Air France-KLM said it would limit investments and accelerate cost controls next year to mop up the remaining impact of a recent pilots’ strike that helped slash its operating profit by more than half in the third quarter.
Europe’s second-largest network carrier by revenues said the interim measures were needed to secure a smooth transition between two successive turnaround plans, after the cash-draining strike slowed down its progress towards debt reduction.
Like rival Lufthansa, Air France is trying to expand low-cost operations and reduce costs to compete with low-cost carriers and Gulf carriers.
However, a bitter two-week confrontation last month with pilots over plans to expand low-cost subsidiary Transavia put a dent of €416 million in quarterly revenues and €330 million in its operating result.
It is difficult to separate the effect of the market from the direct effect of the strike, but the €500 million (cost estimate) includes these elements
The Franco-Dutch group reiterated that the combined effects of the strike and a dip in fourth-quarter demand would remove €500 million from its targeted earnings before interest, tax, depreciation and amortisation (Ebitda) for 2014 of €2.2billion-€2.3 billion.
“Over and above the effects of the strike, we also predict that the market will remain sluggish in the fourth quarter,” Finance Director Pierre-Francois Riolacci told reporters.
“It is difficult to separate the effect of the market from the direct effect of the strike, but the €500 million (cost estimate) includes these elements,” Riolacci said.
Air France-KLM shares, which have fallen 40 per cent over the last six months, dropped almost 4 per cent in opening trades.
Cantor Fitzgerald analyst Robin Byde said although the strike impact remained as expected, Air France had wider problems.
“Our wider concern is that three out of four group divisions still remain ‘structurally’ troubled,” he wrote in a note to clients, referring to the airline’s passenger short-haul and long-haul operations, plus its cargo division.
Overall, the group’s revenue fell 6.7 per cent in the third quarter to €6.7 billion, while operating profit fell by €394 million to €247 million, the group said.
On a like-for-like basis, revenues rose 0.2 per cent and operating income fell by €18 million, it said.
Unit revenues fell 1.8 per cent in real terms in the third quarter while unit costs fell 1.2 per cent.
Unit revenues look set to fall again in the fourth quarter, with the passenger business stable and cargo falling, Riolacci said.
While it is too late to claw back the effects of the strike and the dip in demand in 2014, Air France-KLM said it planned to adjust investments, accelerate cost cuts and apply “dynamic management” to its asset portfolio from 2015.
However, it repeated denials of Dutch news reports that it was looking at major job cuts in its Dutch arm. “There are no drastic or emergency measures which need to be declared,” Riolacci said.
“Of course, there has been a strike and the market environment is difficult, so it is quite right to manage things strictly.”
He said the areas to look at in managing assets may include the group’s remaining 4.4 per cent stake in reservation systems Amadeus, in which it reduced its shareholding last month.
“Our Amadeus stake immediately springs to mind but the formula is a little wider than that, and we have to look at all the possibilities for action in the current environment,” he said, adding that fleet plans would also be up for discussion.
Asked if Air France might cancel two Airbus A380s is has on order, Riolacci said it had an option to swap them for smaller A350 aircraft but that no decision had been made.
“We still have time and it is a bit early to address this subject, but we have the flexibility to convert,” he said.
The broad goals of Perform 2020, a successor plan to the Transform 2015 restructuring project which is due to be completed soon, would remain unchanged, the airline said.
The European economy remains lacklustre but the effect on activity from concerns over Ebola is limited, Riolacci said.
One positive for airlines are lower fuel prices. Air France has trimmed its fuel bill estimate for 2014 to €8.9 billion from €9 billion.
Several analysts expect Germany’s Lufthansa to alter its profit outlook due to its own recent pilot strikes when it reports quarterly figures today.
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