(In third paragraph, corrects year-earlier operating loss)

By Laurence Frost

PARIS (Reuters) – Air France-KLM blamed higher fuel costs and tough price competition as it posted a deeper first-quarter loss that caused its shares to fall.

The Franco-Dutch group reported a 1.9 percent drop in unit revenue for January-March, as sales failed to keep pace with its 2.3 percent expansion in flights offered, although the company said pressure would ease in the rest of the year as rival airlines’ capacity growth slows.

The operating loss widened to 303 million euros ($339 million) from 118 million euros, and Air France KLM’s shares fell by around 3 percent in early session trading.

Under new Chief Executive Officer Ben Smith, who joined last September from Air Canada, the company is seeking to boost efficiency in part through better coordination of the Air France and KLM networks and fleets.

“The first quarter has been challenging for the European airline industry including the Air France-KLM Group,” Smith said in a statement.

“Substantial industry capacity growth in the off-peak business period led to unit revenue pressure.”

Fuel costs and excess capacity also led to ballooning losses at Lufthansa, the German airline said this week.

Air France-KLM said it saw “improving trends” and a “more benign industry supply outlook” – with a slowdown in Gulf carriers’ growth plans – as it reiterated pledges to keep a lid on debt in 2019 while continuing to cut non-fuel costs.

The fuel bill grew by 140 million euros to 1.2 billion in the quarter, Air France-KLM said, putting a bigger-than-expected dent in earnings. The 303 million-euro operating loss exceeded the 251 million euros expected by analysts, based on the median of 14 estimates in a consensus poll by the company.

Its net loss also widened to 320 million euros from 269 million, even as group revenue rose 3.1 percent to 5.986 billion euros, in line with market expectations.

Non-fuel costs fell 0.4 percent before currency effects, which pared another 34 million euros off earnings. But forward long-haul bookings are up for the summer season, the company said, with gains of 1 percent for May-June.

Transavia, the group’s low-cost operator, saw unit revenue decline 3.5 percent, as a 7.4 percent passenger traffic hike failed to keep pace with an 11.4 percent capacity expansion – partly the result of a later Easter weekend this year. The division’s loss widened to 71 million euros from 58 million.

Beyond the financial metrics, CEO Smith hailed what he described as “signs of progress in operational performance at Air France”, as the carrier improved punctuality and overall customer satisfaction scores – narrowing the gap with KLM.

Smith will give his first detailed strategy presentation to investors at a capital markets day scheduled for November, the company also said on Friday.

($1 = 0.8947 euros)