the former Chairman of the Executive Board of AEGON N.V. / Vice- Chairman of Anheuser-Busch InBev S.A., Vice-Chairman Unilever N.V. and Plc., Chairman of Pon Holdings B.V., a board member of AEGON N.V., Baxter International Inc. and Curatorium VNO-NCW;
Mrs Irene Asscher-Vonk is a former professor of labour law and social security law at the Radboud University Nijmegen / Arriva Personenvervoer Nederland B.V., Philip Morris Holland, Rabobank Nederland, TBI;
Mr Jean-Didier Blanchet is the former CEO of the Board of Air France, the former Chairman and CEO of Méridien / SNCF participations, Cercle des Transports;
Mr Henri Guillaume is the former CEO of ANVAR, former Vice President of ERAP/ Adoma, SNI, Demeter Partners;
Mr Remmert Laan is Vice-Chairman of Leonardo & Co / Chairman of Forest Value Investment Management, Director of Patrinvest S.A., Trustee Insead Foundation;
M. Jean Peyrelevade is the Chairman of Leonardo & Co SAS, former CEO of Suez, former CEO Stern Bank, former CEO of the Union des Assurances de Paris, former CEO of Credit Lyonnais, former Associate of Toulouse & Associates / Director of Bouygues BG Gardel Bonnard;
Mr Hans Smits is Chairman of the Board of Managing Directors of Havenbedrijf Rotterdam N.V., the former Chairman and CEO of Rabobank, the former Chairman and CEO of Amsterdam Airport Schiphol / Chairman of the Janssen de Jong Group;
Mrs Annemieke Roobeek is Professor Strategy en Transformation management, Nyenrode Business University and Director-owner, MeetingMoreMinds and Open Dialogue / ABN Amro Group, Amsterdam RAI Exhibition Centres, Abbott Healthcare Products; and
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Mr Philippe Calavia is Chief Financial Officer of Air France - KLM. There is no family relationship amongst the members of the supervisory board and the management board.
To KLM's knowledge:
no member of the supervisory board or the management board has been convicted of fraud in the last five years;
no member of the supervisory board or the management board has been involved in any bankruptcy, receivership or liquidation in the last five years;
no member of the supervisory board or the management board has had any public sanction or incrimination made against him by a statutory or regulatory authority in the last five years;
no member of the supervisory board or the management board has been disqualified from acting as a member in any supervisory or administrative board or any board of directors of any issuer, or from taking part in the management of any issuer in the last five years.
CONFLICTS OF INTEREST OF THE BOARD OF DIRECTORS, MANAGEMENT BOARD AND SUPERVISORY BOARD
To KLM’s knowledge, there are no conflicts of interest between the duties of the members of the supervisory board and the management board in relation to the company and their private interests or other duties.
ORGANISATION OF THE MANAGEMENT BOARD AND THE SUPERVISORY BOARD
To help in the preparation of its work, the supervisory board has created three specialised committees: an audit committee, a remuneration committee and a nomination committee.
The audit committee is made up of three members:
Hans Smits (Chairman);
Henri Guillaume; and
Annemieke Roobeek.
The audit committee met on two occasions during the financial year 2011. Apart from the financial results, the audit committee discussed the main (financial and non financial) risks based on management’s risk assessments, the results of internal audits and the yearly audit plan performed by the Group’s internal auditor. Next to that, the Audit Committee also addressed the internal risk management and control system.
The Chairman of the audit committee reported on the main discussion topics during the meeting of the Supervisory Board.
The audit committee meetings were attended by the Chairman (as an observer), the President and Chief Executive Officer, the Chief Financial Officer, the external auditors, the internal auditor and the corporate controller. In keeping with previous years, the audit committee met with the external
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auditors without the members of the Board of Managing Directors being present, to discuss the closing process and course of affairs during the financial year.
CORPORATE GOVERNANCE
KLM’s corporate governance is, insofar as possible, in line with generally accepted principles of good governance, such as the amended Dutch Corporate Governance Code (the "Code").
Although KLM, as an unlisted company is not formally obliged to the Code, it has committed itself to follow the Code voluntarily where possible. KLM deviates from the best practices described in the Code in a limited number of areas. These deviations are:
regulations and other documents are not made available on the Internet. Since the vast majority of KLM shares are owned by a small group of known shareholders, it has been decided to provide copies of regulations and other documents upon written request;
in deviation from best practice provision II.1.6 KLM has implemented a whistleblower policy with a limited financial scope. The reason for that is that KLM has various other complaint regulations that are adequate for the respective domains they entail. In view of this scope, it has been decided that the Chairman of the Audit Committee will be the primary point of contact if there are suspicions of financial misconduct regarding the Board of Managing Directors;
best practice provision II.2.8 is only implemented in contracts of new external members of the Board of Managing Directors;
in deviation from best practice provision II.2.11 , KLM has integrated the claw back clause with a maximum term of recovery of three years after the variable remuneration was awarded;
in deviation from best practice provision III.6.5, KLM has not drawn up regulations governing ownership of and transactions in securities by Board of Managing Directors or Supervisory Board members, other than securities issues by its parent company Air France - KLM, because these are considered to be less relevant for KLM, and
in deviation from best practice provision III.5.13, a limited number of consultants that provide advice to the Remuneration Committee of the Supervisory Board, also provide advice to the Board of Managing Directors. However, in these cases separate agreements are made in order to create a so-called Chinese wall.
PRINCIPAL SHAREHOLDERS
KLM’s shareholder structure is outlined below. Depositary receipts of shares carry beneficial ownership (economic right to the dividends issued), but no voting rights on the underlying KLM shares.
Air France - KLM holds:
all KLM priority shares and a proportion of the ordinary shares, together representing 49% of the voting rights in KLM;
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the depositary receipts issued by SAK I on ordinary KLM shares and on the cumulative preference shares A held by SAK I, together representing 33.16% of the beneficial rights of KLM’s nominal share capital, and
the depositary receipts issued by SAK II on the cumulative preference shares C, representing 11.25% of the beneficial rights of KLM’s nominal share capital.
As at the date of this Prospectus, SAK I held 33.16% of the voting rights in KLM on the basis of ordinary shares and cumulative preference shares A. SAK II holds 11.25% of the voting rights in KLM. The Dutch State directly holds cumulative preference shares A which represent 5.92% of the voting rights.
Stichting Administratiekantoor KLM ("SAK I") and Stichting Administratiekantoor Cumulatief Preferente Aandelen C ("SAK II") are two independent foundations that were incorporated to allow for a split in voting and economics rights.
SELECTED FINANCIAL INFORMATION IN RELATION TO THE CAPITAL, FINANCIAL SITUATION AND RESULTS OF KLM
Selected financial information
Overview of Consolidated income statement of KLM 1 April 2011 – 1 April 2010 – 1 April 2009 – 31 December 2011 31 March 2011 31 March 2010 (9 months)* (12 months) (12 months) In millions of Euros
Revenues 6,985 8,651 7,469
Income from current operations before depreciation and amortization 685 922 261
Income / (loss) from current operations 275 383 (285)
Income / (loss) from operating activities 272 305 (376)
Profit/(loss) for the period 48 147 (383)
Attributable to: Equity holders of the Company 47 147 (383) Non-controlling interests 1 - - 48 147 (383)
Profit/(loss) per share (in EUR) 1.01 3.14 (8.18) Diluted profit/(loss) per share (in EUR) 1.01 3.14 (8.18)
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Overview of Consolidated balance sheet of KLM In millions of Euros 31 December 2011* 31 March 2011 31 March 2010
After proposed appropriation of the result for the year
ASSETS
Non-current assets 8,217 8,067 8,019
Current assets 2,400 3,157 2,780 TOTAL ASSETS 10,617 11,224 10,799
Total attributable to Company's equity holders 2,556 2,681 2,238 Non-controlling interests 2 2 2 Total equity 2,558 2,683 2,240
Non-current liabilities 4,917 5,034 5,110
Current liabilities 3,142 3,507 3,449 Total liabilities 8,059 8,541 8,559
TOTAL EQUITY AND LIABILITIES 10,617 11,224 10,799
* The figures for the 2011 financial year relate to a 9-month period and are therefore not directly comparable to the figures for the 2010 and 2009 financial years which relate to a 12-month period.
