Air France-KLM jet fuel bill set to increase by $2.4 billion this year
Impact of Rising Jet Fuel Costs on Air France-KLM
By Joanna Plucinska
LONDON, April 30 (Reuters) - Air France-KLM expects its fuel bill to increase by $2.4 billion this year due to energy market disruptions caused by the Iran war, it said on Thursday, as it downgraded its capacity outlook.
Surging Jet Fuel Prices and Limited Hedging Effectiveness
Jet fuel typically accounts for a third of most airlines' costs. And with prices surging since the onset of the war in late February, hedges taken out against price rises are increasingly unable to cushion the shock, forcing European carriers, including easyJet and TUI, to revise their outlooks.
"While fuel price increases are not yet reflected in the results we present today, they are expected to weigh on the coming quarters," Air France-KLM Chief Executive Ben Smith said in a statement accompanying its first-quarter earnings report.
First-Quarter Performance and Financial Outlook
First-Quarter Loss Smaller Than Expected
FIRST-QUARTER LOSS SMALLER THAN EXPECTED
The airline said it expected total fuel costs for the year to reach $9.3 billion, with nearly half of the additional fuel costs - $1.1 billion - coming in the second quarter.
Smith told analysts that he expected the group would not be able to fully offset the increased costs in the coming quarters.
Measures to Mitigate Higher Fuel Prices
Airlines have been deploying a range of measures - from raising ticket prices and trying to operate fuller flights to cutting capacity - in an attempt to mitigate higher fuel prices.
Airports and airlines have also warned of the risk of running out of jet fuel.
Jet Fuel Supply and Strategic Reserves
Chief Financial Officer Steven Zaat told a media call that the airline was expected to have stable supply until June, and that it was hopeful European strategic stocks would be released and EU guidelines would be finalized to allow imports of Jet-A fuel from North America to make up for limited shipments from the Middle East.
Booking Trends and Capacity Adjustments
Robust bookings before the Iran war began as well as passengers' preference for European airlines meant Air France-KLM reported a smaller first-quarter loss than analysts had expected.
It lowered its expectations for group capacity to an increase of 2% to 4% from 2025. It previously expected an increase of 3% to 5%.
Analysts said that the capacity cut was much smaller than expected, sending the company's shares up around 3.5% by 1200 GMT.
Analyst Insights
Bernstein analyst Alex Irving said in a note that the airline's decision against a larger capacity cut reflected "an ongoing strong earnings environment and high demand for travel".
Financial Results and Strategic Shifts
Air France-KLM reported a first-quarter operating loss of 27 million euros ($31.6 million), compared to a 389 million euro loss projected by analysts polled by LSEG.
That represents a 301 million euro improvement over last year, though fuel price increases had not yet affected first-quarter results.
Air France-KLM said it had seen an initial boost after the start of the Iran war as more travellers favoured European carriers for flights to Asia, as well as success in capitalising on its premiumisation strategy.
However, as the conflict drags on, it said it planned smaller increases to its long-haul capacity as people postpone booking travel over concerns about the financial risk of long-haul trips.
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(Reporting by Joanna Plucinska; Editing by Barbara Lewis, Joe Bavier and Keith Weir)
