July 31, 2019 / 5:31 AM / 2 months ago

Air France-KLM cost-cutting lifts profit, shares

PARIS (Reuters) - Air France-KLM (AIRF.PA) said operating profit rose 16% in the second quarter as new Chief Executive Ben Smith’s cost-cutting helped offset rising fuel prices, sending its shares up 7%.

FILE PHOTO: An Air France Boeing 777-300 airplane lands at the Charles-de-Gaulle airport in Roissy, near Paris, France, May 9, 2018. REUTERS/Christian Hartmann/File Photo

The Franco-Dutch group has lagged European rivals on profitability in recent years but delivered a stronger quarter than rival Lufthansa (LHAG.DE), which reported a 25% earnings fall on Tuesday as increasing capacity intensified competition.

Operating income rose to 400 million euros (£366.4 million), ahead of the 316 million euros expected by analysts, according to the company’s own poll of 20 estimates.

Better sales and “execution in unit-cost reduction enabled us to more than offset rising fuel costs,” CEO Smith said. A 6.1% increase in Air France-KLM traffic outpaced its 4.5% capacity expansion year-on-year.

Smith, who joined Air France-KLM last September from Air Canada, wants to boost efficiency through better coordination of the Air France and KLM networks and fleets while expanding services under the Transavia low-cost brand.

Revenue rose 6.4% to 7.05 billion euros, while unit costs fell 2.3% excluding currency and fuel costs - which rose by 220 million euros year-on-year.

Further gains on efficiency will come from simplification of the business as well as recent labour deals that mean Air France-KLM has “enormous flexibility now to drive productivity gains”, Smith told analysts on a call. The new CEO has pledged to give investors a detailed strategy presentation in November.

Long-haul bookings for August-December are ahead of their level a year earlier, the company said.

“Forward bookings suggest the long-haul outlook remains encouraging, although we would expect further short-haul challenges,” Liberum analysts said in a note.

Air France-KLM shares were up 6.9% at 9.29 euros as of 0959 GMT in Paris, reversing much of their 8.3% slide this year.

The operating margin improved to 5.7% from 5.2% - largely reflecting the impact of Air France strikes a year earlier that led to the abrupt departure of Smith’s predecessor.

“BIG POSITIVE”

Air France pilots overwhelmingly approved plans to expand Transavia’s fleet beyond the 40-plane limit currently imposed by labour agreements, Smith announced on Wednesday, hailing the SNPL union members’ 78% referendum vote as a “big positive”.

In a sign of remaining hurdles, however, Air France-KLM trimmed its Transavia capacity growth forecast for 2019 to 7-9% from 9-11%, citing pilot recruitment delays.

Unit revenue rose across all major long-haul regions except crisis-hit Latin America, with the lucrative North Atlantic market showing 2.6% growth before currency effects. North America will show a smaller improvement for the third quarter underway, Chief Financial Officer Frederic Gagey predicted.

Net income fell 27.3% to 80 million euros. Debt declined by 466 million euros over six months to 5.7 billion euros.

The fuel-cost impact reflected the expiry of hedging instruments that had benefited the group last year, Gagey said. For the full year 2019, however, Air France-KLM trimmed the expected fuel bill increase to 550 million euros from a previously forecast 650 million.

To improve fuel-efficiency and costs, Air France-KLM said on Tuesday it will buy at least 60 Airbus A220s to replace ageing aircraft and retire all 10 A380 superjumbos from its 541-plane fleet earlier than planned, a decision that will incur about 400 million euros in future writedowns, the CFO said.

Air France-KLM also reiterated its 2019 goals including a unit-cost progression between flat and a 1% decline before fuel - a benchmark surpassed by a 1.4% decline in the first half.

Reporting by Laurence Frost and Cyril Altmeyer; Editing by Cynthia Osterman and Deepa Babington

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