May 3, 2019 / 5:23 AM / 20 days ago

Air France loss widens on fuel costs, competition

PARIS (Reuters) - Air France-KLM blamed higher fuel costs and price competition as it posted a deeper first-quarter loss on Friday, sending the airline group’s shares lower.

FILE PHOTO: The Air France-KLM company logo is seen at the annual shareholder meeting in the La Defense business district in Puteaux, France, May 15, 2018. REUTERS/Philippe Wojazer

The Franco-Dutch company reported a 1.9 percent drop in unit revenue for January-March but said pressure should ease in the rest of the year as rival airlines’ capacity growth slows.

Air France-KLM shares were down 4.4 percent to 9.78 euros at 0813 GMT, after the group said its operating loss widened to 303 million euros (£260.1 million) from 118 million a year earlier.

Fuel costs and excess capacity also led to ballooning losses at Lufthansa, the German airline said this week.

“The first quarter has been challenging for the European airline industry including the Air France-KLM Group,” Chief Executive Ben Smith said.

“Substantial industry capacity growth in the off-peak business period led to unit revenue pressure.”

Smith, who joined last September from Air Canada, is seeking to boost efficiency in part through better coordination of the Air France and KLM networks and fleets. But his task is complicated by the recent arrival of the Dutch government as a major shareholder keen to preserve KLM’s autonomy.

Air France-KLM said it saw “improving trends” and a “more benign industry supply outlook” - with a slowdown in Gulf carriers’ growth plans - as it reiterated pledges to keep a lid on debt in 2019 while continuing to cut non-fuel costs.

The fuel bill grew by 140 million euros to 1.2 billion in the quarter, Air France-KLM said, putting a bigger-than-expected dent in earnings. Its 303 million-euro operating loss exceeded the 251 million euros expected by analysts, based on the median of 14 estimates gathered by the company.

The group’s net loss also widened to 320 million euros from 269 million, even as group revenue rose 3.1 percent to 5.99 billion euros, in line with market expectations.

CHALLENGES

“Offsetting higher fuel costs was always going to be a challenge,” Liberum analysts said in a note, “even without the additional pressure on unit revenues from excessive industry capacity growth.”

Wage costs rose 6.4 percent as a result of pay increases at both carriers, following protracted Air France strikes last year. Industrial action at Scandinavian rival SAS resulted in a similar pay hike on Thursday.

But non-fuel costs fell 0.4 percent overall before currency effects - which pared another 34 million euros off earnings. Forward long-haul bookings are up for the summer season, the company said, with gains of 1 percent for May-June.

Transavia, the group’s low-cost operator, saw unit revenue decline 3.5 percent, as a 7.4 percent passenger traffic hike failed to keep pace with an 11.4 percent capacity expansion - partly the result of a later Easter weekend this year. The division’s loss widened to 71 million euros from 58 million.

Beyond the financial metrics, CEO Smith hailed what he described as “signs of progress in operational performance at Air France”, as the carrier improved punctuality and overall customer satisfaction scores - narrowing the gap with KLM.

Smith will give his first detailed strategy presentation to investors at a capital markets day scheduled for November, the company also said.

Reporting by Laurence Frost; Editing by Sudip Kar-Gupta and Mark Potter

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