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Travel News

Air France-KLM second quarter profit plunges

Written by editor

PARIS – Air France-KLM Thursday posted a sharp drop in profitability in its fiscal second quarter and blamed the steep rise in fuel costs, weakening economic activity and the strong euro.

PARIS – Air France-KLM Thursday posted a sharp drop in profitability in its fiscal second quarter and blamed the steep rise in fuel costs, weakening economic activity and the strong euro.

But while airlines worldwide are suffering from waning demand for travel and freight, the Franco-Dutch airline said that it is faring better than European rivals.

Net profit for the three months through Sept. 30 plunged 96% to EUR28 million from EUR736 million a year before, while revenue rose 3.2% to EUR6.70 billion. Operating profit dropped 44% to EUR405 million despite a 35% rise in the airline’s fuel bill.

Net profit was dented by a EUR373 million charge against potential future losses from its fuel and currency hedging operations due to mark to market accounting, something that the airline hasn’t done before. Because of the sharp drop in the price of fuel since the peak in the summer, the airline’s fuel hedging is expected to cost the company in the second half of the year if the price of fuel remains at current levels.

Net profit, restated to eliminate this effect and other non-recurring items, including a EUR212 million capital gain in the year-earlier period, fell 49% to EUR244 million, below a consensus estimate of EUR272 million calculated by the airline.

Operating margin fell to 6.8% in the period from 12% a year before.

Air France-KLM warned in October that it wouldn’t hit its operating profit target of EUR1 billion for its financial year ending March 31, 2009, but said it would remain profitable. Chief Operating Officer Pierre-Henri Gourgeon said that guidance still stands, as profitability will be buoyed by increasing planned cost savings by EUR260 million.

Analysts and investors weren’t convinced. At 1316 GMT, Air France-KLM shares traded down EUR0.57, or 5.7%, at EUR9.47 in a generally weaker Paris market.

An analyst at Royal Bank Of Scotland said that the airline’s outlook remained vague, is getting more cautious and shows a loss of confidence, and there’s nothing to lend confidence to the stock.

“The second-quarter result is good, in a difficult business context,” Gourgeon said, noting that the airline’s fuel bill had swelled by EUR700 million in the first half to about EUR3 billion despite the hedging program.

Gourgeon said Air France-KLM plans additional savings totaling EUR1.16 billion through 2012. With air travel and cargo expected to be minimal or flat over the next year, Air France-KLM plans to reduce spending on its aircraft fleet by EUR1.6 billion over the next three years. This will mean canceling purchase options with Airbus and Boeing Co. (BA), as well as delaying deliveries.

Air France-KLM’s passenger traffic held up well in the period, rising 1.7% while capacity rose 3.6%. Cargo traffic fell 6.8%. The slowdown in economic activity is starting to hurt airline traffic, however, and the carrier now plans a rise of between 1% and 2% in capacity for next summer.

Gourgeon said he estimates the cost of a four-day strike that forced the airline to cancel about half of its flights at between EUR40 million and EUR50 million, compared with the EUR100 million that the airline had projected last week, saying the strike was less disruptive than feared.