Air France Predicts Loss, Says Euro Straining Bank Options

Air France-KLM Group CEO Jean-Cyril Spinetta
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. Photographer: Fabrice Dimier/Bloomberg

Nov. 10 (Bloomberg) -- Air France-KLM Group, Europe’s biggest airline, reported a 31 percent drop in quarterly profit, predicted a full-year loss and said it will become tougher for the industry to fund investments as the euro-crisis deepens.

Air France-KLM stock fell as much a 4.9 percent after the 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 million-euro profit, based on six estimates.

Jean-Cyril Spinetta, reinstated as chief executive officer last month, said high fuel costs and a sluggish economy mean the Paris-based company is headed for a 12-month operating loss after previously aiming to break even, while Chief Financial Officer Philippe Calavia said that accessing credit is becoming “complicated” as French banks limit lending on jet purchases.

“The situation is difficult, not disastrous, but we need to take action,” said Spinetta, 68, who was last CEO from 1998 until the end of 2008. “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.”

Steepest Fall

Air France-KLM was trading 1.9 percent lower at 4.77 euros as of 12:17 p.m. in Paris, taking the stock’s drop this year to 65 percent and valuing the company at 1.43 billion euros.

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

The quarterly yield, a measure of average fares, fell 3.2 percent even as traffic gained 7.9, though it’s improving on North Atlantic services. Air France-KLM is still expanding on Chinese routes, Spinetta said, while Japan is showing a gradual recovery, as is French-speaking Ivory Coast, though there is no significant improvement in North Africa after the unrest there.

Christmas Cancelled

Cargo traffic fell 2.1 percent in the quarter, and while there’s unlikely to be a complete collapse in volumes to match that during the last recession, export flows into Europe are weaker than expected and there’ll be little evidence of the usual peak season during the current three months, Calavia said.

“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.

Calavia said French banks are having difficulties accessing dollars for loans on jets, which are sold in the U.S. currency, as they rein in lending amid pressure to bolster capital and insulate themselves against Europe’s sovereign debt crisis.

Fewer Players

“Having access to bank credit will surely become more complicated in Europe,” the finance chief said in an interview late yesterday. “As in 2009, there are certain banks that have already announced that they’re cutting activity in this sector. The number of players is reducing, and that’s not good.”

French banks play a key role in financing jets, usually contributing up to 20 percent of all commitments. BNP Paribas SA and Societe Generale SA are among institutions trimming lending.

Turnaround Plan

While Air France pays for planes in euros translated from dollar sums, it has still had to use Asian lenders. “These banks aren’t in the same difficulty as banks in the euro zone,” the CFO said. “They have liquidity and they’re not threatened by the ratios that are being applied to solvency for European banks.”

Spinetta, who is also Air France-KLM’s chairman, said he’ll provide details of a strategy to improve the company’s competitiveness in the first quarter of 2012, with the focus on deepening cost savings, accelerating 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 returned as CEO when slumping profit forced the exit of Pierre-Henri Gourgeon. He delivered 11 years of profitability during the previous stint as chief.

Outshone by Alitalia

“I’m not interested in my image,” the CEO said at a 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 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.”

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.

Credit Lines

Air France-KLM’s quarterly net income tumbled 95 percent to 14 million euros, while adjusted operating profit dropped 28 percent to 468 million euros.

There has been no decision as yet on whether to defer any pending plane deliveries, Calavia said, and bookings for first-and business-class seats “look fine,” according the company.

Air France itself has fewer than 10 long-haul planes set for delivery in 2012, the CFO said, and half of those already have financing lined up.

“We were lucky enough to renew the credit lines before the crisis between May and July,” the executive said, adding that the credit is available until 2016 and 2017 and covenants are being adhered to. The company plans 1.3 billion euros of capital spending next year, though this could yet be reduced, he said.

While Air France-KLM views its stake in Amadeus IT Holding SA, the biggest processor of travel transactions, as a “reserve, available for use,” there are currently no plans to sell it or dispose of any other assets to pay down debt, Calavia said.

To contact the reporters on this story: Andrea Rothman in Paris at aerothman@bloomberg.net; Steve Rothwell in London at srothwell@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net