Air France cuts profit guidance as overcapacity hits prices

Tuesday 08 July 2014 10.10
Air France KLM joins other airlines that have also flagged overcapacity as a drag on earnings
Air France KLM joins other airlines that have also flagged overcapacity as a drag on earnings

Air France KLM said its 2014 profits could be as much as 12% lower than previously predicted, mainly as a result of overcapacity and resulting weak prices in both the passenger and cargo sectors. 

The company has now joined other airlines that have also flagged overcapacity as a drag on earnings.

But the France-Dutch carrier stressed that the lower result, at €2.2-2.3 billion down from previous guidance of €2.5 billion, still represented a 20% improvement on 2013 earnings before interest depreciation and amortisation (EBITDA). 

"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 ahead of results due later this month.

"This comes on top of the persistently weak cargo demand and the challenging situation in Venezuela identified in the first quarter," it added.

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

The government there 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 $290m 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 Venzuela 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 will sell all or part of its Martinair cargo division. 

German carrier Lufthansa warned on its profit targets for 2014 and 2015 in June, citing weaker than expected revenue in its passenger division and poor cargo trends.

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

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

Keywords: air france, klm