Nov. 23 (Bloomberg) -- Air France-KLM Group, Europe's biggest airline, may report a quarterly profit of 203 million euros ($264 million) as demand for travel increased and Chief Executive Jean-Cyril Spinetta cut costs following the May merger that created the company.

The second-quarter net income forecast is based on the median estimate of seven analysts surveyed by Bloomberg. Paris- based Air France reported net income of 48 million euros a year earlier while KLM had net income of 90 million euros. The company declined to give comparable year-earlier numbers.

Spinetta told shareholders on Sept. 15 that savings from integrating purchasing and sales with Amsterdam-based KLM will approach 100 million euros in the first fiscal year of the merger, 30 percent more than he forecast May 4. The carrier's passenger traffic rose about 6 percent in the quarter, based on an average of monthly traffic reports released by the company. Air France agreed to buy KLM for 850 million euros in shares.

``Integration with KLM seems to be going very well,'' said Emmanuel Soupre, a fund manager at Neuflize Gestion in Paris, which holds Air France shares among $15 billion in assets.

Shares of Air France-KLM have risen 16 percent so far this year compared with an 8.5 percent decline in the Bloomberg Europe Airlines Index, giving the company a market value of 3.8 billion euros. Of the 18 analysts who cover Air France-KLM, eight rate the stock as a ``buy,'' eight as a ``hold'' and two as a ``sell.''

Spinetta, who was paid 382,200 euros in fiscal year ended March 31, declined to be interviewed for this article.

Sales in the fiscal second-quarter ended Sept. 30 rose 6.4 percent to 5.13 billion euros, the airline said on Nov. 15. The airline also said that passenger revenue yield, average sales per passenger for each kilometer flown, fell 0.8 percent.

Comparing Results

Air France spokeswoman Brigitte Barrand said figures for last year's second-quarter, before Air France bought KLM, can't be computed accurately by adding the two separate results. She declined to provide any numbers before tomorrow's announcement.

Air France-KLM's second-quarter decline in yield was ``a very good result'' compared with a 3.75 percent drop at British Airways Plc, Europe's second-largest airline, and a 5 percent decline at Cologne, Germany-based Deutsche Lufthansa AG, the region's No. 3, in the comparable quarter, said Smith Barney analyst Andrew Light in a Nov. 15 report to investors.

Lufthansa reported net income in the third quarter ended Sept. 30 of 125 million euros compared with a year-earlier loss of 17 million euros.

London-based British Airways' second-quarter profit rose 25 percent to 123 million pounds ($228 million) on jobs cuts and increased travel demand. Chief Executive Rod Eddington on Nov. 8 called the next six months ``very challenging,'' because of oil prices near record highs and competition driving down average ticket prices.

Full-Year Profit

Spinetta, 61, told shareholders on Sept. 15 that the carrier would have a ``strong increase'' in profit for the year ending March 31, provided Brent crude oil averaged around $40 a barrel. Each $1 increase in the price of oil boosts operating costs by 20 million euros, Chief Operating Officer Pierre-Henri Gourgeon said in May.

Brent crude oil has averaged $40.90 a barrel since April, the beginning of Air France's fiscal year. It traded at $45.08 a barrel on Monday, 13 percent lower than on Oct. 26, when it closed at record $51.56.

Air France-KLM is better protected against increases in the price of oil in 2005 than British Airways and Lufthansa, with futures contracts for about 70 percent of its fuel needs compared with about 25 percent now for its competitor, said Yan Derocles, an analyst at Oddo Securities in Paris with a ``buy'' recommendation on Air France-KLM shares.

`Bad Will'

The airline also will have a one-time gain in the quarter of about 47 million euros for what analysts called ``bad will'' -- Air France paid less for KLM than its book value.

The carrier also is benefiting from cost-cutting KLM initiated before the takeover. On April 2, 2003, KLM announced a plan to save as much as 600 million euros with cuts including the elimination of 2,000 to 3,000 jobs.

Spinetta said in April he planned to save an additional 600 million euros, or 6 percent of costs, over three years with further costs cuts.

To contact the reporter on this story: Andrea Rothman in Toulouse, France at aerothman@bloomberg.net.

Last Updated: November 23, 2004 01:19 EST