Skift Take

Given Air-France KLM Group's recent history of losses, it might not be the wisest move to go on a capacity growth spurt, especially when going up against carriers with a significantly lower cost base.

Air France-KLM Group said it will accelerate capacity increases despite an uncertain economic climate in order to defend its share of an air-travel market that’s becoming flooded with discount rivals.

The Paris-based carrier will boost seating by up to 4 percent this year in a bid to combat the low-cost challenge, even as fuel expenses jump by a forecast 150 million euros ($188 million), it said in a statement Friday. The stock declined as much as 6.4 percent.

“As we enter 2018 in a context of rising oil prices and even more intense competition, we will go on the offensive,” Chief Executive Officer Jean-Marc Janaillac said. More partnership are planned to help defend long-haul markets, but the company played down prospects for investing in Italy’s Alitalia SpA.

Air France-KLM is keeping its foot to the pedal after breaking a cycle of losses and labor unrest, helping to propel the stock up more than 160 percent last year. The company is set to face an increased domestic challenge as Ryanair Holdings Plc seeks to open its first French bases, while long-haul discounters led by Norwegian Air Shuttle ASA are encroaching on trans-Atlantic routes.

Shares of Europe’s largest airline traded 5.6 percent lower at 10.10 euros as of 9:31 a.m. in Paris. That takes the stock’s decline to 25 percent this year following last year’s mammoth advance, the best on the 29-member Bloomberg World Airlines Index.

The planned capacity jump will follow a more modest increase of 2.6 percent in 2017, encouraged by bookings indicating higher demand and unit revenue, a measure of fares. Seat increases will include inter-continental services, where the Level discount arm of British Airways is preparing to offer Paris-New York flights for 129 euros.

There are as yet no plans for Air France-KLM to launch its own low-cost long-haul unit, Chief Financial Officer Frederic Gagey told Bloomberg TV.

Cool on Alitalia

Air France-KLM agreed to buy 31 percent of Britain’s Virgin Atlantic Airways Ltd. in July and partnerships are set to become increasingly important, Gagey said, describing them as “weapons to answer attacks from competitors.” At the same time, he talked down the likelihood of taking a stake in Alitalia, saying that while his carrier is “not totally uninterested” given an existing joint venture, that “doesn’t mean we will be involved in the equity of company.”

Air France-KLM plans to cut unit costs as much as 1.5 percent in 2018 after they were flat last year, aided by increased productivity, higher fleet utilization and the expansion of reduced-fare brand Joon. That excludes a forecast jump in the fuel bill.

Operating profit last year jumped 42 percent to 1.49 billion euros, the company reported. Analysts had predicted a figure of 1.52 billion euros, based on 13 estimates. The Dutch KLM arm made the biggest contribution and had an 8.8 percent margin, versus 3.7 percent at Air France. The group had a net loss of 274 million euros following a one-time pension expense of 1.43 billion euros.

©2018 Bloomberg L.P.

This article was written by Ania Nussbaum from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].

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Tags: air france-klm, airline innovation, alitalia, europe, norwegian, ryanair

Photo credit: An Air France sign. The airline's parent company is planning to accelerate capacity increases. Bloomberg

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