Air France to Extend Seat, Route Cuts After Profit Decline

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Air France-KLM Group will drop routes, curb winter-season seating capacity and deepen other cost-cutting measures after second-quarter earnings tumbled 22 percent.

Operating profit fell to 185 million euros ($203 million), hurt by a continuing slide in fares and a stronger dollar that increased fuel prices, the Paris-based company said Friday.

Europe’s biggest airline group has posted net losses in the past four years amid pressure from Persian Gulf carriers on international flights and a squeeze from discounters such as EasyJet Plc on shorter routes. Management is still struggling to win backing from Air France pilots for its savings plans and said wholesale route cuts will be necessary without a deal.

“The rapid conclusion of the negotiations with the Air France unions is key to re-launching the results turnaround,” Chief Executive Officer Alexandre de Juniac said. The cost burden also limits the group’s ability to fund acquisitions and participate in consolidation, which it wants to do, he added.

Air Frances-KLM shares traded 3.4 percent higher at 6.82 euros as of 1:04 p.m. in Paris after earlier adding 5.2 percent. Analysts had predicted an operating profit of 148 million euros, prompting short-sellers to unwind negative bets on a stock that’s among the most shorted on France’s SBF120 index, with 12.1 percent out on loan, according to data from Markit.

Capacity Curb

Air France-KLM market value has declined 14 percent this year to $2 billion, while British Airways parent IAG SA, though smaller in terms of passenger traffic, is up 18 percent and has a market capitalization of $18 billion, while EasyJet Plc has added 5 percent and worth almost $11 billion.

De Juniac said he’ll trim second-half capacity to meet lower demand, with cuts of 14 percent to Japan -- where recent terror attacks in France have deterred visitors -- 5 percent to Brazil and 6 percent to East Africa. He also plans to shave a further 300 million euros from administrative costs by 2017.

The Air France arm has already announced plans to drop four unprofitable destinations including Kuala Lumpur and Stavanger, Norway, while Dutch unit KLM will pare flights to 10 European cities, as well as locations in Africa, Japan and Brazil, removing a total of 500,000 seats from the network.

The company didn’t specify today which other routes will be affected or where fresh cuts might come as it seeks “an acceleration and an increase in the magnitude” of savings -- though De Juniac warned that if there’s no agreement with Air France pilots by the end of September he’ll be forced to take “severe measures” in slimming down the long-haul network.

Fares

Group wide, revenue per seat for each kilometer flown, a benchmark for pricing, fell 4.8 percent on a like-for-like basis in the second quarter. Factors weighing on long-haul fares include travel-budget reductions at oil- and gas-related customers, especially in Africa, the company said.

Air France-KLM maintained its 2015 targets for a unit-cost improvement in the 1 percent to 1.3 percent range, and for net debt of about 4.4 billion euros by year-end. Operating margins shrank 0.9 of a percentage point to 2.8 percent in the quarter.

Goodbody analysts Jack Diskin and Mark Simpson said that while the company’s share price already reflects pricing pressure, 55 percent of its medium-term cost targets require further labor restructuring, and that issues arising from the pilot dispute therefore “remain a risk.”

De Juniac said he expects further industry consolidation and that Air France-KLM wants to take part through acquisitions or minority investments anchoring commercial partnerships, but is being starved of funds by its crippling cost base.

The company last year agreed to pay $52 million for 1.5 percent of the preferred shares of Gol Linhas Aereas Inteligentes SA, the second-biggest carrier in Brazil.

“We have lots of ideas,” the CEO said. “All of the cost improvements we’re seeking are meant to finance our ideas.”

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