Friday, July 26, 2013

Air France-KLM Loss Narrows on Recovery Plan: Cuts Start to Pull Airline Out of Red as Company Plans Tough New Measures

Updated July 26, 2013, 3:54 a.m. ET


The Wall Street Journal

PARIS—Franco-Dutch airline Air France-KLM said Friday its Transform 2015 efficiency plan is starting to pull the company out of the red, but said it needs to take new, tough measures to deal with its unprofitable medium-haul and cargo operations.

The airline said its recovery plan introduced more than a year ago to slash fixed costs, reduce head count and win back paying customers has helped to shrink its operating losses so far in 2013, and predicted that the improvement will continue through the remainder of the year.

"Our results have improved quarter after quarter, in spite of the persistently tough economic environment," Chief Executive Officer Alexandre de Juniac said in a statement. "Nevertheless, revenues remain below target at this stage and the turnaround of the medium-haul and cargo businesses in particular are taking longer than expected," he said.

Air France-KLM plans to unveil "additional major measures" in the autumn that will be implemented early next year to address these weak areas, and said the plan would include voluntary departure plans as well as unspecified "industrial and commercial decisions."

The turnaround in Air France-KLM's fortunes was apparent in the second quarter of this year. The airline group's net loss shrank to €163 million ($216 million) in the three months from an €897 million loss in the same period a year before, when the red ink was swelled by a €368 million restructuring provision.

"We are on the right track," Mr. de Juniac told some journalists ahead of a news conference to present the results, adding he was particularly pleased that unit costs had fallen by some 5% year on year.

Chief Financial Officer Philippe Calavia concurred, commenting: "We are getting out of the woods."

The better performance was helped by a 7.7% reduction in the company's fuel bill compared with the second quarter of 2012, but the head-count reduction nevertheless trimmed its wage bill—the main cost center—by 0.6%. Revenue rose 0.6% year on year to €5.16 billion, and passenger operations swung into the black at €93 million, compared with a €57 million loss in the second quarter of 2012. Overall, the group posted an operating profit of €79 million, a €158 million improvement from the previous year.

Using the assumption of continued strict capacity discipline, solid bookings for the summer season, slightly higher revenues from passenger operations and a fuel bill of around $4.8 billion, Air France-KLM said it is aiming to improve its operating income in the second half of this year in line with the €239 million improvement achieved in the first half. Continuing that trend could allow the airline group to post a small operating profit for all of 2013, as in the second half of 2012 the company reported a €337 million operating profit.

Reducing Air France-KLM's debt load is one of Mr. de Juniac's goals for the period through 2015, and in the first half of this year the debt was cut by €630 million, thanks in part to €1.03 billion of positive cash flow that came partly from a steep reduction in capital expenditure.