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IAG and Air France shares drop as airlines brace for turbulence

By Joanna Plucinska and Diana Mandia

LONDON (Reuters) -Shares in British Airways owner IAG and Air France-KLM dropped on Thursday as concerns over costs, supplies of new jets, and geopolitical risks overshadowed strong 2023 results.

As consumers continue to prioritise travel in the wake of the pandemic, European airlines are reporting strong summer bookings. But high jet fuel prices, global flashpoints, problems at plane manufacturers, and wage talks are clouding prospects.

Case in point: despite record revenues for 2023 as a whole, Air France-KLM swung to an unexpected loss in the last quarter, hit by higher costs and disruptions caused by conflict in the Middle East, sending its shares down as much as 10.7%.

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Analysts are also worried whether manufacturers will be able to keep up with strong demand for new planes amid ongoing supply chain problems, particularly as Boeing grapples with quality issues and a regulatory crackdown following the blowout of a panel on one of its MAX 9 jets during a flight on Jan. 5.

"The problem is not selling the tickets. We can sell every seat we want," said Air France-KLM finance chief Steven Zaat, adding the issue was having enough capacity.

Even IAG, which more than doubled its operating profit last year and gave a positive outlook for 2024, saw its shares turn negative to trade down 1% in the afternoon.

"Concerns over aircraft availability and demand in some of its key markets, alongside stickier than expected inflation in Europe, have overshadowed what were some generally positive results," said John Moore, senior investment manager at RBC Brewin Dolphin.

"It may not be the market response the company anticipated, but IAG is on a much surer footing nonetheless."

People familiar with the matter also told Reuters that European Union antitrust regulators were likely to warn IAG about its 400-million-euro ($434 million) bid to buy out Air Europa, suggesting that remedies offered by IAG last week were not sufficient to address their concerns.

'WE'RE BEING STIFLED'

With concerns over keeping up with demand shared across the industry, Emirates Airlines President Tim Clark expressed doubts on Thursday about the company getting its order of Boeing aircraft by the end of next year, in light of the U.S. regulatory scrutiny.

"We're all being stifled by not only supply chain, but the ability of the manufacturers to get those aircraft out the door," Clark told an industry lunch in London.

In another example of possible clouds on the horizon, analysts and investors told Reuters that Lufthansa will likely miss its 2024 profit margin goal as the German airline seeks to agree higher pay deals to end prolonged strikes.

IAG CEO Luis Gallego said the Middle East conflict had impacted mostly corporate demand in the last quarter of 2023 and the first quarter of 2024, but that was expected to recover.

Unlike other airlines, IAG, which also owns Iberia, said it was not concerned over capacity for the year to come and was not expecting delays in Boeing deliveries this year.

Gallego said that if the certification of Boeing's 737 MAX 10 was slowed down, IAG could convert to other variants.

"For the time being we aren't worried. We are sure they'll fix the situation," he told a press call.

Both IAG and Air France-KLM said bad weather had impacted costs too.

Air France-KLM reported a 2023 operating profit of 1.7 billion euros, in line with expectations.

However, its fourth-quarter operating loss of 56 million euros was far short of analysts' consensus forecast for a profit of 88 million euros, according to a company poll.

Still, Air France-KLM was able to pay down 1.3 billion euros in debt, much of which was amassed during the pandemic travel shutdown, leaving outstanding net debt at 5 billion euros.

"We can be satisfied of our efforts to further strengthen our balance sheet and restore the Group's equity," Chief Executive Ben Smith said.

The group said it expected costs would not go up as quickly as they did in 2023, and added that for the summer of 2024 its capacity would be close to 2019 levels.

Bernstein analysts said Air France-KLM's fourth quarter loss was impacted by one-off disruption costs and the implementation of an employee shareholding plan.

"Importantly, real-terms cost reduction looks set to continue, supporting margin expansion ahead," they added.

($1 = 0.9230 euros)

(Reporting by Joanna Plucinska, Diana Mandia, Tim Hepher; Writing by Ingrid Melander; Editing by Mark Potter)