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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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Form 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of November, 2007

 

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AIR FRANCE–KLM

(translation of registrant’s name into English)

45, rue de Paris, 95747 Roissy-CDG Cedex. France

(Address of principal executive offices)

 

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Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F:
Form 20-F   x     Form 40-F   ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):     ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):     ¨

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.    Yes   ¨     No   x

 

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28 November 2007

Our interim report and our annual report on Form 20-F are available on our website at www.airfranceklm-finance.com or on the website maintained by the SEC at www.sec.gov. You may also request a copy of our interim report, which includes our six-month financial results, or of our annual report on Form 20-F, which includes our complete audited annual financial statements, at no charge, by calling our investor relations department at +33 1 41 56 75 14 or writing to Air France-KLM – Investor Relations Department, 45 rue de Paris, 75747 Roissy CDG, Cedex, France.

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Activity report

April-September, 2007

Société anonyme with share capital of 2,385,379,574 euros

Registered offices: 2, rue Robert Esnault-Pelterie, 75007 Paris, France

Mailing address: 45, rue de Paris, 95747 Roissy CDG Cedex, France

Paris Trade and Company Register: 552 043 002

 

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Key figures		2
Corporate governance		4
Board of Directors		4
Executive Committee		5
Stock market and shareholders		6
Shareholder structure		7
Market and environment		8
Highlights		9
A strategy of profitable growth		10
Strongly higher first half to September 30		12
Activities		14
Passenger activity		14
Cargo activity		16
Maintenance activity		17
Other activities		18
The Air France-KLM fleet		19
The Air France group fleet		19
The KLM group fleet		22
Comments on the financial statements		24
Consolidated results for the first half to September 30, 2007		24
Investment and financing		27
Air France-KLM parent company results		27
Consolidated financial statements		28
Consolidated income statements		29
Consolidated balance sheets		30
Consolidated statements of changes in stockholders’ equity		32
Consolidated statements of recognized income and expenses		33
Consolidated statements of cash flows		34
Notes to the unaudited interim condensed consolidated financial statements		36
Information and control		54
Person responsible for the first half financial report		54
Statutory Auditors’ report on the first half financial information for 2007		55

 

Activity report April-September, 2007 | Air France-KLM              1

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Key figures

 

Revenues		Operating income
((In euro billion)		(In euro billion)
Breakdown of revenues by activity		Breakdown of operating income by activity
(In euro billion)		(In euro million)

 

2             Activity report April-September, 2007 | Air France-KLM

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Key figures

 

 

Net income, group share		Financing of investments
((In euro billion)		(In euro billion)
Balance sheet
(In euro billion)
Ø          Net debt		Ø          Gearing ratio

 

Activity report April-September, 2007 | Air France-KLM             3

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Corporate

governance

Board of Directors

At September 30, 2007, the Board of Directors was unchanged on the Board at March 31, 2007 and comprised 15 members:

 

¨	10 directors appointed by the Shareholders’ Meeting;

 

¨	2 representatives of the employee shareholders appointed by the Shareholders’ Meeting;

 

¨	3 representatives of the French State appointed by ministerial decree.

 

Ø	Experience and training of members of the Board of Directors

 

Board of Directors experience

Principal professional experience

Director

Age at 09/30/2007

Date appointed to Board

Experience at 09/30/2007

Sector

Experience in the sector

Current position

Jean-Cyril Spinetta  (2)

64 years

09/23/1997

10 years

Public Sector Air Transport (Air Inter and Air France)

14 years

Chairman and CEO of Air France-KLM and of Air France

Leo van Wijk (2)

61 years

06/24/2004

3.5 years

Air Transport (KLM)

36 years

President and CEO of KLM until March 31, 2007

Patricia Barbizet (2)(4)

52 years

01/03/2003

4.5 years

Industry (Renault, Pinault group)

30 years

Chief Executive Officer and Director of Artemis

Bruno Bézard (1)

44 years

03/14/2007

6.5 months

Public Sector

19 years

Director of the French State Treasury Holdings Agency

Frits Bolkestein

73 years

11/22/2005

1.5 years

Industry (Shell) and Public Sector (Dutch Parliament and European Commission)

16 years 26 years

—

Jean-François Dehecq (1)(4)

67 years

01/25/1995

12.5 years

Industry (SNPA and Sanofi)

42 years

Chairman of the Board of Directors of Sanofi-Aventis

Jean-Marc Espalioux (3)(4)

55 years

09/14/2001

6.5 years

Services (CGE, Accor)

20 years

Chairman and CEO of Financière Agache Investissement

Pierre-Henri Gourgeon

61 years

01/20/2005

2.5 years

Aeronautics and Air Transport

36 years

Deputy Chief Executive Officer of Air France-KLM and Chief Operating Officer of Air France

Claude Gressier (2)

64 years

06/24/2004

3.5 years

Public Sector

39 years

President of the Department of Economic Affairs, Counsel General for Public Works

 

4             Activity report April-September, 2007 | Air France-KLM

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Corporate governance

Executive Committee

 

 

Board of Directors experience

Principal professional experience

Director

Age at 09/30/2007

Date appointed to Board

Experience at 09/30/2007

Sector

Experience in the Sector

Current position

Philippe Josse (2)

47 years

05/16/2006

17 months

Public Sector

11 years

Director of Budget

Floris Maljers (1)

74 years

06/24/2004

3.5 years

Industry (Unilever)

35 years

Chairman of the Board of Directors of the Rotterdam School of Management

Didier Le Chaton (1)(2)

56 years

01/26/2006

21 months

Air Transport (Air France)

31 years

Flight captain

Cornelis van Lede (3)

65 years

06/24/2004

3.5 years

Industry (Shell, Akzo, Dutch Industry Federation) Consultancy (McKinsey & Company)

36 years

Chairman of the Board of Directors of INSEAD

Christian Magne (1)(2)

55 years

09/14/2001

6.5 years

Air Transport (Air France)

33 years

Finance executive

Pierre Richard (1)(3)

66 years

10/20/1997

10.5 years

Banking (CDC, Crédit Local de France)

24 years

Chairman of the Dexia Board of Directors

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(1)	Member of the audit committee.

(2)	Member of the strategy committee.

(3)	Member of the remuneration committee .

(4)	Member of the appointments committee.

Executive Committee

Pursuant to the agreements concluded between Air France and KLM at the time of the merger, the Strategic Management Committee, which had been responsible for managing the Group since May 2004, was replaced by an Executive Committee, which assumed its functions on October 1, 2007.

The Executive Committee comprises 11 members who fulfill responsibilities at the level of the Air France-KLM group while retaining their functions within each company.

 

Activity report April-September, 2007 | Air France-KLM             5

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Corporate governance

Stock market and shareholders

 

 

Ø	Experience and training of members of the Group’s Executive Committee

 

		Professional experience
Members		Age		Sector		Experience
Jean-Cyril Spinetta Chairman and CEO of Air France-KLM and of Air France		64 years		Air Transport (Air Inter and Air France)		14 years
Leo van Wijk Vice-Chairman of Air France-KLM		61 years		Air Transport (KLM)		36 years
Pierre-Henri Gourgeon Deputy Chief Executive Officer of Air France-KLM and Chief Operating Officer of Air France		61 years		Aeronautics and Air Transport		36 years
Philippe Calavia Senior Executive Vice President, Finance, of Air France-KLM and Chief Financial Officer of Air France		59 years		Banking Air Transport (Air France)		6 years 9 years
Peter Hartman President and CEO of KLM		58 years		Air Transport (KLM)		34 years
Alain Bassil Senior Vice President, Maintenance, of Air France and of the Air France-KLM group		52 years		Air Transport (Air France)		27 years
Christian Boireau Senior Vice President, Marketing France, Air France		57 years		DDE – French Departmental Directorate for Equipment Air Transport (Air Inter and Air France)		5 years 26 years
Frédéric Gagey Senior Executive Vice President, Finance, KLM and Senior Vice President, Fleet and Purchasing, of the Air France-KLM group		51 years		Air Transport (Air Inter, Air France and KLM)		13 years
Bruno Matheu Senior Vice President, Marketing, Revenue Management and Networks, of Air France and of the Air France-KLM group		44 years		Air Transport (UTA and Air France)		21 years
Erik Varwijk Senior Vice President, International Marketing, KLM and of the Air France-KLM group		46 years		Air Transport (KLM)		18 years
Michael Wisbrun Executive Vice President of Air France-KLM Cargo		55 years		Air Transport (KLM)		29 years

Stock market and shareholders

Stock market performance

During the first half to September 30, 2007, the Air France-KLM stock, a CAC 40 component since June 18, encountered some significant profit-taking. After rising steadily early in the year, culminating in a June 4 high of 39.40 euros on the announcement of its inclusion in the CAC 40, the stock was hit by the financial crisis which destabilized the markets over the summer and by the increase in the oil price. During the first half, the stock declined by 24.5% compared with a 12.2% fall in the European Air Transport index and a 1.2% rise in the CAC 40. Over the first nine months of the year, the fall was 19.2%. However, it should be noted that the stock has more than doubled since the combination between Air France and KLM.

 

6             Activity report April-September, 2007 | Air France-KLM

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Corporate governance

Shareholder structure

 

 

		2007-08 First half		2006-07 Financial year		2005-06 Financial year		2004-05 Financial year
Share price high (In euros)		39.40		36.30		20.50		15.33
Share price low (In euros)		24.32		15.93		11.78		11.28
Share price at the end of the period		25.77		34.15		19.43		13.87
Number of shares in circulation		280,626,346		269,398,500		269,383,518		269,383,518
Market capitalization at the end of the period
(In euro billion)		7.2		9.2		5.2		3.7

Share capital

At September 30, 2007, the share capital of Air France-KLM comprised 280,626,346 shares, all in circulation. Between April 1 and September 30, 1.26 million shares were issued in exchange for warrant exercise (BASAs). Note that, on March 31, 2007, 14.5 million BASAs had been exercised, giving rise to the creation of 9.98 million shares, which entered into circulation in April 2007. In total, of the 45 million BASAs issued in May 2004 within the framework of the KLM share exchange, some 28.7 million remained outstanding at September 30, 2007, conferring entitlement to 19.8 million shares. At the November 6, 2007 expiry date, 28.4 million BASAs were exercised giving rise to the issue of 19.6 million new shares. In total, 99.3% of the BASAs issued have been exercised. The terms of the exchange were as follows: three warrants and 40 euros conferring the right to 2.066 shares. The capital of Air France-KLM henceforth comprises 300,219,278 shares.

Securities conferring entitlement to shares

Bonds convertible and/or exchangeable into Air France-KLM new or existing shares (OCEANEs)

In April 2005, Air France issued 21,951,219 bonds convertible and/ or exchangeable into new and/or existing Air France-KLM shares, with a 15-year maturity, for a total sum of 450 million euros. These bonds, convertible and/or exchangeable at any time until March 23, 2020, have a nominal unit value of 20.5 euros, an attribution ratio of 1.03 shares for one bond and a maturity date of April 1, 2020. The annual coupon is 2.75%, paid annually in arrears on April 1. At September 30, 2007, 510 bonds had been converted giving rise to the creation of 525 shares.

Shareholder structure

 

(In %)		2007-08 First half		2006-07 Financial year		2005-06 Financial year		2004-05 Financial year
Number of shares		280,626,346		269,398,500		269,383,518		269,383,518
French State		17.8		17.9		18.6		23.2
Current and former employees		10.6		11.3		14.1		11.7
Treasury stock		0.6		0.7		1.5		2.4
Free float		71.0		70.1		65.8		62.7

At September 30, 2007, French residents held 63.5% of the share capital and non-residents 36.5%. Of the French resident shareholders, in addition to the French State (50 million shares) and employees (29.8 million shares), individual shareholders represented 8.7% of the share capital with 24.4 million shares and institutions 26.6% with 73.9 million shares. Non-residents held 102.4 million shares. The breakdown of non-residents was as follows: North America 44.6% or 16.3% of the capital, Europe 48% or 17.5% of the capital, Asia 6.8% or 2.5% of the capital and the rest of the world 0.6% or 0.2% of the capital.