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Overview of Consolidated cash flow statement of KLM 1 April 2011 – April 1, 2010 – April 1, 2009 – 31 December 2011 31 March 2011 31 March 2010 (9 months) * (12 months) (12 months) In millions of Euros
Profit/(loss) for the period 48 147 (383)
Net cash flow from operating activities before changes in working capital 354 394 (147)
Change in working capital (268) 215 (112)
Net cash flow from operating activities 86 609 (259)
Net cash used in investment activities (236) (400) (231)
Net cash flow from financing activities (25) (62) 456
Effect of exchange rates on cash and cash equivalents 3 (3) 2
Change in cash and cash equivalents (172) 144 (32) Cash and cash equivalents at beginning of period 1,229 1,085 1,117 Cash and cash equivalents at end of period** 1,057 1,229 1,085
Change in cash and cash equivalents (172) 144 (32) * The figures for the 2011 financial year relate to a 9-month period and are therefore not directly comparable to the figures for the 2010 and 2009 financial years which relate to a 12-month period. ** Including unrestricted Triple A bonds, deposits and commercial paper the overall cash position and other highly liquid investments amounts to EUR 1,264 million as at 31 December 2011 (as at 31 March 2011: EUR 1,542 million and as at 31 March 2010: EUR 1,533 million).
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Overview of key financial ratios 1 April 2011 – 1 April 2010 – 1April 2009 – 31 December 2011 31 March 2011 31 March 2010 (9 months) (12 months) (12 months)
Operating margin 3.9% 4.4% (3.8)%
Return on capital employed (%) 5.2% 5.7% (7.0)%
Net-debt-to-equity ratio 119 109 118
LITIGATION AND ARBITRATION PROCEEDINGS
KLM is not involved in any material litigation or arbitration proceedings other than those described in the documents incorporated by reference herein.
SHARE CAPITAL
At the date of this Prospectus, authorised share capital of KLM amounts to €562,500,000. It is divided into:
- 1,875 priority shares - 149,998,125 ordinary shares; - 37,500,000 A cumulative preference shares - 75,000,000 B preference shares; and - 18,750,000 C cumulative preference shares.
All the company shares have a nominal value of €2.00 each.
COMPANY INCORPORATION AND ARTICLES OF ASSOCIATION
KLM (Koninklijke Luchtvaart Maatschappij) is a Dutch limited liability company (naamloze vennootschap) incorporated on 7 October 1919. The company operates under the name "KLM Royal Dutch Airlines".
The company’s main purpose is to operate the service of air transport of passenger and cargo, aircraft maintenance as well as take holdings in companies of any kind.
Its registered office is at Amsterdamseweg 55, 1182 GP Amstelveen, Netherlands, and the telephone number is +31 20 649 91 23. The registration number of the company at the Register of Commerce is no. 33014286. Its corporate seal is at Amstleveen, The Netherlands.
DOCUMENTS AVAILABLE TO THE PUBLIC
The company’s articles of association, the annual and consolidated financial statements for the 2009- 2010 financial year, 2010-2011 financial year and 2011 financial year and the related auditors’ reports may be consulted, in hard copy, at the registered office of the company.
The annual and consolidated financial statements for the 2009-2010 financial year, 2010-2011 financial year and 2011 financial year and the related auditors’ reports are also available on the website of KLM N.V. (http//www.klm.com/corporate/en/publications/index.html)).
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RECENT DEVELOPMENTS
ISSUER’S AND GROUP’s RECENT DEVELOPMENTS
Retirement benefits
In the nine months ended 30 September 2012, the discount rate used by companies for defined benefit obligations decreased significantly. In note 30.1 of the DR 2011 (incorporated herein by reference), the sensitivity of the defined benefit obligation to variations in the discount rate is mentioned.
In the same period the fair value of the plan assets increased markedly. The net basis could have a significant impact on the funded status of the Group pension funds as of 31 December 2012.
European Commission has deferred the implementation of the international aspects of the ETS
The European Commission issued a press release on 12 November 2012 on the implementation of the international aspects of the European Emissions Trading Scheme. This regulation was intended to apply to all European and non-European airlines flying into and out of the European economic space.
Further to the ICAO council meeting on 9 November 2010, the European Union has decided to defer the application of the international aspects of its Emissions Trading Scheme by one year, thus not requiring the obligation to surrender emissions allowances in April 2013 in respect of air traffic to and from the European Union during the whole of 2012.
This position will be reexamined at the light of the outcome of the 2013 assembly of the ICAO (to be held in September/October of that year) regarding an internationnally coordinated approach on this topic.
Judgment of the European Court of Justice confirming Sturgeon ruling on consumer compensation
In a judgment made on 23 October 2012, the Court of Justice in Luxembourg confirmed its interpretation of EU law in the judgment Sturgeon and Others of 19 November 2009. That ruling allows passengers to claim a fixed compensation from an airline if they reach their final destination three hours or more after the arrival time originally scheduled, unless the delay is caused by extraordinary circumstances.
Furthermore, the Issuer has published the following press releases:
AIR FRANCE-KLM THIRD QUARTER 2012 RESULTS
31 October 2012
QUARTER JULY-SEPTEMBER 2012 - Operating result of €506 million (€397 million euros at 30 September 2011) - Good improvement in passenger activity but deterioration in cargo - Revenues of €7.2 billion euros (+6%) - Ongoing reduction in unit costs at constant currency and fuel price
OUTLOOK - Unchanged objectives of second half operating result above last year’s level and reduction in net debt
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The Board of Directors of Air France-KLM, chaired by Jean-Cyril Spinetta, met on 30 October to examine the accounts for third quarter 2012.
The group realised a satisfactory third quarter across all its businesses with the exception of cargo. In passenger, the limited capacity increase in the industry led to an improvement in unit revenues, which, for the group, were also helped by a positive foreign exchange effect due to the depreciation of the euro versus other currencies. On the other hand, the cargo business continued to deteriorate over the quarter. As previously indicated, measures undertaken in the context of the plan Transform 2015 are starting to have a significant impact on costs.
Key data
In millions of euros except per Quarter to 30 September Nine months to 30 September share data in euros 2012 2011 change 2012 2011 change Revenues 7,184 6,789 5.8% 19,329 18,335 5.4% EBITDAR2 1,228 1,018 20.4% 1,872 1,726 8.5% Current operating result 506 397 27.5% -157 -151 nm Adjusted operating result3 592 468 26.5% 87 63 38.0% Net result, group share 306 14 nm -957 -550 nm Net result per share 1.03 0.05 nm -3.24 -1.86 nm Fully diluted result per share 0.85 0.05 nm -3.24 -1.86 nm
Activity
Ongoing capacity control
The group enjoyed a good Summer season in its passenger business, with traffic up by 0.9% for a rise in capacity limited to 1.0% and a high load factor of 86%. Unit revenue per available seat kilometre (RASK) progressed by 6.3% (+1.8% at constant currency). Passenger revenues grew by 7.9% after a positive currency effect of 4.4% to €5.69 billion. The operating result stood at €453 million (+27%) despite a rise in the fuel bill of €231 million.
The cargo business was further impacted by the economic slowdown and the situation of overcapacity in the industry. Traffic fell by 6.6% for capacity down by 3.7%. The load factor stood at 61.8% (-1.9 points). Unit revenue per available tonne kilometre (RATK) rose 0.7% on the back of a positive currency effect of 6.7%. Cargo revenues stood at €758 million (-1.9%) while the operating result was - €67 million (-€37 million at 30 September 2011).
Third party revenues at the maintenance business declined by 5.9% to €256 million. However the operating result was up strongly at €52 million (versus €18 million in Q3 2011 following €23 million in one-off costs).
Other activities, including Transavia, generated revenues of €476 million (+1.7%) and an operating result of €68 million (versus €60 million at 30 September 2011). Transavia generated revenues of €368 million (+12%) and an operating result of €69 million (versus €60 million a year earlier).
Total revenues stood at €7.18 billion, up 5.8% after a favourable currency effect of 4.5%. Unit revenues in equivalent available seat kilometres (EASK) rose 5.7% (+1.1% at constant currency).
2 Before amortisation, provisions and operating leases 3 Adjusted for the portion of operating leases corresponding to financial costs (34%)
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Reduction in operating costs ex-currency
Operating costs totalled €6.68 billion, up 4.5% (+0.7% ex-fuel). On a comparable currency basis they fell 1.1%, reflecting the strict cost control measures implemented in the context of Transform 2015. Unit cost, measured in EASK, increased by 4.2%, but declined by 1.7% on a constant currency and fuel price basis, for production measured in EASK up by 0.6%.
