The carrier’s valuation has surged almost 190% since hitting a five-year low in September 2016. The Paris-based company’s shares are also the best performers among members of the Stoxx Europe 600 benchmark index this year, with a 20-times greater advance than index’s 7.9% gain.
Air France-KLM is rebounding from a weak 2016, with improved demand from business flyers and tourists, higher ticket prices and more peaceful unions. Analysts expect this year’s operating profit to grow by 36%. Those gains may be tough to sustain for an airline that’s losing market share, underperforming on costs and hasn’t paid a dividend since 2009.
“Management has a lot of work to do,” Daniel Roeska, a London-based analyst at Sanford C Bernstein & Co, said in an interview. He rates the shares underperform, and said the company is an industry “laggard.”
Air France-KLM is losing share at home to EasyJet Plc and is moving too slowly to reduce costs and achieve synergies between the Air France and KLM divisions, Roeska said. The company hasn’t resumed paying a dividend, something IAG and Deutsche Lufthansa AG have done.
Chief executive officer Jean-Marc Janaillac said at his first earnings presentation in September last year that traffic had declined year-on-year on terrorism. He also took action in areas over which the company has greater control, introducing a restructuring plan and seeking to make peace with employee groups after a series of damaging strikes. In July, he won support from a pilots union for a planned lower-cost unit called Joon. Executives told analysts over dinner last month that current trading is positive and ticket bookings look reassuring. Passenger revenue for September rose from a year earlier, the company said.
The carrier strengthened an alliance with Delta Air Lines Inc and China Eastern Airlines Corp, which each acquired 10% stakes in the company. The agreement offers Air France- KLM “a unique set of options” in the North Atlantic and Asian markets, wrote Morgan Stanley analyst Penny Butcher. She rates the shares outperform, and the stock is among the broker’s top European midcap picks.
Even after the gains of the past year, which have added €3.3bn ($3.9bn) to AirFrance-KLM’s market value, the stock looks cheap. The shares trade on a one-year forward price-to-earnings ratio of 5.4 times, below the level of the past five years and at a wider-than average discount to airline rivals.
Short sellers have backed off too, signalling that downside may be limited. Short interest is 3.8% of shares outstanding, data from IHS Markit show, below the one-year high of 12.6% reached in February.
An Airbus A318 passenger aircraft, operated by Air France-KLM Group, taxis at Venice Marco Polo Airport in Venice, Italy. The Paris-based company’s shares are the best performers among members of the Stoxx Europe 600 benchmark index this year, with a 20-times greater advance than index’s 7.9% gain.