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Air France says coronavirus impact could climb above $200 million

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02/20/2020 | 06:26am EDT
A passenger walks to check at the Air France desk at Nice international airport

Air France-KLM warned on Thursday of a 150 million to 200 million euro (125.51 million pounds to 167.35 million pounds) hit to earnings by April as it contends with the China coronavirus epidemic's "brutal" impact on the airline industry.

The Franco-Dutch group's shares fell sharply after its full-year results and 2020 outlook, which was in the spotlight as markets watch for economic effects well beyond the Asian centre of the outbreak.

Like many global airlines, Air France-KLM has cancelled flights to mainland China until the end of March, basing its impact estimate on the assumption that flights will then will resume progressively.

"That's the hypothesis we're using for the moment, but we don't know how credible it is," Chief Financial Officer Frederic Gagey said. "Obviously if it lasts longer, the impact will be heavier."

Air France-KLM shares were down 3.8% at 9.36 euros at 1102 GMT, with travel and tourism stocks hit by mounting concerns over the spread of the virus across Asia.

For Air France and stablemate KLM, as for global peers, the January outbreak came just as an easing of global trade tensions seemed to promise stronger demand in 2020.

After "significantly positive" January growth in unit revenue - measured in euro cents per seat-kilometre - Gagey said the situation "changed quite brutally" with the travel lockdown now leading the group to forecast a first-quarter decline. Mainland China flights accounted for 5.5% of its 2019 traffic.

Under new Chief Executive Ben Smith, Air France-KLM needs to fund an ambitious fleet renewal plan that includes 3.6 billion euros in capital expenditure this year as it takes delivery of five new Airbus A350 jets and four Boeing 787s.

Those plans remain on track for now, but Air France-KLM is poised to review its budget and capacity goals should the coronavirus outlook worsen.

While any large-scale transfer of aircraft from grounded China flights could hurt pricing in some markets, Smith and Gagey told analysts that Air France-KLM has more profitable options for summer redeployment than most of its rivals.

NETWORK EXPANSION

"We do have many scenarios we can look at should this virus continue," Smith said. The group currently plans to expand its network by 2-3% in 2020, with low-cost carrier Transavia expanding by 4-6%.

Fourth-quarter operating income came in at 96 million euros on a 1.9% rise in revenue to 6.618 billion, missing expectations of 104 million euros on 6.648 billion of revenue in a company supplied poll of analysts.

An 18.8% decline in full-year operating income reflected a decline in passenger and cargo revenue as well as higher fuel costs, which are expected to drop by 300 million euros this year.

Air France-KLM also trimmed 2019 unit costs by 0.9%, near the top of its target range.

In the fourth quarter, restructuring of the French domestic network delivered a 7.8% revenue gain for the short-haul business and a 1.5% reduction in group unit costs.

But cutbacks by the group have encountered resistance. Ground staff and pilots plan begin strikes on Friday as unions at domestic carrier Air France Hop press for improved pay, working conditions and job guarantees.

Air France-KLM's cargo performance highlighted the deterioration of an oversupplied air freight markets even before the virus extended Chinese factory shutdowns, halting supply chains.

Cargo revenue dropped by 13.7% in the fourth quarter and 5.9% in 2019 as a whole, the group said, blaming what it described as "the worst traffic-versus-capacity trend for the past 10 years".

($1 = 0.9258 euros)

By Laurence Frost

Stocks mentioned in the article
ChangeLast1st jan.
AIR FRANCE-KLM -5.10% 4.842 Real-time Quote.-48.63%
AIRBUS SE -9.34% 53.73 Real-time Quote.-54.52%
BOEING COMPANY (THE) -5.42% 141.6127 Delayed Quote.-53.25%
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