The fuel bill increased by €254 million to €1.97 billion (+14.8%) under the effect of a decline in volume of 2%, a negative currency effect of 15% and a rise in the fuel price after hedging of 2%.
Employee costs (excluding temporary staff) amounted to €1.88 billion. The measures taken in the context of Transform 2015 took effect, limiting the rise to 1.2% in spite of an additional pension charge at KLM of €18 million.
The operating result amounted to €506 million and the adjusted operating result to €592 million, implying an adjusted operating margin of 8.2%.
In the context of the reorganisation of the French regional pole, the group has undertaken impairment tests for assets not included in this pole, leading it to depreciate goodwill in respect of VLM, a subsidiary of CityJet, for an amount of €168 million. Net interest charges were stable at €94 million. ‘Other financial income and costs’ amounted to €216 million (-€268 million a year ago) of which €210 millions relating to the change in the fair value of derivatives.
Net income, group share, amounted to €306 million (€14 million at 30 September 2011). The net result per share stood at €1.03 and the diluted net result per share at €0.85 (€0.05 at 30 September 2011 for both results).
Nine months to 30th September 2012
In passenger business, during the first nine months of 2012, capacity increased by 0.9% and traffic by 2.8%. The load factor gained 1.5 points to 83.5%. Unit revenue per available seat kilometre (RASK) rose by 6.0% and by 3.1% at constant currency.
In cargo business, traffic declined by 6.5% for capacity down by 2.9%, leading to a 2.4 point decline in the load factor to 63.6%. Unit revenue per available tonne kilometre (RATK) declined by 1.4% and by 5.5% at constant currency.
Total revenues amounted to €19.33 billion (+5.4% after a positive change effect of 2.8%). Operating costs increased by 5.4%, but by only 2.0% ex-fuel.
The operating result amounted to -€157 million (-€151 million at 30 September 2011) while the adjusted operating result was €87 million. The adjusted operating margin stood at 0.5%.
The net interest charge amounted to €264 million, a decline of 3.3% on the previous year. ‘Other financial income and costs’ swung from -€230 million at 30 September 2011 to €38 million at 30 September 2012, thanks to a less negative foreign exchange result and a €200 million positive change in the fair value of derivatives.
The net result, group share, was -€957 million (-€550 million at 30 September 2011) after €536 million in non-current and non-cash charges, of which €348 million for the voluntary departures plan, not affecting the group’s cash flow at 30 September 2012.
The result per share and fully diluted result per share stood at -€3.24 against -€1.86 at 30 September 2011.
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Financial position
Investments amounted to €1.26 billion and disposals to €650 million (€1.98 billion and €986 million respectively at 30 September 2011). Operating cash flow amounted to €712 million. Before changes in working capital requirement, it amounted to €716 million versus €308 million a year ago. At 30 September 2012 the group had cash of €3.4 billion and credit lines of €1.85 billion.
Shareholders’ funds amounted to €5.27 billion. Net debt declined relative to 31 December 2011 (€6.02 billion versus €6.52 billion at 31 December 2011). However, as a consequence of the reduction in shareholders’ funds, the gearing ratio increased to 1.14 (1.07 at 31 December 2011).
Outlook
In a difficult economic environment in Europe, but with a good level of activity in the other markets, the group maintains its objectives of an operating result in the second half of 2012 above the level of the second half of 2011 (€195 million) and a reduction of its net debt at 31 December 2012 relative to 31 December 2011
Additional information
The nine month January to September 2012 accounts are not audited by the Statutory Auditors.
Information by business
Passenger business
Quarter to 30 September Nine months to 30 September 2012 2011 Change 2012 2011 Change Traffic (RPK millions) 62,098 61,563 0.9% 169,651 165,089 2.8% Capacity (ASK millions) 72,246 71,534 1.0% 203,093 201,215 0.9% Load factor 86.0% 86.1% -0.1 pts 83.5% 82.0% 1.5 pts Total passenger revenues (€m) 5,694 5,276 7.9% 15,254 14,150 7.8% Scheduled passenger revenues 5,448 5,055 7.8% 14,552 13,537 7.5% (€m) Unit revenue per RPK (€cts) 8.77 8.24 6.4% 8.58 8.24 4.1% Unit revenue per RPK at constant - - 1.9% - - 1.3% currency (€cts) Unit revenue per ASK (€cts) 7.54 7.09 6.3% 7.16 6.76 6.0% Unit revenue per ASK at constant - - 1.8% - - 3.1% currency (€cts) Unit cost per ASK (€cts) 6.91 6.61 4.7% 7.21 6.85 5.3% Unit cost per ASK at constant - - -1.2% - - 0.0% currency and fuel price (€cts) Operating result (€m) 453 356 27,2% -98 -151 ns
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Cargo business
Quarter to 30 September Nine months to 30 September 2012 2011 Variation 2012 2011 Variation Traffic (RTK millions) 2,631 2,813 -6.5% 7,893 8,443 -6.5% Capacity (ATK millions) 4,264 4,419 -3.5% 12,425 12,792 -2.9% Load factor 61.7% 63.7% -2.0 pts 63.5% 66.0% -2.5 pts Total cargo revenues 758 773 -1.9% 2,266 2,341 -3.2% Scheduled cargo revenues (€m) 710 731 -2.9% 2,126 2,221 -4.2% Unit revenue per RTK (€cts) 27.01 26.02 3.8% 26.93 26.32 2.3% Unit revenue per RTK at constant - - -2,8% - - -1.9% currency (€cts) Unit revenue per ATK (€cts) 16.69 16.58 0.7% 17.12 17.37 -1.4% Unit revenue per ATK at constant - - -5,7% - - -5.5% currency (€cts) Unit cost per ATK (€cts) 18.27 17.40 5.0% 18.71 17.85 4.8% Unit cost per ATK at constant - - -2.4% - - -2.0% currency and fuel price (€cts) Operating result (€m) -67 -37 ns -197 -60 ns
Maintenance
The maintenance activity realised third party revenues of €256 million in the third quarter of 2012 (€272 million for the same period in 2011). The operating result amounted to €52 million (€18 million at 30 September 2011 after €23 million in exceptional charges linked to strike action). For the first nine months of 2012, revenues amounted to €779 million (+1.9%). The operating result stood at €108 million (€67 million at 30 September 2011).
Other businesses
Other businesses include mainly Transavia and the catering activity. In the third quarter, total revenues for this business amounted to €476 million against €468 million a year earlier. The operating result stood at €68 million (€60 million at 30 September 2011).
Transavia
Quarter to 30 September Nine months to 30 September 2012 2011 Change 2012 2011 Change Traffic (RPK millions) 6,024 5,804 3.8% 12,507 12,020 4.1% Capacity (ASK millions) 6,589 6,384 3.2% 14,267 13,815 3.3% Load factor 91.4% 90.9% 0.5 pts 87.7% 87.0% 0.7 pts Total passenger revenues (€m) 368 330 11.5% 732 667 9.7% Passenger revenues (€m) 358 325 10.1% 702 643 9.2% Unit revenue per RPK (€cts) 5.93 5.60 6.0% 5.61 5.35 4.8% Unit revenue per RPK at constant - - 6.0% - - 4.8% currency (€cts) Unit revenue per ASK (€cts) 5.43 5.09 6.6% 4.92 4.66 5.6% Unit revenue per ASK at constant - - 6.6% - - 5.6%
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currency (€cts) Unit cost per ASK (€cts) 4.37 4.16 5.2% 4.76 4.53 5.1% Unit cost per ASK at constant - - 2.0% - - -1.7% currency and fuel price (€cts) Operating result (€m) 69 60 15.0% 23 18 27.7%
Revenues for the catering activity were flat in the third quarter at €217 million of which €99 million from third parties. The operating result was €3 million (€10 million at 30 September 2011). For the nine months to at 30 September 2012, revenues amounted to €599 million (-5.0%) of €271 million with third parties, with an operating result of €2 million (€17 million at 30 September 2011).