 

Activity report April-September, 2007 | Air France-KLM             7

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Market

and environment

After the setback caused by the September 11, 2001 terrorist attacks, it was to take the global air transport industry six long years to return to positive net margins. Between 2001 and 2006, this sector accumulated total net losses of around 42 billion dollars. According to the latest estimates from IATA ( September 2007 ), our industry should record net income of around 5.6 billion dollars in 2007 ( 2006: -$0.5bn ) for an operating margin of 3.3%. This recovery is all the more remarkable in that it was achieved within the context of a sharp rise in the oil price. Whereas, in 2001, the fuel bill amounted to 43 billion dollars, representing 13% of total operating expenses, at the end of 2007 it should stand at 132 billion dollars, accounting for some 28% of operating expenses. Faced with this dramatic increase in the proportion of costs represented by fuel, the industry has responded and continues to respond with the implementation and pursuit of cost saving plans as well as significant productivity gains (labor productivity, fleet fuel efficiency, use of aircraft, etc.).

Within this difficult environment, the airlines have based their development on the growth in passenger traffic. According to IATA forecasts ( October 2007 ), passenger traffic should show steady growth between 2007 and 2011, both internationally and in a number of domestic markets: the expectation is for overall demand growth of 5% annually.

After drastic restructuring plans and capacity reductions in the US domestic market, and despite the ‘sub-prime’ crisis, the traditional North American carriers should show, for the 2007 fiscal year, a positive financial situation with net income of around 2.7 billion dollars compared with losses of 6.7 billion two years earlier. Between 2007 and 2011, the airlines in this zone should see average annual growth of 4.2% in the number of passengers carried internationally.

Airlines in the Middle East and Asia/Pacific zones should record the strongest growth in passengers carried internationally with, respectively, +6.8% and +5.9% per year between 2007 and 2011.

The traffic measured in RPK (revenue passenger kilometers) and capacity measured in ASK (available seat kilometers) of the traditional European carriers increased by 5.3% and 4.4%, respectively, in 2006, slower growth than in 2004 and 2005. According to AEA forecasts for 2007, the growth in these same key indicators will be of the order of 6.2% and 5.3%. The passenger load factor reached 76.6% in 2006 and increased by a further 1.2 points year-on-year to 77.8% in the first 9 months of 2007.

In 2006, the European industry recorded an operating surplus of around 2.2 billion euros for a gross operating margin of 3.3%, of which more than half was generated on the North Atlantic routes. In 2007, AEA estimates show the gross operating margin reaching 4.1%.

The financial situation of the European airlines is, thus, positive overall but there are some marked differences between the players. While the four leading European companies, Air France-KLM, British Airways, Lufthansa/Swiss and Iberia are benefiting from the strong global economic environment to return positive results with the majority increasing their earnings, the results from the smaller companies are less good.

 

8             Activity report April-September, 2007 | Air France-KLM

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Highlights

Environment

The main events arising between April and September 2007 were as follows:

 

¨

After a slight fall in April and May, the oil price returned to a virtually steady upwards path, moving from 68.74 dollars a barrel on April 2 to 79.17 dollars at the end of September. This increase accelerated in October with oil crossing the 90 dollar threshold intraday on October 19, a 49% increase on the beginning of the year. Since then, the oil price has approached 100 dollars a barrel.

 

¨	Over the same period, the dollar weakened, moving from a parity of 1.317 against the euro at the beginning of the year to 1.426 on October 19 (-8.3%). The Japanese currency also fell.

 

¨	The summer of 2007 was also characterized by the US sub-prime crisis, which destabilized the financial markets.

 

¨

Despite this environment, world-wide air passenger transportation remained very strong. The first half (April – September) again recorded a very buoyant level of activity, in terms of both traffic and revenues. The month of July saw a record average load factor of 82.2% for AEA (Association of European Airlines) member airlines. Furthermore, the cargo activity has also seen a recovery since June with traffic up strongly although unit revenues remain under pressure.

 

¨	Finally, the Open Skies agreement signed in April 2007 between Europe and the United States, to come into application as of late March 2008, will open new development opportunities.

Air France-KLM

 

¨	The Group has seen very strong passenger activity and a recovery in the cargo activity in terms of traffic since last June, in line with the economic environment.

 

¨	With the gradual opening of satellite S3 as of last June, Air France is starting to dispose of the airport infrastructure consistent with its objectives for service quality and growth.

 

¨	The Group took the decision to accelerate the withdrawal of the Boeing 747-400s from its fleet and their replacement by Boeing 777-300s in order to reduce its fuel consumption and emissions.

 

¨	On June 18, 2007, Air France-KLM was included in the CAC 40 and, for the third consecutive year, the stock was selected for the two Dow Jones sustainable development indices.

 

Activity report April-September, 2007 | Air France-KLM              9

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A strategy

of profitable growth

The Air France-KLM group is pursing a strategy of profitable growth in leveraging the fundamental strengths arising from the complementarities between Air France and KLM in their three principal activities (passenger, cargo and maintenance) and the significant synergies in terms of both revenues and costs. Within the framework of the merger between the two companies, this objective is combined with a pragmatic approach, tailored to the needs of each activity. In passenger transport, the Group has implemented coordination between networks and teams but has retained the two separate brands, Air France and KLM. In cargo, a common management structure, the Joint Cargo Team, has been established to manage sales, distribution, marketing and the network and to coordinate strategy and development. In aeronautics maintenance, the Group chose to create centers of technical excellence based on the competences of each company.

The Group’s growth strategy goes hand in hand with rigorous cost control, reflected in three-year cost savings plans.

A powerful, balanced network

The Air France-KLM group has the largest network between Europe and the rest of the world. Of the 178 long-haul destinations operated by AEA member airlines (Association of European Airlines) in the 2007 summer season, Air France-KLM accounts for 111 or 62% of the total compared with 48% for British Airways and 44% for Lufthansa and Swiss. The Group also offers 42 unique destinations which are served by neither British Airways nor Lufthansa.

Finally, given its presence in all the major markets, the Group’s network is balanced. No one market dominates, with the first market representing just 26% of revenues.

Two coordinated hubs at developing airports

The Group’s network is coordinated around the intercontinental hubs, Roissy-Charles de Gaulle and Amsterdam-Schiphol, which are two of the four largest transfer platforms in Europe. Furthermore, these hubs which combine connecting with point-to-point traffic, are organized around airports with significant potential to develop in line with air traffic growth, further strengthening the role of the large intercontinental hubs. As of June 2007, and through to 2012, Air France will benefit from the gradual opening of new airport infrastructure which will enable it to provide an excellent level of passenger service and make Roissy-Charles de Gaulle a European reference model.

A global alliance to strengthen the network

Air France and KLM play a lead role in SkyTeam, the number two global alliance in terms of market share. Bringing together ten European, American and Asian airlines, SkyTeam enables the Group to respond to market needs and withstand competition in both passenger and cargo transportation. In 2006, Aeroflot joined Aeromexico, Air France, Alitalia, Continental, CSA Czech Airlines, Delta Airways, KLM, Korean Airways and Northwest Airlines. In November 2007, China Southern joined the SkyTeam alliance.

 

10             Activity report April-September, 2007 | Air France-KLM

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A strategy of profitable growth

 

A modern fleet

The Group makes an ongoing commitment to investing in new aircraft and currently operates one of the most rationalized and modern fleets in the sector. Such investment has a triple advantage. With an up-to-date fleet, the Group offers a greater degree of passenger comfort, achieves substantial fuel savings and respects its sustainability commitments in limiting noise disturbance for local residents and greenhouse gas emissions.

An innovative product offer

Air France-KLM puts the customer at the heart of its strategy in offering not only the best network world-wide in terms of destinations and frequencies but also in developing innovative products. This innovation is seen in fare combinality, which multiplies the routing possibilities and gives access to attractive fares, in the joint frequent flyer program, Flying Blue , born of the merger of the Air France and KLM loyalty programs, in e-services or in the development of cabin services.

Synergies and cost savings plans to bolster the Group’s profitability

The complementarity between the two airlines enables the release of significant synergies. Originally estimated at 495 million euros after five years (2008-09), such synergies have been regularly upgraded with the most recent estimate standing at 750 million (+51.5%) over the same period. Furthermore, there will be new synergies to add to this total thanks, particularly, to the integration of IT which will be gradually undertaken through to 2010-11. At the end of this period, cumulative synergies should reach one billion euros.

In parallel, in order to manage costs more effectively, the two airlines have established a joint 3-year cost savings plan which includes the 212 million euros of cost synergies still to come. Challenge 10 , launched on April 1, 2007, is targeting total savings of 1.4 billion euros, equating to a unit cost reduction of 3% by the close of the 2009-10 financial year.

A key performance indicator

Air France-KLM has chosen return on capital employed as its key performance indicator, since it is relevant for an industry which is investing heavily. In effect, this ratio measures the return on capital invested by expressing operating income as a percentage of the average capital employed. The comparison of this ratio with the cost of capital shows whether or not the Group has created value for its shareholders.

The capital invested is calculated from shareholders’ funds restated for the KLM pension fund surplus and the valuation of derivative instruments to which net debt and operating leases capitalized at 7 times are added. As a consequence of this last restatement, operating income is also restated for the portion of financial charges in operating leases (34%).

The Group has a post-tax return on capital employed target of 8.5% for the 2009-10 financial year compared with an estimated cost of capital of 7%.

 

Activity report April-September, 2007 | Air France-KLM             11

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Strongly higher

first half

to September 30

The Air France-KLM group recorded a strong progression in results for the first half of the 2007-08 financial year. Revenues rose by 4.2% after a negative currency impact of 2.3%, to 12.43 billion euros (11.93 billion at September 30, 2006) for production measured in equivalent available seat kilometers (EASK) up by 5.4%. Unit revenue per EASK was virtually unchanged (-0.3%) and increased by 2.0% excluding the currency impact.

Operating income increased by 16.5% to 1.14 billion euros (0.98 billion at September 30, 2006), with 415 million coming from the first quarter (+1%) and 725million from the second quarter (+27.6%). The slow first quarter growth was due to significant adverse calendar effects and to the French presidential and legislative elections which led to a slowdown in business traffic during May 2007.

In April 2007, the Group launched Challenge 10 , a three-year cost savings program, whose objective is to reduce unit costs by 3% excluding fuel by the end of the period. This plan to achieve a total saving of 1.4 billion euros, is based on savings in four main areas. The first is linked to fleet renewal. Air France has decided to accelerate the replacement of its Boeing 747-400s by Boeing 777-300s which will enter the fleet between 2007 and 2013. The saving over the three first years is estimated at 340 million euros, of which 235 million on fuel and 105 million on maintenance.

“Challenge 10” schedule over three years

The second source of savings, amounting to 100 million euros, is the continued reduction in travel agent commissions abroad and the renegotiation of GDS costs.

A further 280 million euros of savings is expected to come from procurement, thanks to the integration of the Air France and KLM purchasing functions and the definition of common specifications for both companies.

The final and largest source of savings, or some 680 million euros, concerns productivity efforts and process improvement through the non-replacement of retirees, the integration of the marketing teams abroad and, finally, the gradual integration of IT systems.

 

12             Activity report April-September, 2007 | Air France-KLM

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Strongly higher first half to September 30

 

At September 30, 2007, the amount of savings achieved (236 million euros) enabled a reduction in unit costs measured per EASK (equivalent available seat kilometers) of 1.4% and 1% on a constant currency and fuel price basis, in line with the Challenge 10 objective.

