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Declining passengers and cargo send Europe's biggest airline gliding down

AIR France-KLM Group, Europe's biggest airline, said it had a third-quarter loss on lower premium passenger traffic and a "strong decline" in cargo revenue.

The loss for the three months to December 31 stemmed from a weakening in passenger unit revenue, or yield, lower income from transporting goods and wrong-way bets on oil prices, the Paris-based company said in an e-mailed statement.

"Deterioration in yield is a lot stronger than thought earlier," said Yan Derocles, an analyst at Paris-based Oddo Securities, who has a "reduce" rating on the shares.

Airlines including Air France and British Airways Plc are facing falling revenues as the global recession crimps demand for first and business-class tickets, typically the most lucrative. Premium air travel globally slumped 11.5 percent in November, adding to drops in September and October, the International Air Transport Association said on Monday. Shares of Air France, which briefed some analysts on January 16 on the impact of lower revenue, tumbled as much as 6.6 percent in Paris trading yesterday, after sliding 7.9 percent on Monday. The stock has fallen 54 percent in the past 12 months, valuing Air France at 2.58 billion euros (US$3.3 billion).

"We're down at very low margins so a relatively small change in any of the inputs has a big impact on profits," said Jonathan Wober, an analyst at Societe Generale in London. "If conditions continue to be difficult, we could see further capacity cuts from airlines, rather than them wanting to cut prices further." Wober, who has a "buy" recommendation on Air France shares, cut his target price on the stock to 11 euros from 12 euros yesterday.

Cargo plummeted

First and business-class travelers are generally charged a multiple of the amount economy passengers pay for tickets, so even if traffic doesn't fall much, if the bulk of passengers flying are in economy class, revenue falls sharply. Air France on January 8 said December passenger traffic rose 1.3 percent, while cargo plummeted 20 percent.

"The deterioration in the economic environment during the third quarter has led to a slight weakening in passenger unit revenue and a strong decline in cargo revenue," Air France said in its statement yesterday.

Air France's investor relations department called some analysts on January 16 to say earnings would be weaker than anticipated and to suggest that they review estimates, the analysts said, Bloomberg News reported.

The airline is heading toward a loss of 200 million euros to 220 million euros at the level of earnings before interest and tax, analysts said.


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