Bloomberg News

Air France-KLM Quarterly Loss Narrows on Cost Reductions

July 30, 2012

Air France-KLM Group CEO Jean-Cyril Spinetta

Air France-KLM Group Chief Executive Officer Jean-Cyril Spinetta poses for a photograph during a news conference to present the company's earnings in Paris. Photographer: Balint Porneczi/Bloomberg

Air France-KLM Group (AF), Europe’s biggest airline, surged the most since its formation more than eight years ago as the introduction of a 2 billion-euro ($2.5 billion) savings plan helped halve its second-quarter loss.

Air France’s operating loss narrowed to 66 million euros from 145 million euros a year earlier, beating the 163 million- euro average estimate of analysts in a Bloomberg poll. Ryanair Holdings Plc (RYA), Europe’s top low-cost carrier, posted a 29 percent drop in net income to 98.8 million euros as fuel costs jumped.

Air France-KLM closed almost 73 cents or 19 percent higher at 4.62 euros in Paris, where the company is based, the sharpest gain since the group was founded via a Franco-Dutch merger in May 2004. That boosted the stock’s advance this year to 16 percent, giving a market value of 1.39 billion euros.

“Air France is going in the right direction but I’m still not convinced that they’re prepared to be radical enough in the face of industrial strife over job cuts,” said John Strickland, director of JLS Consulting in London. “Ryanair on the other hand will do whatever’s necessary in terms of grounding aircraft when demand is low, and they don’t have labor issues to worry about.”

Ryanair, which is based in Dublin, closed up 2.4 percent at 4 euros after earlier sliding as much as 5.4 percent.

Job-Cut Costs

Air France-KLM said last month it would eliminate more than 5,000 jobs at its French unit as Chief Executive Officer Jean- Cyril Spinetta seeks the savings he says are needed to guarantee survival. As the economic slump combines with volatile oil prices and exchange rates, the quarterly results show how crucial the Transform 2015 turnaround plan is, he said today.

The carrier posted a restructuring charge of 368 million euros against buyout packages related to the job cuts, extending its second-quarter net loss to 895 million euros from 197 million euros. Sales advanced 4.5 percent to 6.5 billion euros.

“The vast majority of charges were taken into account at end of June,” Chief Financial Officer Philippe Calavia said on a conference call. “For the second part of the year, they will be much lower.” Excluding exceptional items, the net loss would have been about 230 million euros, he said.

Air France aims to post an operating profit higher than the 195 million euros achieved in the second half of 2011 and on that basis should reduce net debt by the end of the year.

“These are interesting results, because they’ve halved their operating loss when everyone thought it would be in line with last year,” said Yan Derocles, an analyst at Oddo Securities in Paris with a “buy” recommendation on the stock. “The debt picture is also evolving in a positive way.”

Fuel Burden

Air France-KLM’s quarterly fuel bill advanced 13 percent to about 1.9 billion euros and will reach 9.4 billion euros for the year, and increase of about 400 million euros, it said today.

Ryanair’s profit was short of the 106 million euros expected by analysts as fuel costs jumped by 117 million euros, or 27 percent, in the three months, its fiscal second quarter.

That wiped out the positive impact of a 6 percent gain in passenger numbers and a 4 percent boost in fares that helped spur revenue 11 percent to 1.28 billion euros. The Irish carrier is seeking to sustain growth by expanding in Eastern Europe and making a 694 million-euro takeover bid for Aer Lingus Group Plc. (AERL)

“There’s austerity right across piece, it’s everywhere,” Chief Financial Officer Howard Millar said in a telephone interview, reiterating that full year earnings will shrink to between 400 million euros and 440 million euros after rising 25 percent to 502.6 million euros in the 12 months to March 31.

‘Cautious’

The deepening European slump means it’s tougher to increase prices this year. Ryanair idled 80 aircraft last winter, curbing capacity and helping to boost average fares 16 percent.

Pricing may improve slightly this quarter, generally the busiest for the airline industry, with fares up as much as 7 percent, Millar said. For the 12 months, passenger numbers should increase by about 5 percent, or 4 million, to 79 million.

The full-year fuel bill is likely to be about 1.95 billion euros, up 320 million euros, the CFO said, and while Ryanair is hedged at $94 a barrel on 50 percent of its requirement for the first half of fiscal 2014, versus $100 this year, that will be more than offset by the euro’s lower value versus the dollar.

“Our outlook remains cautious for the year,” Ryanair Chief Executive Officer Michael O’Leary said in a statement.

The job cuts being targeted at Air France-KLM, equal to 10 percent of posts at the French unit, are to be achieved through voluntary departures and attrition, avoiding firings, it says.

Cabin-Crew Question

Unions representing ground workers and pilots last week backed the cuts, Air France said, though two of the main cabin- crew groups oppose the proposals, causing the carrier to suggest that it may scrap current accords when they expire in March.

Deutsche Lufthansa AG (LHA), Europe’s No. 2 airline, said on May 2 that it would scrap about 3,500 administrative posts as part of a 1.5 billion-euro savings plan. The German company may also cut 1,000 jobs at LSG Sky Chefs, the world’s biggest inflight caterer. It reports second-quarter results on Aug. 2.

Air France also plans to slim its European business into three units to slash costs at the perennially unprofitable operation, it said May 24. Brit Air, Regional and Airlinair, which serve smaller cities, will become a single division, while a leisure arm will be established around discount unit Transavia and Air France’s short-haul brand will add a no-frills class.

Passenger traffic rose 2.4 percent in the second quarter and the load factor, a measure of seat occupancy, also improved. Bookings in the summer, the busiest period for travel, are “strong,” Calavia said.

Genuine Bid

Ryanair has gained 10 percent this year for a market value of 5.8 billion euros. EasyJet Plc (EZJ), Europe’s second-biggest discount carrier, has advanced 45 percent.

Millar said Ryanair’s bid for shares of Aer Lingus that it doesn’t already own has too many cost implications for it not to be meant as a serious offer, even though European Union regulators blocked two previous approaches.

Dublin-based Aer Lingus on July 18 urged investors to reject O’Leary’s 1.30 euros-a-share offer, saying it was too low and probably incapable of completion under antitrust rules.

Ryanair last week asked an English court to block a U.K. Competition Commission probe into its existing 29.8 percent Aer Lingus stake, added six years ago, arguing that it violates the jurisdiction of the EU, which is considering the latest bid.

The 2012 Olympics, being held in London, are having little impact on Ryanair, Millar said, even though the U.K. is its biggest market. EasyJet said last week that the games have hurt demand as Britons avoid travel and business visitors stay away.

Ryanair has no interest in buying more planes at the prices on offer from Boeing Co. (BA:US), Millar said, adding that the U.S. company has “sold lots of aircraft to people who have no money.”

The Irish carrier is continuing to work with Commercial Aircraft Corp. of China, which is developing the C919 jet, though there’s no prospect of an order soon, the executive said.

“We’re helping them out,” he said. “But it’s a long way off. You are talking towards the end of this decade.”

To contact the reporter on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net; Chris Jasper in London at cjasper@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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