Air France-KLM retreats as worries mount on pace of rebound

Air France-KLM left investors guessing about the strength of its recovery, abstaining from a full-year profit forecast and trimming its capacity prediction as French air-traffic control strikes and engine shortages inject uncertainty into the outlook.

Shares in the Franco-Dutch group fell as much as 6.3% , slipping to their lowest level in more than three months, as its muted assessment contrasted with a raised 2023 forecast from British Airways owner IAG SA. 

Air France-KLM pared its capacity forecast to about 95% of 2019 levels, after previously saying it would reach as high as 100%. Beyond the strikes and engine shortages, a lack of available workers also is holding back the recovery. The company, which relied on billions of state aid to survive the pandemic, said it would restore its equity first before resuming a dividend payout and reaffirmed its longer-term margin guidance.

“The main reason to explain today’s drop is the forecast downgrade for the group’s full-year capacity,” said Alphavalue analyst Yi Zhong. 

Strikes Hurt

Air-traffic controller strikes in France will also continue disrupting operations, notably at Orly airport in Paris, exposing Air France to the risk of higher costs, revenue gaps and management distractions during the busy summer months. 

“It takes an enormous amount of effort from our operational teams to mitigate those losses,” Chief Executive Officer Ben Smith said on a call with analysts. “We expect those to continue in the near term. Our understanding is that it will continue one to two days a week for the foreseeable future.”

The financial hit from the walkouts is below €20 million ($22 million) so far, Smith said.

Air France-KLM was down 3.4% as of 11:36 a.m. in Paris. The company reported a narrower first-quarter net loss of €344 million, versus €552 million a year earlier. Revenue surged 42% to €6.33 billion, slightly exceeding analyst expectations. 

IAG, by contrast, was up 3% in London. It reported a surprise operating profit, raised its financial outlook for the year and said it would pay back debt earlier than forecast.

Air France-KLM has also been paying down debt, after receiving more than €10 billion of state aid during the pandemic. A large chunk of that has been converted to equity, with the French government emerging with a 29% stake. Air France-KLM still has €5.5 billion in net debt. 

Acquisition Hunt

The company now has “full strategic autonomy” after paying back the remainder of what’s owed during in April, Smith said.

The exit from state aid helps “retake control of our destiny,” the 51-year-old CEO said on the call, giving the carrier flexibility to resume its growth path. Smith reiterated interest in taking a stake in Portuguese flag carrier TAP SA if the conditions are right as the government in Lisbon seeks an industry backer for an airline it was forced to rescue during the health crisis.

Air France-KLM won’t enter M&A that puts the company’s margin targets at risk, the CEO said. The group is still mulling the best way forward for its Latin America positioning and has “options” to grow in the region, he added.

The global aviation industry has enjoyed a robust comeback since most countries lifted their coronavirus restrictions and people resumed travel for business and leisure. Deutsche Lufthansa AG this week provided an upbeat preview of the early summer months — the crucial travel period for the aviation industry. IAG said bookings for the summer came rushing in and the airline group benefited from lower fuel prices. 

The company has entered exclusive talks with Apollo Global Management for a €500 million equity financing into an affiliate owning engineering and maintenance assets as it continues to restore its balance sheet. It also received “several” non-binding offers on equity financing supported by its loyalty program, with talks continuing with potential investors.