Air France-KLM warns of profits fall on fuel cost

22nd May 2008, Comments 0 comments

The world’s biggest airlines said operating profit would fall by about a third in 2008 because of fuel costs.

22 May 2008

PARIS - Air France-KLM, the world's biggest airline, warned on Thursday that operating profit would fall by about a third in 2008 because of fuel costs, and its shares slumped for a three-day loss of about 16 percent.

As the oil price hovers near a record of 135 dollars a barrel after a surge on Wednesday, the airline reported a sharp rise in operating profit for the last full year.

But it also warned that fuel costs would set it back sharply this year, even though it asserted it was among the world's airlines best placed to cope.

And it said that if fuel prices continued on current trends, they would trigger a restructuring of the airline industry.

The price of shares in the group slumped by 9.65 percent to EUR 16.85, having already fallen by nearly 8.0 percent in the last two days.

Deutsche Bank brokers commented: "The group forecast seems to be a significant reduction from the consensus expectations." Analysts had expected a forecast of EUR 1.2 billion of operating profit in the current year.

Operating profits in the year to March 31 were EUR 1.405 billion, up 13.3 percent on 2006-2007, on sales of EUR 24.1 billion, despite a fourth-quarter operating loss of EUR 46 million.

"The current year is set to be challenging, with the oil price and global economy creating significant uncertainty," chairman Jean-Cyril Spinetta told the Paris-based air carrier's board of directors, a company statement said.

But thanks to "strategic advantages", efficient fuel hedging, rigorous cost control and ongoing post-merger synergies, Air France-KLM will remain "comfortably in profit," he said.

"Under these conditions, and based on an oil price of USD 120 per barrel, our objective is of an operating income in the region of EUR 1 billion."

Air France-KLM said it was strongly placed because it had a 10-year-old strategy of hedging against rises in the cost of fuel.

Hedging is a sophisticated practice of insuring against some upward future price volatility by buying future deliveries at pre-determined prices.

Referring to a sharp slowdown of the US economy and sharp rise of oil and fuel prices, the airline said it expected an operating profit for 2007-2008 or "in the region of EUR 1 billion."

Finance director Philippe Calavia told journalists before a press conference: "Our target is to be among the airline companies in the world which stand up best to the situation."

Calavia said that the airline had already covered 78 percent of its fuel requirements for 2008-2009 on the basis of an oil price of 70-80 dollars per barrel.

He recalled that in 2002 only three airlines had made profits, Qantas of Australia, Singapore Airlines and Air France-KLM.

Air France considers it is better placed than most of its competitors because of its hedging strategy and because it has a relatively young fleet of aircraft which use less fuel than older models.

The airline expected its fuel bill for the current year to be EUR 5.7 billion from EUR 4.6 billion last year.

"If the oil context remains as we have seen in recent weeks, the situation for air transport will be profoundly changed," Calavia said.

"Such fuel costs, transferred to customers, will put pressure on demand and will therefore lead to a reduction of capacity," he said, but companies with a structural advantage would benefit.

"One may consider that fuel will be the factor which triggers a restructuring of the airline sector," he said.

Air France-KLM was created in 2004 by the merger of Air France and KLM Royal Dutch Airlines.

[AFP / Expatica]

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