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Amid terrorist attacks, Air France buckles up for hard times

Air France-KLM is the latest European airline to warn of a sharp impact to earnings this year amid a spate of terrorist attacks in Europe that are hitting demand for travel.

The Franco-Dutch airline group reported Wednesday a 5.2 percent drop in second-quarter revenue from a year ago and said it was concerned over the "high level of geopolitical and economic uncertainty, increasing pressure on unit revenues and special concern about France as a destination."

French police officers patrol at the Marseille Provence airport in Marignane on March 22, 2016.
BERTRAND LANGLOIS/AFP/Getty Images
French police officers patrol at the Marseille Provence airport in Marignane on March 22, 2016.

Neil Wilson, an analyst at ETX Capital, said in a note on Wednesday that Air France-KLM's "warning today about the future of European air travel is a stark reminder that this is a sector under pressure."

There were reports on Wednesday that police in Geneva had tightened airport security after receiving information about a possible threat. The security scare turned out to be based on a hoax call but nonetheless signaled that authorities remain jumpy about another potential high-profile attack after a spate of attacks in France and Germany.

Aside from the labor disputes hampering Air France-KLM's operations, it is operating in amid a wider ongoing "state of emergency" in France. The latest high-profile terror attack occurred in the country yesterday in which a Catholic priest was killed by two men claiming to be members of the terrorist group that calls itself Islamic State.

The attack comes just weeks after 84 people died in a terrorist attack in Nice. In 2015, too France was rocked by an attack on the staff offices of satirical magazine Charlie Hebdo in January and in November, a mass terrorist attack in Paris in which 130 people died that prompted the government to introduce a state of emergency.

'War on several fronts'

ETX Capital's Wilson said that Air France-KLM "may be more exposed than others as it is fighting a war on several fronts, not least because there is 'special concern' about France as a destination."

"Firstly terror attacks in Europe are biting into demand and France in particular is bearing the brunt of this. Secondly, in an attempt to compete with low-cost carriers the firm's aggressive restructuring has run into turbulence with unions and strikes are hitting revenues. The next walkout is on August 2nd."

There have also been several terrorist attacks in France on a smaller scale, all serving to heighten societal and political tensions in France as well as hitting the country's tourist industry.

The number of both French and foreign arrivals in Paris last year fell by 0.5 and 1.6 percent respectively, its tourist board said in a data release last week.

Speaking after the attack in Saint-Etienne-du-Rouvray on Tuesday, French President Francois Hollande said that "French people must know that they're under threat, that they're not the only country - Germany is too, as are others - but that their strength depends on their cohesion."

UK warning

Low-cost British carrier easyJet said in a trading statement at the end of June that "significant external events" had prompted a 2.6 percent drop in total revenue in the third quarter to £1.1 billion ($1.43 billion) . Specifically, it said "commercial and operational performance during the quarter was impacted by the Brussels attack and Egyptair tragedy."

It noted that the U.K.'s decision to leave the European Union was also weighing on the airline's outlook. "More recently currency volatility as a result of the U.K.'s referendum decision to leave the EU as well as the recent events in Turkey (a terrorist attack at the airport) and Nice continue to impact consumer confidence," easyJet said.

The airline's main competitor, Ryanair, also said this week there was "ongoing market volatility arriving from terrorist events" and other European carriers have warned of similar concerns and the expected impact on earnings.

Trouble in Germany

Germany too has faced a number of smaller scale terrorist attacks in the last week and the U.K. is on high alert with the security service saying the current threat level is "severe."

National carrier Deutsche Lufthansa issued a profit warning last week as it said that advance bookings, especially on long-haul routes to Europe, had "declined significantly" and that it was adjusting its earnings outlook accordingly. It was doing so, it said, "in particular due to repeated terrorist attacks in Europe and to greater political and economic uncertainty since the original forecast (for adjusted 2016 earnings before interest and tax) was made in March."

Lufthansa warned that its "Executive Board regards a complete recovery as not likely anymore. At its meeting today (July 20), the Executive Board of Deutsche Lufthansa therefore decided to lower the full year forecast for the Adjusted EBIT from 'slightly above previous year' to 'below previous year,' despite an earnings performance above previous year in the first six months," the airline warned.

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