General Industry

Air France-KLM Cost-Cutting Lifts Profit, Shares

By Dave Simpson
Air France-KLM Cost-Cutting Lifts Profit, Shares

Air France-KLM has said its operating profit rose 16% in the second quarter as new CEO Ben Smith's cost-cutting helped offset rising fuel prices, sending its shares up 7%.

The Franco-Dutch group has lagged European rivals on profitability in recent years but delivered a stronger quarter than rival Lufthansa, which reported a 25% earnings fall as increasing capacity intensified competition.

Operating income rose to €400 million, ahead of the €316 million expected by analysts, according to the company's own poll of 20 estimates.

Better sales and "execution in unit-cost reduction enabled us to more than offset rising fuel costs," Smith said. A 6.1% increase in Air France-KLM traffic outpaced its 4.5% capacity expansion year-on-year.

Smith, who joined Air France-KLM last September from Air Canada, wants to boost efficiency through better coordination of the Air France and KLM networks and fleets while expanding services under the Transavia low-cost brand.


Revenue rose 6.4% to €7.05 billion, while unit costs fell 2.3% excluding currency and fuel costs, which rose by €220 million year-on-year.

Further gains on efficiency will come from simplification of the business as well as recent labour deals that mean Air France-KLM has "enormous flexibility now to drive productivity gains", Smith told analysts on a call. The new CEO has pledged to give investors a detailed strategy presentation in November.

Long-haul bookings for August-December are ahead of their level a year earlier, the company said.

"Forward bookings suggest the long-haul outlook remains encouraging, although we would expect further short-haul challenges," Liberum analysts said in a note.

The operating margin improved to 5.7% from 5.2%, largely reflecting the impact of Air France strikes a year earlier that led to the abrupt departure of Smith's predecessor.


"Big Positive"

Air France pilots overwhelmingly approved plans to expand Transavia's fleet beyond the 40-plane limit currently imposed by labour agreements, Smith announced last week, hailing the SNPL union members' 78% referendum vote as a "big positive".

In a sign of remaining hurdles, however, Air France-KLM  has trimmed its Transavia capacity growth forecast for 2019 to 7%-9% from 9%-11%, citing pilot recruitment delays.

Unit revenue rose across all major long-haul regions except Latin America, with the lucrative North Atlantic market showing 2.6% growth before currency effects. North America will show a smaller improvement for the third quarter underway, chief financial officer Frederic Gagey predicted.

Net income fell 27.3% to €80 million. Debt declined by €466 million over six months to €5.7 billion.

The fuel-cost impact reflected the expiry of hedging instruments that had benefited the group last year, Gagey said. For the full year 2019, however, Air France-KLM trimmed the expected fuel bill increase to €550 million from a previously forecast €650 million.


Airbus A220s

To improve fuel-efficiency and costs, Air France-KLM said it will buy at least 60 Airbus A220s to replace ageing aircraft and retire all 10 A380 superjumbos from its 541-plane fleet earlier than planned, a decision that will incur about €400 million in future writedowns, the CFO said.

Air France-KLM also reiterated its 2019 goals including a unit-cost progression between flat and a 1% decline before fuel - a benchmark surpassed by a 1.4% decline in the first half.

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