Air France-KLM to cut costs through deeper integration

Paris — Air France-KLM has pledged new efficiency gains to offset higher fuel costs in 2019, as the Franco-Dutch airline group deepens co-operation between its two main carriers.

Presenting 2018 earnings for the group he joined in September, CEO Ben Smith promised better co-ordinated networks and fleets, after overcoming KLM resistance to closer integration with Air France in a new boardroom deal.

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

After opening lower, Air France-KLM shares rose 4.1% to €10.80 by late morning on Wednesday.

Underlining Smith’s challenge, fourth-quarter earnings before interest, tax, depreciation and amortisation (ebitda) fell 20% to €776m as the fuel bill mounted, despite a 4.1% revenue gain to 6.54bn.

Unit revenue fell 0.6% in the last three months of 2018 and will decline further in the current quarter, the group said.

Air France-KLM has trailed rivals Lufthansa and British Airways on profitability, held back by restrictive French union deals and strikes that in 2018 wiped €335m off earnings and forced out its previous CEO.

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

Wariness on the Dutch side is partly explained by the relative underperformance of Air France, whose 2018 operating margin was 1.7%, or 4%  excluding the impact of strikes — compared with 9.8%  for KLM.

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

The financials were broadly in line with expectations of €786m of ebitda on 6.52bn in revenue, based on the median of seven analyst estimates in a poll by Infront Data.

“While a new CEO with an impressive track record has been appointed and short-term pay deals agreed with the French unions, we await details of his new strategy,” Liberum analysts said in a note.

The fuel bill rose by €451m in 2018 and will climb another €650m this year as hedges expire, CFO Frederic Gagey told reporters.

Overall unit costs, up 0.6% last year before currency and fuel-price impacts, were “well under control”, Gagey said, adding that while a later Easter holiday will likely lead to lower unit revenue in the first quarter, summer bookings are already “better positioned”.

The group said 2019 costs are expected to come in somewhere between flat and a 1% decline, on the same basis.

Passenger traffic rose 3.4% to 24.460-million in the last quarter, the group said, while crossing the 100-million threshold for the full year.

The low-cost Transavia arm was a bright spot, posting a 9% 2018 operating margin for its French operations, as it expands services by 9% to 11% in 2019, with a more modest 2% to 3% growth at group level — to include eight new Air France destinations from mid-year.

The new labour deals should provide a financial lift in 2019, the CFO said, avoiding the strikes and disruption that led to a spike in Air France’s customer compensation bill last year.

The rollout of new digital sales platforms will also generate savings, along with improvements to long-haul network planning and the gradual replacement of less fuel-efficient four-engined Airbus A340 and Boeing 747 planes.

The newly announced management changes may boost efforts to increase synergies in areas such as purchasing — which lacked a single group-wide chief procurement officer until last year.

Smith's centralisation push builds on years of painstaking integration that had already assigned 18,000 staff 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.
Reuters