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Air France-KLM plans sales and efficiency drive to lift profit

PARIS/HELSINKI (Reuters) - Air France-KLM AIRF.PA outlined plans to expand its budget Transavia business and push the core French carrier upmarket, while overhauling its fleet in pursuit of improved sales and profitability.

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After a wave of Air France strikes that cost 335 million euros ($373 million) in 2018, the Franco-Dutch airline group has stabilized under Chief Executive Ben Smith thanks to union deals that have increased both wage costs and operating flexibility.

In his first major strategy presentation since he joined from Air Canada last year, Smith set a 7-8% profit margin goal for 2024 and dangled the “prospect” of renewed dividends - last paid out to shareholders in 2008.

These would resume if operating income rises to 1.9 billion euros from the 1.3 billion euros reported in 2018, the group said.

Shares in the company, which had gained 11.5% so far this year, were down 6.5% at 9.88 euros as of 1458 GMT, with one trader citing expectations that a dividend may not materialize before 2022 as one chief disappointment.

Air France-KLM “has all the assets to regain its leadership position,” Smith said in a statement before the presentation.

To boost sales, the group aims to sharpen the focus of its three main airline brands. Air France will push harder into premium travel, leaving KLM positioned as a competitive network operator of connecting flights through Amsterdam while Transavia expands into the low-cost market.

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Transavia will add two more aircraft based in Nantes, western France, and open a new base in the Mediterranean city of Montpellier next spring, Smith said. Air France struck a recent union deal to allow Transavia’s fleet expansion, but pilot recruitment delays have continued to hold back growth this year.

Air France KLM’s operating margin came in at 4.8% for the first nine months of 2019, a 1.7 point decline from the same period a year earlier..

The group also pledged to drive costs lower by speeding up the renewal of its planes and streamlining the management of its combined fleet of more than 500 aircraft.

Air France-KLM took a 100 million euro charge last quarter to retire its Airbus A380 superjumbos early and replace them with more fuel-efficient planes.

“It’s a good time to buy long-haul airplanes,” Smith said, citing the weaker aviation market outlook.

Smith overcame Dutch objections earlier this year to integrate Air France and KLM fleet management, which was still being carried out separately 15 years after the airlines merged.

Reporting by Laurence Frost, Sarah White, Matthias Blamont and Patrick Vignal; Editing by Mark Potter and David Evans