Air France Pushes Long-Haul Plans as Profit Beats Estimates

  • Capacity to be increased 3.5% in bid to win market share
  • 2016 earnings gained 35%, sending shares up most in a year

Air France-KLM CFO Says Unit Revenue Trend Helps Profit

Air France-KLM Group plans to boost passenger capacity and win back long-haul travelers after reporting a full-year earnings increase that beat analyst estimates and spurred the stock to its biggest gain in a year.

Operating profit surged by more than a third to 1.05 billion euros ($1.1 billion), helped by lower fuel costs and productivity gains at Dutch arm KLM, Europe’s biggest airline said Thursday. Analysts had predicted a figure of 950 million euros.

Chief Executive Officer Jean-Marc Janaillac said that while political and economic uncertainties are continuing to weigh on fares amid industry overcapacity, the decline in unit revenue slowed to 0.7 percent in January, indicating a “resilient start” to the year. The group will therefore lift capacity as much as 3.5 percent in 2017 “in order to regain the offensive” in lucrative long-haul markets and boost performance on medium-distance routes.

The unit-revenue trend and improved forward bookings point to a recovery in demand and pricing, Chief Financial Officer Frederick Gagey said on a conference call, adding that the company is encouraged but “not euphoric.”

Shares of Air France-KLM rose as much as 10 percent, the biggest gain since Feb. 18 last year, and were trading 9.8 percent higher at 6.03 euros as of 1:55 p.m. in Paris, where the group is based. The stock has gained 17 percent this year after losing 26 percent in the course of 2016.

Profit at the main Air France arm fell 54 percent to 372 million euros, held back by the effects of visitors staying away amid a spate of terror attacks spanning Paris to Nice and two strikes involving pilots and cabin crew opposed to cost cuts proposed by former chief Alexandre de Juniac.

Dutch Lift

KLM, two-thirds the size of the French business, boosted its earnings almost 80 percent to 681 million euros, aided by a 4.2 percent productivity improvement, almost twice the pace at Air France. The overall payroll was reduced by 1,850 full time jobs, with 1,400 of those positions going at the French arm.

The group aims to push savings above 1.5 percent in 2017 at constant currencies and oil costs by “amplifying” current initiatives. The jet-fuel bill will increase by up to 100 million euros, having fallen by 1.5 billion euros or 26 percent in 2016. Janaillac also aims to pare costs by renegotiating terms for leased planes as they come off-contract.

Gerald Khoo, an analyst at Liberum Capital in London, said that “the worst might have passed” in terms of pricing pressure. At the same time, talk of an offensive in long-haul smacks of “targeting market share over earnings, and signaling an end to the recent reasonable degree of capacity discipline.”

Boost Unit

Janaillac is aiming to extend some of De Juniac’s less contentious measures while avoiding the industrial strife that cost the company 130 million euros last year. He’s also aiming to carve a new unit, dubbed Boost, out of Air France to operate low-expense long- and short-haul flights at full fares from the Paris Charles de Gaulle hub. Pilots have yet to deliver a formal response to the plan, which requires a 1.5 percent pay cut across French operations.

At the same time, the new CEO has placed less emphasis on expanding discount arm Transavia, the source of the bitterest labor clashes under his predecessor.

Janaillac said that Air France-KLM would like to extract more benefit from its joint ventures with China Southern Airlines Co. and China Eastern Airline Corp. The two Asian carriers are not themselves commercially aligned.

The company restated its 2015 results and revised the 2016 figures to exclude the Servair catering arm after selling a 49.99 percent stake in the business to Gategroup Holding AG on Dec. 29.

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