Net income, group share amounted to 1.15 billion euros, an increase of 86.2% on the previous year (617.7 million at September 30, 2006) after proceeds of 284 million on Amadeus and taxation of 346 million euros. Diluted earnings per share stood at 3.73 euros, 73% higher than in the previous year.

Outlook for the current year

Taking into account the level of forward bookings for the coming months and in spite of the impact of the Air France cabin crew strike, estimated at 60 million euros, we confirm our objectives for the full financial year 2007-08 of a return on capital employed of 7% as well as a further increase in operating income.

 

Activity report April-September, 2007 | Air France-KLM             13

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Activities

Passenger activity

The Air France-KLM group’s passenger activity remained very dynamic throughout the 2007-08 first half with traffic up by 5.2% for a capacity increase of 5%. The load factor improved by 0.2 of a point to a record 83%, well above the AEA average of 79.3% for the same period. The Group continued its development in strategic markets such as Latin America and Asia by strengthening its offer.

With a fleet of 589 passenger aircraft, of which 570 in operation, the Group carried nearly 40 million passengers, 3% more than in the 2006-07 first half, and generated revenues of 9.93 billion euros (+4.7% after a negative currency effect of 2.3%).

At CDG on June 27, the new S3 boarding satellite was opened to the public. With a total handling capacity of 8.5 million passengers and directly connected to terminals 2E and 2F, satellite S3 enables the number of gate-parked aircraft to be increased, allows for dedicated connecting channels and is equipped with an integrated baggage sorting system. It has also been designed to facilitate the fastest-possible boarding and deplaning of A380 passengers.

This new infrastructure will be completed, in April 2008, by the reopening of the terminal 2E boarding pier, taking its passenger handling capacity back up to 8.5 million. Finally, in autumn 2008, a terminal dedicated to Air France’s regional airlines, with a passenger handling capacity of 3 million, will come into service. With this new airport infrastructure, Air France-KLM plans to make CDG the leading European hub.

In September, the SkyTeam alliance welcomed three new Associate Airlines, Air Europa (Spain) Copa Airlines (Panama) and Kenya Airways (Kenya), offering 47 new destinations and nearly 500 additional daily flights. Furthermore, following the Open Skies agreement between Europe and the United States, signed last April, the six European and American companies excluding Continental in SkyTeam filed a request with the US Department of Transportation for antitrust immunity to be extended for their trans-Atlantic services. The requested extension will enable the six carriers to harmonize their offer, services and fares on departures from the United States.

 

Ø	Buoyant activity across all the networks

 

		Capacity in ASK				Traffic in RPK				Load factor				Nbr of passengers				Scheduled passenger revenues
		(In millions)				(In millions)				(In %)				(In thousands)				(In € m)
First half to September 30		2007		2006		2007		2006		2007		2006		2007		2006		2007		2006
Europe		30,125		29,155		22,454		21,835		74.5		74.9		27,810		27,251		3,754		3,673
North and Latin America		42,967		38,930		37,429		34,496		87.1		88.6		5,090		4,730		2,334		2,174
Asia/Pacific		27,409		25,644		24,053		22,511		87.8		87.8		2,782		2,601		1,504		1,357
Africa/ Middle East		17,487		17,584		14,102		13,664		80.6		77.7		2,691		2,605		1,263		1,190
Caribbean/ Indian Ocean		12,767		13,255		10,541		10,690		82.6		80.6		1,443		1,482		594		576
Total		130,755		124,566		108,580		103,196		83.0		82.8		39,817		38,669		9,449		8,970

 

14             Activity report April-September, 2007 | Air France-KLM

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Activities

Passenger activity

 

The long-haul network covers 118 destinations (115 destinations during the 2006 summer season) in 69 countries. Supported by global growth, traffic on this network confirmed its dynamism, showing growth of nearly 6% on the 2006-07 first half. The load factor gained one point to 86%, after a 5.5% increase in capacity. The number of passengers carried amounted to 12 million (+5%). Revenues generated on this network rose by 7.5% to 5.69 billion euros and represented 60% of total scheduled passenger revenues as at September 30, 2006.

The contribution of this network was very little changed on last year, representing 79% of the Group’s traffic and 77% of capacity.

The Americas network is the Group’s first network, representing around one third of traffic and capacity. It recorded a traffic increase of 8.5% for capacity up by 10.4%, resulting in a 1.5 point fall in the load factor which, however, remained at a very high 87.1%. The number of passengers increased by 7.6% to 5.1 million. Revenues were affected by dollar weakness but nonetheless showed 7.4% growth to 2.33 billion euros (2.17 billion at September 30, 2006).

Asia , the Group’s second network (around 22% of traffic and capacity) remained buoyant, with an increase in traffic and capacity of around 7%. The load factor thus remained stable at 87.7%. The number of passengers also increased by 7% to 2.7 million. Revenues increased by nearly 11% to 1.5 billion euros (1.35 billion at September 30, 2006).

Nearly 2.7 million passengers (+3.3%) were carried on the Africa-Middle East network, the Group’s third long-haul network, during this half. It represents around 13% of the Group’s capacity and traffic. Traffic on this network increased by 3.2% for capacity down by 0.6%, resulting in a 2.9 point improvement in the load factor to 80.6%. Revenues rose by 6% to 1.26 billion euros (1.19 billion euros at September 30, 2006).

The Caribbean and Indian Ocean network is the Group’s fourth long-haul network. It accounts for 10% of the overall traffic and capacity. Despite a fall in traffic (-1.4%) and capacity (-3.7%), the network recorded a modest revenue increase (3%) to 594 million euros.

The medium-haul network covers Europe including France and North Africa. It totals 122 destinations in 36 countries. This network principally links Europe to the rest of the world thanks to the Group’s two hubs. The French domestic market is mostly served out of Orly, notably thanks to the Navette shuttle, connecting Paris with the main regional cities in France.

The second of the Group’s networks in terms of capacity, it represents a little over 20% of capacity and traffic but 70% of passengers and 40% of revenues. In effect, 27.8 million passengers traveled on these routes (+2.0%), generating revenues of 3.75 billion euros, up by 2.2% (3.67 billion at September 30, 2006).

 

Ø	Key figures for the passenger activity

 

First half to September 30		2007		2006		2005
Number of passengers (In thousands)		39,817		38,669		36,657
Total passenger revenues (In € m)		9,933		9,486		8,600
Scheduled passenger revenues (In € m)		9,449		8,970		8,088
Unit revenue per RPK (In € cts)		8.70		8.69		8.34
Unit revenue per ASK (In € cts)		7.23		7.20		6.83
Unit cost per ASK (In € cts)		6.36		6.43		6.24
Operating income (In € m)		1,044		868		601

Unit revenue per RPK (revenue passenger kilometer) and per ASK (available seat kilometer) increased by 0.1% and 0.4% respectively, and by 2.4% and 2.6% excluding currency impact on the period to September 30, 2006. The unit cost fell by 1.2% over the same period and by 0.5% on a constant currency and fuel price basis.

 

Activity report April-September, 2007 | Air France-KLM             15

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Activities

Cargo activity

 

Developments

On October 17, 2007, Air France and Delta concluded a joint venture agreement on the North Atlantic, the first step towards the implementation of a trans-Atlantic joint venture between Air France, KLM, Delta and Northwest.

As of April 2008, this joint venture will apply to all non-stop trans-Atlantic flights and to connections between the hubs of the two companies as well as to the flights the two airlines will be introducing out of London Heathrow. In effect, the Open Skies agreement signed between the United States and Europe in April 2007, to come into effect as of April 2008, will give new airlines access to Heathrow airport. Thus Delta will launch three flights to Heathrow out of New York and Atlanta and Air France one flight to Los Angeles. As of 2010, the scope of this joint venture will be extended to Canada and Mexico and the Mediterranean basin and will concern all the trans-Atlantic flights.

Cargo activity

The cargo activity has had to content with a difficult operating environment over the past year and, despite an upturn in traffic since June, unit revenue remains under pressure. In the six months to September 30, 2007, traffic increased by 3.8% for capacity up by 1.5%. The load factor gained 1.4 points to 66.3%. There was a 4.4% rise in tonnage transported to 751,000 tons.

 

		Capacity in ATK				Traffic in RTK				Load factor				Nbr of tons				Cargo revenues
		(In millions)				(In millions)				(In %)				(In thousands)				(In € m)
		2007		2006		2007		2006		2007		2006		2007		2006		2007		2006
Europe		293		289		44		41		14,9		14,0		34		32		32		34
North and South America		2,797		2,787		1,813		1,835		64.8		65.8		238		242		405		420
Asia/Pacific		3,915		3,909		2,891		2,722		73.8		69.6		333		308		603		620
Africa/Middle East		1,007		905		624		551		62,0		60,9		111		100		184		175
Caribbean/Indian Ocean		495		488		266		284		53.8		58.2		35		37		90		94
Total		8,507		8,378		5,638		5,432		66.3		64.8		751		719		1,314		1,343

 

16             Activity report April-September, 2007 | Air France-KLM

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Activities

Maintenance activity

 

The Americas, Asia and Africa-Middle East are the three main networks. The Americas network represents around one third of the cargo networks and revenues. Traffic declined by 1.2% for virtually unchanged capacity (+0.3%), resulting in a 1 point fall in the load factor to 64.8%. Revenues were down by 2.9% after a negative currency impact of 3%. The Asia network represents around 50% of traffic and 46% of capacity and revenues. This network remained dynamic with traffic up by 6.2% for unchanged capacity (+0.2%). Revenues, however, fell by 3%. Finally, the Africa/Middle East network, representing around 10% of traffic and capacity and 14% of revenues, saw a revenue increase of 5% in the six months to September 30, 2007.

 

Ø	Key figures in the cargo activity

 

First half to September 30		2007			2006		2005
Tonnage transported (In thousands)		751			719		693
Total cargo revenues (In € m)		1,411			1,453		1,358
Freight transport revenues (In € m )		1,314			1,343		1,255
Unit revenue per ATK (In € cts)		15.46			16.04		15.33
Unit revenue per RTK (In € cts)		23.32			24.74		23.89
Unit cost per ATK (In € cts)		15.65			15.61		14.61
Operating income (In € m)		(29	)		22		45

Unit revenue per ton kilometer (RRTK) declined by 5.7% and by 2.9% on a constant currency basis. Unit revenue per available ton kilometer (RATK) was down by 3.6%, but by only 0.7% on a constant currency basis. Unit costs were slightly higher (0.3%) and showed a 0.8% increase on a constant currency and fuel price basis.

Maintenance activity

The maintenance activity saw a strong improvement in results during the first half, with third-party revenues of 476 million euros, down by 0.8% on the six month period to September 30, 2006, largely due to the dollar impact. Operating income, however, rose strongly, moving from 14 million euros at September 30, 2006 to 48 million euros at September 30, 2007.

 

Activity report April-September, 2007 | Air France-KLM             17

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Activities

Other activities

 

Other activities

The other activities mainly comprise the catering and leisure businesses. Total revenues from these other activities amounted to 614 million euros at September 30, 2007 compared with 514 million euros in the previous year. In addition to the good underlying performance from these two activities, the revenue increase was due to changes in their scope. Operating income amounted to 77 million euros (75 million at September 30, 2006). At September 30, the leisure activity showed revenues of 433 million euros and the catering activity 181 million euros.

In May 2007, the inaugural flight took place of the French subsidiary of leisure specialist transavia.com. This subsidiary of Air France and transavia.com, operates flights out of Paris-Orly to medium-haul leisure destinations. The launch proved successful with results in line with the business plan at September 30, 2007. The catering activity fully consolidated a subsidiary previously equity accounted, which contributed revenues of 22 million euros.

