Air France-KLM Loss Widens as Wage Hit Shows Cost of Union Peace

(Bloomberg) -- Air France-KLM Group’s first-quarter loss more than doubled as fares fell and wages climbed following union deals struck by Chief Executive Officer Ben Smith after he took charge last year.

  • The loss jumped to 303 million euros ($339 million) from 118 million euros a year earlier, with higher fuel costs and currency fluctuations also taking their toll. The loss was in excess of the minus 206 million-euro average estimate of four analysts.

Key Insights

  • Net employee costs showed the price of industrial peace at the formerly strike-torn carrier, increasing 6.4 percent in the quarter following the implementation of Smith’s wage agreements with pilots, ground staff and maintenance workers. The effect of the settlements is expected to moderate over the full year.
  • The CEO said operating conditions have been tough amid a European capacity glut. He pointed, though, to signs of a turnaround in the operational performance of the main Air France unit, the group’s biggest drag on profits, with improvements in punctuality and net promoter score, a gauge of customer loyalty and brand sentiment.
  • Those advances should be supported by a more benign market this the summer, Smith said, with Europe-wide long-haul capacity set to grow more slowly, especially to North America, Asia and the Middle East. Company bookings through September are up on last year and second-quarter fares are showing a slight improvement.
  • While Air France was once again outperformed by KLM, the Dutch arm showed a greater deterioration in earnings, swinging to a loss from a profit. Chief Financial Officer Frederic Gagey said the difference was down to the absence of strikes at Air France. Tensions between the units became public this year when the Netherlands bought a stake to match the French holding, pledging to defend national interests.

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  • Air France-KLM stock has gained 7.9 percent this year after slumping 30 percent in 2018 as the aftermath of French strikes stoked investor concern. Deutsche Lufthansa AG, Europe’s biggest airline, is up 9.3 percent, though it slid this week after announcing a capacity freeze at the Eurowings discount division in response to the fare war.

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  • Smith reiterated full-year targets for a reduction of unit costs of up to 1 percent and a debt to earnings ratio below 1.5 times. The 12-month fuel bill is likely to increase by 650 million euros and capital spending will total about 3.2 billion euros, he said.

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