Air France-KLM plans sales and efficiency drive to lift profit

© Reuters. FILE PHOTO: An Air France Airbus A330 airplane lands at the Charles-de-Gaulle airport in Roissy

PARIS/HELSINKI (Reuters) - Air France-KLM (PA:AIRF) said on Tuesday it would expand its budget Transavia line and push its core French carrier further into premium air travel as it looks to boost sales, while shaking up its fleet in a bid to lift profit margins.

After a wave of 2018 strikes that grounded flights and cost 335 million euros ($373 million), the Franco-Dutch group has stabilized under Chief Executive Ben Smith, a former Air Canada boss, thanks to union deals that have pushed up wage costs but increased operating flexibility.

In his first major strategy presentation, Smith vowed to look at restoring dividends, which the firm had not paid out since 2008, once operating income reached 1.9 billion euros ($2.11 billion). It came in at 1.3 billion euros in 2018.

He also wanted to lift profit margins to 7-8% over the medium term. Air France KLM's operating margin came in at 4.8% for the first nine months of 2019, a 1.7 point decline from the same period a year earlier..

As part of the five-year plan, the group said it aimed to sharpen the focus of its three main airline brands, after already closing its low-cost carrier Joon earlier this year and further phasing out regional brand Hop.

Air France will push harder into premium travel, its more profitable segment, with KLM positioned as a competitive network operator of connecting flights through Amsterdam.

Transavia, meanwhile, will expand in the low-cost market, including with a new base in the French city of Montpellier next spring, despite coming up against hurdles such as the terms of labor agreements that have held back pilot recruitment.

Air France-KLM shares had extended losses by 1218 GMT and were down 6.2%. The stock has risen 11.5% so far this year, partly in anticipation of Smith's mid-term performance plan.

FLEET CHANGES

The group also pledged to drive costs lower by speeding up the renewal of its planes and being more flexible in managing the combined Air France-KLM fleet of more than 500 aircraft.

"It's a good time to buy long-haul airplanes," Smith said, adding the market was down, which would benefit Air France's renewal plans in particular.

Renewing the airline's fleet would add 300 million euros to its operating profit over the next five years, the group projected, while at KLM it would bring in an extra 130 million euros.

Air France-KLM took a 100 million euro charge last quarter to retire its Airbus A380 superjumbos early and replace them with more fuel-efficient planes.

Smith also overcame Dutch objections earlier this year to push through an integration plan combining management of the Air France and KLM aircraft fleets, which were still being handled separately 15 years after the airlines merged.

Smith said the group would consider acquisition opportunities, in part as a result of a wave of aviation bankruptcies reshaping the industry, when they made sense.

Union accords prevented Air France from acquiring Aigle Azur, a smaller domestic rival that went bankrupt in September, after the group withdrew an initial bid.

Smith added that management changes were on the cards at Air France as part of plans to simplify the organization.