Air France-KLM Earnings Beat Estimates With Lufthansa

Air France-KLM Group (AF) and Deutsche Lufthansa AG (LHA) posted earnings gains that beat analyst estimates as Europe’s two biggest airlines began to reap the benefits of moves to eliminate thousands of jobs. Their shares surged.

Third-quarter operating profit jumped 27 percent to 506 million euros ($656 million) at Air France-KLM, where analysts had predicted 434 million euros, and 6.2 percent to 648 million euros at Lufthansa, exceeding a 522 million-euro forecast.

Air France-KLM said today it will seek 1,300 job cuts at its Dutch unit in addition to 5,000 already being eliminated at the larger French business. Lufthansa, which is cutting 3,500 administrative posts and as many as 1,000 in catering, said it’s “making progress” but that margins remain inadequate.

“We didn’t expect such a rapid recovery,” said Yan Derocles, an analyst at Oddo Securities in Paris who recommends buying Air France-KLM stock. The French company’s earnings jump may be “a result of the first measures implemented, even before the job-cuts plan, with more flexibility and a wage freeze.”

Air France shares rose as much as 9.3 percent to 6.50 euros for the biggest gain since July 30 and were trading at that level as of 4:39 p.m. in Paris, where the airline is based. The stock has advanced 63 percent this year, valuing the company at 1.95 billion euros.

Shares Advance

Germany’s Lufthansa added 7.9 percent, the biggest jump since Aug. 5, 2009, before trading up 6.6 percent at 11.71 euros in Frankfurt. That takes 2012’s gains to 27 percent and gives the business a market value of 5.38 billion euros.

British Airways parent International Consolidated Airlines Group SA, which reports third-quarter results on Nov. 9, rose as much as 4.4 percent and is up 9.4 percent this year.

Air France-KLM Chief Executive Officer Jean-Cyril Spinetta is also merging the finance arms of its main brands and adding no-frills flights to counter competitors such as EasyJet Plc. (EZJ) The French job cuts, part of the Transform 2015 plan aimed at paring debt by 2 billion euros, amount to 10 percent of the unit payroll, a reduction he says is necessary to guarantee survival.

Air France-KLM cut 2,900 posts through the first quarter, while third-quarter sales increased 5.8 percent to 7.18 billion euros, led by a 7.9 percent gain in passenger revenue. The company said it “enjoyed a good summer season,” with traffic up 0.9 percent and seat occupancy running at 86 percent.

‘Good Summer’

The hurricane that hit the U.S. this week, closing major airports, had an impact of 5 million euros to 10 million euros, Chief Financial OfficerPhilippe Calavia said on a conference call with analysts, adding that the carrier aims “to catch up” with part of that figure over coming days as flights resume.

At European No. 2 Lufthansa, sales rose 6.1 percent to 8.31 billion euros, with profit jumping 15 percent at the passenger business on a revamp of the Austrian Airlines arm, a weaker euro that benefitted bookings outside the region, and capacity constraint that helped boost yields, a measure of fares. Profit also rose 43 percent at catering unit LSG Sky Chefs, which in August agreed to run Finnair OYJ’s food and drink operations.

While CEO Christoph Franz reiterated that full-year operating profit will be in the “mid-three-digit million-euro range,” minus restructuring costs of 100 million euros, he said the figure will fall short of last year’s 820 million euros and that operating conditions are generally getting more demanding.

“The numbers are very good, but the outlook is still cautious,” said Frankfurt-based Bankhaus Metzler analyst Juergen Pieper, who recommends buying Lufthansa shares.

Headcount Impact

Cologne-based Lufthansa plans to save 1.5 billion euros by 2015 through its Score reorganization plan, which in addition to job cuts includes the folding of short-haul operations outside Frankfurt and Munich into the Germanwings low-cost unit. The company has also scrapped some routes, frozen capacity this year and delayed an upgrade of the inter-continental plane fleet.

Third-quarter headcount was 1.7 percent lower than a year ago at 118,088, according to today’s statement, with 12-month savings likely to top 380 million euros. Lufthansa will cut winter capacity by 3 percent as it pursues its longer-term savings target and also bundle finance, human resources and procurement functions into a unit incorporating 2,500 of 4,900 global admin jobs, paralleling developments at Air France-KLM.

Regional Threat

Air France’s Spinetta reiterated a forecast for reduced net debt and a second-half operating profit above 2011’s 195 million euros. Still, airline earnings will drop by more than half this year, crimped by a sluggish economy and persistently high oil prices, the International Air Transport Association trade group reckons, and Air France-KLM remains set for a fourth straight annual net loss, according to analyst estimates.

CFO Calavia told Bloomberg Television that the company is targeting a full-year profit in 2013, though “that will depend on the economic environment.” Options available for refinancing debt due in 2014 including tapping bond markets, he said.

Air France’s regional flights, which are being merged and partly recast as low-cost operations, face two new competitors posing “a further challenge that we’re well aware of,” he said.

Fuel expenses jumped 15 percent or 254 million euros in the quarter and cargo traffic fell 6.5 percent, hurt by the economy and industry overcapacity, according to Calavia, who said there’ll be no discernible pre-Christmas freight peak this year.

IAG, SAS

At Lufthansa, fuel costs also rose and cargo traffic was barely changed, with the carrier seeing no sign of a turnaround in that market. As part of the short-haul reorganization the expanded Germanwings unit will operate a fleet limited to Airbus SAS A320-series and Bombardier Inc. (BBD/B) CRJ 900 planes by 2015, CEO Franz said. The operations currently have Boeing Co. (BA) 737 models.

Other European airlines are also cutting costs. SAS Group, the biggest Nordic airline, said yesterday it plans to sell assets worth 3 billion kronor ($450 million) and shave the same amount from costs. That’s on top of steps including 300 job cuts aimed at reducing expenses by 5 percent and boosting earnings by 5 billion kronor in 2012 and 2013 at a company which hasn’t posted an annual profit since 2007.

IAG (IAG) meanwhile plans to scrap jobs at Spanish arm Iberia arm after saying that shortfalls at the Madrid-based unit are likely to push it to a “small operating loss” for the full year.

Air Berlin Links

Air France secured on Oct. 8 a code-sharing agreement with Etihad Airways, bringing the third-biggest Gulf carrier closer to its SkyTeam global alliance. The deal allows the companies to sell tickets on each other’s flights beyond their hubs in Paris, Amsterdam and Abu Dhabi and is intended to be the initial phase of a “much larger strategic partnership,” according to Etihad.

Calavia said today that the deal is “a first step,” with negotiations ongoing on to improve the deal. That might include stronger links with German discount operator Air Berlin Plc (AB1), in which Etihad is an investor, he said.

Air France-KLM is still discussing a possible order for Airbus A350 wide-body planes that’s been held up as the company seeks to secure rights to service the model’s engines from manufacturer Rolls-Royce Holdings Plc (RR/), the CFO said.

“It’s not over, because major stakes are on the table,” he said, adding that engine-makers are trying to impose constraints as they expand high-margin maintenance activities. “We can’t accept that because for us this is a source of profit,” he said.

Air France is meanwhile negotiating with Airbus over compensation for technical glitches and fixes for wing cracks on A380 aircraft, spokesman Jean-Charles Trehan said separately while declining to comment on the amount being sought.

To contact the reporters on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net; Alex Webb in Frankfurt at awebb25@bloomberg.net

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

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