Air France-KLM Cuts Profit Target on Overcapacity, Cargo

Air France-KLM Group, Europe’s largest airline, cut its full-year earnings forecast amid overcapacity on North American and Asian routes, poor demand for freight and the fallout from a dispute with Venezuela.

Earnings before interest, tax, depreciation and amortization will be 2.2 billion euros ($3 billion) to 2.3 billion euros this year, compared with a previous target of as much as 2.5 billion euros, Air France said in a statement. In 2013 the airline group reported Ebitda of 1.86 billion euros.

Air France-KLM follows Deutsche Lufthansa AG in lowering its earnings projections as excess capacity on long-range routes cuts into air-fare prices. The Paris-based carrier said average fares for passengers and cargo dropped last month, and said forward bookings declined this month and next.

“While not representing a turning point in market trends, the June traffic figures published today as well as bookings for July and August nevertheless reflect the over-capacity on certain long-haul routes, notably North American and Asia, with the attendant impact on yields,” the carrier said.

Compounding the drop is a “persistently” weak cargo demand as well as the situation in Venezuela, which Air France-KLM called “challenging.” Air France-KLM took a charge against money in Venezuela in the first quarter and cut capacity to that country almost in half.

Venezuelan Challenge

Air France-KLM declined as much as 9.5 percent to 8.51 euros in Paris, the most intraday since October 2011, and traded at 8.54 euros as of 4:25 p.m. in the French capital. The shares have gained about 13 percent in value this year.

Delta Air Lines Inc., an Air France-KLM partner in the SkyTeam alliance, fell 5.5 percent to $34.87 in New York trading. The Atlanta-based airline announced yesterday it’s cutting the number of flights between the U.S. and Venezuela. United Continental Holdings Inc. dropped 3.3 percent to $37.33 and American Airlines Group Inc. fell 4.8 percent to $38.16.

Airlines had the equivalent of $3.9 billion stuck in bolivars as of April as they struggled to repatriate revenue from ticket sales, the International Air Transport Association said in May.

Air France-KLM also cited weak cargo demand as a reason for cutting its guidance. The airline has said it may sell its freighter business and plans to update investors by July 25, when it reports first-half earnings.

Air France KLM Chief Executive Officer Alexandre de Juniac has been struggling to restore the airline to profitability amid losses from short-and medium haul business and cargo. The airline is reviewing options that may include closing regional bases the carrier created just two years ago, and it may also sell its cargo operations.

Cutting Outlook

Lufthansa on June 11 cut its own forecasts for this year and next as a capacity splurge at Gulf competitors hurts prices. The airline now anticipates an operating profit of about 1 billion euros in 2014 and 2 billion euros in 2015, versus prior forecasts of 1.3 billion euros to 1.5 billion euros and 2.65 billion euros respectively.

Lufthansa CEO Carsten Spohr, who took over on May 1, is set to unveil his strategy tomorrow.

Carriers including Lufthansa and British Airways have been increasing the number of seats on offer across the North Atlantic, with mounting competition depressing fares. Capacity has also risen from Europe to Asia, with carriers such as Dubai-based Emirates contributing to the fight for passengers.

Total traffic rose by 2.9 percent in June on a capacity increase of 1.8 percent, producing a load factor, or seat occupancy rate of 86.2 percent. Long-haul traffic was up by 2.6 percent with capacity up 2 percent. Traffic to the Americas rose by 4.1 percent on a 5.3 percent boost in capacity, cutting load factor by 1 percentage point to 89.8 percent.

European airline shares have slumped in recent weeks amid concerns about overcapacity. Lufthansa fell 19 percent in June, while Air France declined 18 percent. Ryanair Holdings Plc and EasyJet Plc, the region’s largest low-cost carriers, have fallen 3.8 percent and 11 percent in the month.

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