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Air France-KLM Pulls Out Of Nose Dive

07/30/2012 | 03:45am US/Eastern

PARIS--Air France-KLM (>> AIR FRANCE -KLM) sank deeper into the red in the three months to June weighted own by higher fuel costs, provisions for restructuring, and an accounting charge, but investors took heart from signs that cost reductions have started to stabilize the Franco-Dutch carrier's finances.

Air France-KLM said it expects to feel the first positive effects of its latest cost-savings program, which involves the elimination of 5,122 jobs, in the second half of this year.

The airline operator reported a second-quarter net loss of EUR895 million ($1.1 billion), including EUR368 million in restructuring costs and a EUR372 million accounting charge, up from a net loss of EUR197 million a year earlier.

Revenue rose to EUR6.5 billion from EUR6.22 billion and the operating loss was EUR66 million, less than half the EUR145 million reported in the second quarter of 2011.

The carrier generated EUR461 million in free cash due to the sale of its stake in travel company Amadeus Holding SA (>> Amadeus IT Holding SA), allowing it to trim net debt to EUR6.24 billion at June 30 from EUR6.51 billion six months earlier.

Chief Financial Officer Philipped Calavia said other restructuring provisions will probably have to be taken in the second half, but added that the bulk of the costs related to staff departures were taken in the first half.

The positive news for the second quarter was that the pace of operating losses has slowed, Mr Calavia said.

Analysts agreed, with Air France-KLM shares surging 13% to EUR4.40 in morning trading on the Paris stock exchange.

"The better than expected performance looks to be principally driven by an improvement in ex-fuel constant currency unit costs, rather than an improvement in the revenue environment" said Oliver Neal, an analyst at Goldman Sachs in a report.

Still, Air France-KLM warned that it has work to do to return the business to profitability when fuel prices remain high and Europe's economic outlook is uncertain.

"Even though these second quarter results represent a year on year improvement, they remain in negative territory, said Air France-KLM Chairman Jean-Cyril Spinetta. "In an increasingly uncertain global economic environment, compounded by oil price and exchange rate volatility, an improvement in our productivity and costs is even more necessary."

Earlier Monday, budget carrier Ryanair Holdings PLC (RYA.DB) reported a 29% drop in net profit to EUR98.8 million as a 15% increase in fuel costs offset an 11% rise in revenue to EUR998 million in the three months to June 30. The carrier expects its net profit to decline to between EUR400 million and EUR440 million in the 2013 fiscal year to April, from EUR560.4 million in the previous year.

Ryanair has so far managed increased fuel costs better than many of the region's flag carriers, but the Dublin-based airline's results underscore how high oil prices are also eating into even budget airlines profits, costs which contributed to the demise of some smaller airlines like Hungary's Malev and Spain's Spanair.

Air France-KLM's fuel bill rose 13%, or EUR214 million, to EUR1.89 billion in the second quarter. The airline said it expects to see an improvement in the second half of this year as the effects of its Transform 2015 cost reduction program kick in, and said it is targeting an operating profit above the EUR195 million reported for the second half of 2011. It also said it expects to see a decline in the level of its net debt by year-end compared with the end of 2011.

Air France-KLM said it expects to see an improvement in the second half of this year as the effects of its Transform 2015 program kick in, and said it is targeting an operating profit above the 195 million reported for the second half of 2011. It also said it expects to see a decline in its net debt by the end of the year compared with the level at the end of 2011.

The airline group's French arm Air France has launched a tough two billion euro cost-savings program aimed at improving its economic efficiency by 20% compared to its main European competitors, in a bid to stem its operating losses and reduce its debt by two billion euros by 2015.

The airline has sought agreements from representatives of its pilots, ground staff and cabin crew to revise their work contracts, pledging there would be no compulsory job cuts. The latter group balked at the plan, however, meaning that management will be forced to impose more painful measures than if the unions had agreed to the deal.

-Write to David Pearson at david.pearson@dowjones.com

Geraldine Amiel contributed to this story.

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

Stocks mentioned in the article : AIR FRANCE -KLM, Amadeus IT Holding SA
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