Air France-KLM shows successful business as its 2Q profit doubled

Photo: Air France-KLM shows successful business as its 2Q profit doubled

Strong demand on long-haul routes to Asia and the Americas helped Air France-KLM, the world's largest airline by revenue, double its second-quarter profit.

Chief Executive Jean-Cyril Spinetta said "robust global growth" in the quarter fed passenger traffic growth, which he sees no signs of abating despite the crisis in financial markets.

Investors welcomed the results, which were stronger than expected, sending the stock soaring 9.36 percent to EUR24.18 (US$35.86).

Net profit for the quarter ended Sept. 30 rose 97 percent to EUR736 million (US$1.09 billion), boosted by a EUR202 million (US$300 million) exceptional gain from the leveraged buyout of its Amadeus reservation system, the company said in a statement.

"These are good quality results," said Pierre Boucheny of Kepler Equities.

But he warned of a "lack of visibility" on future demand which is vulnerable to the fallout from the mortgage crisis and rising oil prices.

Spinetta said demand has held up "remarkably" well, even as tighter lending conditions threaten the broader economy.

"We don't see any variation in demand in reservations," he said in a Paris news conference.

The network of the Franco-Dutch airline, which has hubs in Amsterdam and Paris, "remains a major advantage," he said.

Formed by the merger of Air France and KLM three years ago, the group said it carried 20.5 million passengers in the three months, up 4.4 percent from a year earlier.

Some of the rising oil prices have been passed on to customers, but Chief Financial Officer Philippe Calavia said higher ticket prices had not led to a weakening in passenger traffic.

The company said the "efficiency" of its hedging measures and the decline in the dollar allowed it to contain the rise in its fuel bill to just 1.8 percent in the quarter.

Spinetta said the company continued to reap the benefits of a three-year cost-cutting plan initiated last spring. Operating costs rose 3.6 percent in the second quarter to EUR5.77 billion (US$8.56 billion).

Revenues were up 6 percent in the quarter at EUR6.49 billion (US$9.64 billion). Total passenger revenue rose 6.1 percent to EUR5.2 billion (US$7.7 billion). Cargo revenues fell 0.3 percent to EUR722 million ($1.07 billion) in a "difficult operating environment" and despite an upturn in traffic from the first quarter.

Full-year results will be impacted by a strike by cabin crew Oct. 25-29 which led to the cancellation of some 28 percent of Air France group flights over the period.

The airline estimates the strike costs at EUR60 million (US$89 million). Taking this into account, Spinetta confirmed the airline's full-year objectives of a further rise in operating income and a return on capital employed of 7 percent after tax, up from 6.5 percent last year.

In 2008, Air France-KLM plans to order as many as 100 replacement jets for its mid-line range, served by Airbus's A350 XWB and Boeing's 787 Dreamliner, Calavia said. The airline may split the order.

Air France-KLM stock is down 22 percent this year on investor fears about higher oil prices which have hurt airline shares worldwide.

Calavia said the airline's market capital was now below its equity, which he described as "an overreaction that's in no way justified by our activity."

Boucheny agrees, saying a share price of EUR35 (US$51.90), 50 percent above the current rate, would be reasonable.

London brokerage Collins Stewart said Air France-KLM was the "cheapest airline in Europe," but warned: "This is not an airline-friendly market, and many investors will be forgiven for showing no interest in having an oil-sensitive, consumer-sensitive stock in their portfolio."

Concerns that Air France-KLM will take over Italy's loss-making airline Alitalia SpA have also hurt the stock.

Calavia said the airline was "continuing to weigh the risks and opportunities" of an alliance with either Alitalia or Spain's Iberia Lineas Aereas de Espana SA. A decision on Alitalia was to be made by the end of this month or early next month, he said.

Air France-KLM also said it planned to delist its American Depository Receipts from the New York Stock Exchange for savings of about EUR3.5 million a year (US$5.1 million). Share transactions in New York represent about 2 percent of the total daily trading volume in the company's shares, Calavia said.