Air France-KLM Sees Q3 Operating Loss

January 20, 2009

Air France-KLM warned it would post a third-quarter operating loss after the economy deteriorated and fuel hedging backfired, sending its shares lower after the latest profit warning to hit the airline sector.

Europe's biggest airline said it still expected to achieve an operating profit for the year ending March 31, but the level would depend on the economic situation in coming weeks.

"The deterioration in the economic environment during the third quarter has led to a slight weakening in passenger unit revenues and a strong decline in cargo revenue," Air France-KLM said in a statement on Tuesday.

"Unit costs were not able to benefit from lower oil prices because of the negative effect of the oil hedges," it said.

Airlines, battling high fuel costs before the financial crisis and weakening economies began to hurt demand for air travel, have sought to hedge against oil prices to try to manage fuel costs better.

But since reaching a high of some USD$147 a barrel last July, oil prices have fallen more than 75 percent and are near USD$33 a barrel.

"Though we were not anticipating a significant deterioration in Air France's business before the fourth quarter... the third quarter has equally been highly impacted by a drop in yields that emerged in November," Oddo Securities analysts wrote.

Air France-KLM had already withdrawn its detailed full-year earnings forecast in November after warning in October it would not be able to reach its 2008-09 operating profit target of EUR1 billion euros (USD$1.3 billion).

The carrier said in November it still expected its operating result to be "clearly positive" barring worsening conditions.

German rival Lufthansa in October cut its 2008 operating profit target to about EUR1.1 billion from a previous forecast for a result similar to the EUR1.38 billion achieved in 2007.

Austrian Airlines also cut its 2008 earnings guidance in October and predicted a wider net loss.

Europe's biggest low-cost carrier, Ryanair, in November predicted a fiscal second-half loss but said it was still confident of breaking even for the full year.

British Airways meanwhile said earlier this month it was keeping its guidance for the year to March 31 of a small operating profit. The British carrier had lifted its full-year sales growth target to 4 percent from 3 percent in November.

AirWise © Ascent Pacific 2009

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