July 8, 2014 / 6:08 AM / 5 years ago

Air France warns on profit as overcapacity hits prices

PARIS (Reuters) - 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.

Passengers check-in at an Air France counter in Nice International airport in Nice July 31, 2013. REUTERS/Eric Gaillard

Europe’s second-largest traditional network carrier warned its 2014 profits could be as much as 12 percent 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 8.9 euros 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 Jet2.com (part of UK-listed Dart), SAS has said it will step up cost cuts while U.S. based Delta disappointed with its revenue figures.

“This warning is not entirely surprising given Lufthansa’s warning in June for the same reasons and the recent 21 percent decline in Air France-KLM’s share price,” said Citi Research analyst Andrew Light in a note.

“We expect further restructuring actions to be announced later in the year.”

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 percent, and British Airways and Iberia parent IAG, whose stock dropped 4 percent.

Air France-KLM said the lower expected result - at 2.2-2.3 billion euros ($3.0-3.15 billion) down from previous guidance of 2.5 billion - still represented a 20 percent 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 euros in 2015.

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

June passenger capacity was up 1.8 percent, Transavia France capacity up 4.6 percent, and cargo capacity down 1.7 percent.($1 = 0.7331 Euros)

Additional reporting by Victoria Bryan, Sudip Kar-Gupta, Editing by Dominique Vidalon and Andrew Callus

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