 

18             Activity report April-September, 2007 | Air France-KLM

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The Air France-KLM

fleet

At September 30, 2007, the Air France-KLM group fleet totaled 601 aircraft, of which 582 in operation. The regional fleet amounted to 189 aircraft in operation and the transavia.com fleet to 32 aircraft. Commitments stand at 97 firm orders and 62 options.

The Air France group fleet

At September 30, 2007, the Air France group fleet comprised 412 aircraft, of which 393 in operation. Orders amounted to 65 aircraft, of which 18 for regional aircraft, while options stood at 39 aircraft including 17 options on regional aircraft.

The Air France fleet

The Air France fleet totaled 262 aircraft at September 30, 2007, of which 255 are in operation (256 aircraft at March 31, 2007). The operational fleet comprises 96 long-haul, 147 medium-haul and 12 cargo aircraft. Of the total fleet, 63% is fully owned, 5% under financial lease and 32% under operating lease.

During the first half to September 30, 2007, four Boeing B 777- 300ERs and one Boeing 747-400 cargo aircraft were added to the long-haul fleet. Three Boeing B747-200s and one Boeing 747-300 were withdrawn. In the medium-haul fleet, one Airbus A319-100 and one Airbus A321-200 were added while two Boeing B 737-500s were withdrawn.

 

Activity report April-September, 2007 | Air France-KLM              19

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The Air France-KLM fleet

The Air France group fleet

 

 

		Owned				Finance lease				Operating lease				Total				In operation
Aircraft type		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07
A340-300		10		10		3		3		6		6		19		19		19		19
A330-200		6		6		1		1		9		9		16		16		16		16
B777-200/300		25		30		4		4		15		14		44		48		44		48
B747-400		9		7		—		—		7		7		16		14		15		13
B747-200/300		4		3		—		—		—		—		4		3		—		—
B747-200 Cargo		6		4		—		—		1		—		7		4		7		4
B747-400 Cargo		2		4		—		—		4		5		6		9		6		8
Long-haul fleet		62		64		8		8		42		41		112		113		107		108
A318-200		18		18		—		—		—		—		18		18		18		18
A319-100		19		19		4		4		22		23		45		46		45		46
A320-100/200		52		52		—		—		16		16		68		68		68		68
A321-100/200		11		11		—		—		3		4		14		15		14		15
B737-300/500		2		2		—		—		2		—		4		2		4		—
Medium-haul fleet		102		102		4		4		43		43		149		149		149		147
Total		164		166		12		12		85		84		261		262		256		255

The regional fleet

At September 30, 2007, the regional subsidiaries had a fleet of 146 aircraft, of which 134 in operation (127 aircraft at March 31, 2007).

Of the regional fleet, 35% is fully owned, 30% is under finance lease and 35% under operating lease.

Over the six-month period, there were three new entries to the fleet and one aircraft withdrawn at Brit Air. The company took delivery of three CRJ700s and withdrew one CRJ100. At City Jet, four RJ85s were added and four BAE 141-200s were withdrawn. At Régional, two Embraer 190s were added to the fleet and one Embraer 120ER and one Fokker 100 were withdrawn.

 

20             Activity report April-September, 2007 | Air France-KLM

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The Air France-KLM fleet

The Air France group fleet

 

 

		Owned				Finance lease				Operating lease				Total				In operation
Aircraft type		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07
Brit Air
CRJ-100ER		2		2		11		11		5		4		18		17		18		17
CRJ-700		3		6		9		9		—		—		12		15		12		15
F100-100		5		5		—		—		8		8		13		13		13		13
Total		10		13		20		20		13		12		43		45		43		45
City Jet
BAE 146-200/300		5		5		1		—		14		11		20		16		20		15
AVRO RJ 85		13		13		—		—		1		5		14		18		3		12
Total		18		18		1		—		15		16		34		34		23		27
Régional
Beech 1900		3		3		1		1		1		1		5		5		—		—
Embraer 190		—		—		—		—		2		4		2		4		2		4
Embraer 120 ER		8		7		—		—		—		—		8		7		8		7
Embraer 135 ER		2		2		3		3		4		4		9		9		9		9
Embraer 145		2		2		17		17		9		9		28		28		28		28
Fokker 70/100		4		6		5		2		6		6		15		14		14		14
Total		19		20		26		23		22		24		67		67		61		62
Total regional fleet		47		51		47		43		50		52		144		146		127		134

Other fleet

 

Owned

Finance lease

Operating lease

Total

In operation

Aircraft type

03/31/07

09/30/07

03/31/07

09/30/07

03/31/07

09/30/07

03/31/07

09/30/07

03/31/07

09/30/07

transavia.com

B737-800

—

—

—

—

—

4

—

4

—

4

 

Activity report April-September, 2007 | Air France-KLM             21

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The Air France-KLM fleet

The KLM group fleet

 

The KLM group fleet

The KLM group fleet comprised 189 aircraft at September 30, 2007 (187 aircraft at March 31, 2007) all in operation. Orders amounted to 32 aircraft with options on 23 aircraft.

The KLM fleet

At September 30, 2007, KLM’s fleet comprised 106 aircraft, all operational (105 aircraft at March 31, 2007), of which 56 long-haul, 47 medium-haul and 3 cargo aircraft. Of the overall fleet, 25% is fully owned, 44% under finance leases and 31% under operating lease.

During the first half, fleet movements concerned long-haul aircraft with the addition of one Airbus A 330-200 and one Boeing 777-300 and the withdrawal of one Boeing 767-300.

 

		Owned				Finance lease				Operating lease				Total				In operation
Aircraft type		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07
A330-200		—		—		6		6		2		3		8		9		8		9
B777-200/300		—		—		6		6		8		9		14		15		14		15
B747-400		11		11		11		11		—		—		22		22		22		22
MD11		2		3		6		5		2		2		10		10		10		10
B767-300		—		—		—		—		1		—		1		—		—		—
B747-400 Cargo		—		—		3		3		—		—		3		3		3		3
Long-haul fleet		13		14		32		31		13		14		58		59		57		59
B737-300		6		6		1		1		7		7		14		14		14		14
B737-400		6		6		—		—		7		7		13		13		13		13
B737-800		—		—		13		13		2		2		15		15		15		15
B737-900		—		—		2		2		3		3		5		5		5		5
Medium-haul fleet		12		12		16		16		19		19		47		47		47		47
Total fleet		25		26		48		47		32		33		105		106		104		106

 

22             Activity report April-September, 2007 | Air France-KLM

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The Air France-KLM fleet

The KLM group fleet

 

The regional fleet

At September 30, 2007, the regional fleet comprised 55 aircraft, all in operation (55 at March 31, 2007). The aircraft are 60% fully owned, 25% under finance lease and 15% under operating lease. There were no aircraft added or withdrawn from the fleet during this six-month period.

 

		Owned				Finance lease				Operating lease				Total				In operation
Aircraft type		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07
KLM Cityhopper
F50		6		6		—		—		8		8		14		14		14		14
F70		18		18		3		3		—		—		21		21		21		21
F100		9		9		11		11		—		—		20		20		20		20
Total		33		33		14		14		8		8		55		55		55		55

Other fleet

 

		Owned				Finance lease				Operating lease				Total				In operation
Aircraft type		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07		03/31/07		09/30/07
transavia.com
B737-700		—		—		5		5		5		5		10		10		10		10
B737 800		6		6		7		7		4		5		17		18		17		18
Total		6		6		12		12		9		10		27		28		27		28

 

Activity report April-September, 2007 | Air France-KLM             23

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Comments

on the financial statements

Consolidated results for the first half to September 30, 2007

The Air France-KLM group consolidation scope at September 30, 2007 showed no significant change on that of the previous financial year.

 

(In euro million)		September 30, 2007		September 30, 2006		Change
Revenues		12,434		11,933		4.2	%
Income from current operations		1,140		979		16.4	%
Income from operating activities		1,476		954		54.7	%
Net income from continuing activities		1,165		607		91.9	%
Net income, group share		1,151		618		86.2	%
Basic earnings per share ( In € )		4.13		2.33		77.3	%

Revenues

Consolidated revenues for the period amounted to 12.4 billion euros, a 4.2% increase on the comparable period of the previous year. This increase was mainly due to the passenger activity.

Operating expenses

Operating expenses increased by 3.1%, rather less than the growth in revenues despite the 4.8% rise in the fuel bill. Excluding fuel, expenses increased by 2.7%.

Income from current operations consequently showed strong growth to 1.14 billion euros compared with 979 million euros at September 30, 2006, an increase of 16.4%.

Group unit costs per EASK (equivalent available seat kilometer) fell by 1.4% and by 1% on a constant currency and fuel price basis.

External expenses moved from 6.6 billion euros to 6.9 billion euros, an increase of 4.2%. Excluding the rise in the oil price, the increase was 4%.

 

24             Activity report April-September, 2007 | Air France-KLM

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Comments on the financial statements

Consolidated results for the period ended September 30, 2007

 

 

Breakdown of external expenses		September 30				Change
(In euro million)		2007		2006		%
Aircraft fuel		2,285		2,181		4.8
Chartering costs		326		330		(1.2	)
Aircraft operating leases		305		305		—
Landing fees and en route charges		915		881		3.9
Catering		238		215		10.7
Handling charges		663		635		4.4
Aircraft maintenance costs		498		434		14.7
Commercial and distribution costs		617		620		(0.5	)
Other charges		1,067		1,031		3.5
Total		6,914		6,632		4.3

The main changes are as follows:

 

¨	Aircraft fuel

First-half expenses amounted to 2.28 billion euros compared with 2.18 billion at September 30, 2006, up by 4.8%, reflecting a 3% increase in volumes, a 9% increase in the fuel price after hedging and a favorable currency impact of 8%.

 

¨	Landing fees and en route charges

Landing fees and en route charges increased by 3.9% to 915 million euros compared with 881 million euros at September 30, 2006. This change is in line with the increase in traffic.

 

¨

Catering

Catering expenses amounted to 238 million euros compared with 215 million euros, a significant rise of 10.7%, partly due to the increase in the activities of Air France’s catering subsidiary, Servair, the increase both organic and arising from the full consolidation of a subsidiary which had previously been equity accounted.

 

¨	Handling charges

Handling charges increased by 4.4% to 663 million euros, in line with activity.

 

¨	Aircraft maintenance costs

These amounted to 498 million euros, up by 14.7%, at September 30, 2007. This increase is mainly due to the reclassification which took place this year for spare parts with useful lives of less than one year, from flight equipment to inventories, generating an increase in inventory expense and a reduction in depreciation.

 

¨	Other external expenses

Other external expenses amounted to 1.07 billion euros at September 30, 2007 compared with 1.03 billion at September 30, 2006.

Salaries and related costs stood at 3.5 billion euros compared with 3.3 billion at September 30, 2006, an increase of 4.7%, the average headcount over the period increasing by 1.6% to 104,991.

Taxes other than income taxes amounted to 114 million euros compared with 129 million euros during the previous financial year.

Amortization, depreciation and provisions stood at 834 million euros compared with 893 million euros at September 30, 2006. The decrease mainly reflects the reclassification of spare parts with useful lives of less than one year under inventories (cf § aircraft maintenance costs).

 

Activity report April-September, 2007 | Air France-KLM             25

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Comments on the financial statements

Consolidated results for the period ended September 30, 2007

 

Information on the sectors of activity

The contribution to revenues and current operating income by sector of activity was as follows:

 

		September 30, 2007					September 30, 2006
(In euro million)		Revenues		Operating income			Revenues		Operating income
Passenger		9,933		1,044			9,486		868
Cargo		1,411		(29	)		1,453		22
Maintenance		476		48			480		14
Other		614		77			514		75
Total		12,434		1,140			11,933		979

Income from operating activities

Income from operating activities amounted to 1.48 billion euros compared with 954 million euros at September 30, 2006. The income for the period included, notably, the 284 million euro gain on the WAM transaction relating to the share premium distribution.

