Skift Take

If Air France-KLM is able to take advantage of its relationship with Etihad and improve its low-cost offering even more 2013 may finally be a year where the loss narrows enough to turn into a profit.

Air France-KLM Group narrowed its full-year operating loss after a capacity freeze boosted average fares and Europe’s biggest airline reduced its headcount by 3,300 over the 12 months.

The Paris-based company had an operating loss of 300 million euros ($396 million) in 2012, compared with 353 million euros a year earlier, it said in a statement. Fluctuations in fuel prices, the economy and world trade make it impossible to predict whether earnings will improve again this year, it added.

Jean-Cyril Spinetta, recalled as chief executive officer in 2011 following a slump in profit, is eliminating 5,000 posts at the company’s French arm and 1,300 more at the smaller Dutch unit. Capacity rose just 0.6 percent in the year, helping to lift unit revenue, a measure reflecting fares, by 5.9 percent.

“Pricing is good and I’d expect that to continue as the industry benefits from capacity restraint,” said Donal O’Neill, an analyst at Goodbody Stockbrokers in Dublin. “Staff costs should come through later this year but a lot of positivity from the restructuring is built in and there’s not much low-hanging fruit now, so they could struggle to surprise on the upside.”

Net loss widens

Shares of Air France-KLM traded 2.4 percent lower at 8.13 euros as of 11:17 a.m. in Paris, reversing an earlier 3.1 percent gain. The stock is up 16 percent this year after surging 76 percent in 2012, valuing the company at 2.44 billion euros.

Analysts had predicted an operating loss of 331 million euros, based on 14 estimates compiled by Bloomberg. The net loss widened to 1.19 billion euros from 809 million euros after fuel costs rose 14 percent to 7.44 billion euros and the company booked 471 million euros of restructuring expenses.

“The economic backdrop in 2012 was mediocre, but capacity was well managed, nicely contained, and it’s thanks to that that we managed to increase unit revenues,” Chief Financial Officer Philippe Calavia said at a briefing, adding that “the context is too uncertain” to make predictions about earnings for 2013.

Air France-KLM is more exposed to the spot price of crude than some carriers because it tends to hedge less, Goodbody’s O’Neill said. Kerosene costs represent 40 percent of expenses on many routes and sometimes even 50 percent, CEO Spinetta told reporters, up from 29 percent in 2012 and 10 percent in 1997.

Short-haul battle

Net debt was cut by 500 million euros in the year to 6 billion euros and unit costs fell 0.9 percent in the fourth quarter at constant rates. Spinetta is seeking to pare expenses and debt again this year with the Transform 2015 plan.

Capacity restraint will also continue, with the company planning to boost seating by no more than 1.5 percent, it said.

Air France-KLM is seeking to fend off the likes of EasyJet Plc in the European short-haul market while competing with British Airways Plc and Deutsche Lufthansa AG and Gulf rivals including Dubai-based Emirates on long-haul routes.

The carrier cut fares on 58 routes from Feb. 6. Sold under the “MiNi” branding, the ticket are as much as 20 euros cheaper than the regular price though come without the right to air miles and free hold baggage. It has also consolidated most of its regional operations as HOP!, with a fleet of 98 aircraft.

In the inter-continental market, Spinetta ended a war of words with Mideast carriers, sealing a code-share deal with Abu Dhabi-based Etihad on Oct. 8.

Alliance entry

That accord could be a precursor to the third-biggest Gulf airline eventually joining Air France’s SkyTeam global alliance, Calavia said today. Virgin Atlantic Airways Ltd. may also become a member of the grouping after Delta Air Lines Inc. agreed to buy a 49 percent stake for $360 million on Dec. 11, he said.

Europe’s major carriers, which have been in a phase of consolidation initiated by Air France’s merger with KLM Royal Dutch Airlines NV in 2003, require further integration to remain key players and “defend our common interests,” Spinetta said.

Air France has ordered 27 Boeing Co. 787-9 jetliners, with deliveries scheduled to begin in 2016. Calavia said today it’s likely the planes will come somewhat later than planned given the current grounding of the Dreamliner by regulatory authorities after difficulties with batteries.

The company has also committed to buying 25 Airbus SAS A350s and that agreement should be firmed up soon, he said. Spinetta said that the order — which has been held up by a dispute with Rolls-Royce Holdings Plc over rights to service the planes’ engines — will come before the year’s end and that there’s “no rush,” with delivery due from the end of 2017.

There are no discussions to buy newer single-aisle planes right now since the savings achievable are less significant over the shorter distances flow, the CEO said.

Editors: Chris Jasper, Benedikt Kammel. To contact the reporter on this story: Andrea Rothman in Toulouse at [email protected]. To contact the editor responsible for this story: Benedikt Kammel at [email protected].


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Tags: air france/klm, earnings, etihad

Photo credit: Passengers check-in at an Air France counter in Nice International airport July 26, 2012. Eric Gaillard / Reuters

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