Air France warns on profit as overcapacity hits prices

Europe’s second-largest traditional carrier warned profits could be as much as 12 % lower

An Air France-KLM profit warning bruised European airline shares on Tuesday, as the latest evidence of overcapacity set the stage for possible further job cuts.

Europe’s second-largest traditional network carrier warned its 2014 profits could be as much as 12 per cent lower than previously predicted, mainly as a result of overcapacity and resulting weak prices in both the passenger and cargo sectors.

Shares in the Franco-Dutch group fell more than five percent to €8.90 in early trading, reaching their lowest level since late February and dragging the European airline sector lower.

Its warning comes weeks after a similar jolt from Germany's Lufthansa, which warned on profit targets for 2014 and 2015 due to weaker-than-expected passenger revenue and cargo trends.


Among the factors it blamed were overcapacity on North Atlantic routes and competition from low-cost and Gulf carriers.

Since the Lufthansa statement, other smaller players have warned on profit such as Icelandair and (part of UK-listed Dart), SAS has said it will step up cost cuts while US-based Delta disappointed with its revenue figures.

European airline stocks were among the region's worst-performing shares, as the Air France-KLM profit warning spilled over to Lufthansa, whose shares fell 2 per cent, and British Airways and Iberia parent IAG, whose stock dropped 4 per cent.

Air France-KLM said the lower expected result - at €2.2 to €2.3 billion - down from previous guidance of €2.5 billion - still represented a 20 per cent improvement on 2013 earnings before interest, tax, depreciation and amortisation.

“While not representing a turning point in market trends, the June traffic figures published today as well as bookings for July and August nevertheless reflect the over-capacity on certain long-haul routes, notably North America and Asia, with the attendant impact on yields,” the airline said.

“This comes on top of the persistently weak cargo demand and the challenging situation in Venezuela identified in the first quarter.”

Air France-KLM is one of a number of airlines whose revenues remain blocked in Caracas because of a currency-related dispute.

The government requires airlines to sell tickets in the local bolivar currency, but has been slow to allow repatriation of funds under strict foreign currency controls.

A company official said the airline was owed some $290 million as a result of the dispute, out of a total estimated in May at $4.2 billion by the Venezuelan Airlines Association.

He said the cargo and Venezuela factors represented about half the resulting profit guidance adjustment together, with the fall in passenger yields accounting for the other half.

There has been talk Air France-KLM will sell all or part of its Martinair cargo division.

Air France-KLM also said that job cuts it announced in October 2013 had been completed in June and that it had begun a programme to cut some 700 cabin crew posts.

It said that despite the reduced profit guidance it was on track to reduce net debt to €4.5 billion in 2015.

Air France-KLM's June passenger traffic climbed 2.9 per cent from a year ago. Traffic at its Transavia France low cost unit was up 4.3 per cent, and cargo traffic down 4.3 per cent.

June passenger capacity was up 1.8 per cent, Transavia France capacity up 4.6 per cent, and cargo capacity down 1.7 per cent.