AF Air FranceKLM

PARIS—Air France-KLM's management on Thursday called for drastic cost-cutting despite the airline posting its largest quarterly net profit in five years as a result of lower fuel prices.

Air France-KLM reported a sharp rise in third-quarter net profit to €480 million ($533 million), compared with a revised €86 million profit in the same period last year. The airline's bottom line was boosted by some €500 million in cost savings from lower jet-fuel prices as well as a weak comparative quarter, which was hit by a costly pilots strike, Chief Financial Officer Pierre Francois Riolacci said.

However, strong profit growth is likely to complicate the company's effort to convince restive unions in France that the carrier needs to undertake sharp cost cuts. Management says the cuts are necessary for it to compete with short-haul budget carriers and Gulf airlines on the more expensive long-haul flights.

Talks between Air France's management and unions turned sour early this month when a group of company employees accosted two company executives and tore off their shirts. Workers turned against the company's negotiators when they announced a plan to cut 2,900 jobs.

The profit also thrusts Air France-KLM into the unusual position of arguing that its results are actually weaker than they appear.

"Since the gain is mostly due to favorable fuel prices, our competitors also improved their results," Mr. Riolacci said on a conference call with reporters. "We still have a competitiveness gap that we must close."

Air France-KLM argues it needs to adjust its cost structure the same way rival legacy airline British Airways did a few years ago, a move that led to double-digit profitability. With sales at €7.42 billion during the quarter, Air France-KLM's profit margin is still much too low to be sustainable in the long-run, Mr. Riolacci said.

Even low fuel prices themselves are a threat, the company argues: Competitors will take advantage of their own boosted profit to increase capacity in coming months, adding new pressure to prices, and jeopardizing Air France-KLM's apparent turnaround during the third quarter, Mr. Riolacci added.

After years of losses, Air France-KLM may even post a net profit this year, Mr. Riolacci said, though he insisted the company doesn't give guidance for net profit. Like in 2013, the company will post an operating profit, after posting operating losses in 2012 and 2014, he said.

Air France has managed to improve its competitiveness since 2013 by reducing its payroll size without firing workers; some employees, such as technicians, have accepted working more days and have taken pay cuts.

Still, its expenses are much higher than many rivals. Air France's unit costs, measured by costs per available seat kilometer, were 13% higher than KLM's last year and their combined costs are 12% higher than at International Consolidated Airlines Group SA, the parent company of British Airways, according to the CAPA Center for Aviation.

Write to Inti Landauro at inti.landauro@wsj.com

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(END) Dow Jones Newswires

October 29, 2015 04:15 ET (08:15 GMT)

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