Air France Gains on Reported $1.1 Billion Savings Plan, Possible Job Cuts

Air France-KLM (AF) Group rose as much as much as 4.1 percent in Paris trading after reports that Europe’s largest airline may seek 800 million euros ($1.1 billion) in fresh cost savings that could lead to thousands of job cuts.

Air France rose to 6.19 euros and traded 2.7 percent higher at 6.11 euros at 1:24 p.m. after Les Echos said the company was preparing the savings plan, citing a person it didn’t identify. Spokeswoman Brigitte Barrand declined to comment on the report.

Chief Executive Officer Pierre-Henri Gourgeon has enforced a hiring freeze and told union officials yesterday that further cost-cutting measures may be necessary, without giving any targets or discussing job cuts, Barrand said after the meeting.

“It’s good to hear, however I think it means things are probably getting worse for Air France,” said Chris Logan, an analyst at Echelon Research & Advisory in London. “My guess is they’re seeing something they don’t like in forward bookings.”

Air France-KLM shares have plunged 55 percent this year, the worst performance on the Bloomberg EMEA Airlines Index, valuing the company at 1.84 billion euros ($2.6 billion). The stock slid 7.1 percent yesterday on concern that Europe’s debt crisis will worsen and global growth will evaporate.

High fuel costs and sluggish business-class demand will lead to a weak end to the year for an industry already hurt by unrest in the Middle East and an earthquake in Japan, the International Air Transport Association said Sept 1.

Job Risk

Air France, which is targeting a positive 2011 operating profit, may cut as many as 10,000 jobs if economies slow more severely than expected, Le Figaro cited an unidentified union official as saying. The carrier is already seeking 500 million euros in savings in 2011 via productivity and procurement gains, it said in July, up from the 470 million euros first pledged.

“Cost cutting in France has always been difficult,” said Chris Tarry, an independent aviation analyst who has followed the industry for almost three decades. “When they announced the first cost-cutting exercise that was a major step forward.”

The carrier, which is switching its accounting to the calendar year, earned 122 million euros in the 12 months to March 31, its first operating profit in three years, before posting a 145 million-euro loss for the quarter ended June 30.

Estimated Earnings

Air France-KLM will post a full-year operating profit of 25 million euros, according to the average of eight analyst estimates compiled by Bloomberg. That compares with estimates of 1.09 billion euros for Deutsche Lufthansa AG (LHA) and 644 million euros for International Consolidated Airlines Group SA, formed from the merger of British Airways and Spain’s Iberia.

Lufthansa was trading 0.6 percent higher today and IAG was unchanged, as was leading discount carrier Ryanair Holdings Plc. (RYA)

Airline earnings fell 60 percent industry-wide in the second quarter compared with a year earlier, IATA said today. The trade body said while carriers generate most revenue in the July-September period, “conditions are now deteriorating.”

Air France-KLM will reduce planned capacity increases next summer, it said yesterday, after trimming growth for the current winter timetable to 2.7 percent from 5.1 percent in July, two months after announcing a 10 percent seat reduction in its joint venture with Atlanta-based Delta Air Lines Inc. (DAL)

“There’s nothing like a crisis to increase the focus on reducing costs, but the most important thing is that you don’t compromise your business for when the upturn comes,” Tarry said.

To contact the reporters on this story: Laurence Frost in Paris at lfrost4@bloomberg.net; Steve Rothwell in London at srothwell@bloomberg.net

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

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