Air France-KLM Raises Profit Forecast, Plots Asian Routes as Demand Booms

Air France-KLM Group, Europe’s biggest airline, raised its full-year earnings target and plans to add more than a dozen new routes to tap surging demand for flights to Asia, Africa and the Middle East.

The shares rose the most in five months in Paris after Air France said late yesterday it’s targeting an operating profit of more than 300 million euros ($409 million) for the 12 months to March 31. It had forecast only a “positive” result on Oct. 26.

The carrier will add four or five new Asian destinations by 2014, mainly in China, plus a similar number in Africa and the Middle East and one or two in the Americas, Chief Executive Officer Pierre-Henri Gourgeon said. The company has also recruited PT Garuda Indonesia to its SkyTeam alliance and is seeking new members in India, Brazil and Saudi Arabia, he said.

“The main purpose of our development in China is to have a good part of their huge potential for air transport,” Gourgeon said in an interview. New destinations will include Wuhan in central China and the coastal city of Xiamen, the CEO said.

Air France-KLM rose 75.5 cents, or 5.7 percent, to 13.98 euros, the steepest gain since June 3, as of the close in Paris. The stock has added 27 percent this year, valuing the company at 4.19 billion euros.

Photographer: Antoine Antoniol/Bloomberg.

Air France-KLM Group Chief Executive Officer Pierre-Henri Gourgeon. Close

Air France-KLM Group Chief Executive Officer Pierre-Henri Gourgeon.

Close
Open
Photographer: Antoine Antoniol/Bloomberg.

Air France-KLM Group Chief Executive Officer Pierre-Henri Gourgeon.

Beating Estimates

The airline had net income of 290 million euros in the three months ended Sept. 30, a second straight quarterly profit, compared with a 147 million-euro year-earlier loss, it said in a statement. Sales rose 19 percent to 6.65 billion euros.

Analysts had predicted earnings of 248 million euros on revenue of 6.4 billion euros, according the average figures from estimates compiled by Bloomberg.

“These are really excellent results,” said Paul Butler, an analyst at Macquarie Research in London who added that his estimate for a 12-month operating profit of 290 million euros had been at the top end of the range. Butler has an “outperform” rating on Air France-KLM stock.

Passenger traffic rose 3.1 percent last month, led by a 5 percent increase on Asian routes, which the company said were “dynamic,” with seat occupancy levels of 89.5 percent compared with a “very high” 84.2 percent across the network as a whole.

Airlines worldwide are reporting a surge in earnings as they emerge from the worst slump in decades. Among Air France’s biggest rivals, Deutsche Lufthansa AG of Germany tripled net income in the quarter and British Airways Plc ended two years of losses, while Delta Air Lines Inc., its U.S. partner in SkyTeam, also swung to a profit from a loss.

Business Barrier

Still, some measures of fares and demand remain below the high point before the credit crunch and recession, and Air France and its peers will struggle to regain those heights, said Dan Solon at consulting company Avmark International in London.

“I think this is probably where it’s going to get stuck,” the analyst said. “Business travelers have got a number in their heads for what a ticket to such and such costs, and the industry will have a hell of a time budging upwards from that.”

Garuda is likely to make an announcement on joining SkyTeam next week, Gourgeon said today at a briefing with analysts. The Jakarta-based carrier’s CEO, Emirsyah Satar, said in February that it was in discussions about membership of the alliance.

India, Brazil

Air France-KLM is in talks with potential Indian and Saudi Arabian recruits and is looking to bring in a Brazilian partner, the CEO said. Jet Airways is the largest Indian carrier yet to commit to an alliance, with Air India having agreed in 2007 to join the Lufthansa-led Star grouping and Kingfisher Airlines Ltd. signing up to British Airways-led Oneworld in June.

Saudi Arabian Airlines is considering joining one of the three main groups, the country’s national press agency reported on Nov. 3, citing Director General Khaled Abdullah Al Melhem.

In Brazil, Tam SA, the biggest airline and part of Star, is being bought by Lan Airlines SA, of Chile, a Oneworld member. Gol Linhas Aereas Inteligentes SA, the No. 2, has no immediate alliance plans, finance chief Leonardo Pereira said on Sept. 30.

In Europe, Gourgeon said Air France-KLM is moving forward with a plan to better compete with discount carriers Ryanair Holdings Plc and EasyJet Plc by establishing a unit next summer with 40 planes split between four cities in southern France.

‘Project Base’ will seek to reduce costs by improving aircraft utilization, accelerating turnaround times for Airbus SAS A320-series jets, using only two crew per plane a day and introducing remuneration rules based on “days on.”

There will be no change to the in-flight product, branding or pricing, the CEO said at presentation in Paris today.

Higher Yields

While capacity will grow about 7 percent next summer, aided by more Airbus SAS A380 superjumbos, the move is mainly intended to restore seats eliminated during the economic slump and represents “a recovery, not an increase,” Gourgeon said.

Demand remains “very strong,” with a clear improvement in premium traffic as corporate travel rebounds, Peter Hartman, CEO of Dutch division KLM, said yesterday in Paris. Unit revenues or yields increased by about 18 percent in the quarter.

Air France-KLM reported a quarterly operating profit of 576 million euros, snapping seven straight deficits. It had failed to achieve positive earnings at that level in the three months through June after the eruption of an Icelandic volcano closed European airspace at a cost of 158 million euros.

The carrier posted fiscal first quarter net income of 736 million euros only after a 1.03 billion-euro gain from the sale of a stake in the Amadeus IT Holding SA flight-booking system.

After achieving 287 million euros of cost cuts in the first half the group has raised its full-year target by 10 million euros to 540 million euros. Operating expenses fell 0.7 percent in the half, excluding the impact of currency fluctuations and fuel costs, which rose 21 percent as hedging had a negative impact of 230 million euros.

Airline earnings will peak at $8.9 billion this year before falling to $5.3 billion in 2011 as austerity measures and slower growth curb demand and capacity increases hurt pricing power, the International Air Transport Association said Sept. 21.

To contact the reporters on this story: Laurence Frost in Paris at lfrost4@bloomberg.net; Andrea Rothman in Paris at aerothman@bloomberg.net.

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.