Airlines on rack as Air France-KLM issues warning

PARIS (Reuters) - Air France-KLM became the first major European airline to issue a profit warning since the financial storm broke, sending its shares down more than 11 percent as the industry reported its worst demand in 5 years.

Europe's largest airline group, and the world's largest by revenues, said on Friday it would be "very difficult" to reach a target of 1 billion euros operating profit this financial year.

However the airline, which has so far weathered the crisis better than many rivals, said it would remain "comfortably" in the black as long as market conditions did not get worse.

The economic malaise showed few signs of easing as European stocks ignored an attempted recovery on Wall Street and fell by well over 5 percent on a slew of warnings and bad results.

Air France-KLM shares fell as much as 11.1 percent to their weakest level since it was created out of a 2004 merger between French and Dutch carriers. Trading was briefly suspended.

At 1430 GMT they were down 6.5 percent at 11.1 euros with the blue-chip CAC40 index down 7 percent as another big French name, carmaker PSA Peugeot Citroen, also slashed targets.

Airline stocks fell across Europe, led by Scandinavian SAS down 13 percent, on fears the industry would be hurt by recession just as it escapes the noose of high oil prices.

To shore up profitability, Air France-KLM said it would boost its existing "Challenge 10" cost-saving plans by another 100 million euros on top of 190 million euros earlier this year.

Finance Director Philippe Calavia said in a speech to investors that work had started on a new plan calling for additional cumulative cost cuts of 700 to 800 million euros by 2011-2012 and of 1.1 to 1.2 billion euros by 2013-14.

Air France-KLM, which made 234 million euros operating profit in its first quarter to end-June, said it would review its investments to protect its balance sheet.

Its profit warning, coming shortly before what could be a grim quarterly results season for airlines, highlighted worries that poor demand is wiping out gains from tumbling oil prices.

International airlines lobby IATA said global passenger traffic declined 2.9 percent in September while cargo traffic dropped 7.7 percent compared to the same month in 2007.

International load factors or the proportion of seats sold fell 4.4 points from August to 74.8 percent in September.

"The deterioration in traffic is alarmingly fast-paced and widespread. We have not seen such a decline in passenger traffic since SARS in 2003," IATA chief Giovanni Bisignani said.

"Even the good news that the oil price has fallen to half its July peak is not enough to offset the impact of the drop in demand. At this rate, losses may be even deeper than our forecast US$5.2 billion for this year," he said in a statement.

AUSTRIA'S "MASTER OF DISASTER"

Long-haul premium traffic has been particularly hit by the economic slowdown and British Airways said earlier this month that its full-year revenue forecasts carried some risk.

BA shares fell more than 7 percent on Friday. Lufthansa, which reports quarterly earnings next week, fell 8 percent.

In the United States, where a drastically restructured industry has seen share prices recover recently as oil prices fell, the AMEX airline index dipped around 1 percent.

Many airlines are cutting capacity to try to protect prices on seats they sell. For some, it is a question of survival.

Industry turmoil and high oil prices have caused dozens of airlines worldwide to fail or be swallowed in the past year and triggered a long-postponed merger race in Europe. But the sheer speed of the downturn threatens to derail some negotiations.

Austria's junior finance minister Christoph Matznetter slammed the conduct of an auction of a 42 percent state holding in Austrian Airlines, saying it looked unprofessional and could qualify for a "Master of Disaster" award.

Lufthansa was the only bidder when a deadline for strategic offers closed and had three days until Friday to decide on its bid price, which analysts say could therefore be a nominal sum.

Air France-KLM decided not to bid but is competing with Lufthansa for a stake in a slimmed down Alitalia.

Air France-KLM confirmed it was again trimming its targeted band of capacity growth for the upcoming winter and summer seasons. But it clawed back its prediction earlier in the week that capacity would be frozen for the next two years.

It said it would offer between 1 and 2 percent more seats in both the winter 2008 and summer 2009 seasons and then tailor its capacity to market requirements in subsequent years.

Following a newspaper report of a pessimistic briefing to unions, a spokeswoman said on Wednesday that Chairman and Chief Executive Jean-Cyril Spinetta had told labor representatives that there may be "zero growth in capacity in 2009 and 2010."

Air France-KLM has already cut its capacity growth plans from an original target of 4 percent.

(Additional reporting by Laura MacInnis, Julien Ponthus, Boris Groendahl; Editing by Victoria Main)