Net income, group share

The 47 million euro net cost of financial debt at September 30, 2007 was significantly lower than in the comparable period of the previous financial year.

The overall financial result was positive to the tune of 46 million euros due to gains recognized during the period on changes in the fair value of financial instruments.

The tax charge amounted to 346 million euros compared with 238 million euros at September 30, 2006, giving an effective tax rate of 22.7% compared with 28.7% in the previous year.

Share of profits (losses) of associates amounted to a negative 11 million euros at September 30, 2007, compared with a positive contribution of 15 million euros at September 30, 2006.

Net income, group share , established after minorities (14 million euros), amounted to 1.15 billion euros at September 30, 2007 compared with 618 million euros at September 30, 2006. The contribution to net income by quarter was, respectively, 415 million euros at June 30 and 736 million euros at September 30, 2007.

 

26             Activity report April-September, 2007 | Air France-KLM

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Comments on the financial statements

Air France-KLM parent company results

 

Investment and financing

Total capital expenditure on tangible and intangible assets during the 2007-08 first half amounted to 1.27 billion euros compared with 1.11 billion euros at September 30, 2006.

Operating cash flow for the period amounted to 1.35 billion euros compared with 1.63 billion euros for the previous period. This was after, notably, the payment to the State in respect of the 2003 shares-for-salary scheme and an additional voluntary payment to the Air France pension scheme, amounting to a total of 308 million euros. It was also reduced by 103 million euros due to the accounting reclassification of spare parts from flight equipment to inventories.

The cash position stood at 4.5 billion euros at September 30, 2007. In addition, the Group still had 1.7 billion euros in available credit facilities at September 30, 2007.

The balance sheet was again strengthened with a 480 million euro reduction in net debt since March 31, 2007 to 3.11 billion euros. Shareholders’ funds stood at 9.59 billion euros (8.41 billion at March 31, 2007), of which 668 million of fair value on derivative instruments. The Group’s gearing ratio thus moved from 0.43 at March 31, 2007 to 0.32 at September 30, 2007.

Air France-KLM parent company results

As a holding company, Air France-KLM has no operational activity. Its revenues comprise loyalties paid by the two operational subsidiaries for use of the Air France-KLM logo, and its expenses are mainly financial communication expenses, auditors’ fees and payroll costs for corporate officers. The overall operating result thus amounted to a negative 1.7 million euros. Net income stood at 173.8 million euros after taking into account, notably, 171.2 million of dividends received from Air France and KLM.

 

Activity report April-September, 2007 | Air France-KLM             27

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C onsolidated financial statements

 

Consolidated income statements (unaudited)		29
Consolidated balance sheets (unaudited)		30
Consolidated statements of changes in stockholders’ equity (unaudited)		32
Consolidated statements of recognized income and expenses (unaudited)		33
Consolidated statements of cash flows (unaudited)		34
Notes to the unaudited interim condensed consolidated financial statements		36
Person responsible for the first half financial report		54
Statutory Auditors’ report on the first half financial information for 2007		55

 

28             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Consolidated income statements (unaudited)

 

Consolidated income statements (unaudited)

 

Period from April 1 to September 30,		Notes		2007			2006
(In euro million)
Sales		4		12,434			11,933
Other revenues				3			3
Revenues				12,437			11,936
External expenses		5		(6,914	)		(6,632	)
Salaries and related costs		6		(3,460	)		(3,305	)
Taxes other than income taxes				(114	)		(129	)
Amortization and depreciation		7		(799	)		(870	)
Provisions		7		(35	)		(23	)
Other income and expenses		8		25			2
Income from current operations				1,140			979
Sales of aircraft equipment		9		7			5
Other non-current income and expenses		9		329			(30	)
Income from operating activities				1,476			954
Cost of financial debt		10		(189	)		(193	)
Income from cash and cash equivalents		10		142			108
Net cost of financial debt				(47	)		(85	)
Other financial income and expenses		10		93			(39	)
Income before tax				1,522			830
Income taxes		12		(346	)		(238	)
Net income of consolidated companies				1,176			592
Share of profits (losses) of associates		11		(11	)		15
Net income from continuing operations				1,165			607
Net income from discontinued operations				—			—
Net income for the period				1,165			607
- Group				1,151			618
- Minority interest				14			(11	)
Earnings per share – Group (In euros)
- basic		13		4.13			2.33
- diluted		13		3.73			2.16

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Activity report April-September, 2007 | Air France-KLM             29

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Consolidated financial statements

Consolidated balance sheets (unaudited)

 

Consolidated balance sheets (unaudited)

 

Assets		Notes		September 30, 2007		March 31, 2007
(In euro million)
Goodwill				211		204
Intangible assets		14		446		424
Flight equipment		15		11,994		11,551
Other property, plant and equipment		15		2,050		2,007
Investments in equity associates				177		228
Pension assets				2,153		2,097
Other financial assets (which includes € 805 million of deposits related to financial leases as of September 30, 2007 and € 835 million as of March 31, 2007)				1,023		1,095
Deferred tax assets				24		26
Other non-current assets				911		604
Total non current assets				18,989		18,236
Other short term financial assets (which includes € 708 million of deposits related to financial leases and investments between 3 months and 1 year as of September 30, 2007 and € 631 million as of March 31, 2007)				752		689
Inventories		16		479		360
Trade accounts receivable				2,757		2,610
Income tax receivables				—		7
Other current assets				1,307		1,271
Cash and cash equivalents				4,089		3,497
Total current assets				9,384		8,434
Total assets				28,373		26,670

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

30             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Consolidated balance sheets (unaudited)

 

Consolidated balance sheets (unaudited) (continued)

 

Liabilities and equity		Notes		September 30, 2007			March 31, 2007
(In euro million)
Issued capital		17.1		2,385			2,375
Additional paid-in capital				553			539
Treasury shares				(43	)		(30	)
Reserves and retained earnings		17.3		6,575			5,415
Equity attributable to equity holders of Air France-KLM				9,470			8,299
Minority interest				127			113
Total Equity				9,597			8,412
Provisions and retirement benefits		19		1,205			1,387
Long-term debt		20		7,219			7,419
Deferred tax				1,178			891
Other non-current liabilities				608			401
Total non-current liabilities				10,210			10,098
Provisions		19		261			225
Current portion of long-term debt		20		1,133			1,098
Trade accounts payable				2,170			2,131
Deferred revenue on ticket sales				2,062			2,217
Current tax liabilities				127			21
Other current liabilities				2,525			2,335
Bank overdrafts				288			133
Total current liabilities				8,566			8,160
Total liabilities				18,776			18,258
Total liabilities and equity				28,373			26,670

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Activity report April-September, 2007 | Air France-KLM             31

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Consolidated financial statements

Consolidated statements of changes in stockholders’ equity (unaudited)

 

Consolidated statements of changes in stockholders’ equity (unaudited)

 

(In euro million)		Number of shares		Issued capital		Additional paid-in capital		Treasury shares			Reserves and retained earnings			Equity attributable to holders of Air France- KLM			Minority interests			Total equity
March 31, 2006		269,383,518		2,290		430		(58	)		5,072			7,734			119			7,853
Fair value adjustment on available for sale securities		—		—		—		—			(3	)		(3	)		—			(3	)
Gain / (loss) on cash flow hedges		—		—		—		—			(392	)		(392	)		—			(392	)
Currency translation adjustment		—		—		—		—			(2	)		(2	)		(2	)		(4	)
Net income for the period		—		—		—		—			618			618			(11	)		607
Total of income and expenses recognized		—		—		—		—			221			221			(13	)		208
Stock based compensation
(ESA)		—		—		—		—			17			17			—			17
Dividends paid		—		—		—		—			(81	)		(81	)		(1	)		(82	)
Treasury shares		—		—		—		9			—			9			—			9
Other		—		—		—		—			—			—			5			5
September 30, 2006		269,383,518		2,290		430		(49	)		5,229			7,900			110			8,010
March 31, 2007		279,365,707		2,375		539		(30	)		5,415			8,299			113			8,412
Fair value adjustment on available for sale securities		—		—		—		—			—			—			—			—
Gain / (loss) on cash flow hedges		—		—		—		—			128			128			2			130
Currency translation adjustment		—		—		—		—			(1	)		(1	)		(1	)		(2	)
Net income for the period		—		—		—		—			1,151			1,151			14			1,165
Total of income and expenses recognized		—		—		—		—			1,278			1,278			15			1,293
Stock based compensation
(ESA)		—		—		—		—			16			16			—			16
Increase in capital		1,267,184		10		14		—			—			24			—			24
Dividends paid		—		—		—		—			(134	)		(134	)		(1	)		(135	)
Treasury shares		—		—		—		(13	)		—			(13	)		—			(13	)
Other		—		—		—		—			—			—			—			—
September 30, 2007		280,632,891		2,385		553		(43	)		6,575			9,470			127			9,597

The accompanying notes are an integral part of these condensed consolidated financial statements

 

32             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Consolidated statements of recognized income and expenses (unaudited)

 

Consolidated statements of recognized income and expenses (unaudited)

 

(In euro million)		September 30, 2007			September 30, 2006
Fair value adjustment on available for sale securities
Valuation gains / (losses) taken to equity		—			(3	)
Transferred to profit or loss on sale		—			—
Cash flow hedges
Gains / (losses) taken to equity		406			(139	)
Transferred to profit or loss on sale		(226	)		(453	)
Currency translation adjustment		(1	)		(2	)
Tax on items taken directly to or transferred from equity
Gains / (losses) taken to equity		(52	)		200
Income and expenses directly recognized in equity – Group		127			(397	)
Net income for the period – Group		1,151			618
Total of income and expenses recognized for the period – Group		1,278			221
Total of income and expenses recognized for the period – Minority interest		15			(13	)
Total recognized income and expenses for the period		1,293			208

The accompanying notes are an integral part of these condensed consolidated financial statements

 

Activity report April-September, 2007 | Air France-KLM             33

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Consolidated financial statements

Consolidated statements of cash flows (unaudited)

 

Consolidated statements of cash flows (unaudited)

 

Period from April1 to September 30,		Notes		2007			2006
(In euro million)
Net income for the period – Group				1,151			618
Minority interests				14			(11	)
Amortization, depreciation and operating provisions				834			893
Financial provisions				5			18
Gain on disposals of tangible and intangible assets				(9	)		(7	)
Loss / (gain) on disposals of subsidiaries and associates				(41	)		(1	)
Gain on WAM (Amadeus GTD) transaction		9		(284	)		—
Derivatives – non monetary result				(105	)		18
Unrealized foreign exchange gains and losses, net				(5	)		(9	)
Share of (profits) losses of associates – non monetary part		11		11			(15	)
Deferred taxes				238			255
Other non-monetary items				(45	)		(62	)
Subtotal				1,764			1,697
(Increase) / decrease in inventories				(47	)		(20	)
(Increase) / decrease in trade receivables				(109	)		(272	)
Increase / (decrease) in trade payables				29			161
Change in other receivables and payables				21			61
Payment of the ESA 2003 soulte				(110	)		—
Additional contribution to pension fund				(198	)		—
Net cash flow from operating activities				1,350			1,627
Acquisitions of subsidiaries and investments in associates, net of cash acquired				(8	)		(27	)
Purchase of property, plant and equipment and intangible assets				(1,275	)		(1,114	)
Proceeds on disposal of subsidiaries and investments in associates				80			15
Proceeds on WAM (Amadeus GTD) transaction		9		284			—
Proceeds on disposal of property, plant and equipment and intangible assets				37			60
Dividends received				4			2
Decrease (increase) in investments, net between 3 months and 1 year				(123	)		(93	)
Net cash used in investing activities				(1,001	)		(1,157	)

