Air France-KLM cuts profit forecast

Air France-KLM cuts profit forecast

Air France-KLM sent a further shiver through the airline sector today when it slashed full-year profit forecasts due to overcapacity on its US routes.

Shares in British Airways owner International Airlines Group slumped 5% in the wake of the warning, which comes weeks after Lufthansa cut forecasts for the next two years due to overcapacity and competition from Middle Eastern carriers such as Emirates or Etihad on US and European routes.

Air France-KLM, which flew 77.3m passengers across its fleet of 552 planes last year, cut its 2014 earnings target by 12% to around £1.7bn.

Cantor Fitzgerald analyst Robin Byde said the pressure on fares reported by Germany’s Lufthansa was also being felt by Air France-KLM.

He said: “The Middle Eastern carriers continue to put a lot of capacity into the market. We are seeing this on transatlantic routes and a number of other long-haul routes from Europe.”

Air France-KLM said its June traffic figures as well as bookings for July and August “reflect the overcapacity on certain long-haul routes, notably North America and Asia”.

It added that weak cargo demand and government regulations in Venezuela which leave airlines unable to repatriate profits, also dragged on earnings.

Despite the profit warning, Air France-KLM said that it still expected earnings to rise over 20% compared with 2013.

Since Lufthansa’s warning a number of smaller airlines have also downgraded their profit forecasts such as the UK’s Jet2.com and Icelandair.

Citi analyst Andrew Light said: “This warning is not entirely surprising given Lufthansa’s warning in June for the same reasons and the recent 21% decline in Air France-KLM’s share price.”

He added: “We expect further restructuring actions to be announced later in the year.”

Air France-KLM said it is coming to the end of a consultation period over plans to axe up to 1,800 ground staff, and added it was about begin a plan to cut 700 cabin crew. The airline employs around 95,000 staff.

Brokers are already looking towards IAG’s half-year results on August 1 to see if it can stem the flow of bad news sweeping the industry.

Analysts at Credit Suisse said: “IAG will need to report a strong second quarter and provide significant comfort on the third quarter to reassure investors following Air France-KLM and Deutsche Lufthansa warnings.”

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