Air France-KLM Says Falling Fares Set to Consume Fuel Saving

  • Overcapacity weighing on ticket prices in unpredictable market
  • Lower fuel costs help pare quarterly loss to 99 million euros

Air France-KLM Group said air fares will come under sustained pressure this summer amid a glut in capacity, making it tougher to maintain the pricing discipline that helped the company pare losses in the first quarter.

Declining unit revenue, a measure that reflects average fares, wiped 119 million euros ($137 million) from earnings in the three months through March, Air France-KLM said in a statement on Wednesday. Europe’s largest airline is expecting a further slide against a background of a “highly uncertain” travel market following the March 22 Brussels attacks.

“The market is oversupplied,” Chief Financial Officer Pierre-Francois Riolacci said on a conference call. “We see capacity coming in. For sure you shouldn’t take the strong performance of the first quarter as a proxy for the full year.”

Outgoing Chief Executive Officer Alexandre de Juniac failed to secure a productivity deal with unions aimed at re-basing the company’s costs amid strikes and sometimes violent protests by pilots and other staff. Jean-Marc Janaillac, who takes over July 31, will face those issues with less of a cushion as fuel savings are “significantly offset” by falling fares and currency moves that provided a 79 million-euro drag in the first quarter, the company said.

Air France-KLM shares fell as much as 5.8 percent and closed 4.3 percent lower at 7.37 euros in Paris. The stock has gained 4.9 percent this year, valuing the company at 2.21 billion euros.

The dour prospects for the key summer travel season cast a shadow over improved first-quarter earnings. Buoyed by 26 percent lower fuel costs, the carrier reduced its operating loss to 99 million euros from 417 million euros a year earlier.

While Air France held on to more fuel savings than its European peers, pricing has been tough with travelers booking later than in the past, a trend that’s already affected bookings in April and May, CFO Riolacci said.

Air France is joining a chorus of other carriers cautioning about ticket prices. Deutsche Lufthansa AG, Europe’s third-biggest airline, suffered a 6.3 percent drop in yields in the quarter, the steepest slump in at least four years. Like Air France-KLM, it benefited from cheap fuel, paring its adjusted loss before interest and tax to 53 million euros from 167 million euros.

Lufthansa and British Airways owner IAG SA, the European No. 2, are both reining in capacity. IAG last week warned that demand has been clipped by the Brussels attacks, weaker bookings in oil-based economies and the possibility of the U.K. exiting the European Union.

Net Figure

Air France cut non-fuel costs 1.3 percent at constant currencies as it seeks to respond to a squeeze from discount specialists led by Ryanair Holdings Plc and fast-expanding Persian Gulf carriers including Dubai-based Emirates. Among more traditional rivals, British Airways has already slashed employee expenses, while Lufthansa is edging forward with its own restructuring.

The Paris-based company said it’s maintaining its goals for 2016 of achieving a free operating cash flow of 600 million euros to 1 billion euros, a unit-cost reduction of about 1 percent, and a “significant” reduction in net debt.

The Air France arm will begin imposing productivity measures concerning areas such as rest times between flights after defeating a court challenge by pilots, the company said. The steps, part of De Juniac’s Transform plan which ended in 2015, should save up to 30 million euros a year. Unions are expected to resist the moves, the company said.

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