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INCOME STATEMENTS (unaudited) Q3 (July to September) 9 months (January to September) 2012 2011 2012 2011 Variation Variation In euros million (proforma)
SALES 7,184 6,789 5.8% 19,329 18,335 5.4% Other revenues 2 5 -60.0% 11 27 -59.3% EXTERNAL EXPENSES (4,332) (4,093) 5.8% (12,352) (11,618) 6.3% Aircraft fuel (1,971) (1,717) 14.8% (5,539) (4,816) 15.0% Chartering costs (141) (157) -10.2% (417) (431) -3.2% Aircraft operating lease costs (254) (210) 21.0% (718) (628) 14.3% Landing fees and en route charges (510) (485) 5.2% (1,411) (1,367) 3.2% Catering (165) (153) 7.8% (450) (428) 5.1% Handling charges and other operating costs (384) (356) 7.9% (1,042) (1,003) 3.9% Aircraft maintenance costs (279) (324) -13.9% (831) (879) -5.5% Commercial and distribution costs (236) (227) 4.0% (677) (638) 6.1% Other external expenses (392) (464) -15.5% (1,267) (1,428) -11.3% Salaries and related costs (1,882) (1,860) 1.2% (5,762) (5,594) 3.0% Taxes other than income taxes (46) (50) -8.0% (140) (142) -1.4% Amortization and depreciation (409) (411) -0.5%) (1,187) (1,226) -3.2% Provisions (59) 0 nm (124) (23) nm Other income and expenses 48 17 nm 68 90 -24.4% INCOME FROM CURRENT OPERATIONS 506 397 27.5% (157) (151) -4.0% Sales of aircraft equipment 1 9 nm 5 6 16.7% Sales of subsidiaries 0 0 nm 97 1 nm Other non-current income and expenses (182) (12) nm (565) (111) nm INCOME FROM OPERATING ACTIVITIES 325 394 -17.5% (620) (255) -143.1% Income from cash and cash equivalents 21 22 -4.5% 61 69 -11.6% Cost of financial debt (115) (117) -1.7% (325) (342) -5.0% Net cost of financial debt (94) (95) 1.1% (264) (273) 3.3% Foreign exchange gains (losses), net 3 (125) nm (29) (88) nm Change in fair value of financial assets and liabilities 210 (145) nm 58 (142) nm Other financial income and expenses 3 2 nm 9 0 nm INCOME BEFORE TAX 447 31 nm (846) (758) -11.6% Income taxes (147) (9) nm (58) 242 nm NET INCOME OF CONSOLIDATED COMPANIES 300 22 nm (904) (516) -75.2% Share of profits (losses) of associates 11 (6) nm (49) (31) 58.1% INCOME FROM CONTINUING OPERATIONS 311 16 nm (953) (547) -74.2% Net income from discontinued operations NET INCOME FOR THE PERIOD 311 16 nm (953) (547) -74.2% Minority interest (5) (2) (4) (3) NET INCOME FOR THE PERIOD - GROUP 306 14 nm (957) (550) -74.0%
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CONSOLIDATED BALANCE SHEET (unaudited)
Assets 30 September 31 December In € millions 2012 2011 Goodwill 258 426 Intangible assets 827 774 Flight equipment 10,271 10,689 Other property, plant and equipment 1,959 2,055 Investments in equity associates 413 422 Pension assets 3,400 3,217 Other financial assets(*) 1,714 2,015 Deferred tax assets 1,116 1,143 Other non-current assets 163 168 Total non-current assets 20,121 20,909 Assets held for sale 7 10 Other short term financial assets 853 751 Inventories 533 585 Trade accounts receivables 2,375 1,774 Income tax receivables 11 10 Other current assets 901 995 Cash and cash equivalents 2,697 2,283 Total current assets 7,377 6,408 Total assets 27,498 27,317
Liabilities and equity 30 September 31 December In € millions 2012 2011 Issued capital 300 300 Additional paid-in capital 2,971 2,971 Treasury shares (83) (89) Reserves and retained earnings 2,025 2,858 Equity attributable to equity holders of Air France-KLM 5,213 6,040 Non-controlling interests 56 54 Total equity 5,269 6,094 Provisions and retirement benefits 2,161 2,061 Long-term debt 9,292 9,228 Deferred tax liabilities 459 466 Other non-current liabilities 368 321 Total non-current liabilities 12,280 12,076 Provisions 610 156 Current portion of long-term debt 1,280 1,174 Trade accounts payables 2,343 2,599 Deferred revenue on ticket sales 2,405 1,885 Frequent flyer programs 766 784 Current tax liabilities 1 6 Other current liabilities 2,504 2,386 Bank overdrafts 40 157 Total current liabilities 9,949 9,147 Total liabilities 22,229 21,223 Total liabilities and equity 27,498 27,317
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CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
In € millions Period from 1 January to 30 September 2012 2011 (proforma) Net income for the period – Equity holders of Air France-KLM (957) (550) Non-controlling interests 4 3 Amortization, depreciation and operating provisions 1,311 1,249 Financial provisions (9) - Gain on disposals of tangible and intangible assets (8) (14) Loss/ (gain) on disposals of subsidiaries and associates (97) (2) Derivatives – non monetary results (78) 87 Unrealized foreign exchange gains and losses, net 1 62 Impairment 168 - Share of (profits) losses of associates 49 31 Deferred taxes 28 (260) Other non-monetary items 304 (298) Subtotal 716 308 (Increase) / decrease in inventories 54 (8) (Increase) / decrease in trade receivables (619) (350) Increase / (decrease) in trade payables (221) 395 Change in other receivables and payables 782 294 Net cash flow from operating activities 712 639 Acquisition of subsidiaries, of shares in non-controlled entities (38) (29) Purchase of property, plant and equipment and intangible assets (1,260) (1,984) Proceeds on disposal of subsidiaries, of shares in non-controlled entities 466 - Proceeds on disposal of property, plant and equipment and intangible assets 650 986 Dividends received 23 26 Decrease (increase) in investments 13 (85) Net cash flow used in investing activities (146) (1,086) Capital increase - 6 Purchase of non-controlling interests, of owned shares - (15) Disposal of subsidiaries without loss of control,of owned shares 7 (2) Issuance of financial debt 1,025 1,056 Repayment on financial debt (678) (894) Payment of debt resulting from finance lease liabilities (415) (425) New loans (59) (76) Repayment on loans 82 192 Dividends paid (1) (3) Net cash flow from financing activities (39) (161) Effect of exchange rate on cash and cash equivalents and bank 4 (23) overdrafts Change in cash and cash equivalents and bank overdrafts 531 (631) Cash and cash equivalents and bank overdrafts at beginning of period 2,126 3,351 Cash and cash equivalents and bank overdrafts at end of period 2,657 2,720
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AIR FRANCE-KLM FLEET
Air France fleet
Brit Finance Operating In Change / Aircraft AF City Jet Régional VLM Transavia Owned Total Air lease lease operation 12/31/11 B747-400 7 3 4 7 7 -2 B777-300 37 14 6 17 37 37 +3 B777-200 25 15 2 8 25 25 B767-300 A380-800 8 1 3 4 8 8 +2 A340-300 14 9 2 3 14 12 -3 A330-300 A330-200 15 3 2 10 15 15 MD11 Long haul 106 45 15 46 106 104 B747-400 cargo 5 2 3 5 3 B777- cargo 2 2 2 2 MD-11-CF MD-11-F Freighter 7 4 3 7 5 B737 900 B737-800 8 8 8 8 B737-700 B737-400 B737-300 A321 25 11 1 13 25 25 A320 60 20 3 37 60 60 +1 A319 44 21 4 19 44 41 -2 A318 18 12 6 18 18 Medium haul 147 8 64 14 77 155 152 -1 AVRO RJ 85 22 11 11 22 20 -2 Canadair Jet 13 13 13 13 +2 1000 Canadair Jet
900 Canadair Jet 15 6 9 15 15 700 Canadair Jet 13 12 1 13 13 100 Embraer 190 10 4 6 10 10 Embraer 170 16 8 2 6 16 16 +6 Embraer 145 23 11 11 1 23 23 -3 Embraer 135 7 4 3 7 2 -2 Fokker 100 Fokker 70 Fokker 50 13 12 1 13 13 -1 Regional 41 22 56 13 81 26 25 132 125
TOTAL 260 41 22 56 13 8 194 55 151 400 386 -1
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KLM fleet
KLM Finance Operating In Change / Aircraft KLM Transavia Martinair Owned Total Cityhopper lease lease operation 12/31/11 B747-400 22 13 4 5 22 22 B777-300 7 7 7 7 +2 B777-200 15 6 9 15 15 B767-300 A380-800 A340-300 A330-300 3 3 3 3 +3 A330-200 11 6 5 11 11 MD11 9 8 1 9 8 -2 Long haul 67 21 24 22 67 66 +3 B747-400 cargo 4 4 3 5 8 4 -1 B777- cargo MD-11-CF 4 3 1 4 4 MD-11-F 3 2 1 3 2 -1 Freighter 4 11 3 5 7 15 10 -2 B737 900 5 1 1 3 5 5 B737-800 23 21 12 6 26 44 44 +1 B737-700 18 10 13 15 28 28 B737-400 3 3 3 B737-300 A321 A320 A319 A318 Medium haul 49 31 16 20 44 80 77 +1 AVRO RJ 85 Canadair Jet
1000 Canadair Jet 900 Canadair Jet 700 Canadair Jet 100 Embraer 190 22 13 9 22 22 +5 Embraer 170 Embraer 145 Embraer 135 Fokker 100 3 3 3 3 -2 Fokker 70 26 26 26 26 Fokker 50 Regional 51 29 13 9 51 51 +3
KLM 120 51 31 11 69 62 82 213 204 +5
TOTAL Air France-KLM Group 263 117 233 613 590 +4
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OCTOBER 2012 TRAFFIC
8 November 2012
- Passenger: decline in capacity (-0.6%) and slowdown in traffic (-2.0%) but rise in unit revenues ex currency; - Cargo: capacity adapted to traffic levels.
