Air France-KLM readies new plan to counter low-cost rivals

PARIS Fri Jul 25, 2014 8:44am EDT

The logo of Air France-KLM is seen during the company's 2014 First-Half results presentation in Paris July 25, 2014.   REUTERS/Benoit Tessier

The logo of Air France-KLM is seen during the company's 2014 First-Half results presentation in Paris July 25, 2014.

Credit: Reuters/Benoit Tessier

PARIS (Reuters) - Air France-KLM (AIRF.PA) posted a sharp increase in core profit for the second quarter and announced a 2015-2020 plan on Friday to recapture market share from low-cost rivals in Europe, helping push its shares up more than 5 percent.

Europe's second-largest traditional carrier by revenue joined rivals Lufthansa (LHAG.DE) and IAG (ICAG.L) in trying to win business from low-cost champions such as easyJet (EZJ.L). It said it was prepared to use acquisitions to achieve its aim.

Air France-KLM has been cutting costs and debt as part of its three-year "Transform 2015" plan, which is due to end in a few months. Its new plan, "Perform 2020", will focus on maintaining the group's position in long-haul markets in the face of competition from Gulf carriers while looking to capture growth and cut costs in short-haul markets.

"The consolidation of the low-cost sector is under way and we want to take part," Chief Executive Alexandre de Juniac said.

"The idea is to be in the leading group of European low-cost carriers, given that aviation is a business where size is important," he told reporters.

The company also plans acquisitions in maintenance and overhaul where it wants to offer services to external clients.

Details of the plan, which follows a review by the head of the airline's French unit, will be announced in September.

Air France-KLM shares, which this month hit a five-month low of 8.20 euros, were up 4.3 percent at 9.0 euros by 1145 GMT. Lufthansa rose 1 percent in a slightly weaker market.

The plan to counter the low-cost boom in Europe comes weeks after Lufthansa's new chief executive announced plans to expand its low-cost services under new brands, though some analysts have questioned the move.

TRANSAVIA

Several network carriers have already set up or acquired their own low-cost units to mimic the success of Britain's easyJet and Europe's largest budget carrier, Ryanair (RYA.I).

They include Lufthansa's (LHAG.DE) Germanwings and Vueling, which is owned by British Airways/Iberia parent IAG (ICAG.L).

But running low-cost operations, based on point-to-point travel, alongside the hubs and frequent-travel schemes of large union-based carriers is rarely simple, analysts say.

"Very few traditional airlines have ever managed to operate low-cost operations that are really low cost. The only one really doing so is IAG," said aviation consultant James Halstead of UK-based Aviation Strategy.

Air France-KLM's Dutch-based low-cost and charter unit Transavia has so far been the main arm for cutting costs in the medium-haul sector.

Inherited from KLM in the 2004 merger with Air France in 2004, it carried 8.9 million passengers last year compared with 78.4 million for the whole group.

Air France-KLM's recent efforts to compete on medium-haul include a new lower "Mini" fare and speeding up development of Transavia France. But a switch to provincial bases on Air France's domestic network suffered against low-cost competition.

Air France-KLM on Friday reported 641 million euros ($862.2 million) in earnings before interest, tax, depreciation and amortization (EBITDA) in the second quarter, up from 510 million a year earlier.

Its gross operating margin rose to 9.9 percent from 7.8 percent on sales of 6.451 billion euros, which were up 1.7 percent on a like-for-like basis. Operating profit almost trebled.

It reaffirmed its latest profit and debt goals for 2014 in the wake of a profit warning this month, but said it remained in a "tough" environment due in part to overcapacity on some long-haul routes, notably to North America and Asia.

Passenger profits more than doubled to 255 million euros due to tight controls on capacity and a bigger-than-expected 4.4 percent drop in unit costs. But the cargo business remained in the red due to a slower than expected economic recovery.

Air France-KLM took a 106 million euro charge on its loss-making cargo planes and said it was also looking at a partnership or restructuring of its full-freighter business.

(Editing by David Holmes and Jason Neely)

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