By Andrea Rothman

Air France-KLM Group, Europe's largest airline, fell the most in 5 1/2 years in Paris trading after the company posted the first quarterly loss since 2003 and joined American Airlines in predicting tougher times ahead.

Air France had a net loss of 542 million euros ($856 million) in the fourth quarter ended March 31, hurt by a provision for a price-fixing probe. Earnings will drop almost 30 percent this year as fuel costs soar and an economic slowdown dents demand for travel, the Paris-based company said today.

The surge in oil prices to more $135 a barrel has come as a ``violent shock'' to the airline industry, Chief Executive Officer Jean-Cyril Spinetta said, predicting Air France's fuel expenses will jump by about 1.2 billion euros this year. American Airlines said yesterday it would cut ``thousands'' of jobs and park 85 planes, the most drastic move yet among major carriers as analysts warn of $40 billion in losses and possible bankruptcies.

"This is the shape of things to come,'' said John Strickland, director of aviation specialist JLS Consulting Ltd. ``All airlines are going to be massively exposed. Air France has been very successful, but it will be more difficult in a market where demand is slowing. And they haven't tackled some of the more thorny cost issues within the company.''

Air France said operating profit will probably drop to 1 billion euros this year from 1.4 billion euros in fiscal 2008, sending the stock down 2.09 euros, or 11 percent, to 16.56 euros, the sharpest drop since Sept. 30, 2002.

The company was trading at 16.79 euros as of 2:17 a.m. in Paris, taking declines this year to 30 percent and valuing the company at 5.04 billion euros.

Lufthansa, BA

Deutsche Lufthansa AG, Europe's second-biggest carrier, dropped as much as 4.3 percent today and is down 14 percent this year. British Airways Plc, the No. 3, lost as much as 4.5 percent and has slumped 34 percent for the year. The eight- member Bloomberg European Airlines index is down 27 percent.

U.S. carriers tumbled in New York trading yesterday after American Airlines announced its capacity cuts and Soleil Securities Corp. analyst James M. Higgins said American parent AMR Corp. and United Airlines owner UAL Corp. may struggle to avoid bankruptcy. AMR plunged 24 percent, the most in five years, and UAL dropped 30 percent.

AMR's retrenchment extends an industry-wide contraction by competitors including United and Delta Air Lines Inc. Delta, which agreed to acquire Northwest Airlines Corp. in an all-stock merger and leads the SkyTeam alliance with Air France, plans a 10 percent cut in domestic capacity.

Airlines may lose as much as $40 billion this year, independent aviation analyst Chris Tarry estimates. That compares with a $12 billion deficit recorded in 2001 after the Sept. 11 terrorist attacks. Record oil prices may add as much as $65 billion in costs, Tarry predicts.

Target Scrapped

"The change in the economic context and a doubling of fuel prices will make the current year challenging,'' Air France Chief Financial Officer Philippe Calavia said at the briefing. He said the company has scrapped its goal of achieving an 8.5 percent return on capital by fiscal 2010.

CEO Spinetta said low-cost operators reliant on leisure travel will be hardest hit in the slowdown and that his own airline should still emerge with an increased market share.

Oil climbed above $135 a barrel for the first time after U.S. stockpiles unexpectedly dropped and trades were closed on losing bets that prices would fall. Crude for July delivery rose as much as $1.87 to $135.04 in after-hours electronic trading on the New York Mercantile Exchange.

Route Cuts

British Airways said last week it may cut routes and capacity to safeguard earnings after doubling profit and achieving a record 10 percent operating margin in the year through March. Air France, which posted a 6.7 percent margin, currently has no plans to reduce seats but may slow expansion, Spinetta said. A premium economy class will be added next year to help lure frugal business people and affluent leisure flyers.

Air France-KLM has hedged about 78 percent of its fuel requirements for the current year at between $70 and $80 a barrel, finance chief Calavia said. The Air France and KLM operating units increased fuel surcharges 12 times last fiscal year in an effort to pass escalating costs to customers.

``The issue now is whether, as the wider economy slumps, the company will be able to pass on fuel prices without slowing demand,'' Yan Derocles, an analyst at Oddo Securities in Paris, said May 19. Air France currently imposes a 101 euro charge on long-haul flights and 26 euros for European ones.

Cargo Probe

Quarterly earnings were hurt by a 530 million-euro charge for potential settlements of a price-fixing probe involving cargo rates, Air France said. Profit was also clipped by an early Easter and a strike by air-traffic controllers.

The net loss before the one-time item was 49 million euros. Analysts surveyed by Bloomberg had forecast 59 million euros. Year-earlier profit was 44 million euros. Sales rose 5.8 percent to 5.7 billion euros.

Full-year net income fell 16 percent to 748 million euros, or 2.63 euros a share. Excluding the one-time charge, profit rose 11 percent to 987 million euros. Air France will increase its annual dividend 21 percent to 58 cents.

Load factor, a measure of seat occupancy, is holding up well everywhere except North America, the company said, with demand matching capacity increases.

Spinetta said he expects to find out within weeks when Airbus SAS will hand over Air France's first A380 superjumbo jetliner following further delays to the project. Delivery had been scheduled for April 2009. The CEO said the plane will be a "powerful tool'' in reducing average costs per passenger because of its size and fuel efficiency.

The French carrier said it's comfortable with a decision last month to abandon takeover talks with Italian state-owned airline Alitalia SpA after failing to agree terms with unions.

"Alitalia is in a much more difficult position now than it was two months ago,'' Calavia said today. He predicted that the high oil price and slowing economy may drive some airlines out of business. (Bloomberg)