Air France-KLM eyes catch-up with Lufthansa, IAG

PARIS (Reuters) - Franco-Dutch carrier Air France-KLM plans extra cost cuts to close the competitiveness gap with European rivals and will scale back air cargo operations to reduce its exposure to economic cycles.

"Our competitiveness is not on the level of that of our major European competitors," Chief Executive Pierre-Henri Gourgeon said on Friday, citing Lufthansa and IAG, formed by the merger of British Airways and Spain's Iberia, as examples.

He told reporters first-quarter results were disappointing but the airline was keeping its target of achieving a full-year operating profit and would give an update on cost plans with its quarterly results on Nov. 9.

Air France-KLM is the worst-performing stock on Paris' broad SBF 120 index this year, down some 55 percent, as it is seen weighed down by high staff costs, a large debt pile and tough competition.

The airline, which is 15.7 percent-owned by the French state and 9.8 percent-owned by employees, spends about a third of its revenue on staff, its biggest expense, compared with about a quarter for Lufthansa and IAG.

Some analysts have said Air France-KLM could suffer if the economic environment worsens while others have questioned whether it could achieve an operating profit this year.

The group said on July 25 it was halving its planned winter long-haul capacity growth to 2.7 percent from 5.1 percent and pushing some of its short-haul operations out to provincial French cities to help drive down costs.

Gourgeon said cost cuts this year would go over the planned savings of 470 million euros but refused to give a precise figure. Les Echos reported on Monday that the airline was eyeing cost savings of 700-800 million euros per year.

Shares in Air France-KLM were down 2 percent at 6.16 euros by 1222 GMT.

"The recent share price falls suggest the market is starting to assume a renewed economic downturn," Espirito Santo Investment Bank, which has a "sell" rating on Air France-KLM, wrote in a research note.

Gourgeon told an industry breakfast the air transport industry was better placed than in 2008 to weather a potential recession.

"In 2008, after four or five years of prosperity, the air transport industry was caught by surprise," he said. "This time, the industry is better prepared."

He added that Air France-KLM would not pursue efforts to rank amongst cargo transport leaders in the future, an area where it competes with airlines such as Cathay Pacific.

"This business is very exposed, and when we see how it is doing, we are encouraged by our decisions to reduce capacity," he said.

International passenger traffic rose 5.9 percent in July year-on-year, while freight traffic fell 0.4 percent, mainly due to weakness in the Asia-Pacific region following the earthquake and tsunami in Japan, the International Air Transport Association said on Sept. 1.

Asked about a possible multi-billion-dollar order to renew Air France-KLM's long-haul fleet, Gourgeon said a decision was likely after a board meeting slated for Sept. 15.

The airline is looking for around 100 lightweight, fuel-saving aircraft in the mid-sized 250-300 seat range and is weighing up Boeing's 787 Dreamliner against Airbus' planned A350.

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