Air France-KLM battles fuel costs with deeper integration

Air France-KLM battles fuel costs with deeper integration
FILE PHOTO - The Air France-KLM company logo is seen during the company's half-year results in Paris, France, August 1, 2018. REUTERS/Benoit Tessier/File Photo GLOBAL BUSINESS WEEK AHEAD   -  Copyright  Benoit Tessier(Reuters)
By Reuters

By Laurence Frost

PARIS (Reuters) – Air France-KLM pledged to eke out efficiency gains to offset higher fuel costs this year, as the Franco-Dutch airline group deepens cooperation between its two main carriers.

Presenting 2018 earnings for the group he joined in September, Chief Executive Ben Smith promised better-coordinated networks and fleets after overcoming KLM resistance to closer integration with Air France, in a boardroom deal struck on Tuesday.

“These first achievements pave the way for our ambition to regain a leading position in Europe and worldwide,” Smith said in a company statement.

Underlining the challenge, fourth-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) fell 20 pct to 776 million euros (£674.16 million) as the fuel bill mounted, despite a 4.1 percent revenue gain to 6.54 billion.

Blighted by restrictive French union deals and strikes that last year wiped 335 million euros off earnings and forced out its previous CEO, Air France-KLM has trailed rivals Lufthansa and British Airways on profitability.

But Smith, an Air Canada veteran, has restored labour peace by granting wage hikes in return for increased flexibility with which he now hopes to make better and more profitable use of the group’s aircraft and networks.

On the eve of its results presentation, Air France-KLM struck a new pay deal with its French pilots and resolved a standoff with KLM and the Dutch division’s popular leader Pieter Elbers, over Smith’s integration plans.

Almost 15 years after the merger that created Air France-KLM, decisions on networks, fleets and commercial strategy will be taken at group level rather than by the individual carriers under the plans unveiled on Tuesday, which also see Elbers and his Air France counterpart become deputy group CEOs.

The financials were broadly in line with expectations of 786 million euros of EBIDTA on 6.52 billion in revenue – based on the median of seven analyst estimates in a poll by Infront Data.

The fuel bill rose by 451 million euros in 2018 and will climb another 650 million this year as hedges expire, Chief Financial Officer Frederic Gagey told reporters.

Overall unit costs, up 0.6 percent last year before currency and fuel-price impacts, were “well under control”, Gagey said, and forward bookings for the summer season are “better positioned” than a year ago.

Passenger traffic rose 3.4 pct to 24.46 million in the last quarter, the group said, while unit revenue – a measure of proceeds in relation to capacity – fell 0.6 pct.

The low-cost Transavia arm was a bright spot, posting a 9 percent full-year operating margin for its French operations as it prepares to expand capacity by about 10 percent in 2019.

The rollout of new digital platforms to travel agents will generate savings in 2019, the CFO said, along with improvements to long-haul network planning and the gradual replacement of four-engined Airbus A340 and Boeing 747 planes, less fuel-efficient than twin-engined alternatives.

The newly announced management changes should also boost efforts to increase synergies in areas such as purchasing, which was nominally integrated in 2008 but lacked a single group-wide chief procurement officer until last year.

Smith’s new centralisation push nonetheless builds on years of painstaking integration that has already assigned some 18,000 workers to group-wide services and managers, said Gagey, who joined Air France in 1997.

“It’s not as if we just realised we should begin to look for synergies,” he said.

(Reporting by Laurence Frost; Additional reporting by Jean-Michel Belot; Editing by Marguerita Choy)

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