Air France-KLM sees earnings drop up to $216m due to coronavirus

European airline group suspends China flights until March, warning of worse effects if they do not resume after then.

Air France
Despite positive revenue growth in January, Air France-KLM said it expected lower sales in the first quarter due to the coronavirus outbreak [File: Christian Hartmann/Reuters]

Air France-KLM expects the coronavirus outbreak to wipe 150 million to 200 million euros ($162m to $216m) from earnings by April, assuming China flights remain suspended until then, the Franco-Dutch airline group said on Thursday.

As the first European network carrier to publish its full-year results and 2020 outlook, Air France-KLM is likely to be closely watched for signs of the coronavirus’s effects on the aviation industry beyond its epicentre in Asia.

Like many global airlines, Air France-KLM has cancelled mainland China flights through March, basing its earnings impact estimate on the assumption they resume progressively after that.

“That’s the hypothesis we’re using for the moment but we don’t know how credible it is,” Chief Financial Officer (CFO) Frederic Gagey told reporters in the run-up to the results announcement. “Obviously if it lasts longer, the impact will be heavier.”

For Air France and stablemate KLM, which has its headquarters in the Netherlands, as for global peers, the January outbreak came just as an easing of global trade tensions seemed to promise stronger demand in 2020.

After “significantly positive” January unit revenue growth, the CFO said, “that all changed quite brutally” as the travel lockdown led Air France-KLM to forecast a decline for the first quarter. Mainland China flights accounted for 5.5 percent of the group’s network traffic in 2019.

Under new Chief Executive Ben Smith, Air France-KLM needs to fund an ambitious fleet renewal plan including 3.6 billion euros ($3.88bn) in planned capital expenditure this year.

Revenue rose 1.9 percent in the fourth quarter and 3.7 percent year on year to 27.189 billion euros ($29.34bn) for 2019, while fuel costs drove an 18.8 percent decline in full-year operating income to 1.141 billion euros ($1.23bn). The fuel bill is expected to fall by 300 million euros ($323.73m) this year.

Analysts had expected operating income of 1.1 billion euros ($1.2bn) on 27.38 billion ($29.54bn) in revenue, based on the median of 19 estimates in the company’s own consensus poll.

Despite weaker pricing on lucrative North Atlantic routes in the fourth quarter, Air France-KLM limited the fallout to a 0.1 percent drop in group unit revenue as overall traffic rose 2.9 percent, outpacing its 2 percent capacity growth.

The group also trimmed 2019 unit costs – measured per seat-kilometre before currency or fuel effects – by 0.9 percent, near the top of the zero to 1 percent target range, renewed for this year. Net income fell by 130 million euros to 290 million.

In the fourth quarter, restructuring of the French domestic network delivered a 7.8 percent revenue gain for the short-haul business and a 1.5 percent group unit-cost reduction.

But the cutbacks are meeting resistance, with strikes by ground staff and pilots poised to kick off on Friday as unions at domestic carrier Air France Hop press for improved pay, working conditions and job guarantees.

Air France-KLM’s cargo performance underscored the deterioration in over-supplied air freight markets even before the virus extended Chinese factory shutdowns, halting supply chains.

Cargo revenue dropped by 13.7 percent in the fourth quarter and 5.9 percent in 2019 as a whole, the group said, blaming what it described as “the worst traffic-versus capacity trend for the last 10 years”.

Source: Reuters