Air France Predicts 2011 Loss; Spinetta Flags Recovery Plan

Air France-KLM Group, Europe’s biggest airline, reported a 31 percent drop in quarterly profit and said it expects to post a full-year loss as fuel costs surge and a sluggish economy weighs on ticket prices.

The stock fell as much a 4.9 percent after the Paris-based carrier said last night that earnings before interest and tax tumbled to 397 million euros ($540 million) in the three months to Sept. 31 from 576 million euros a year earlier. Analysts had predicted a 489.5 million-euro profit, based on six estimates.

Jean-Cyril Spinetta, recalled as chief executive officer last month after slumping profit forced the exit of Pierre-Henri Gourgeon, said the company is headed for a 12-month operating loss after previously aiming to break even. A recovery plan will require more drastic cost cuts, a revamped short-haul network and debt reduction, the 68-year-old said at a press briefing.

“The situation is difficult, not disastrous, but we need to take action,” he said. “You might think I made a mistake coming back, we’ll have to see. I hesitated for a few days before giving the board my answer, knowing it would be no easy task.”

Air France-KLM (AF) was trading 2 percent lower at 4.77 euros as of 9:31 a.m. in Paris, taking the stock’s drop this year to 65 percent and valuing the company at 1.46 billion euros.

Steepest Fall

That makes it the worst performer on the six-member Bloomberg EMEA Airlines Index, which has declined 37 percent.

The carrier reported an adjusted operating profit of 468 million euros, down 28 percent.

“The current economic climate continues to impact international trade as well as business confidence, leading to volatility in both traffic and revenues,” Spinetta said, adding that the “difficult environment” is being exacerbated by a spiraling kerosene bill and volatile currency movements.

While sales rose 2.1 percent to 6.79 billion euros, fuel costs jumped by 14 percent or 214 million euros, Air France said in a statement. 2010’s pro forma operating profit was 28 million euros, with the company switching to calendar reporting for 2011 having previously worked to a fiscal year ending March 31.

“We were expecting them to revise the guidance, though the consensus will have to come down,” said Yan Derocles, an analyst at Oddo Securities in Paris who predicts a full-year loss of 200 million euros and has a “buy” rating on a stock he expects to fall further before the turnaround plan becomes clearer.

Outshone by Alitalia

Spinetta said he’ll provide details of a strategy to improve the company’s competitiveness in the first quarter of 2012, with the focus on further cost savings, rapid debt reduction and restructuring short- and medium-haul operations, a move he added has no implications for employment levels.

“The problem is the need to improve our product,” said Spinetta, who is also Air France-KLM’s chairman and delivered 11 years of profitability in his previous stint as chief.

“I’m not interested in my image,” the CEO said at the press briefing. “I don’t care whether it’s jeopardized. Because the group was in a difficult situation I couldn’t have said ‘no.’”

Air France-KLM may be outperformed this year by Alitalia SpA, which was close to collapse when the larger company took a 25 percent stake in 2009. The Italian carrier should break even this year and is “restoring its credibility,” Spinetta said.

Operating profit at Deutsche Lufthansa AG (LHA) fell 27 percent in the third quarter to 575 million euros, Europe’s second- biggest airline said Oct. 27, less than the 646 million euros predicted by analysts. The carrier is still targeting annual earnings in “the upper three-figure million euro range.”

Fares Slide

International Consolidated Airlines Group SA, the European No. 3 and parent of British Airways and Spain’s Iberia, this week said third-quarter operating profit dropped 31 percent to 363 million euros. Analysts had expected a figure of 424 million euros. Full-year earnings will be “around double” 2010’s pro forma figure of 225 million euros, the company says.

Air France-KLM’s quarterly net income tumbled 95 percent to 14 million euros, according to the statement. Its six-month yield, a measure of average ticket prices, fell 1.8 percent.

There has been no decision as yet on whether to defer any pending plane deliveries, Chief Financial Officer Philippe Calavia said at the briefing. The CFO said French banks are having some difficulties accessing dollars for loans on aircraft, which are priced in the U.S. currency, though Chinese and Japanese banks don’t have the same constraints. Even so, accessing capital at all is becoming more difficult, he said.

To contact the reporter on this story: Andrea Rothman in Paris at aerothman@bloomberg.net;

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

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