Air France Braced for Slump as Terror Spree Weighs on Travel

The 'Uncertainty' and 'Turmoil' Facing Air France-KLM
  • Status of Europe’s top tourist market under threat, group says
  • Fuel savings drive 77% surge in second-quarter profit

Air France-KLM Group warned that political and economic uncertainties are weighing on travel demand, with the carrier especially worried about France’s standing as a tourist hotspot after a succession of terrorist attacks that have spanned Paris to the Riviera.

Europe’s largest airline said Wednesday there is “special concern about France as a destination” amid the Islamic State-inspired killings, with inbound flows on long-haul routes set to fall at least 10 percent this summer. Fuel savings that helped lift operating profit 77 percent in the second quarter are also about to be eaten up by a fare decline as passenger numbers slide.

“If the question is do we see a deteriorating environment, the answer is yes,” Chief Financial Officer Pierre-Francois Riolacci said in a phone briefing. “As the months have gone by we’ve seen a significant drop in demand for inbound travel to Europe, especially France. This pressure is happening in the context of capacity growth that is very high for the summer season.”

Demand for travel from countries including Japan and China is ebbing away as attacks including those that claimed 130 lives in the French capital in November and 84 in Nice this month make global headlines, the company said. In the latest outrage Tuesday, a priest was murdered in a village church. Sluggish growth in markets such as Brazil is also hurting passenger numbers, while Britain’s vote to quit the European Union may prove a further drag.

Incoming Chief Executive Officer Jean-Marc Janaillac said that even with its troubles he views France as “reasonably safe” compared with other countries around the globe, while adding that it is “up to the authorities” to reassure the public. Group travel from China is already down 50 percent, based on forward bookings, with demand from the U.S. also weak.

Air France-KLM said the benefits of cheaper fuel for 2016 as a whole -- which it estimates at $1.8 billion -- will be “more than offset” by a fare drop in coming quarters prompted by overcapacity. The company had previously suggested fuel savings would only be “significantly offset.”

Targets Retained

Oliver Sleath, an analyst at Barclays in London, said in a note that the gloomier outlook, which didn’t include specific earnings guidance, was no surprise given recent events, with Air France-KLM joining a chorus of airlines warning about demand shocks during the key summer season.

The jump in second-quarter operating profit to 317 million euros ($348 million) was also bigger than expected even after a 30 percent decline in fuel costs, especially since fare erosion led sales to slip 5.2 percent to 6.22 billion euros, and reflected better-than-expected trading and cost performance, Sleath said.

The company, which posted a first annual profit for four years in 2015, also kept its 2016 goals of a free cash flow between 600 million euros and 1 billion euros, a 1 percent unit-cost reduction, and a “significant” drop in net debt.

Air France-KLM shares traded 2.5 percent higher at 5.34 euros as of noon in Paris, where the company is based, paring their decline this year to 24 percent. British Airways parent IAG SA, which competes in many of the same markets as Air France-KLM and benefits from a lower cost base, rose as much as 5 percent and Deutsche Lufthansa AG, which last week predicted a decline in annual operating profit instead of a gain, rose as much as 2 percent.

Flybe Group Plc separately cautioned that “consumer uncertainty about Brexit, its economic impact and repeated terrorist incidents” is weighing on earnings, pushing the U.K. regional carrier’s stock down as much as 11.3 percent.

Strike Saga

In addition to contending with turbulent markets, Air France-KLM is immersed in a long-running fight with unions. Flight attendants at its French unit began a strike Wednesday in a dispute stemming from a wholesale restructuring of the airline to cut costs, while KLM ground crew plan unspecified labor actions Thursday. A four-day strike by Air France pilots, timed to disrupt the Euro 2016 soccer championships, wiped 40 million euros from second-quarter earnings.

The walkouts send a message to Janaillac, a former bus company head who took over this month pledging “openness and dialog.” The airline’s new boss doesn’t intend to make any strategic announcements until November.

Riolacci, who plans to leave the company later this year following the exit of his former CEO Alexandre de Juniac, said the strikes are probably contributing to passenger “wariness” about traveling with the Air France unit, though the effect is impossible to quantify.

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