Air France-KLM suffers quarterly loss, sees turbulence ahead

28 May, 2008: Air France-KLM, the largest airline company in the world in terms of total operating revenues, is in a crisis in the face of record-high prices of aviation fuel and the economic downturn in the United States.

The airline, as a result, is projecting a sharp drop in its operating profits.

Air France-KLM, an airline holding company incorporated under French law, has its headquarters at Roissy-Charles de Gaulle Airport near Paris, France.

7Besides being the world’s largest airline in terms of total operating revenues, Air France-KLM is the third-largest in the world in terms of passenger-kilometres.

A member of the SkyTeam airline alliance, Air France-KLM relies on two major hubs: Roissy-Charles de Gaulle International Airport, near Paris, and Schiphol Airport, near Amsterdam, the Netherlands.

In a statement issued in Paris, Air France-KLM Group said it posted its first quarterly loss since 2003 and that earnings in 2008 would drop by nearly 30% as fuel prices soar and an economic slowdown dents demand for travel.

It was Air France that suffered the most in over 5 years in Paris trading after it had a net loss of 542 million euros ($856 million) in the fourth quarter ended March 31, 2008, the statement added. Shares of Air France fell as much as 2.09 euros, or by 11 %, to 16.56 euros – its biggest drop since September 30, 2002.

However, sales rose by 5.8% to 5.7 billion euros.

The airline estimates that operating profits will fall to 1 billion euros from 1.4 billion euros in fiscal 2008.

The website bloomberg.com quoted an aviation specialist at JLS Consulting Limited as commenting: “This is the shape of things to come. All airlines are going to be massively exposed. Air France has been very successful, but it will be more difficult in a market where demand is slowing. And they haven’t tackled some of the more thorny cost issues within the company.”

At a press conference in Paris, Philippe Calavia, chief financial officer of Air France-KLM said: “The change in the economic context and a doubling of fuel prices will make the current year challenging. The company has scrapped its goal of achieving an 8.5% return on capital by fiscal 2010.

Air France-KLM, according to Philippe Calavia, has hedged about 78% of its fuel requirements for the current year at between $70 and $80 a barrel.

He added: “If the oil situation remains as it has been in recent weeks, air transport is going to change profoundly. Measures such as transferring the cost of fuel to the customers will put pressure on demand and will therefore lead to a decrease in capacity.”

It may be noted that the operating units of Air France and KLM had increased fuel surcharges 12 times in the last fiscal year in an effort to pass the soaring costs on to customers.

Air France currently charges a fuel surcharge of 01euros on long-haul flights and 26 euros for European flights.

Air France-KLM, Calavia said, is “comfortable with a decision taken in April 2008 to abandon takeover talks with Italian state-owned airline Alitalia SpA after failing to agree terms with unions. Alitalia is in a much more difficult position now than it was two months ago.”

In the department of load factor – a measure of seat occupancy – Air France-KLM is doing well everywhere except North America, with demand matching increase in capacity, according to the company statement.

Jean-Cyril Spinetta, chairman and chief executive officer of Air France-KLM, was quoted by the website flightglobal.com as saying that he “expects to find out within weeks when Airbus SAS will hand over Air France’s first A380 superjumbo jetliner following further delays to the project. Delivery had been scheduled for April 2009. The Airbus A380 superjumbo will be a powerful tool in reducing average costs per passenger because of its size and fuel efficiency.”