European Airlines Drop After Air France Cuts Outlook

Air France-KLM Group, Deutsche Lufthansa AG and International Consolidated Airlines Group SA, Europe’s three biggest carriers, all dropped after Air France reported an unexpected quarterly loss and cut its forecast.

The fiscal third-quarter net loss was 46 million euros ($63 million), missing a forecast for 60 million euros in profit, based on the average of seven analyst estimates. Air France now targets a “positive operating result” for the fiscal year, after earlier predicting profit of more than 300 million euros.

Earnings declined after French air traffic control strikes and weather disruptions caused the cancellation of flights. Air France, Europe’s largest airline, also said overcapacity was crimping yields, a measure of profitability, and that fuel costs rose by 28 percent to 1.35 billion euros.

“The one-off items are an added negative distraction, but fuel and capacity are the big issues,” said Chris Logan, an analyst at Echelon Research and Advisory in London. “IAG and Lufthansa are also exposed, not just on fuel costs but also pricing if capacity returns faster than expected.”

Air France declined 1.05 euros, or 7.7 percent, to 12.57 euros in Paris, the biggest drop since Feb. 11, 2010. Lufthansa fell 2.5 percent, while IAG, owner of British Airways and Iberia Lineas Aereas de Espana, dropped 3.3 percent.

Capacity Gains

Capacity, or available seats, is up about 10 percent across the North Atlantic in February as rival European carriers, particularly British Airways, have added seats, Air France-KLM Chief Executive Pierre-Henri Gourgeon said today. Air France has boosted capacity on the routes by 1 percent to 2 percent.

Airlines worldwide slashed services in the wake of the global recession as demand for air travel plummeted. As economies recovered demand for flights exceeded supply, allowing airlines to boost yields.

Air France canceled 6,900 flights after the French strikes in October and heavy December snowfalls in northern Europe and the U.S. The disruptions led to the loss of 100 million euros in revenue, the airline said yesterday.

“The impact of the weather is much higher than was expected,” said Yan Derocles, an analyst at Oddo Securities in Paris who recommends buying the stock. “The overcapacity situation is clearly worrying and clearly negative.”

Air France also said “security issues” in countries the airline serves, including Tunisia and Egypt, where there have been uprisings against the ruling governments, would likely hurt revenue in the current quarter.

Lowering Costs

Employee costs fell by 1.3 percent to 1.84 billion euros in the quarter, partially helping offset a surge in fuel costs. Air France hedged 14 percent of fuel costs, mitigating the rise. The airline has hedged about 50 percent of fuel for next year, it said today.

“Air France has done a reasonable job on head count and employee costs, but the fuel bill is now so big relative to the other costs that airlines just can’t take non-fuel costs down enough to keep overall costs unchanged,” said Echelon’s Logan.

IAG will post its first earnings report as a joint company on February 25, it said today. The company will announce full- year earnings for Iberia and nine-month results for BA. Lufthansa reports its 2010 full-year earnings March 17.

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