Air France-KLM disappoints on earnings, outlook

By Laurence Frost

PARIS (Reuters) - Air France-KLM <AIRF.PA> said slowing travel demand will hurt ticket sales in the rest of 2019, sending its shares tumbling as the airline group posted lower-than-expected quarterly earnings.

Unit revenue, which tracks airline takings in relation to flight capacity, fell 0.6% in the July-September quarter and is poised to decline further, the company said on Thursday.

Its stock fell as much as 11.9% before partially recovering to trade down 4.4% at 10.31 euros by 0905 GMT.

The group posted gains in passenger traffic and load factor - a measure of seats filled - but finance chief Frederic Gagey said trade tensions and a litany of economic and geopolitical problems had dampened demand and fares.

"People's inclination to travel is not at its peak," Gagey said, citing Algeria, Argentina, Brazil, Hong Kong and Lebanon among "a number of crises around the world".

To avoid piling up losses in a sluggish market, airlines must prevent capacity growth outstripping traffic.

Pressure may be eased by the grounding of hundreds of Boeing <BA.N> 737 MAX jets, delays to the new 777X, the collapse of Thomas Cook and downsizing by long-haul budget carrier Norwegian Air <NWC.OL>, Bernstein said in a note on Wednesday.

Air France-KLM's operating profit fell 16% to 900 million euros (£777 million) in July-September, with net income down 53% at 366 million euros on a 2% gain in revenue to 7.7 billion. Capacity expanded 2.3% and traffic by 2.6%.

Analysts had expected operating profit of 951 million and 631 million in net income, based on the company's consensus poll.

"We see the balance of risks to consensus estimates as on the downside," Liberum analyst Gerald Khoo said, citing the group's "subdued" outlook.

Trade tensions weighed on cargo, where prices and profits are eroded by excess capacity, much of it in passenger jet holds and therefore inflexible. Air France-KLM's cargo load factor fell 3.4 points to 54.8%.

The group posted a 0.4% increase in unit costs excluding fuel but said they would still come in between flat and down 1% this year.

The 2019 fuel bill is now expected to rise by 600 million euros, above the previously forecast 550 million, to 5.5 billion.

Forward long-haul bookings through March are "on average ahead" year-on-year, but network passenger unit revenue will be "slightly down" in the fourth quarter, Air France-KLM said.

Chief Executive Ben Smith is scheduled to outline a new mid-term strategy on Nov. 5 during his first investor day since joining the group from Air Canada last year.

One of his objectives is to narrow Air France's profitability gap with Dutch stablemate KLM. The French carrier's 2.1% profit margin for January-September was less than a quarter of KLM's 8.5%.

Another challenge will be to further expand the low-cost Transavia business, after striking a deal with Air France pilots' unions to allow its expansion.

Pilot recruitment delays in France are holding back Transavia's growth, the group said - leading its 2019 capacity expansion to be "adjusted downwards" to 6-8% from 7-9%.

(This story corrects paragraph 13 to show revision to forecast fuel bill was upwards)

(Reporting by Laurence Frost; Editing by Jane Wardell and Jan Harvey)