Good News and Bad News for Air France-KLM

Shares of a major French carrier drop 7% as two major pieces of news are released.

May 2, 2014 at 6:07PM

In European Wednesday trading, shares of Air France-KLM (NASDAQOTH:AFRAF) were down 7% following the release of two critical pieces of information. One piece of news was generally positive while the other was definitely negative, and it's worthwhile for airline investors to examine both pieces of information.

Earnings, turnaround, and outlook
Air France-KLM has been hit hard in the past few years as the eurozone recession stifled air travel demand and an unfavorable cost structure kept costs high even as demand fell. In response, Air France-KLM launched its Transform 2015 plan to slash costs and better position the airline going forward.

The French flag carrier is not alone in moving to curb costs. Deutsche Lufthansa (NASDAQOTH:DLAKY) has also been trying to manage in the underperforming eurozone market. Like at Air France-KLM, Lufthansa is looking toward job cuts and internal restructuring to control costs.

In its latest earnings report, Air France-KLM showed slight improvement over the same period last year, but perhaps more importantly, the airline noted that "Delivery on the Transform 2015 plan is fully on track." With the Transform 2015 plan being key to the airline's future success, it's a good sign that company officials note it's still on track.

Protest problems
In recent days, the union that represents Air France's pilots, SNPL, has announced a series of protesting walkouts to occur between May 3 and May 30. Although Air France-KLM has been making job cuts a key part of reducing costs, these protests are not about the job cuts, and are not even directed at Air France-KLM itself.

The pilots are instead protesting a new French law that requires unions to notify airlines 48 hours before beginning a strike. The law has become a source of controversy as it's designed to give airlines more time to inform passengers, but unions charge that it allows airlines to bring in outside pilots hurting the effectiveness of union strike action.

Airlines are no strangers to labor issues, with action taken in the past and recent strike action at Lufthansa. The German airline's CEO, Chirstoph Franz, noted that the most recent three-day walkout cost Lufthansa 45 million euros in profit. With nearly a month's worth of random walkouts, it's reasonable to assume the walkouts will impact Air France-KLM's profits this quarter. Over the next month, airline investors will get a better picture of the severity of the walkouts on operations.

Recovery play
Air France-KLM has already partially recovered from its protest-related low, but it still trades below levels before the news. Additionally, Air France-KLM's Transform 2015 plan follows many of the same cost-cutting strategies that have been implemented at Deutsche Lufthansa and have seen success at North American airlines. For investors looking for a way to play the European recovery, Air France-KLM offers both a way to play the cyclical economic cycle and a temporary drop in the stock price.

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Alexander MacLennan has no position in any stocks mentioned. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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