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Air France-KLM To Battle Fuel Costs With Deeper Integration

Published on Feb 20 2019 12:26 PM in General Industry tagged: Air France-KLM

Air France-KLM To Battle Fuel Costs With Deeper Integration

Air France-KLM has pledged new efficiency gains to offset higher fuel costs this year, as the Franco-Dutch airline group deepens cooperation between its two main carriers.

Presenting 2018 earnings for the group he joined in September, CEO Ben Smith promised better-coordinated networks and fleets, after overcoming KLM resistance to closer integration with Air France in a new boardroom deal.

"These first achievements pave the way for our ambition to regain a leading position in Europe and worldwide," Smith said.

EBITDA And Revenue

Underlining Smith's challenge, fourth-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) fell 20% to €776 million euros as the fuel bill mounted, despite a 4.1% revenue gain to €6.54 billion.

Unit revenue fell 0.6% in the last three months of 2018 and will decline further in the current quarter, the group said.

Wage Hikes

Air France-KLM has trailed rivals Lufthansa and British Airways on profitability, held back by restrictive French union deals and strikes that last year wiped €335 million off earnings and forced out its previous CEO.

But Smith, an Air Canada veteran, has restored labour peace by granting wage hikes in return for increased flexibility with which he now hopes to make better and more profitable use of the group's aircraft and networks.

On the eve of the results presentation, Air France-KLM struck a new pay deal with its French pilots and resolved a standoff with KLM and the Dutch division's popular leader Pieter Elbers, over Smith's integration plans.

Operating Margin

Wariness on the Dutch side is partly explained by the relative underperformance of Air France, whose 2018 operating margin was 1.7%, or 4% excluding the impact of strikes - compared with 9.8% for KLM.

Decisions On Strategy

Almost 15 years after the Air France-KLM merger, decisions on networks, fleets and commercial strategy will now be taken by the group rather than the individual carriers, under the plans unveiled this week- which also see Elbers and AirFrance counterpart Anne Rigail become deputy group CEOs.

The financials were broadly in line with expectations of €786 million of EBITDA on €6.52 billion in revenue, based on the median of seven analyst estimates in a poll by Infront Data.

"While a new CEO with an impressive track record has been appointed and short-term pay deals agreed with the French unions, we await details of his new strategy," Liberum analysts said in a note.

Fuel Bill

The fuel bill rose by €451 million in 2018 and will climb another €650 million this year as hedges expire, chief financial officer Frederic Gagey told reporters on a call.

Overall unit costs, up 0.6% last year before currency and fuel-price impacts, were "well under control", Gagey said, adding that while a later Easter holiday will likely lead to lower unit revenue in the first quarter, summer bookings are already "better positioned".

The group said 2019 costs are expected to come in somewhere between flat and a 1% decline, on the same basis.

Passenger Traffic

Passenger traffic rose 3.4% to 24.46 million in the last quarter, the group said, while crossing the 100 million threshold for the full year.

Transavia

The low-cost Transavia arm was a bright spot, posting a 9% 2018 operating margin for its French operations as it expand services by 9% to 11% percent in 2019, with a more modest 2% to 3% growth at group level - to include eight new Air France destinations from mid-year.

Financial Lift

The new labour deals should provide a financial lift in 2019, the CFO said, avoiding the strikes and disruption that led to a spike in Air France's customer compensation bill last year.

The rollout of new digital sales platforms will also generate savings, along with improvements to long-haul network planning and the gradual replacement of less fuel-efficient four-engined Airbus A340 and Boeing 747 planes.

Efforts To Increase Synergies

The newly-announced management changes may boost efforts to increase synergies in areas such as purchasing - which lacked a single group-wide chief procurement officer until last year.

Smith's centralisation push builds on years of painstaking integration that had already assigned some 18,000 staff to group-wide services and managers, said Gagey, who joined Air France in 1997.

"It's not as if we just realised we should begin to look for synergies," he said.

News by Reuters, edited by Hospitality Ireland. Click subscribe to sign up for the Hospitality Ireland print edition.

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