In order to facilitate year on year comparison passenger data has been restated to include the passenger business of Martinair.
Passenger business
October 2012 was marked by a decline in business traffic in the French market. Traffic was down by 2.0% for capacity down 0.6%. The load factor gave up 1.2 points to 82.7%. The number of passengers amounted to 6.74 million (-0.5%). Nevertheless, unit revenue per available seat kilometre (RASK) was higher than in October 2011.
• The Americas network, and particularly North America, performed satisfactorily in spite of hurricane Sandy. Capacity was reduced by 3.4% and traffic by 3.3%. The load factor was stable at 88.8% (+0.1%).
• The Asia network recorded a 1.4% decline in traffic for capacity up 1.0%. The load factor declined by 2.1 points to 85.2%.
• The Africa and Middle East network recorded stable traffic (+0.2%) for capacity up 0.8%. The load factor declined by 0.5 points to 79.8%.
• On the Caribbean and Indian Ocean network, traffic was down 8.9% for capacity reduced by 6.4%. The load factor declined 2.2 points to 80.7%.
• On the European network traffic rose by 1.7% for capacity up 3.8% on the back of the effect of the regional bases. The load factor declined by 1.5 points to 74.2%.
Cargo business
The group continued to adjust its full-freighter schedule. In consequence, traffic (-6.7%) declined less than capacity (-7.1%). The load factor improved slightly to 66.6% (+0.3 points). Unit revenue per available tonne kilometre (RATK) declined relative to October 2011.
Recent developments - Air France-KLM continues to develop its long-haul network, with three new routes for the Summer 2013 program: Paris-Minneapolis (United States), Paris-Kuala Lumpur (Malaysia) and Amsterdam-Fukuoka (Japan).
- As of 28th October 2012, Air France, KLM and Etihad Airways have extended the choice of schedules and destinations available to their customers with the signature of a code-sharing agreement. In addition to the Paris-Charles de Gaulle-Abu Dhabi and Amsterdam-Abu Dhabi routes, this agreement gives access to five new destinations for Air France to KLM passengers in Asia and Australia, as well as 10 European destinations to Etihad passengers on flights operated by Air France and KLM.
- As of 1st October 2012, Air France customers at Paris-Charles de Gaulle benefit from a simplified transit within the airport’s most modern infrastructures. The international activity is henceforth centered at Terminal 2E, while terminal 2F is exclusively dedicated to the
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European (Schengen) flights of Air France and its SkyTeam alliance partners. Finally, the regional airlines (Brit Air, Regional, Airlinair) now operate out of 2G.
STATISTICS Passenger activity (in millions) October Year to date Total Group 2012 2011 Variation 2012 2011 Variation Passengers carried (000s) 6,742 6,779 (0.5%) 65,456 64,075 2.2% Revenue pax-kilometers (RPK) 19,048 19,431 (2.0%) 188,700 184,519 2.3% Available seat-kilometers (ASK) 23,036 23,167 (0.6%) 226,127 224,383 0.8% Load factor (%) 82.7% 83.9% (1.2) 83.4% 82.2% 1.2
Europe (including France) Passengers carried (000s) 4,730 4,670 1.3% 45,131 43,757 3.1% Revenue pax-kilometers (RPK) 3,900 3,836 1.7% 37,401 35,904 4.2% Available seat-kilometers (ASK) 5,256 5,065 3.8% 49,864 48,147 3.6% Load factor (%) 74.2% 75.7% (1.5) 75.0% 74.6% 0.4
Americas Passengers carried (000s) 832 883 (5.7%) 8,297 8,234 0.8% Revenue pax-kilometers (RPK) 6,468 6,686 (3.3%) 64,145 62,205 3.1% Available seat-kilometers (ASK) 7,285 7,539 (3.4%) 72,421 71,841 0.8% Load factor (%) 88.8% 88.7% 0.1 88.6% 86.6% 2.0
Asia / Pacific Passengers carried (000s) 516 530 (2.8%) 4,998 4,909 1.8% Revenue pax-kilometers (RPK) 4,545 4,611 (1.4%) 43,493 42,140 3.2% Available seat-kilometers (ASK) 5,336 5,285 1.0% 50,391 49,101 2.6% Load factor (%) 85.2% 87.3% (2.1) 86.3% 85.8% 0.5
Africa / Middle East Passengers carried (000s) 433 443 (2.2%) 4,274 4,296 (0.5%) Revenue pax-kilometers,(RPK) 2,425 2,421 0.2% 23,659 23,426 1.0% Available seat-kilometers,(ASK) 3,038 3,013 0.8% 29,324 29,885 (1.9%) Load factor (%) 79.8% 80.4% (0.5) 80.7% 78.4% 2.3
Caribbean / Indian,Ocean Passengers carried (000s) 230 253 (8.8%) 2,757 2,879 (4.2%) Revenue pax-kilometers (RPK) 1,711 1,877 (8.9%) 20,002 20,844 (4.0%) Available seat-kilometers (ASK) 2,121 2,266 (6.4%) 24,128 25,408 (5.0%) Load factor (%) 80.7% 82.8% (2.2) 82.9% 82.0% 0.9
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Cargo activity (in millions) October Year to date Total Group 2012 2011 Variation 2012 2011 Variation Revenue tonne-km (RTK) 915 981 (6.7%) 8,810 9,424 (6.5%) Available tonne-km (ATK) 1,374 1,479 (7.1%) 13,792 14,267 (3.3%) Load factor (%) 66.6% 66.3% 0.3 63.9% 66.1% (2.2)
Europe (including France) Revenue tonne-km (RTK) 6 8 (24.8%) 56 68 (17.1%) Available tonne-km (ATK) 47 50 (5.8%) 449 471 (4.7%) Load factor (%) 12.3% 15.4% (3.1) 12.5% 14.4% (1.9)
Americas Revenue tonne-km (RTK) 369 388 (4.9%) 3,504 3,751 (6.6%) Available tonne-km (ATK) 564 586 (3.7%) 5,552 5,556 (0.1%) Load factor (%) 65.4% 66.2% (0.8) 63.1% 67.5% (4.4)
Asia / Pacific Revenue tonne-km (RTK) 358 397 (9.9%) 3,535 3,805 (7.1%) Available tonne-km (ATK) 446 516 (13.6%) 4,553 5,020 (9.3%) Load factor (%) 80.2% 77.0% 3.3 77.6% 75.8% 1.8
Africa / Middle East Revenue tonne-km (RTK) 147 152 (3.8%) 1,351 1,435 (5.9%) Available tonne-km (ATK) 235 243 (3.4%) 2,278 2,315 (1.6%) Load factor (%) 62.5% 62.7% (0.2) 59.3% 62.0% (2.7)
Caribbean / Indian Ocean Revenue tonne-km (RTK) 36 36 (0.9%) 364 365 (0.1%) Available tonne-km (ATK) 83 85 (2.1%) 959 905 6.0% Load factor (%) 43.4% 42.8% 0.6 38.0% 40.3% (2.3)
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KLM’S RECENT DEVELOPMENTS
KLM UNAUDITED CONSOLIDATED INTERIM FINANCIAL INFORMATION FOR THE SIX-MONTH PERIOD ENDED 30 JUNE 2012 PREPARED IN ACCORDANCE WITH IFRS
8 August 2012
This report contains unaudited consolidated interim financial information of Koninklijke Luchtvaart Maatschappij N.V. ("KLM") for the six months period ended 30 June 2012.
