Air France-KLM raises medium-term profit goal, shares rise

By Joanna Plucinska and Tim Hepher

(Reuters) -Air France-KLM raised a medium-term profitability goal and sped up transformation efforts, promising investors a 2-billion-euro ($2.2 billion) improvement in core profit within five years and sending its shares soaring on Thursday.

The Franco-Dutch airline group, which faces intense competition in core European markets, also laid out plans to eliminate losses at Paris' second airport by refocusing Orly operations around the French part of low-cost unit Transavia.

Shares in the group rose 9% after Chief Executive Ben Smith presented targets to investors including an operating margin of 8% or more in 2026-2028, up from a 2024-26 goal of 7-8%, driven by cost reductions and improved cashflow.

European airlines have reported strong results in recent quarters on the back of robust post-pandemic demand that broadly withstood economic uncertainty and geopolitical instability.

The group said it would continue to invest in fleet renewal while confirming its outlook for 2024-26, with expected expenditure of 3-3.5 billion euros per year in that period, and up to 3.8 billion in 2027-28.

It also said it had secured nearly a third of the supply needed to meet a target for sustainable aviation fuel by 2030.

Founded from a back-office merger between Air France and KLM in 2004, which left the national French and Dutch airline brands intact, Air France-KLM has managed to turn the page from past headlines over management disputes and French pilot strikes.

Smith, who joined from Air Canada in 2018 at a time when relations with pilots were at a low point, said surveys suggested engagement by pilots was among the highest in the industry, with some now even participating in investor meetings.

Management tensions have eased as a gap in profitability that saw Air France lag its partner has narrowed, buoyed also by the appointment of KLM Chief Executive Marjan Rintel last year.

France's national carrier still remains exposed to frequent strikes among the country's air traffic controllers, which have triggered complaints from foreign carriers.

The CEO of the Air France subsidiary, Anne Rigail, said a new rule forcing controllers to give two days notice would be a "game-changer".

Air fares have been rising as travel rebounds and airlines face a shortage of aircraft capacity.

In an indication of forward bookings, Chief Commercial Officer Angus Clarke said the group was "happy with our revenue development" for the coming quarter but downplayed a recent forecast that long-haul fares would fall in the coming year.

Smith defended a decision to preserve Air France's first-class cabins, abandoned by some rivals, saying passengers drawn by the luxury brand were more likely to pay a premium and less likely to revert to business class.

"Someone who buys Hermes or Chanel is not going to buy Zara," he said.

One thing the airline does not expect is a big boost in profits from the Paris Olympics since the world's top tourist destination is already full each summer.

But infrastructure triggered by the Games including a much-needed Charles de Gaulle express link may help in future.

($1 = 0.9186 euros)

(Reporting by Joanna Plucinska Editing by Mark Potter and Elaine Hardcastle)