Air France-KLM will curtail capital expenditures in the coming years to avoid straining its balance sheet at a time of difficult economic conditions for the air transport industry.

The airline group had already signaled it was reviewing plans, and now says EUR1.6 billion in planned outlays between now and the end of its 2010/11 fiscal year will be cut. The bulk of those cuts comes from not fielding new aircraft and keeping older assets in the fleet, says Philippe Calavia, the group's chief financial officer.

Remaining in service longer, for instance, will be 747-400s, which were due to be phased out in cargo operations at Air France and passenger operations at KLM. The drop in fuel prices has meant the higher fuel burn aircraft don't have to be replaced so quickly. Moreover, KLM CEO Peter Hartman says Fokker 100s will also remain in service longer than planned.

The airline group doesn't expect to be hit with financial penalties as a result. In fact, chief operating officer Pierre-Henri Gourgeon notes that the company could receive penalty payments from Boeing because of delays in the 777 freighter. The first aircraft was to be handed over in October, but will not arrive until February.

Air France has no plans to delay receipt of its A380, which airline officials still hope to get next year although they are waiting for a firm commitment from Airbus.

The capital expenditure reduction is part of a larger program to protect the airline from current economic turmoil. Air France-KLM had already announced a sharp reduction in capacity growth and expansion of its cost-cutting program. Unless the economic situation further deteriorates, those measures should allow the airline to deliver "an operating income clearly in profit," said CEO Jean-Cyril Spinetta in announcing first half results today. Although the first half performance has deteriorated markedly from last year - operating income is down 44%, net income is down 83%, and adjusted operating margin was down 4.3 percentage points. But Spinetta insists that Air France-KLM has been doing better than its peers Lufthansa and British Airways.

Photo: Air France