The European airline market continues to be an unusually diverse one in performance terms during the current earnings season, with Air France-KLM the latest to offer a broadly positive view on underlying demand and yields through the rest of the year.
The caveat with the Franco-Dutch group, however, is that while it is keen to stress the pride Air France feels in its home country hosting the Olympic Games, it is also having to grapple with a negative demand impact to the tune of €200 million ($217 million) this year. While most of that financial pain falls in the third quarter, it also hit the second quarter performance it outlined on 25 July by €40 million.
The group’s second-quarter operating profit of €513 million was down 30% year on year on revenues up 4% at €7.9 billion. Its net profit of €165 million was down 73%.
The biggest hit to profit was at Air France, although group chief executive Ben Smith also characterises KLM and Transavia as “stable yet sluggish” during the period.
“The group has already taken strong measures to adapt to this situation, including a hiring freeze and additional cost cuts,” Smith says.
Still, Air France-KLM chief financial officer Steven Zaat points out during an earnings call that despite the decline in earnings at the group, the underlying indicators are encouraging.
“I would not say the second quarter was disappointing,” Zaat says. “We had a lot of headwinds – the Olympics, the high cargo impact and the negative fuel price, but we have to keep in mind this was still the third best quarter in our history.”
And notably the group achieved “stable load factor and yield” despite a 4% rise in capacity from the same period in 2023 (it is also guiding for full-year capacity up 4% – a 1 percentage point drop from previous guidance). It further notes that once the impact of the Olympic Games has played out, fourth quarter load and yields are similarly tracking largely flat against last year.
“For the fourth quarter we don’t see any softening, despite more capacity,” Zaat says.
That puts the group’s analysis of the market more in line with EasyJet’s in this earnings season and less in line with Ryanair’s, which this week observed “materially lower” fares – in the region of 10-15% – this summer. Carriers such as Finnair and Norwegian also mentioned a softening in the market.
Granted, Air France-KLM did note a tiny downturn in yields in the economic cabin, but this was only in the order of 1%.
It also highlights a “surprise” 4.5% improvement in unit revenue at low-cost unit Transavia, supported by the introduction of paid hand luggage, despite a 12% rise in capacity.
Moreover, Air France-KLM – which does not guide on full-year profitability – reckons it will be in a fundamentally better place in profitability terms heading into 2025, keeping it on track for its €2 billion structural improvement programme by 2028.
Alongside the impact of the Olympics, this year’s earnings are seeing a negative impact to the tune of €300 million from staff shortages at KLM in particular and the operational inefficiencies and higher compensation claims that have followed, and a €35 million hit from the introduction of a new IT system at Air France Cargo.
It foresees a €500 million EBIT “catch-up” in 2024 once these “exceptional disruptions” have passed.
That optimism comes despite unit costs rising 1.7% in the second quarter as the business absorbs higher salary costs resulting from labour agreements at Air France and KLM.
Indeed, executives were keen to point out that costs are a big focus for the group, as it guides for a full year unit cost increase of 2% (guidance was previously 1-2%).