 

34             Activity report April-September, 2007 | Air France-KLM

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Comptes consolidés

Consolidated statements of cash flows (unaudited)

 

 

Period from April1 to September 30,		Notes		2007			2006
(In euro million)
Increase in capital				218			—
Issuance of long-term debt				585			942
Repayments on long-term debt				(214	)		(223	)
Payment of debt resulting from finance lease liabilities				(397	)		(282	)
New loans				(32	)		(27	)
Repayments on loans				65			24
Dividends paid				(135	)		(82	)
Net cash flow from financing activities				90			352
Effect of exchange rate on cash and cash equivalents and bank overdrafts				(2	)		(1	)
Change in cash and cash equivalents and bank overdrafts				437			821
Cash and cash equivalents and bank overdrafts at beginning of period				3,364			2,844
Cash and cash equivalents and bank overdrafts at end of period				3,801			3,665
Income tax paid (flow included in operating activities)				(2	)		(268	)
Interest paid (flow included in operating activities)				(178	)		(216	)
Interest received (flow included in operating activities)				139			112

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Activity report April-September, 2007 | Air France-KLM             35

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Notes to the unaudited interim condensed consolidated financial statements

April 1, 2007 – September 30, 2007

 

Note 1

Business description

37

Note 13

Earnings per share

45

Note 2

Significant events of the year

37

Note 14

Intangible assets

46

Note 3

Accounting policies

37

Note 15

Tangible assets

47

Note 4

Information by activity and

Note 16

Inventories

47

geographical area

38

Note 17

Equity attributable to equity holders

Note 5

External expenses

41

of Air France-KLM S.A.

48

Note 6

Salaries and number of employees

42

Note 18

Share based compensation

49

Note 7

Amortization, depreciation

Note 19

Provisions and retirement benefits

49

and provisions

42

Note 20

Financial debt

50

Note 8

Other income and expenses

43

Note 21

Lease commitments

51

Note 9

Sales of aircraft equipment and other

non-current income and expenses

43

Note 22

Flight equipment orders

51

Note 10

Net cost of financial debt and other

Note 23

Related parties

53

financial income and expenses

44

Note 24

Subsequent events

53

Note 11

Share of profits (losses) of associates

44

Note 12

Income taxes

45

 

36             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 1 Business description

As used herein, the term “Air France-KLM” refers to Air France-KLM S.A., a limited liability company organized under French law without its consolidated subsidiaries. The term “Group” refers to Air France-KLM together with its consolidated subsidiaries. The Group is headquartered in France and is one of the largest airlines in the world. The Group’s core business is passenger transportation.

The Group’s activities also include cargo, aeronautics maintenance and other air-transport related activities, including principally catering and charter services.

The limited company Air France-KLM S.A., domiciled 2 rue Robert Esnault-Pelterie 75007 Paris – France, is the parent company of the Air France-KLM group. Air France-KLM is listed for trading in Paris (Euronext), Amsterdam (Euronext) and New-York (NYSE).

The Group’s functional currency is the euro.

Note 2 Significant events of the year

The income for the six-month period ended September 30, 2007 includes a gain of € 284 million before tax relating to the WAM (Amdeus GTD) transaction described in note 9.

Note 3 Accounting policies

3.1. Accounting principles

Accounting principles used for the interim condensed consolidated financial statements as of September 30, 2007 are the same as those used as of March 31, 2007 and described in the consolidated financial statements of the year ended March 31, 2007.

The interim condensed consolidated financial statements as of September 30, 2007 are prepared in accordance with IAS 34 “Interim financial reporting” and must be read in connection with the annual consolidated financial statements for the year ended March 31, 2007. They have been prepared in accordance with those IFRS as of November 21, 2007, date on which the accounts have been approved by the Board of Directors.

3.2. Preparation of unaudited interim consolidated financial statements

Revenues and income from current operations are characterized by their seasonal nature related to a high level of activity during the first half of the fiscal year. This phenomenon varies in magnitude depending on the year. In accordance with IFRS, revenues and the related expenses are recognized over the period in which they are realized and incurred respectively.

For the interim statements, the tax charge (current and deferred) is calculated by applying to the book income for the period the estimated annual average tax rate for the current year for each entity or tax group.

 

Activity report April-September, 2007 | Air France-KLM             37

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

3.3. Use of estimates

The preparation of the condensed consolidated financial statements in conformity with IFRS requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses. The significant areas of estimations described in the note 3 of the March 31, 2007 consolidated financial statements, concerned:

 

¨	revenue recognition related to deferred revenue on ticket sales;

 

¨	tangible and intangible assets;

 

¨	financial assets;

 

¨	deferred tax assets;

 

¨	Flying Blue frequent flyer program;

 

¨	provisions.

The Group’s management makes these estimates and assessments continuously on the basis of its past experience and various other factors considered to be reasonable.

Actual results could differ from these estimates depending on changes in the assumptions used or different conditions.

Note 4 Information by activity and geographical area

The Group’s primary reporting format is business segmentation.

Business segments’ results are those that are either directly attributable or that can be allocated on a reasonable basis to these business segments. Amounts allocated to business segments correspond to the income from current operations. Other elements of the income statement are presented in the “non allocated” column.

Inter-segment transactions are valued based on normal market conditions.

The Group’s secondary reporting format is geographical segmentation based on origin of sales.

Only segment revenues are allocated by geographical sales area.

Business segments

Passenger : Passenger operating revenues primarily come from passenger transportation services on scheduled flights with the Group’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 Group to third party airlines and services linked to IT systems.

Cargo : Cargo operating revenues come from freight transport on flights under the companies’ 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.

Other : The revenues from this segment come primarily from catering supplied by the Group to third-party airlines and to charter flights operated primarily by Transavia.

Geographical segments

Group activities are broken down into five geographical regions:

 

¨	Europe and North Africa;

 

¨	Caribbean, French Guiana and Indian Ocean;

 

¨	Africa, Middle East;

 

¨	Americas, Polynesia;

 

¨	Asia and New Caledonia.

 

38             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

 

4.1.	Information by business segment

 

Ø	Six month period ended September 30, 2007

 

(In euro million)		Passenger			Cargo			Maintenance			Other			Non allocated			Total
Total sales		10,350			1,419			1,424			934			—			14,127
Intersegment sales		(417	)		(8	)		(948	)		(320	)		—			(1,693	)
External sales		9,933			1,411			476			614			—			12,434
Income from current operations		1,044			(29	)		48			77			—			1,140
Income from operating activities		1,044			(29	)		48			77			336			1,476
Share of profits (losses) of associates		—			—			—			—			(11	)		(11	)
Net cost of financial debt and other financial income and expenses		—			—			—			—			46			46
Income taxes		—			—			—			—			(346	)		(346	)
Net income from continuing operations		1,044			(29	)		48			77			25			1,165

 

Ø	Six month period ended September 30, 2006

 

(In euro million)		Passenger			Cargo			Maintenance			Other			Non allocated			Total
Total sales		9,874			1,466			1,394			819			—			13,553
Intersegment sales		(388	)		(13	)		(914	)		(305	)		—			(1,620	)
External sales		9,486			1,453			480			514			—			11,933
Income from current operations		868			22			14			75			—			979
Income from operating activities		868			22			14			75			(25	)		954
Share of profits (losses) of associates		—			—			—			—			15			15
Net cost of financial debt and other financial income and expenses		—			—			—			—			(124	)		(124	)
Income taxes		—			—			—			—			(238	)		(238	)
Net income from continuing operations		868			22			14			75			(372	)		607

 

Activity report April-September, 2007 i Air France-KLM             39

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

 

4.2.	Information by geographical area

Sales by geographical area

 

Ø	Six month period ended September 30, 2007

 

(In euro million)		Europe, North Africa		Caribbean, French Guiana, Indian Ocean		Africa, Middle East		Americas, Polynesia		Asia, New Caledonia		Total
Scheduled passenger		6,204		212		625		1,623		785		9,449
Other passenger sales		365		23		17		29		50		484
Total passenger		6,569		235		642		1,652		835		9,933
Scheduled cargo		597		17		90		169		441		1,314
Other cargo sales		62		2		4		14		15		97
Total cargo		659		19		94		183		456		1,411
Maintenance		472		—		—		—		4		476
Others		599		10		5		—		—		614
Total		8,299		264		741		1,835		1,295		12,434

 

Ø	Six month period ended September 30, 2006

 

(In euro million)		Europe, North Africa		Caribbean, French Guiana, Indian Ocean		Africa, Middle East		Americas, Polynesia		Asia, New Caledonia		Total
Scheduled passenger		5,773		213		615		1,605		764		8,970
Other passenger sales		367		28		20		41		60		516
Total passenger		6,140		241		635		1,646		824		9,486
Scheduled cargo		589		18		91		172		473		1,343
Other cargo sales		76		2		4		11		17		110
Total cargo		665		20		95		183		490		1,453
Maintenance		475		—		—		—		5		480
Others		501		9		4		—		—		514
Total		7,781		270		734		1,829		1,319		11,933

 

40             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Traffic sales by geographical area of destination

 

Ø	Six month period ended September 30, 2007

 

(In euro million)		Europe, North Africa		Caribbean, French Guiana, Indian Ocean		Africa, Middle East		Americas, Polynesia		Asia, New Caledonia		Total
Scheduled passenger		3,754		594		1,263		2,334		1,504		9,449
Scheduled cargo		32		90		184		405		603		1,314
Total		3,786		684		1,447		2,739		2,107		10,763

 

Ø	Six month period ended September 30, 2006

 

(In euro million)		Europe, North Africa		Caribbean, French Guiana, Indian Ocean		Africa, Middle East		Americas, Polynesia		Asia, New Caledonia		Total
Scheduled passenger		3,673		576		1,190		2,174		1,357		8,970
Scheduled cargo		34		94		175		420		620		1,343
Total		3,707		670		1,365		2,594		1,977		10,313

Note 5 External expenses

 

Six month period ended September 30, (In euro million)		2007		2006
Aircraft fuel		2,285		2,181
Chartering costs		326		330
Aircraft operating lease costs		305		305
Landing fees and en route charges		915		881
Catering		238		215
Handling charges and other operating costs		663		635
Aircraft maintenance costs		498		434
Commercial and distribution costs		617		620
Other external expenses		1,067		1,031
Total		6,914		6,632

“Other external expenses” correspond mainly to rent and insurance costs.

The increase of “aircraft maintenance costs” is mainly due to the reclassification of spare parts from flight equipment to inventories as described in note 16.

 

Activity report April-September, 2007 | Air France-KLM             41

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 6 Salaries and number of employees

 

Ø	Salaries and related costs

 

Six month period ended September 30, (In euro million)		2007		2006
Wages and salaries		2,550		2,425
Social contributions		819		766
Net periodic pension cost		42		73
Expenses related to share-based compensation		15		15
Other expenses		34		26
Total		3,460		3,305

 

Ø	Average number of employees

 

Six month period ended September 30,		2007		2006
Flight deck crew		8,185		7,974
Cabin crew		21,605		20,676
Ground staff		75,201		74,697
Total		104,991		103,347

Note 7 Amortization, depreciation and provisions

 

Six month period ended September 30, (In euro million)		2007		2006
Amortization and depreciation
Intangible assets		22		19
Flight equipment		646		728
Other property, plant and equipment		131		123
Total		799		870
Provisions
Inventories		8		5
Trade receivables		5		—
Risks and contingencies		22		18
Total		35		23
Total		834		893

The decrease of the “depreciation of flight equipment” is mainly due to the reclassification of spare parts from flight equipment to inventories as described in note 16.