KLM’s registered office is located in Amstelveen, The Netherlands. KLM is a subsidiary of Air France-KLM S.A., a company incorporated in France. Air France-KLM S.A.’s shares are quoted on the Paris and Amsterdam stock exchange.
KLM together with its subsidiaries has as its principle business activities air transport of passengers and cargo, aircraft maintenance and any other activity linked to air transport.
The accounting policies and basis of presentation is in conformity with those applied in the financial statements for the fiscal year ended 31 December 2011, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), with the exception of the disclosure requirements of IAS 34 Interim Reporting. This unaudited consolidated interim financial information must be read in combination with the financial statements for the fiscal year ended 31 December 2011.
New interpretations mandatory applicable from 1 January 2012, and some of which have yet to be adopted by the European Commission, do not have a material impact on the unaudited consolidated interim financial information as of 30 June 2012.
Proforma comparative figures
KLM changed its financial year from 31 March to a calendar year. As a consequence the fiscal year 2011 was a short financial year from 1 April, until 31 December 2011 (9 months). For comparison purposes the proforma unaudited consolidated income statement and consolidated cash flow statement for the six months ended 30 June 2011 have been included.
Pensions
In the six months ended 30 June 2012 the discount rate used by companies for defined benefit obligations decreased significantly. In note 16 of the KLM Annual Report 2011 the sensitivity of the defined benefit obligation to variations in the discount rate is mentioned. In the same period the fair value of the plan assets increased markedly. On a net basis, this could have a considerable impact on the funded status of the KLM pension funds.
airline operating data * Six months ended June 30, 2012 2011 Proforma Traffic (in millions of ERPK) ** 55,010 54,251 Capacity (in millions of EASK) *** 67,198 67,338 Load factor (%) 81.9% 80.6% * KLM, KLM Cityhopper, Transavia and Martinair ** Equivalent Revenue Passenger Kilometer *** Equivalent Available Seat Kilometer
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Consolidated income statement Six months ended, June 30, June 30, 2012 2011 (in millions of Euro) Proforma
Revenues 4,418 4,172 Expenses External expenses (3,154) (2,884) Employee compensation and benefit expense (1,187) (1,098) Depreciation and amortization (251) (275) Other income and expenses (12) 9 Total expenses (4,604) (4,248) Income from current operations (186) (76)
Gain/(loss) on disposal of assets 5 - Other non recurring charges & incomes (8) (6) Income from operating activities (189) (82)
Gross cost of financial debt (78) (79) Income from cash and cash equivalents 16 20 Net cost of financial debt (62) (59)
Other financial income and expense (87) 13 Pre-tax income (338) (128)
Income tax expense 90 37 Net result after taxation of consolidated companies (248) (91)
Share of results of equity shareholdings (11) 1 Loss for the period (259) (90)
Revenues for the six months ended 30 June 2012 showed a year-on-year increase of 5.9% to EUR 4,418 million. Traffic revenues increased 5.1% versus last year and traffic +1.4% versus last year. Passenger business unit revenues increased by 8.0%, Cargo business was 2.7% below last year and Leisure business was 4.3% above last year.
Capacity was controlled well and reduced by 0.2% compared to last year. The load factor increased 1.3% points to the level of 81.9%.
Income from current operations for the six months ended 30 June 2012 showed a year-on-year decrease of EUR 110 million to a loss of EUR 186 million. Total expenses increased with 8.4% to EUR 4,604 million, mainly due to higher fuel cost (EUR 224 million) and higher labour cost (EUR 89 million), mainly explained by higher pension cost.
Net cost of financial debt is EUR 3 million higher than last year and is mainly the result of lower income from cash and cash equivalents.
Other financial income and expense mainly reflect the negative change in time value on derivatives and negative revaluation differences of US Dollar related debtors and creditors and of perpetual loans in Swiss Franc.
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Consolidated balance sheet (in millions of Euro) June, 30 2012 December 31, 2011
Assets Non-current assets Property, plant and equipment 4,372 4,405 Intangible assets 197 183 Derivative financial instruments 127 95 Other financial assets 329 325 Pension assets 3,331 3,209 8,356 8,217
Current assets Derivative financial instruments 136 165 Other financial assets 79 86 Inventories 207 236 Trade and other receivables 1,104 856 Cash and cash equivalents 1,141 1,057 2,667 2,400 Total assets 11,023 10,617
Equity 2,270 2,556 Minority interest 2 2 Total equity 2,272 2,558
Liabilities Non-current liabilities Loans from parent company 387 387 Financial liabilities and finance leases 3,357 3,271 Derivative financial instruments 180 119 Provisions for employee benefits 158 149 Other non-current liabilities and provisions 904 991 4,986 4,917
Current liabilities Trade and other payables 1,784 1,624 Loans from parent company 223 150 Financial liabilities and finance leases 450 523 Derivative financial instruments 106 64 Other current liabilities and provisions 1,202 781 3,765 3,142 Total liabilities 8,751 8,059
Total equity and liabilities 11,023 10,617
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Movement in total equity (in millions of Euro)
December 31, 2011 2,558
Net result January - June 2012 (259) Other movements (mainly fuel, currency and interest derivatives) (27)
June 30, 2012 2,272
Liquidity position June 30, 2012 June 30, 2011 (in millions of Euro)
Cash and cash equivalents 1,141 1,051 Triple A bonds, deposits and commercial paper 173 288 Total 1,314 1,339
Cash flow statement Six months ended June 30, (in millions of Euro) 2012 2011 Proforma
Loss for the period (259) (90) Depreciation and amortization 251 275 Changes in provisions 8 2 Changes in operating working capital 355 100 Results of equity shareholdings 11 - Changes in pensions (115) (158) Changes in deferred income tax (90) (39) Other changes 93 (57) Net cash flow from operating activities 254 33
Capital expenditure on intangible fixed assets (29) (35) Capital expenditure on tangible fixed assets (211) (197) Capital changes in equity shareholdings (36) 2 Changes in short-term deposits and commercial paper - 83 Net cash used in investing activities (276) (147)
Net cash flow from financing activities 106 132 Change in cash and cash equivalents 84 18
Contingent liabilities
Reference is made to note 20 Contingent assets and liabilities of the KLM Financial Statements 31 December 2011, dated 11 April 2012.
TRANSFORM 2015
The economic environment continues to be uncertain, while the fuel price in euros remains at a high level. In reaction to these factors the KLM Group presented in January 2012 ‘Transform 2015’, a three-year plan (2012-2014) aimed at improving profitability. The main target of the programme is a reduction in its net debt by €700 million. The plan is centred on an improvement of unit revenues and a reduction of unit cost (excluding fuel). Unit cost (excluding fuel) reductions are targeted to come from increasing productivity of labour, renegotiation of the collective labour agreements and flexibility and optimization of fleet and network. Special attention will be given to restructure the short and medium haul network. Detailed transformation projects to achieve these targets have been identified and the KLM Group has started to work on the implementation of the plan. Immediate measures have already been taken such as limiting capacity growth and a downwards revision of the investment programme.
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TAXATION
The following is a summary limited to certain tax considerations in France and, as the case may be, the European Union relating to the Note sas of the date of this prospectus and subject to any changes in law, and is included herein solely for information purposes. It does not purport to be a comprehensive description of all the tax considerations which may be relevant to a decision to purchase, own or dispose of the Notes. Each prospective holder or beneficial owner of Notes should consult its tax advisor as to the tax consequences of any investment in or ownership and disposition of the Notes.
EU savings directive
Under EC Council Directive 2003/48/EC on the taxation of savings income (the "Directive"), each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a paying agent within its jurisdiction to, or collected for, a beneficial owner (within the meaning of the Directive) resident in that other Member State; however, for a transitional period, Austria and Luxembourg impose instead a withholding system for a transitional period unless the beneficiary of interest payment elects for the exchange of information. The rate of this withholding tax is currently 35% until the end of the transitional period. This transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to such payments.
Also with effect from 1 July 2005, a number of non-EU countries, and certain dependent or associated territories of certain Member States, have agreed to adopt similar measures (either provision of information or transitional withholding) in relation to payments made by a paying agent within its jurisdiction to, or collected for, a beneficial owner (within the meaning of the Directive) resident in a Member State. In addition, the Member States have entered into reciprocal provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a paying agent in a Member State to, or collected for, a beneficial owner (within the meaning of the Directive) resident in one of those territories.
