Can Lower Fuel Prices Help Get Air France-KLM Back on their Feet?

It’s not long ago that the carriers jointly announced their third profit warning for 2014.
The last indication reduced profit margins by a further €200 million.
The past year has not been good to both airlines.
The Air France pilot strike which although lasted less than that of Lufthansa, has cost the carrier dearly.
This, however was not the major reason behind the continued miseries which seemed to crop up almost every week.

Nobody really knows to-date exactly what bottom line figure both carriers will come up with for 2014.
That it will be bad – that’s for sure!

Is there some light at the end of the tunnel?
Air France-KLM issued an interesting statement last week, which on the face of it, could give both carriers a little more breathing space.

They announced that they have deferred an order with Boeing for ten B777-300ER aircraft to a later date.
The exact deferral date has not been announced.
These aircraft were planned to replace older and less fuel efficient B747s still in both carriers fleets within the coming two years.
The question also remains as to whether they will in the future even take these aircraft or if they will wait until the next generation and more fuel efficient B777X aircraft come on the market.
There is no mention in the announcement of whether AF-KL will have to pay a cancellation fee due to the fact that the aircraft are deferred at such short notice.

This could also be a signal to other carriers who still have B777-300ERs on order.
If so, this would give Boeing somewhat of a headache.

Risky fuel hedging policy
Fuel prices are falling dramatically, which is good for the industry.
Whether this development will lead to AF-KL bettering their bottom lines remains to be seen.
It is not expected that they will have fuel cost savings for the last quarter of this year as their contracting and procurement structure has until now been based on the so called practice of “fuel hedging.”
In other words, buying up front at fixed annual contract prices. Sometimes more beneficial, but with today’s falling prices, not advisable.

The French-Dutch management makes it clear that this move will in no way affect the delivery schedules of Airbus A350 and Boeing 787 ordered by both airlines.

Fuel prices are not expected to rise very much above their present price levels.
If low prices continue to be obtainable throughout 2015 and 2016, then this will go some way to changing the financial picture.
But, it’s not a savior for the airline.

John Mc Donagh