Air France-KLM cargo traffic improving, will profitability follow?

  • Charles Kauffman
  • February 21, 2017
  • 0
Two 777Fs are all that is left of the once-mighty Air France freighter fleet.

Two 777Fs are all that remain in the once-mighty Air France freighter fleet.

With the publication of its 2016 year-end results, Air France-KLM once again posted a full-year operating loss of €244 million, slightly narrower (by €1 million) than its 2015 full-year result. Cargo traffic meanwhile, has not yet returned to growth, but the situation is improving more rapidly. Group cargo traffic was down 1.6% y-o-y in December 2016, to 737 million RTKs – not impressive, but better than the near double-digit drops reported in the past. According to IATA’s air freight market analysis for December 2016, total traffic carried by European carriers was up 7.6% in 2016 – when then, will the Group return to profitability?

Air France-KLMAir France-KLM Cargo has been a loss-making venture for some time, and although things have improved, the cargo arm of Air France-KLM is still bleeding money. Cargo revenue was down 14.7% to €2.07 billion. These financial results come against a background of falling demand, as the carrier reported cargo traffic for the year, down 6.3% to 8.44 billion RTKs.

What is causing persistent losses? In a financial presentation, the group blamed “persistently weak demand,” overcapacity in the market, and low load factors for its weak cargo results. This sentiment was reiterated by CFO Pierre-François Riolacci during a call to analysts, who also blamed strong competition.

But this cannot be the whole story; competition is a force which all players in the market must deal with. Lufthansa Cargo has not yet reported its 2017 year-end results, but despite a challenging market, has continued to operate rather profitably (2016 may be an exception, though restructuring appears to be improving this result). Turning to load factors, although low load-factors on freighter flights are a drag on performance, as the Group’s airlines add widebody passenger aircraft with ample bellyspace, these AFTKs do not automatically increase the airline’s operating costs.

Insofar as AF-KLM’s maindeck capacity is concerned, freighter-related losses persist; in an effort to mitigate losses, the group reduced its freighter feet by 24% in 2016, with the retirement of the last MD-11Fs from Martinair. Today, just six freighters remain across the group airlines; two 777Fs, three 747-400ERFs, and one 747-400BCF. The result has been a reduction in the operating loss attributable to freighter operations from €120 million in 2013 to €42 million in 2015, to just €28 million in 2016.

During an investors call, noting cost-cutting measures and the Group’s efforts to reduce freighter capacity, CEO Jean-Marc Janaillac said, “Cargo activity, after heavy restructuring, is in a position to make a contribution to the group.” If this contribution materializes, it will not be noticeable in future earnings results.   Beginning in 2017, Air France-KLM will no longer report standalone figures for cargo, moving instead to amalgamate cargo and passenger results.

Towards the second half of 2016, traffic carried by European carriers improved dramatically, will financial performance follow in 2017?

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