On 13 November 2008 the European Commission published a detailed proposal for amendments to the Directive, which included a number of suggested changes. The European Parliament approved an amended version of this proposal on 24 April 2009. If any of those proposed changes are made in relation to the Directive they may amend or broaden the scope of the requirements described above.
France
The following specifically contains information on withholding taxes levied on the income from the Notes held by Noteholders (i) who are not tax residents in France, (ii) who do not hold their Notes through a fixed base or a permanent establishment in France and (iii) who do not otherwise hold shares of the Issuer. This summary is based on the laws in force in France as of the date of this Prospectus, as applied and construed by the French tax authorities, subject to any changes in law or in interpretation.
The Directive has been implemented in French law under Article 242 ter of the French Code général des impôts and Articles 49 I ter to 49 I sexies of Annex 3 to the French Code général des impôts, which imposes on paying agents based in France an obligation to report to the French tax authorities certain information with respect to interest payments made to beneficial owners domiciled in another Member State, including, among other things, the identity end address of the beneficial owner and certain detailed information on the different categories of interest paid to that beneficial owner.
Payments of interest and other revenues made by the Issuer with respect to the Notes will not be subject to the withholding tax set out under Article 125 A III of the French Code général des impôts
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unless such payments are made outside France in a non-cooperative State or territory (Etat ou territoire non coopératif) within the meaning of Article 238-0 A of the French Code général des impôts (a "Non- Cooperative State"). If such payments under the Notes are made in a Non-Cooperative State, a 50% withholding tax will be applicable (subject to certain exceptions and to the more favourable provisions of any applicable double tax treaty) by virtue of Article 125 A III of the French Code général des impôts.
Furthermore, in application of article 238 A of the French Code général des impôts, interest and other revenues on such Notes are not deductible from the Issuer's taxable income inter alia if they are paid or accrued to persons domiciled or established in a Non-Cooperative State or paid in such a Non- Cooperative State (the "Deductibility Exclusion"). Under certain conditions, any such non-deductible interest and other revenues may be recharacterised as deemed distributions pursuant to Articles 109 et seq. of the French Code général des impôts, in which case such non-deductible interest and other revenues may be subject to the withholding tax set out under Article 119 bis 2 of the French Code général des impôts, at a rate of 30% or 55%.
Notwithstanding the foregoing, neither the 50% withholding tax provided by Article 125 A III of the French Code général des impôts nor the Deductibility Exclusion nor the withholding tax set out in article 119 bis 2 of the French Code général des impôts will apply in respect of the issue of the Notes if the Issuer can prove that the relevant interest or revenues relate to genuine transactions and are not in an abnormal or exaggerated amount and that the principal purpose and effect of such issue of Notes was not that of allowing the payments of interest or other revenues to be made in a Non-Cooperative State (the "Exception"). Pursuant to the BOI-ANNX-000364-20120912 and the BOI-ANNX-000366- 20120912, an issue of notes will benefit from the Exception without the Issuer having to provide any proof of the purpose and effect of the issue of the Notes if such notes are, inter alia:
(i) admitted to trading on a regulated market or on a French or foreign multilateral securities trading system provided that such market or system is not located in a Non-Cooperative State, and the operation of such market is carried out by a market operator or an investment services provider, or by such other similar foreign entity, provided further that such market operator, investment services provider or entity is not located in a Non-Cooperative State; or
(ii) admitted, at the time of their issue, to the clearing operations of a central depositary or of a securities clearing and delivery and payments systems operator within the meaning of Article L.561-2 of the French Code monétaire et financier, or of one or more similar foreign depositaries or operators provided that such depositary or operator is not located in a Non- Cooperative State.
Consequently, payments of interest and other revenues made by the Issuer under the Notes are not subject to the withholding tax set out under Article 125 A III of the French Code général des impôts and neither the Deductibility Exclusion nor the withholding tax set out under Article 119 bis 2 of the French Code général des impôts apply to such payments solely on account of their being paid to a bank account opened in a financial institution located in a Non-Cooperative State or accrued or paid to persons established or domiciled in a Non-Cooperative State.
All prospective investors should seek independent advice as to their tax positions.
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SUBSCRIPTION AND SALE
Pursuant to a subscription agreement dated 12 December 2012 (the "Subscription Agreement") entered into between Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank International), Crédit Agricole Corporate and Investment Bank, HSBC Bank plc, ING Bank N.V., London Branch, Natixis and The Royal Bank of Scotland plc (the "Joint Lead Managers"), the Issuer and the Guarantors, the Joint Lead Managers have agreed with the Issuer and the Guarantors, subject to satisfaction of certain conditions, to jointly and severally subscribe and pay for the Notes at a price equal to 99.451 per cent. of their principal amount less the commissions agreed between the Issuer and the Joint Lead Managers. The Subscription Agreement entitles the Joint Lead Managers to terminate it in certain circumstances prior to payment being made to the Issuer.
General Restrictions
The present Prospectus does not constitute an offer of, or an invitation or solicitation by or on behalf of the Issuer or the Joint Lead Managers to subscribe or purchase, any of the Notes. It may not be used by anyone for the purpose of an offer or a solicitation in a country or jurisdiction in which such offer or solicitation would not be authorised. It may not be communicated to persons to which such offer or solicitation may not legally be made.
France
The Issuer and each Joint Lead Manager has represented and agreed that it has not offered or sold, and will not offer or sell directly or indirectly, any Notes to the public in the Republic of France, and has not distributed or caused to be distributed and will not distribute or cause to be distributed to the public in the Republic of France this Prospectus or any other offering material relating to the Notes, and such offers, sales and distributions have been and will be made in France only to (i) providers of investment services relating to portfolio management for the account of third parties (personnes fournissant le service d'investissement de gestion de portefeuille pour compte de tiers), and/or (ii) qualified investors (investisseurs qualifiés), to the exclusion of any individuals, all as defined in, and in accordance with, Articles L.411-1, L.411-2 and D.411-1 of the French Code monétaire et financier.
United States
The Notes and the Guarantee have not been and will not be registered under the Securities Act and may not be offered or sold, directly or indirectly, within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Rule 903 of Regulation S; or pursuant to another exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Each of the Joint Lead Managers represents, warrants and agrees that it has offered and sold and will offer and sell the Notes and the Guarantee (i) as part of their distribution at any time and (ii) otherwise until forty (40) days after the later of the commencement of the offering and the closing date, only in accordance with Rule 903 of Regulation S. Accordingly, neither it, nor any of its affiliates (as defined in Rule 405 of Regulation S), nor any person acting on its or their behalf, have engaged or will engage in any "directed selling efforts" with respect to the Notes and the Guarantee, and it and they have complied and will comply with the offering restrictions requirement of Regulation S. Each Joint Lead Manager agrees that, at or prior to confirmation of sale of Notes and the Guarantee, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes and Guarantee from it during the distribution compliance period a confirmation or notice to substantially the following effect:
"The securities covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until
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40 days after the later of the commencement of the offering and the closing date of the offering, except in either case in accordance with Regulation S under the Securities Act. Terms used above have the meanings given to them by Regulation S under the Securities Act."
Terms used in this paragraph have the meanings given to them by Regulation S.
United Kingdom
Each Joint Lead Manager has represented and agreed that:
(i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000, as amended (the "FSMA")) received by it in connection with the issue or sale of any Notes in circumstances in which section 21 (1) of the FSMA does not apply to the Issuer; and (ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
Italy
Each Joint Lead Manager acknowledges that this Prospectus has not been, nor will be, published in the Republic of Italy in connection with the offering of the Notes and such offering of the Notes has not been, nor will be, registered with the Commissione Nazionale per le Società e la Borsa ("Consob") in the Republic of Italy pursuant to Legislative Decree no. 58 of 24 February 1998 as amended (the "Financial Services Act") and to Consob Regulation no. 11971 of 14 May 1999, as amended (the "Issuers Regulation") and, accordingly, no Notes may be offered or sold, and will not be offered or sold, directly or indirectly, in the Republic of Italy in an offer to the public (offerta al pubblico), nor may, or will, copies of this Prospectus or any other document relating to the offering of the Notes be distributed in the Republic of Italy, except
(a) to qualified investors (investitori qualificati), as defined in Article 34-ter, paragraph 1(b) of the Issuers Regulation; or (b) in other circumstances which are exempted from the rules on offers to the public pursuant to, and in compliance with, the conditions set out in Article 100 of the Financial Services Act and its implementing regulations, including Article 34-ter, first paragraph, of the Issuers Regulation.