 

42             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 8 Other income and expenses

 

Six month period ended September 30, (In euro million)		2007		2006
Joint operation of routes		16		(2	)
Operations-related currency hedges		1		5
Other		8		(1	)
Total		25		2

Note 9 Sales of aircraft equipment and other non-current income and expenses

Six month period ended September 30, 2007

During the six month period ended September 30, 2007, the Group sold its shares in Alpha recording a gain on disposal of € 40 million. The company Alpha, previously held at 26%, was accounted for under the equity method in the Group’s condensed consolidated financial statements.

The gain on WAM (Amadeus GTD) transaction that amounts to € 284 million, corresponds to the reimbursement of the shareholder capital for € 202 million, of the shareholders’ loan for an amount of € 76 million and to a payment of interests for € 6 million. The shares and the loan had been recognized at a value of nil in the operation of reinvestment of Air France-KLM within the LBO operation initiated in July 2005.

Six month period ended September 30, 2006

The result on disposal of aircraft equipment that amounts to € 5 million corresponds to the sale of an aircraft owned by AFPL.

Moreover, AFPL has recorded a loss of € 20 million relating to an aircraft destined to be sold.

 

Activity report April-September, 2007 I Air France-KLM             43

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 10 Net cost of financial debt and other financial income and expenses

 

Six month period ended September 30, (In euro million)		2007			2006
Income from marketable securities		43			38
Other financial income		99			70
Income from cash and cash equivalents		142			108
Loan interests		(115	)		(115	)
Lease interests		(94	)		(96	)
Capitalized interests		20			18
Cost of financial debt		(189	)		(193	)
Net cost of financial debt		(47	)		(85	)
Foreign exchange gains (losses), net		2			(9	)
Change in fair value of financial assets and liabilities		105			(18	)
Net (charge) release to provisions		(5	)		(18	)
Other		(9	)		6
Other financial income and expenses		93			(39	)
Total		46			(124	)

The interest rate used in the calculation of capitalized interest is 4.96% for the six month period ended September 30, 2007 (4.45% for the six month period ended September 30, 2006). Net foreign exchange result includes an unrealized net gain of € 5 million for the six month period ended September 30, 2007 and a gain of € 9 million for the six month period ended September 30, 2006, mainly due to the change of the US dollar rate.

Net charge to provisions includes an unrealized loss on shares of Alitalia for an amount of € 4 million and € 9 million, as a result of the stock price decreasing significantly during the six month period ended September 30, 2007 and 2006, respectively.

Note 11 Share of profits (losses) of associates

Share of profits (losses) of associates includes a new provision for risk recorded in the accounts of Martinair concerning the inquiry of the US Department Of Justice (DOJ) about an alleged conspiracy to fix the price of air shipping services. Because of the status of discussions with the US DOJ, Martinair has recorded a provision net of tax amounting to € 23 million. The part of the Group is a cost amounting to € 11 million.

 

44             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 12 Income taxes

 

12.1.

Income tax charge

 

Six month period ended September 30, (In euro million)		2007			2006
Current tax (expense) / benefit		(108	)		17
Charge for the period		(108	)		(3	)
Adjustment of previous current tax charges		—			20
Deferred tax income / (expense) from continuing operations		(238	)		(255	)
Change in temporary differences		(107	)		(24	)
Change in tax rates		—			—
(Use) / recognition of tax loss carryforwards		(131	)		(231	)
Total income tax (expense) / credit		(346	)		(238	)

The current tax charge relates to the amounts paid or payable in the short term to the tax authorities in respect of the financial period, in accordance with the regulations prevailing in various countries and any applicable treaties.

 

12.2.

Deferred tax recorded directly in equity

Deferred tax directly recorded in equity amounts to an income of € 53 million as of September 30, 2007 against an income of € 200 million for the period ended September 30, 2006. These deferred taxes relate to the accounting of cash flow hedges.

Note 13 Earnings per share

 

Ø	Reconciliation of income used to calculate earnings per share

 

Six month period ended September 30, (In euro million)		2007		2006
Income for the period – Group share		1,151		618
Dividends to be paid to priority shares		—		—
Income for the period – Group share (used to calculate basic earnings per share)		1,151		618
Impact of potential ordinary shares:
interest paid on convertible bonds (net of tax)		5		5
Income for the period – Group share (used to calculate diluted earnings per share)		1,156		623

 

Activity report April-September, 2007 | Air France-KLM             45

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

 

Ø	Reconciliation of the number of shares used to calculate earnings per share

 

Six month period ended September 30,		2007			2006
Weighted average number of:
•        ordinary shares issued		280,164,858			269,383,518
•        treasury stock held regarding stock option plan		(1,616,586	)		(3,943,674	)
•        treasury stock held for the share buyback plan		(40,154	)		(96,985	)
Number of shares used to calculate basic earnings per share		278,508,118			265,342,859
Weighted average number of ordinary shares:
•        Conversion of convertible bonds		22,609,230			21,951,219
•        Conversion of warrants		8,083,123			—
•        Exercise of stock options		633,978			596,306
Number of potential ordinary shares		31,326,331			22,547,525
Number of ordinary and potential ordinary shares used to calculate diluted earnings per share		309,834,449			287,890,384

Note 14 Intangible assets

Starting April 1, 2007, software development expenses are capitalized and amortized over their useful lives. For that purpose, the Group equipped with the necessary tools that enabled a tracking by project of all the stages of development, and particularly the internal and external expenses directly related to each project during its development phase. Capitalized software development expenses amount to € 31 million as of September 30, 2007.

 

46             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 15 Tangible assets

 

		As of September 30, 2007						As of March 31, 2007
(In euro million)		Gross value		Depreciation		Net Value		Gross value		Depreciation		Net Value
Owned aircraft		8,706		2,331		6,375		7,972		2,091		5,881
Leased aircraft		4,409		1,031		3,378		4,435		908		3,527
Assets in progress		1,386		—		1,386		1,170		—		1,170
Other		1,546		691		855		1,716		743		973
Flight equipment		16,047		4,053		11,994		15,293		3,742		11,551
Land and buildings		2,276		966		1,310		2,172		909		1,263
Equipment and machinery		956		599		357		933		572		361
Assets in progress		892		623		269		145		—		145
Other		114		—		114		831		593		238
Other tangible assets		4,238		2,188		2,050		4,081		2,074		2,007
Total		20,285		6,241		14,044		19,374		5,816		13,558

The net value of tangible assets financed under capital lease amounts to € 3,651 million as of September 30, 2007 and € 3,811 million as of March 31, 2007.

Note 16 Inventories

As of April 1, 2007, € 87 million of spare parts with useful lives of less than a year have been reclassified from flight equipment to inventories.

 

Activity report April-September, 2007 | Air France-KLM             47

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 17 Equity attributable to equity holders of Air France-KLM S.A.

 

17.1.

Breakdown of stock and voting rights

 

		As of September 30, 2007						As of March 31, 2007
		Capital			Voting rights			Capital			Voting rights
French State		18	%		18	%		18	%		18	%
Employees and former employees		11	%		11	%		11	%		11	%
Treasury shares		1	%		—			1	%		—
Other		70	%		71	%		70	%		71	%
Total		100	%		100	%		100	%		100	%

The item “Employees and former employees” includes shares held by employees and former employees identified in funds or by a Sicovam code.

 

17.2.

Other securities giving access to common stock

On April 22, 2005, Air France issued 15-year bonds with an option of conversion and/or exchange for new or existing Air France-KLM shares (OCEANE). 21,951,219 bonds were issued for a total amount of € 450 million. Because each bond can be exchanged for a share Air France-KLM, the potential maximum increase of equity of Air France-KLM amounts to € 450 million.

Following the Exchange Offer, 45,093,299 Equity Warrants for new or existing shares (Bons d’Acquisition et/ou de Souscription d’Actions, BASA) were issued. Three BASAs give the holder the right to purchase and/or subscribe to 2.066 new or existing shares of Air France-KLM stock, with a par value of 8.50 euros, at an exercise price of 20 euros per Air France-KLM share. BASA holders will have the option, at any time during a 24-month period beginning November 2005, to obtain new or existing shares, at the Group’s discretion, upon exercise of the BASA.

During the six month period ended September 30, 2007, 1,839,336 BASA were exercised, leading to the issuance of 1,266,659 shares.

As of September 30, 2007, 28,747,934 BASA remain floating. The maximum potential increase in the equity capital of Air France-KLM is € 383 million.

 

17.3.

Reserves and retained earnings

 

(In euro million)		As of September 30, 2007		As of March 31, 2007
Legal reserve		57		46
Distributable reserve		989		973
Derivatives and available for sale securities reserves		673		550
Aggregate results of consolidated subsidiaries		3,705		2,955
Net income (loss)		1,151		891
Total		6,575		5,415

 

48             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 18 Share based compensation

On February 1, 2005, the Group launched a shares-for-salary exchange scheme, in which all Air France employees residing in France were offered the opportunity to purchase Air France-KLM shares at a price of € 14 per share in exchange for wage concessions over a 6-year period. The offer was limited to a maximum of 13,186,853 ordinary shares. At the date the offer was closed, February 21, 2005, Air France employees had acquired 12,612,671 Air France-KLM shares.

These shares were granted by the French State, the largest Air France-KLM shareholder, subject to a € 110 million payment by Air France-KLM made in April 2007. The wage concessions cover the period from May 2005 to May 2011.

In the event an employee leaves the Group prior to the end of the six-year period, the unvested shares are returned to Air France which, in turn, returns them to the French State. The fair value of the services provided under the shares-for-salary exchange scheme was calculated on the basis of the market price of the Air France-KLM share on the date the offer was closed, namely 14.30 euros and amounts to € 180 million. The corresponding salary expense covers the acquisition period of voting rights from May 2005 to May 2011. Each instalment, corresponding to the annual decrease of salary, is treated as a separate grant. The ESA 2003 plan share-based payment is therefore recognized on a straight-line basis over the requisite service period for each separately vested portion.

Note 19 Provisions and retirement benefits

 

		As of September 30, 2007						As of March 31, 2007
(In euro million)		Non Current		Current		Total		Non current		Current		Total
Retirement benefits		805		—		805		990		—		990
Restitution of aircraft		236		164		400		221		153		374
Restructuring		—		35		35		32		7		39
Litigation		34		59		93		32		60		92
Other		130		3		133		112		5		117
Total		1,205		261		1,466		1,387		225		1,612

The decrease of the “retirement benefits” is mainly explained by the payment of an additional contribution of € 198 million to the funds covering the termination indemnities in France.

Contingent liabilities

The Group is involved in several disputes, and the potential losses have not been recorded in the consolidated financial statements. The Group was definitively removed by the Court of Appeals of Richmond, Virginia on December 9, 2004, from in the HALL action, the name of one of the travel agents who had filed a class action suit against American and European airlines, including Air France and KLM, accusing them of illegal agreements to reduce the commissions collected on the sale of airline tickets.

In another lawsuit based on the same complaints, filed by fifty travel agents acting individually against the same airlines a settlement agreement between Air France and the plaintiffs has been executed in May 2007.

In the dispute between Servair a subsidiary of the Group, and its employees for payment of meal times, all judgments issued to date by the courts have dismissed the claims of the employees involved. Only one proceeding with 255 employees is still pending before the Labor Board. This action, like the preceding cases, is considered to be not relevant by the Group and no provisions have been recorded.

 

Activity report April-September, 2007 | Air France-KLM             49

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

As of February 14, 2006, authorities from the EU Commission and the US Department Of Justice (DOJ) presented themselves at the offices of Air France and KLM, as well as most airlines and world major cargo operators, formally requesting information about an alleged conspiracy to fix the price of air shipping services. Skyteam Cargo, a Company in which Air France held shares, was subject to the same investigations.

