Air France-KLM Warns about Surging Fuel Bill

Air France-KLM, the world's biggest airline by revenue, warned that soaring fuel prices would slash operating profits this year, knocking its shares to two-month lows on Thursday despite a rise in 2007 operating profit.

Oil spiked to a record $135 a barrel overnight, extending this month's nearly 20 percent rally and spooking shares in U.S. carriers such as American Airlines, whose parent firm's shares plunged 24 percent.

The falls spread to carriers in Asia and Europe, with Chief Executive Jean-Cyril Spinetta adding to worries by warning that Air France would have to brace for a 1.1 billion euro ($1.73 billion) rise in fuel costs this year, squeezing its profits.

"The current year is set to be challenging, with the oil price and the global economy creating significant uncertainty," he said in a statement.

The airline posted a 13.3 percent rise in 2007 operating profit to 1.405 billion euros but a 46 million euro loss in the final quarter to end-March pointed to tougher times ahead.

Sales rose 4.5 percent to 24.114 billion euros and the dividend was bumped up to 0.58 euro from 0.48 euro.

"With an average oil price of $120 a barrel and equivalent market conditions, the group's objective is to be comfortably in profit with operating income in the region of 1 billion euros," Spinetta said.

Air France-KLM shares closed 10.2 percent lower at 16.74 euros.

Net Disappoints

Its 2007 net attributable profit was also lower than expected, down 16 percent to 748 million euros ($1.18 billion), dented by a 530 million euro pre-tax charge to provision for legal risk linked to wide EU and U.S. investigations into allegations of cargo price-fixing.

The airline industry is struggling to cope with oil prices that have surged 170 percent since the start of 2007 and economic uncertainty in the United States and elsewhere which threatens growth.

American Airlines on Wednesday announced it said would cut thousands of jobs, retire old aircraft and charge passengers to check bags in a move to counter record fuel prices and a weak U.S. economy.

A cut in domestic capacity of at least 11 percent planned for the fourth quarter marked its biggest contraction since the hijack attacks of Sept. 11, 2001.

Air France-KLM said it too was looking to make more cost savings, a week after Air France and KLM separately raised fuel surcharges.

Japan Airlines, Asia's biggest airline by revenue, must also raise its fuel surcharge, Chief Executive Haruka Nishimatsu told Reuters on Thursday.

Copyright 2009 Reuters. Click for restrictions.