February 16, 2018 / 9:17 AM / a year ago

UPDATE 1-Air France-KLM shares slide over cost discipline disappointment

* 2017 operating results 1.488 bln euro vs 1.53 bln forecast

* Unit costs flat in 2017, missed initial target

* Company says ticket pricing positive in Q1

* Shares down to eight-month low (Recasts, adds shares, analyst comment)

By Victoria Bryan

BERLIN/PARIS, Feb 16 (Reuters) - Worries about Air France-KLM’s ability to reduce costs sent the group’s shares down on Friday, after the company slightly missed profit and cost-cutting targets in 2017.

Air France-KLM has lagged European rivals on cost-cutting efforts, especially at the Air France side of the business. With fuel prices set to rise this year, there is more pressure on airlines to keep a lid on spending.

The Franco-Dutch group had set an initial target early last year to reduce unit costs by 1-1.5 percent, but tempered that late last year.

On Friday, it said unit costs were flat in 2017 as it reported an operating result of 1.488 billion euros ($1.87 billion). That was up 42 percent on 2016 but slightly missed the average analyst forecast for 1.53 billion euros in a company compiled consensus.

It also reported a net loss of 274 million euros for 2017 due to a 1.4 billion-euro charge linked to a new pension deal for KLM pilots and cabin crew.

Air France-KLM said it was aiming for a reduction of 1-1.5 percent this year, excluding the impact of currency, fuel and pension charges.

“Clearly, the similar target for 2017 was not achieved, and the headwinds in 2017 seem likely to persist in 2018,” Liberum analyst Gerald Khoo wrote in a note.

Air France-KLM shares started higher, but then turned negative.

The stock was down 6 percent in early session trading, touching its lowest level in more than eight months, as concern about costs overshadowed the company’s positive comments on first-quarter ticket prices.

Bernstein analysts said the guidance was mixed and the cost reduction target was not enough to materially change the group’s cost base.

Adding to pressure on staff expenses, 10 Air France unions representing pilots, cabin crew and ground staff have called for a strike on Feb. 22 to support demands for a 6 percent pay rise.

By comparison, easyJet and Ryanair both reduced unit costs excluding fuel by 1 percent in the quarter to the end of December, while Air France-KLM’s rose 1.7 percent in the same period.

Like other major European airlines, Air France-KLM is benefiting from strong travel demand, while the collapse of Monarch and Air Berlin has removed some competition from the market, helping to ease pressure on ticket prices.

Chief Financial Officer Frederic Gagey said unit revenues were expected to be positive in the first quarter compared to last year and the group planned to increase the number of seats it offered on its main passenger networks this year.

“We will continue to grow network by network where there is demand, we will probably be more cautious on short-haul,” he told reporters, citing competition from high-speed trains in France.

Traditional rivals IAG and Lufthansa are due to report in the next few weeks.

$1 = 0.7972 euros Reporting by Victoria Bryan; Additional reporting by Dominique Rodriguez; Editing by Sudip Kar-Gupta and Edmund Blair

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