October 31, 2019 / 6:15 AM / 19 days ago

Air France-KLM sees slowing travel demand in tail-end of 2019

* Unit revenue falls 0.6% in Q3

* Lower Q4 unit revenue expected

* Economic, geopolitical crises dent demand

* Cargo business hit by trade tensions

By Laurence Frost

PARIS, Oct 31 (Reuters) - Air France-KLM said slowing travel demand is likely to hurt ticket sales in the remainder of 2019, as the airline group posted lower-than-expected third quarter earnings.

Unit revenue, which tracks airline takings in relation to flight capacity, fell 0.6% in the July-September quarter and is poised to decline further, the company said on Thursday.

While Air France-KLM posted gains in passenger traffic and load factor - a key measure of seats filled - finance chief Frederic Gagey blamed trade tensions and a litany of economic and geopolitical problems for dampening demand and fares.

“People’s inclination to travel is not at its peak,” Gagey said, citing Algeria, Argentina, Brazil Hong Kong and Lebanon among “a number of crises around the world”.

To avoid piling up losses in a sluggish market, airlines must prevent capacity growth outstripping traffic. The pressure may be eased by the grounding of hundreds of Boeing 737 MAX jets, delays to the new 777X, the recent collapse of Thomas Cook and downsizing by long-haul budget carrier Norwegian Air , Bernstein analysts said in a note yesterday.

Air France-KLM’s operating profit fell 16% to 900 million euros ($1 billion) in July-September, with net income down 53% at 366 million euros on a 2% gain in revenue to 7.7 billion. Capacity expanded 2.3% and traffic by 2.6%.

Analysts had expected operating profit of 951 million and 631 million in net income, based on the median of 18 estimates in the company’s own consensus poll.

Trade tensions weighed on cargo, where prices and profits are eroded by excess capacity - much of it in passenger jet holds and therefore inflexible. Air France-KLM’s cargo load factor fell 3.4 points to 54.8%, closer to half-empty.

The group posted a 0.4% increase in unit costs but said they would still come in between flat and a 1% decline this year. It reiterated goals including net debt at or below 1.5 times earnings before interest, tax, depreciation and amortization.

Forward long-haul bookings through March are “on average ahead” year-on-year, but network passenger unit revenue will be “slightly down” in the fourth quarter, Air France-KLM said.

TRANSAVIA BUSINESS

Chief Executive Ben Smith is scheduled to outline a new mid-term strategy on Nov. 5 during his first investor day since joining the group from Air Canada last year.

One of his objectives is to narrow Air France’s profitability gap with Dutch stablemate KLM. The French carrier’s 2.1% profit margin for January-September was less than a quarter of KLM’s 8.5%.

Another challenge will be to clear remaining obstacles to the low-cost Transavia business, after striking a deal with Air France pilots’ unions to allow its expansion.

The carrier’s load factor reached 93% as quarterly unit revenue jumped 3%. But an 8.4% costs surge hit operating profit after plane delivery delays forced the company to seek expensive short-term substitutes, Chief Financial Officer Gagey said.

Pilot recruitment delays in France are holding back Transavia’s growth, the group said - leading its 2019 capacity expansion to be “adjusted downwards” to 6-8% from 7-9%. ($1 = 0.8975 euros) (Reporting by Laurence Frost; editing by Jane Wardell)

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