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Air France Cuts Spending by $645M to Reduce Debt
Posted On: Dec 10, 2012

Air France-KLM Group (AF) plans to cut capital spending by a further 500 million euros ($645 million) over the next two years as Europe’s biggest airline trims investments in a push to pare debt and lift profit margins.

The outlay will be reduced by 300 million euros next year and 200 million euros in 2014, the Paris-based company said today in a statement, adding that operating profit should reach a level equivalent to 6 to 8 percent of sales in 2015.

Air France-KLM’s Transform 2015 plan is seeking to shave 10 percent from non-fuel costs and cut net debt by 2 billion euros. The capital-spending curbs, which may crimp jet purchases, will pare investment next year to 1.2 billion euros, including a 200- million euro reduction to the initial target announced in July.

“This is a necessary reduction, but given the group’s younger fleet age versus competitors they have the flexibility to do it,” said analyst Donal O’Neill at Goodbody Stockbrokers in Dublin, who has a “buy” rating on the stock. “The Transform plan is gathering pace and should be well on track to deliver.”

Employee Exits

Employee expenses will be reduced by 400 million euros by 2014, aided by 735 departures already secured, and the medium- haul business should break even that year as the fleet is reduced by 34 aircraft, Air France-KLM said prior to an investor briefing at Paris’s Charles de Gaulle airport today.

Chief Executive Officer Jean-Cyril Spinetta said in June he would eliminate more than 5,000 jobs at the main French unit to deliver savings he reckons are needed to guarantee survival.

The cut in capital spending is being driven by a “headwind” of high fuel costs, “but does show the group’s determination to deliver on targets,” said Stephen Furlong, an analyst at Davy Holdings in Dublin who rates the stock “underperform.”

Air France-KLM expects a 500 million-euro annual operating loss from French medium-haul flights alone, spokeswoman Brigitte Barrand said, reiterating comments at the investor event, which was closed to reporters. That’s unchanged from a year earlier.

Shares of Air France-KLM, which is folding the Brit Air, Regional and Airlinair units that connect smaller cities into a single business, traded 0.9 percent lower at 7.05 euros as of 4:20 p.m. in the French capital. They’ve gained 77 percent so far this year, valuing the company at 2.12 billion euros.

Lufthansa, IAG

Rival carriers are also seeking to slash costs. Deutsche Lufthansa AG (LHA), Europe’s second-biggest, plans to save 1.5 billion euros by 2015 through its Score plan, which in addition to 4,500 job cuts includes the folding of short-haul operations outside Frankfurt and Munich into the Germanwings low-cost unit.

The Cologne-based company has also scrapped routes, frozen capacity and delayed an upgrade of the inter-continental fleet.

At European No. 3 International Consolidated Airlines Group SA (IAG), the British Airways unit is seeking voluntary departures among 2,338 senior cabin crew at London’s Heathrow airport and Spanish division Iberia plans 4,500 job cuts, prompting unions to call a six-day strike in the run up to Christmas.

Air France-KLM’s capital-spending cuts will see investment in 2014 fall to 1.4 billion euros, reversing an increase for that year announced on July 30, when the carrier had said it was reining in the outlay for this year and 2013. Expenditure totaled 2.1 billion euros in 2011.

Adopting new accounting standards for pensions will have a 1.1 billion-euro negative impact on opening equity next year, though there’ll be no cash impact, the carrier said today.

Air France-KLM had an 895 million-euro loss in the second- quarter, versus 197 million euros a year earlier, as it posted charges of 368 million euros for payments linked to job cuts.


     
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