Air France-KLM CEO Vows Ambitious Strategy as Profit Drops

(Bloomberg) -- Air France-KLM Group Chief Executive Officer Ben Smith pledged to pursue an ambitious strategy after the carrier posted lower earnings in its first set of results under his leadership.

Air France-KLM CEO Vows Ambitious Strategy as Profit Drops
  • Smith, a Canadian who took charge last month, praised the company’s commercial strengths, attractive brands and staff -- despite 15 days of strikes at the French arm this year. At the same time, he acknowledged that the business has fallen from the ranks of the industry elite.
  • Speaking to analysts for the first time, he declined to say when he’ll detail his plans, while adding that the group must rely on clear brands -- a possible reference to millennial-friendly unit Joon, created to cut costs but derided as confusing for customers -- and the strength of its international network.

Key Insights

  • Air France and KLM saw profit fall, though the Dutch arm’s 18 percent margin remained well ahead of its larger sibling, a discrepancy that’s stoked tensions between both staff and management in Paris and Amsterdam.
  • The company revealed that a recent pay deal with Air France unions will add 50 million euros ($57 million) to annual costs -- less than the 335 million-euro price of the walkouts. Negotiations aren’t over and Smith must now tackle demands from pilots, who have threatened to resume strikes.
  • The 2019 fuel bill is expected jump by 900 million euros, almost double this year’s forecast gain, putting pressure on Smith to secure labor peace without crippling the company. Rival Deutsche Lufthansa AG says next year’s increase in kerosene costs will be only 50 million euros higher. Bernstein analysts called the results strong in a note, warning that fuel costs would constitute a significant headwind.
  • Smith, whose predecessor Jean-Marc Janaillac resigned after workers rejected his strategy, said deals reached so far will bring much needed stability. He has yet to provide detail on a range of questions, including the introduction of low-cost long-haul flights, the future of Joon, the role of discount arm Transavia, and whether to refurbish Air France’s costly Airbus SE A380 fleet.

Market Reaction

  • The stock rose as much as 5.4 percent and traded 4.6 percent higher as of 9:03 a.m. in Paris, paring its decline this year to 34 percent.

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  • Air France-KLM posted third-quarter operating profit of 1.07 billion euros, 6.7 percent lower than a year earlier. It provided no 12-month estimate
  • Full-year capacity increases will be cut to 2 percent from the 2.5 percent previously targeted
  • Passenger traffic and revenue are forecast to grow in the fourth-quarter
  • The group sees a 2018 currency headwind of around 150 million euros
  • To read more on Air France results, click here

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