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Air France Had ’Vigorous’ Debate With Delta Over Seat Cuts

Air France-KLM Group CEO Pierre-Henri Gourgeon
Pierre-Henri Gourgeon, chief executive officer for Air France-KLM Group. Photographer: Antoine Antoniol/Bloomberg

Air France-KLM Group said it held a “vigorous” debate with SkyTeam ally Delta Air Lines Inc. over capacity before the pair agreed to slash seats in their trans-Atlantic venture as much as 9 percent for the northern winter.

The shift, also involving Italy’s Alitalia SpA, will entail fewer frequencies and a redeployment of the fleet to cope with rising fuel costs and fluctuating demand, with some planes sent to warmer destinations where winter demand is stronger, the companies said today. The carriers jointly operate 260 daily flights with 144 planes, generating $11 billion in annual sales.

“We went too hard last year, especially on the U.S. side,” Air France Chief Executive Officer Pierre-Henri Gourgeon said today in Paris. “Everyone was enthused after the summer and said ‘wow, we have the aircraft, let’s go.’ But the gap between demand and capacity fell. This year we want to correct that.”

Negotiations with Delta, which lifted capacity 20 percent last winter, were “vigorous” and a test of the governance of the joint venture, Gourgeon said, adding that “business discussions are always a bit tense.”

Delta and its partners worked as a “virtual single airline” to determine which cuts to make and on which routes, and that’s “a great testament to how we work together,” said Olivia Cullis, a spokeswoman for the U.S. carrier in London.

Empty Seats

Atlanta-based Delta failed to lift ticket prices across the Atlantic in the first quarter after boosting capacity there 16 percent as traffic rose 6 percent, it said last month. The disparity cut seat occupancy by 6.4 percentage points and helped push the world’s No. 2 airline to a $318 million net loss.

The cuts announced today will cover the fall and winter seasons and eliminate 7 to 9 percent of seats on relevant routes versus a year earlier, the companies said.

Delta CEO Richard Anderson acknowledged on April 26 that there was “significant industry overcapacity” on trans-Atlantic routes, and the carrier said May 6 it would pare seating in the market by 8 to 10 percent following the Labor Day holiday in September. Delta President Ed Bastia said today at a transportation conference that the figure is now 10-12 percent.

Peter Hyde, an analyst at Liberum Capital in London, said today in an investor note that Delta and Air France had revealed future seating plans “early” and that he’s concerned about the European carrier’s “strategic positioning” in light of last winter’s capacity deployment and issues over yields or pricing.

Fuel Squeeze

Airlines returned to profit after the recession by slashing routes, cutting frequencies and raising fares on remaining flights. A glut of seats could prompt a reversal in prices and make it tougher to pass on the spiraling cost of jet fuel, said Chris Tarry, an independent airline analyst in London.

“It’s better to have fewer seats and people being prepared to pay a bit more to fly than having excess capacity and not being able to recover the costs,” said Tarry, who has followed the aviation industry for almost 30 years.

Air France’s fuel costs increased by 1 billion euros ($1.4 billion) in the year to March 31 and by 186 million euros, or 15 percent, in the fourth quarter, when post-hedging fuel expenses rose 7 percent, the Paris-based company said today in an earnings statement. The bill may jump 26 percent this year.

As part of the winter shakeup, Air France will switch planes to seasonally busy cities such as Cape Town and Cancun, Mexico, it said, with Gourgeon adding that “it makes far more sense to use the planes in zones where the demand is stronger.”

The measures will also include “right-sizing” the joint-venture fleet, the carriers said, without being specific. The venture is based around hubs in Amsterdam, Atlanta, Detroit, Minneapolis, New York, Paris and Rome and directly serves 26 gateways in North America and 33 in Europe.

BA Broadside

Air France said Feb. 21 it would add flights to locations including Orlando as it boosted summer seating 5.7 percent, less than two weeks after Gourgeon warned “significant overcapacity” on North Atlantic routes was starting to crimp earnings.

Willy Walsh, CEO of International Consolidated Airlines Group SA, formed from a merger of British Airways and Spain’s Iberia in January, said at the time that the Air France chief’s comments were unhelpful and “confused.”

IAG spokeswoman Laura Goodes said today that the London-based company had no comment on the Delta-Air France announcement, while confirming that it plans to lift capacity at an underlying rate of about 5 percent for the rest of 2011.

Air France-KLM said today that its fourth-quarter operating loss narrowed as cost cuts and increased demand for travel outweighed higher fuel expenses and disruption caused by the Japanese earthquake and unrest in Arab states.

Full-Year Profit

Europe’s largest airline pared the loss for the three months through March to 403 million euros from 497 million euros a year earlier, pushing it to the first annual profit in three years. Full-year traffic grew 1.1 percent, led by a 4 percent jump on Asian routes.

The annual result was spurred by a “strong recovery” in most markets, Air France said, with seat occupancy increasing 1 percentage point to 81.6 percent and cargo traffic up 2.5 percent. The company shaved 595 million euros from costs and said it’s seeking a further 470 million euros this year.

Air France-KLM rose as much as 2.6 percent to 12.20 euros and was trading at 12.14 euros as of 5:21 p.m. in Paris, where the company is based, paring the stock’s decline this year to 11 percent and valuing the company at 3.64 billion euros.

Delta was priced up 3.6 percent at $11.33 in New York.

Gourgeon said the company won’t pay a full-year dividend as it focuses on “longer term objectives” including a “significant reduction” in gearing. Net debt was cut by 300 million euros to 5.9 billion euros in the year, with the debt-to-equity ratio reduced to 85 percent from 115 percent.

Excluding one-time items such as gains from the sale of shares in flight-reservations system Amadeus, the company said it would have recorded a 234 million-euro full-year net loss, narrowing from a deficit of 1.23 billion euros a year earlier.

----With assistance from Steve Rothwell in London and Mary Jane Credeur in Atlanta. Editors: Chris Jasper, Chad Thomas.

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