Air France Plans Job Freeze, Capacity Cuts to Defend Profit

September 05, 2011, 11:43 AM EDT

Business Week

By Laurence Frost

Sept. 5 (Bloomberg) -- Air France-KLM Group, Europe’s largest airline, declined as much as 7.5 percent in Paris trading after saying it will deepen capacity cuts and is discussing a hiring freeze with unions to defend earnings goals.

Chief Executive Officer Pierre-Henri Gourgeon will “seek a consensus to reduce structural costs in a context of economic uncertainty,” Jean-Charles Trehan, a spokesman for the Paris- based airline, said today. A target for a positive operating profit still stands, he said.

Air France, which had a loss of 145 million-euro ($205 million) in the quarter ended June 30, will post a full-year operating profit of 25 million euros, according to the average of eight analyst estimates. The company, which is switching its accounting to the calendar year, earned 122 million euros in the 12 months to March 31, its first profit in three years.

“The outlook for all major airlines is deteriorating, especially in crucial premium traffic, but the starting point is clearly weaker for Air France,” said Andrew Lobbenberg, a London-based analyst at RBS. “While it’s incumbent on all of them to take some action, it’s even more important for Air France to manage their capacity down and attack their cost base,” he said.

Air France’s 2011 guidance and analyst forecasts compare with average full-year operating profit estimates of 1.09 billion euros for Deutsche Lufthansa AG and 644 million euros for International Consolidated Airlines Group SA, formed from the merger of British Airways and Iberia.

Share Performance

Air France fell as much as 48 cents to 5.92 euros, the biggest intraday drop since Aug. 18, and was down 5.8 percent at 5:04 p.m. in Paris. The stock has plunged 56 percent this year, the worst performance on the Bloomberg EMEA Airlines Index.

High fuel prices and a decline in business and consumer confidence will clip growth and lead to a weaker end to the year for an airline industry in which earnings have already been squeezed after unrest in the Middle East and an earthquake in Japan, the International Air Transport Association said Sept 1.

Air France will drop more capacity for the coming winter season and next summer, Trehan said. The group had already trimmed planned winter seating growth to 2.7 percent from 5.1 percent in July, two months after announcing a 10 percent seat reduction for its joint venture with Delta Air Lines Inc.

Productivity

Air France also said in July it would achieve 500 million euros in savings this year from improvements in productivity and procurement, an increase on the 470 million euros first pledged.

Trehan declined to elaborate on the additional cuts being presented to unions today. A union representative who declined to be indentified confirmed the planned hiring freeze and said that no job reductions are planned.

IATA says a 0.4 percent decline in July freight traffic indicates the likely trend for passenger demand, which increased 5.9 percent for the month, since cargo volumes generally fall first. The last slump and financial crisis cost airlines about two years of growth, the organization says.

http://www.businessweek.com