An air travel recovery and cost cutting at Europe's largest airline by revenue lifted Air France-KLM (AIRF.PA) back to a full-year operating profit, with its bottom line also boosted by a unit's share flotation.

The Franco-Dutch group posted a 2010/11 operating profit of 122 million euros on Thursday after a 1.4 billion euro turnaround in core earningssince the previous year.

Revenue rose 12.5 percent to 23.62 billion euros.

Air France-KLM said it was "confident" in its ability to improve operating income this year but was also focused on reducing its 85 percent debt-to-equity ratio, prompting it to skip its dividend for the financial year to end-March.

International Airlines Group (ICAG.L) (ICAG.MC), formed by the merger of BA and Iberia, said this month it expected significant growth in operating profit this year as a continuing recovery in travel helps unit revenue and costs.

Air France-KLM shares rose 1.09 percent at 0756 GMT, outperforming a firmer market, boosted by a stronger-than-expected performance in cargo that reflects a brisk recovery in global trade.

"Air transport remains in a favourable condition, particularly in emerging markets," analysts at CM-CIC Securities said, adding Air France-KLM had demonstrated its ability to cap costs after weathering a tough final quarter.

READY TO ADAPT CAPACITY

Like most airlines navigating through an economic recovery hampered by political instability and volatile oil prices, Air France-KLM expressed uncertainty about the Middle East and the aftermath of the Japan earthquake, as well as its fuel bill.

The various crises in the past few months shaved half a percentage point off its unit revenue in the fourth quarter.

"The oil price is very difficult for the world economy and air transport feels the effects more quickly than most," said Pierre-Henri Gourgeon, whose mandate as chief executive was renewed by the airline group's board.

"We have reduced our costs and improved performance and are much better positioned to face these uncertainties than before."

Fuel costs rose by 186 million euros to 1.43 billion in the fourth quarter ended March 31. Unit costs rose slightly.

Full-year net profit of 613 million euros was boosted by a 1 billion euro gain from a revaluation of the company's 15 percent stake in the Amadeus reservations system, which is now listed.
The underlying net loss was 234 million euros.
The results were slightly below average analyst estimates of an operating profit of 173 million euros and a net loss of 179 million.
Air France-KLM said it would be taking no chances this year with capacity on the North Atlantic, where the group complained about a glut of available competitor seats over the past winter.
Gourgeon said a joint venture between Air France-KLM and U.S. carrier Delta  would trim capacity by 10 percent compared with the previous year in the 2011/12 northern winter.
The group has announced a 5.7 capacity increase in the summer to absorb a "positive" trend in bookings but said it was ready to lower this to adapt to any bumps in the recovery.

Analysts have questioned to what extent airlines can pass on increases in fuel costs to passengers while offering more seats.

Gourgeon unveiled the annual results for the last time on the company's current April-March reporting year, since the company plans to adopt the regular civil calendar from the end of 2011. 

News Story First Published By By Tim Hepher and Cyril Altmeyer from Reuters
PARIS | Thu May 19, 2011 5:56am EDT