Air France-KLM as well as Air France and KLM are cooperating with these investigations which were still ongoing as of September 30, 2007.

As of the same date 2007, over 140 purported class action lawsuits were filled in the US against air cargo operators including Air France-KLM, Air France, KLM and/or related entities. Plaintiffs allege that defendants engaged in a conspiracy to fix the price of air shipping services since January 1, 2000 including various surcharges in air cargo services in violation of antitrust laws. They consequently seek compensatory damages and treble monetary damages in unspecified amounts, costs and attorney’s fees, as well as injunctive relief amounting to triple amount of compensatory damages. These actions have been transferred and consolidated before the US District Court of the Eastern District of New-York. The consolidated case is currently in the pleading process, with the first consolidated amended complaint filed by the plaintiffs in February 2007. Air France and KLM filed a motion to dismiss on July 2007. A decision by the Court on the motion to dismiss is not expected before several weeks.

At this time, Air France-KLM is unable to predict the outcome of these investigations requested by antitrust and civil litigation authorities, or the amount of penalties and compensatory damages which could be due.

On July 20, 2006, Air France was placed under formal investigation for (i) possible illegal employment practices and (ii) being a possible accessory to misappropriation of funds by Pretory, a company that supplied on board safety guards to Air France for flights to the US or other destinations following the September 11 terrorist attacks.

Air France has denied any illegal practice and immediately filed an appeal against the judge’s decision as of September 30, 2007. This appeal was still pending before the Paris Court of Appeal.

To the Group’s knowledge, there is no other litigation, arbitration or other threatened or pending disputes that could have or has had in the recent past a material impact on the financial position, earnings, business or holdings of the Group.

Note 20 Financial debt

 

		As of September 30, 2007						As of March 31, 2007
(In euro million)		Non current		Current		Total		Non current		Current		Total
Perpetual subordinated loan stock		446		—		446		462		122		584
OCEANE (convertible bonds)		386		—		386		386		—		386
Bonds		750		—		750		550		—		550
Capital lease obligations		3,668		692		4,360		3,917		657		4,574
Other long-term debt		1,969		322		2,291		2,104		224		2,328
Accrued interest		—		119		119		—		95		95
Total		7,219		1,133		8,352		7,419		1,098		8,517

On April 23, 2007, the company Air France, subsidiary of the Group Air France-KLM has made a bond in euro for an amount of € 200 million with a maturity as of January 22, 2014. Characteristics of this bond are as follows:

 

¨	Amount: € 200 million;

 

¨	Coupon: 4.75%;

 

¨	Starting date: April 23, 2007;

 

¨	Maturity date: January 22, 2014.

 

50             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Note 21 Lease commitments

 

21.1.

Capital lease

The breakdown of total future minimum lease payments related to capital lease is as follows:

 

(In euro million)		As of September 30, 2007		As of March 31, 2007
Flight equipment		4,962		5,153
Buildings		403		422
Other		12		—
Total		5,377		5,575

 

21.2.

Operating leases

The undiscounted amount of the future minimum operating lease payments for aircraft under operating lease totaled € 2,729 million as of September 30, 2007 ( € 2,786 million at March 31, 2007).

Note 22 Flight equipment orders

Due dates for commitments in respect of flight equipment orders are as follows:

 

(In euro million)		As of September 30, 2007		As of March 31, 2007
N+1		927		870
N+2		1,323		571
N+3		959		688
N+4		776		416
N+5		388		287
> 5 years		—		—
Total		4,373		2,832

These commitments relate to amounts in US dollars, converted into euros at the closing date exchange rate.

The number of aircraft on firm order as of September 30, 2007 increased by 50 units compared with March 31, 2007 to 97 units. The number of options increased by 28 units over the same period to reach 62 aircraft. These movements can be explained by:

 

¨	the delivery of 8 aircraft over the period;

 

¨	new orders: 47 firm orders and 39 options;

 

¨	the conversion of 11 options into firm orders.

Long-haul fleet

Passenger

The Group took delivery of 4 Boeing B777. Concerning this aircraft type, the Group has ordered a firm order of 5 units, converted 6 options into firm orders (including one coming from Boeing B777F) and ordered 8 options. Moreover, the Group has converted two options on Airbus A380.

As of September 30, 2007, the Group’s backlog for the long-haul fleet comprised firm orders for 12 Airbus A380s and 18 Boeing B777s. It comprised also 13 options: 2 Airbus A380s and 11 Boeing B777.

 

Activity report April-September, 2007 | Air France-KLM             51

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

Cargo

Following to the conversion of an option on Boeing B777F transformed into B777, the Group has ordered a new option. The outstanding orders concerning the cargo long-haul fleet are stable with 8 Boeing B777F (five firm orders and three options). The first deliveries will begin during the winter of 2008-2009.

Medium-haul fleet

The Group took delivery of one Boeing B737 finally under operational lease.

The Group has ordered a firm order of 15 Airbus A320/A321 and taken the three options on Airbus A318 converted into A320/A321. This new order is accompanied with ten options. Concerning the Boeing B737, the Group has ordered a firm order for seven aircraft and two options.

As of September 30, 2007, the Group’s backlog comprised 18 Airbus A320/A321 and 16 Boeing B737. The Group has 20 options equally shared between Airbus A320 and Boeing B737.

Regional fleet

The Group took delivery of three Canadair CRJ700. It has placed an order with Embraer for 12 ERJ170 (6 firm orders and 6 options) and for 26 ERJ190 (14 firm orders and 12 options).

As of September 30, 2007, the Group’s backlog comprised 28 aircraft under firm orders (eight CRJ1000, six ERJ170 and fourteen ERJ190) and 26 options (eight CRJ1000, six ERJ170 and twelve ERJ190).

The Group’s commitments concern the following aircraft:

 

Aircraft type				To be delivered in		N+1		N+2		N+3		N+4		N+5		Beyond N+5
A318		As of September 30, 2007		Firm orders		—		—		—		—		—		—
				Options		—		—		—		—		—		—
		As of March 31, 2007		Firm orders		—		—		—		—		—		—
				Options		—		2		1		—		—		—
A320		As of September 30, 2007		Firm orders		—		1		2		4		5		—
				Options		—		—		—		—		4		6
		As of March 31, 2007		Firm orders		—		—		—		—		—		—
				Options		—		—		—		—		—		—
A321		As of September 30, 2007		Firm orders		—		1		—		3		2		—
				Options		—		—		—		—		—		—
		As of March 31, 2007		Firm orders		—		—		—		—		—		—
				Options		—		—		—		—		—		—
A380		As of September 30, 2007		Firm orders		—		3		3		4		2		—
				Options		—		—		—		—		2		—
		As of March 31, 2007		Firm orders		—		—		5		3		2		—
				Options		—		—		—		1		2		1
B737		As of September 30, 2007		Firm orders		9		3		2		1		1		—
				Options		—		3		—		—		1		6
		As of March 31, 2007		Firm orders		4		6		—		—		—		—
				Options		—		2		5		1		—		—
B777		As of September 30, 2007		Firm orders		4		6		5		2		1		—
				Options		—		—		—		—		7		4
		As of March 31, 2007		Firm orders		6		4		1		—		—		—
				Options		—		—		5		3		—		—

 

52             Activity report April-September, 2007 | Air France-KLM

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Consolidated financial statements

Notes to the unaudited interim condensed consolidated financial statements

 

 

Aircraft type				To be delivered in		N+1		N+2		N+3		N+4		N+5		Beyond N+5
B777 F		As of September 30, 2007		Firm orders		—		4		1		—		—		—
				Options		—		—		1		1		1		—
		As of March 31, 2007		Firm orders		—		3		2		—		—		—
				Options		—		—		1		2		—		—
CRJ 700		As of September 30, 2007		Firm orders		—		—		—		—		—		—
				Options		—		—		—		—		—		—
		As of March 31, 2007		Firm orders		3		—		—		—		—		—
				Options		—		—		—		—		—		—
CRJ 1000		As of September 30, 2007		Firm orders		—		1		3		4		—		—
				Options		—		—		—		—		4		4
		As of March 31, 2007		Firm orders		—		—		1		4		3		—
				Options		—		—		—		—		—		8
Emb 170		As of September 30, 2007		Firm orders		1		4		1		—		—		—
				Options		—		—		1		4		1		—
		As of March 31, 2007		Firm orders		—		—		—		—		—		—
				Options		—		—		—		—		—		—
Emb 190		As of September 30, 2007		Firm orders		—		9		5		—		—		—
				Options		—		—		1		8		3		—
		As of March 31, 2007		Firm orders		—		—		—		—		—		—
				Options		—		—		—		—		—		—

Note 23 Related parties

During the six-months period ended September 30, 2007, relationships of the Group with its related parties have not changed significantly in terms of amounts and or scope, except the WAM (Amadeus GTD) transaction described in note 9.

Note 24 Subsequent events

A strike of cabin crew of Air France company has occurred during October 2007. Total cost of this strike has been estimated by the management to € 60 million on the income from current operation and will be recorded in the third quarter 2007-08.

 

Activity report April-September, 2007 | Air France-KLM             53

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Information

and control

Person responsible for the first half financial report

I hereby certify that, to the best of my knowledge, and having taken all reasonable precautions to that effect, that the financial statements have been established in conformity with the applicable accounting standards and present an accurate picture of the company’s assets, financial situation and results and of all the companies included in the consolidation scope, and that the first half activity report presents an accurate account of the significant events arising during the first six months of the financial year, their incidence on the first half financial statements and a description of the main risks and uncertainties for the remaining six months of the financial year.

 

 

54             Activity report April-September, 2007 | Air France-KLM

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Information and control

Statutory Auditors’ report on the first half financial information for 2007

 

Statutory Auditors’ report on the first half financial

information for 2007

This is a free translation into English of the statutory auditors’ review report issued in the French language and is provided solely for the convenience of English speaking readers. This report should be read in conjunction with, and is construed in accordance with, French law and professional auditing standards applicable in France.

To the Shareholders,

In our capacity of statutory auditors of Air France-KLM S.A. and in accordance with the requirements of article L. 232-7 of the French Commercial Law (Code de commerce), we hereby report to you on:

 

•

the review of the accompanying condensed half-year consolidated financial statements of Air France-KLM S.A. for the six month period ended 30 September 2007;

 

•

the verification of information contained in the half-year management report.

These condensed half-year consolidated financial statements are the responsibility of the Board of Directors. Our role is to express a conclusion on these financial statements based on our review.

We conducted our review in accordance with professional standards applicable in France. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with professional standards applicable in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed half-year consolidated financial statements are not prepared, in all material respects, in accordance with IAS 34 — standard of the IFRSs as adopted by the EU applicable to interim financial information.

In accordance with professional standards applicable in France, we have also verified the information given in the half-year management report commenting the condensed half-year consolidated financial statements subject of our review.

We have no matters to report as to its fair presentation and consistency with the condensed half-year consolidated financial statements.

Paris La Défense and Neuilly-sur-Seine, on the 22 November 2007

The Statutory Auditors

French original signed by

 

		KPMG Audit				Deloitte & Associés
		Department of KPMG S.A.

 

Jean-Luc Decornoy		Jean-Paul Vellutini		Pascal Pincemin
Partner		Partner		Partner

 

Activity report April-September, 2007 | Air France-KLM             55

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Notes

 

56             Activity report April-September, 2007 | Air France-KLM

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Document edited by

Air France-KLM’s Financial Communication departement.

Cover: Harrison & Wolf Agency

Interior design and realization:

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto authorized.

 

				Air France–KLM
Date: November 29, 2007				By		/s/    Dominique Barbarin
				Name:		Dominique Barbarin
				Title:		Head of Investor Relations