August 1, 2018 / 11:16 AM / in 20 days

Air France sees better than expected 2018 despite strike fallout

PARIS (Reuters) - Air France-KLM on Wednesday posted strong second-quarter sales and beat profit expectations dampened by strikes that have so far cost the airline group 335 million euros (£298.09 million) and one chief executive.

The Air France-KLM company logo is seen during the company's half-year results in Paris, France, August 1, 2018. REUTERS/Benoit Tessier

Its shares rose after it reported a 345 million-euro operating profit on a 1.7 percent unit revenue gain at constant exchange rates - a key measure of airline proceeds in relation to capacity.

The company had predicted in May that second-quarter unit revenue would be flat. It now expects an increase for the full year 2018.

Air France-KLM, which is still hunting for a new CEO three months after Jean-Marc Janaillac’s surprise resignation over a pay stand-off with unions, also announced an upgrade to cooperation with Air Europa as it forges ahead with new and deeper partnerships.

“The environment was better than we expected,” Chief Financial Officer Frederic Gagey told reporters, citing strong medium-haul demand through the group’s Paris and Amsterdam airport hubs.

Long-haul bookings for the next four months are ahead of their year-ago level, Air France-KLM said.

The recurring operating result, down 41 percent largely because of the industrial action, nonetheless beat analyst expectations of 252 million euros, based on the company’s own consensus survey of 13 named financial institutions.

Air France-KLM shares rose as much as 8.3 percent in Paris and were trading 5.7 percent higher at 8.25 euros as of 0951 GMT. The stock has fallen about 40 percent this year.

“Underlying revenue trends remain strong, and the group’s underlying cost performance is good,” Goodbody Aviation analyst Mark Simpson said in a note, adding that buoyant North American yields could bode well for British Airways and Iberia parent IAG Group, which reports earnings on Aug. 3.

Lufthansa also raised its unit-revenue outlook on Tuesday as the German airline benefits from the demise of domestic rival Air Berlin.

Air France’s short-haul business got a similar competitive boost from strikes afflicting the country’s national railway operator, Gagey said. “I won’t hide the fact that we were helped by the problems our friends at the SNCF have been having.”

But the airline’s own disruption crimped second-quarter capacity growth to just 0.4 percent for the group overall.

It also unveiled plans on Wednesday to expand an existing partnership with Spain’s Air Europa into a full-blown joint venture focused on South American routes.

The new venture, if it goes ahead, would complement Air France-KLM’s successful pairing with Delta Air Lines on North Atlantic routes, to be joined by Virgin Atlantic next April.

Gagey said joint ventures had “proved their worth as a means of consolidation in aviation”, a sector where takeover options are often severely curtailed by national ownership rules.

The CEO search is “in progress”, he added, declining to elaborate on what he described as a board matter. Air France-KLM aims to name a new boss in September, it told staff last month.

Resolving the pay dispute with Air France unions, which have threatened to resume strike action in September with or without a new CEO, will be one of the first tasks facing the appointee.

Franck Terner, CEO for the French carrier’s operations, said the February-May stoppages led to “no massive cancellations” among corporate clients - but that could change if strike action resumed, he warned. “Our big customers would begin to ask serious questions.”

The Air France business saw its quarterly profit margin all but evaporate to 0.3 percent from 6.1 percent, while Dutch stablemate KLM maintained an 11.7 percent margin.

Excluding changes to passenger network capacity, expected to rise 2.5-3.5 percent in 2018, costs increased 2.4 percent in the second quarter, inflated by the prolonged strikes.

Air France-KLM also predicted a 450 million-euro hit this year from rising fuel costs that would have been 850 million euros higher still without hedging contracts in place. It had previously forecast a negative impact of 350 million.

Net income fell sharply to 110 million euros from a year-earlier 594 million, restated under new accounting rules. Revenue slid 1.2 percent to 5.697 billion euros, dented by a 259 million-euro exchange-rate effect.

Reporting by Laurence Frost and Cyril Altmeyer; Additional reporting by Victoria Bryan in Berlin; Editing by Sudip Kar-Gupta and Alexandra Hudson

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