Any offer or sale of the Notes or distribution of copies of this Prospectus or any other document relating to the offering of the Notes in the Republic of Italy under (a) or (b) above must, and will, be effected in accordance with all relevant Italian securities, tax and exchange control and other applicable laws and regulations and, in particular, will be made:
(i) by an investment firm, bank or financial intermediary permitted to conduct such activities in the Republic of Italy in accordance with the Financial Services Act, Consob Regulation No. 16190 of 29 October 2007 (as amended from time to time) and Legislative Decree No. 385 of 1 September 1993, as amended; and (ii) in compliance with any other notification requirement and/or limitation which may be, from time to time, imposed by Consob, the Bank of Italy and/or any other Italian authority.
Any investor purchasing the Notes in the offering is solely responsible for ensuring that any offer or resale of the Notes it purchased in the offering occurs in compliance with applicable Italian laws and regulations. No person resident or located in the Republic of Italy other than the original addressees of this Prospectus may rely on this Prospectus, its content or any other document relating to the offering of the Notes.
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The Netherlands
The Notes are not and may not be offered in the Netherlands other than to persons or entities who or which are qualified investors as defined in Section 1:1 of the Dutch Financial Supervision Act (Wet op het financieel toezicht) (which incorporates the term "qualified investors" as used in the Prospectus Directive, as amended).
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GENERAL INFORMATION
1. Application has been made to the AMF to approve this document as a prospectus and this Prospectus has received visa n°12-595 from the AMF on 12 December 2012. Application has been made for the Notes to be listed on, and admitted to trading on the regulated market (within the meaning of Directive 2004/39/EC) of Euronext Paris on 14 December 2012.
2. The Notes have been accepted for clearance through Euroclear France (155, rue Réaumur, 75081 Paris Cedex 02 France), Clearstream, Luxembourg (42, avenue JF Kennedy, 1855 Luxembourg, Luxembourg) and Euroclear (1, boulevard du Roi Albert II, 1210 Brussels, Belgium) with the Common Code 086425327. The International Securities Identification Number (ISIN) for the Notes is FR0011374099.
3. The issue of the Notes has been authorised pursuant to a resolution of the Board of Directors (Conseil d’administration) of the Issuer dated 30 October 2012 and a decision of its Chairman and Managing Director (Président Directeur général) dated 6 December 2012.
4. The Guarantee has been authorised (i) by Société Air France pursuant to resolutions of its Board of Directors (Conseil d’administration) dated 30 October 2012 and (ii) by KLM pursuant to a resolution of its Management Board dated 6 December 2012.
5. The Issuer and the Guarantors have obtained all necessary consents, approvals and authorisations in the Republic of France in connection with the issue of, and performance of (i) the Issuer’s obligations under the Notes and (ii) the Guarantors’ obligations under the Guarantee, as the case may be.
6. The total expenses related to the admission to trading are estimated at € 6,000.
7. The yield of the Notes is 6.375 per cent. per annum. The yield is calculated at the Issue Date on the basis of the issue price. It is not an indication of future yield.
8. As far as the Issuer is aware, no person involved in the issue of the Notes has an interest material, including any conflicting interest, to the issue.
9. Save as disclosed in this Prospectus, there has been no significant change in the financial or trading position of the Issuer, the Guarantors or the Group since 30 June 2012.
10. Save as disclosed in this Prospectus, there has been no material adverse change in the prospects of the Issuer, the Guarantors or the Group since 31 December 2011.
11. Except as disclosed in this Prospectus, there have been no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Issuer is aware) during the period of 12 months prior to the date of this Prospectus which may have, or have had in the recent past, significant effects on the Issuer's or the Guarantors’ financial position or profitability.
12. There are no material contracts (other than those entered into in the ordinary course of the Issuer's business) which could result in any member of the Group being under an obligation or entitlement that is material (i) to the Issuer's ability to meet its obligations to Noteholders in respect of the Notes being issued or (ii) to the ability of each of the Guarantors to meet its obligations to Noteholders in respect of the Guarantee.
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13. For so long as any of the Notes are outstanding, copies of the following documents may be obtained free of charge during normal business hours at the registered office of the Issuer:
a. this Prospectus (including any documents incorporated by reference); b. the Fiscal Agency Agreement (for inspection only); and c. the Statuts of the Issuer.
The Prospectus and all documents incorporated by reference are also available on the website of the AMF (www.amf-france.org).
14. Deloitte & Associés and KPMG Audit, department of KPMG S.A. have audited the consolidated financial statements of the Issuer prepared in accordance with IFRS as adopted by the European Union as of and for the nine-month period ended 31 December 2011 and as of and for the twelve-month periods ended 31 March 2011 and 2010. There reports with respect thereto are respectively dated 26 March 2012, 31 May 2011 and 27 May 2010.
The Statutory Auditors reports dated 31 May 2011 and 27 May 2010 with respect to the consolidated financial statements of the Issuer as of and for the years ended 31 March 2011 and 2010 respectively include an emphasis paragraph relating to a change in accounting principles with respect to implementation of new IFRS standards and interpretations effective 1 April 2010 and 1 April 2009 respectively.
Deloitte & Associés and KPMG Audit, department of KPMG S.A. are registered as Commissaires aux Comptes (members of the Compagnie Nationale des Commissaires aux Comptes).
15. Deloitte & Associés and KPMG Audit, department of KPMG S.A. have audited the consolidated financial statements of Société Air France prepared in accordance with IFRS as adopted by the European Union as of and for the nine-month period ended 31 December 2011 and as of and for the twelve-month periods ended 31 March 2011 and 2010. There reports with respect thereto are respectively dated 26 March 2012, 31 May 2011 and 27 May 2010.
The Statutory Auditors reports dated 31 May 2011 and 27 May 2010 with respect to the consolidated financial statements of Société Air France as of and for the years ended 31 March 2011 and 2010 respectively include an emphasis paragraph relating to a change in accounting principles with respect to implementation of new IFRS standards and interpretations effective 1 April 2010 and 1 April 2009 respectively.
16. Deloitte Accountants B.V. and KPMG Accountants N.V. have audited the consolidated financial statements of KLM prepared in accordance with IFRS as adopted by the European Union as of and for the nine-month period ended 31 December 2011 and as of and for the twelve-month periods ended 31 March 2011 and 2010. There reports with respect thereto are respectively dated 11 April 2012, 1 June 2011 and 2 June 2010.
Deloitte Accountants B.V. and KPMG Accountants N.V. are governed by Dutch law in the Netherlands and are subject to inspection by the Autoriteit Financiële Markten (the "AFM"). The AFM has granted each of Deloitte Accountants B.V. and KPMG Accountants N.V. a license to perform financial statement audits of public interest entities.
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ISSUER
Air France-KLM 2, rue Robert-Esnault-Pelterie 75007 Paris France
JOINT LEAD MANAGERS
Coöperatieve Centrale Raiffeisen- Crédit Agricole Corporate and Investment Boerenleenbank B.A. (Rabobank International) Bank Croeselaan 18, 3521 CB Utrecht 9 quai du Président Paul Doumer Nederland 92920 Paris La Défense Cedex France
HSBC Bank plc ING Bank N.V., London Branch 8 Canada Square 60 London Wall London, E14 5HQ London EC2M 5TQ United Kingdom United Kingdom
Natixis The Royal Bank of Scotland plc 30, avenue Pierre Mendès-France 135 Bishopsgate 75013 Paris London EC2M 3UR France United Kingdom
FISCAL AGENT, PAYING AGENT AND PUT AGENT
CACEIS Corporate Trust 14 rue Rouget de Lisle 92862 Issy les Moulineaux Cedex 9 France
AUDITORS OF THE ISSUER
Deloitte & Associés KPMG Audit 185, avenue Charles de Gaulle Department of KPMG S.A. 92524 Neuilly sur Seine Cedex 1, cours Valmy France 92923 Paris-La Défense Cedex France
LEGAL ADVISERS
To the Issuer as to French law To the Joint Lead Managers as to French law
Linklaters LLP Gide Loyrette Nouel A.A.R.P.I. 25, rue de Marignan 26, cours Albert 1er 75008 Paris 75008 Paris France France
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