Air France-KLM said Friday its net loss deepened by nearly 50 percent last year to 1.2 billion euros ($1.59 billion) as it began restructuring to cope with the rise of low-cost airlines.
However the airline group said that underlying prospects were improving despite heavy fuel and restructuring costs, with its operating loss narrowing to 300 million euros from 353 million euros in 2011.
This was better than the average figure expected by analysts polled by Bloomberg financial agency of a loss of 334.6 million euros.
In the fourth quarter of last year, the operating loss was reduced to 143 million euros from 202 million euros 12 months earlier.
Sales rose by 5.2 percent in 2012 to 25.6 billion euros. The load factor, the percentage of seats occupied, rose by 1.2 points to a record 83.1 percent.
Financial director Philippe Calavia said that 2012 was an important year for the group because decisions about the structure and transformation of the company had been taken.
"Today, all of the foundations for an improvement of competitiveness are in place and will produce their full effects in 2013 and 2014," said Calavia.
Air France-KLM has suffered from a fall of competitiveness in recent years, under the pressure of low-cost operators and the rise of airlines in the Middle East and in Asia.
In January of last year, the company announced a vast restructuring plan called "Transform 2015."
It booked provisions of 471 million euros under this plan to cover expenses related to cutting its workforce in order to boost productivity.
Last year some 3,300 out 100,000 staff voluntarily left the airline group and most were not replaced, said AirFrance-KLM.
The plan targets 5,122 voluntary departures this year.
Wages have been frozen and the fleet of aircraft trimmed.
Air France-KLM executives said this led to an improvement in the results on long-haul routes, but that in the medium-haul sector they had yet to turn a corner.
Chief executive Jean-Cyril Spinetta said the operating loss on medium-haul activities deepened from 700 million euros in 2011 to 800 million euros in 2012 due to a worse performance at Air France.
Losses at Air France regional hubs at Marseille, Nice and Toulouse were to blame, and the company has already taken measures to improve their performance.
Air France recently reorganised its three French regional airlines into one company, HOP!, which will begin offering next month flights in France and Europe at prices from 55 euros one way to compete with low-cost airlines.
Air France also boasts another low-cost unit, Transavia France, which under the Transform 2015 plan is also gradually being expanded.
And Air France itself also launched last month low-cost "Mini" tickets that require passengers to pay for luggage as an optional service.
Chief executive Alexandre de Juniac said the Mini tickets sparked a 23 percent rise in sales compared to the same period in 2012.
Air France-KLM said that net debt, which weighs heavily on the group, fell by 540 million euros to slightly less than 6.0 billion euros.
The company aims to have cut it by 2 billion euros over 2012-2014.
Air France-KLM executives were cautious about providing any guidance for 2013 given the poor outlook for Europe and market volatility.
The company's shares dove 5.2 percent to 7.90 euros in afternoon trading while the Paris market was up 1.8 percent overall.