Why Cheap Fuel Can’t Stop Air France-KLM Retiring 747 And A340

Air France and KLM are pressing ahead with retiring their A340s and 747s despite low fuel prices diminishing the need for more efficient aircraft.

“We’ve pushed these airplanes pretty much to their limit,” Group CEO Benjamin Smith said. “They can fly longer, but the ability to do so will require significant increase in capital expenditure.”

Smith said Air France’s A340s and KLM’s 747s “are all lined up to retire with major engine and airframe overhaul events – very expensive capital expenditure.”

Retaining the aircraft for the next year or two would be a poor return on an overhaul that extends service life for many years.

Smith was responding to an investor query why Air France and KLM would retire existing aircraft yet take delivery of new jets, increasing cash burn during the COVID-19 downturn.

There could be more fleet changes.

“The retirement of the remaining Airbus A380s at Air France is also under study,” Smith said. Air France-KLM is reviewing its fleet in light of expecting next year’s capacity to be down 20%, with greater impact on long-haul routes. Air France-KLM plans to present a new strategy during the summer.

The medium-term outlook on fuel price is uncertain, adding risk to the four-engined A340 and 747. While fuel prices are now at recent lows, this is partially driven by reduced consumption. Smith expects fuel prices to increase this year.

Retaining the A340 and 747 fleets would add environmental burden. Air France has to meet stricter emissions targets as a condition of receiving a €7 billion loan package from the French government. The Netherlands is working on an aid package for KLM that is likely to also include emission targets.

Air France expects to book an approximately €70 million expense in the second quarter for the A340’s accelerated retirement. It booked a €21m impairment for KLM’s 747s and €25m in depreciation for Air France’s A380s in the first quarter, bringing retirement charges to €116m so far in 2020.

Last year Air France booked an initial €126 million charge for the A380’s early exit. That comprised €52m of depreciation and €74m in impairment. Air France said it expects to accumulate €370m in charges for retiring the A380.

KLM’s 747-400 fleet peaked at 22, more than Air France’s 16. Air France retired the 747 passenger aircraft in 2015, when KLM still had most of its 747s.

Air France has been gradually retiring the A340, which was used for the airline’s inaugural Ho Chi Minh flight and had a special livery for the 1998 World Cup.