What is Air France-KLM’s Weakest Link?
Hello and welcome to the Airline Weekly Lounge. I’m your host Gordon Smith and I’m joined as usual by co-host Jay Shabet. In part one, we’re unpacking the latest numbers from Air France KLM and in part two we’re making sense of some impressive financials from the Latam Group. Hey Jay, how’s it going? All right, Gordon, how’s it going? Doing very, very well. We are recording here on Tuesday uh 5th of August. Can’t believe we’re in August already. And we’ve got some breaking news just as we’re coming on air uh with regard to Air Europa. Regular listeners of the show, regular readers of Airline Weekly uh will be aware that a fairly meaty stake of Air Europe is potentially up for grabs. Previous suitors uh Lufanza Group, Air France KM, Turkish Airlines. What we’re just getting through on the newswires now is that Lufanza is no longer interested in acquiring a stake in Air Europa. That was through a a spokesperson for the German Airline Group. Here’s a quote for you. uh from Lufanza quote uh here we are after thorough analysis and intense negotiations we have at this stage decided against further engaging in a capital contribution and shareholding in a Europa uh you might recall Europa is controlled by Globalia that’s around 80% stake a family sort of empire there out of Spain the remainder is still owned by IG so really Jay this leaves just Turkish airlines still in the bidding with previous reports that Air France KM had also dropped oped out of the process. Uh what’s your initial take on that on that breaking news? Yeah, right. Lanza and Air France KM uh the reports say are um have pulled out. So uh yeah, quite a surprise actually because I think both of those airlines were certainly interested and Air Europa and it Madrid hub seems to uh you know it’s it it just seems like a hub that would fit very well with uh with the networks of either of those two car carriers. Yeah, the at this point we don’t know why, but the initial suspect would be that perhaps the the price was too high or the uh the terms were too ownorous, but uh we’ll have to wait and see if we uh if we learn at all about why exactly they pulled out. But uh yeah, as you say, that does leave Turkish Airlines um from one uh I’d have to believe that I AG, which uh tried to buy Air Europa itself, but ran into regulatory resistance, they actually do uh retain an ownership stake, a minority ownership stake. I’d have to believe that they’re happy about this. They wouldn’t be too enthused about seeing Air Europa fall into the hands of either Lufanza or Air France KM. I think if you ask them they probably prefer that it fall into the hands of Turkish if that winds up the way it goes know that there’s you know as many synergies there between an air Europe and a Turkish. So uh you know perhaps count IG as as as a winner here. Uh but as as you suggested Gordon it’s all kind of unfolding uh as we speak. So we’ll we’ll have to wait and withhold uh full judgment there. Well, if you want full judgment, uh the next issue of Airline Weekly, we will have more insight on that developing story. And we should say that neither Globalia or Turkish Airlines were immediately available for comment. And also just speaking to the Iberian Peninsula very selfishly here, speaking to you from Portugal, uh Tap Portugal is still of course a a hot topic um in takeover circles or M&A circles depending on your your point of view. Uh both Lufanza, Air France, KM, and I think IG are all still uh very actively engaged there. So uh plenty to discuss Jay but let’s get back onto the the here and now with regard to quarterly financials. Uh we’ve had Air France KM uh report in the past few days. If anyone’s coming into this a little cold, tell our listeners what they need to know uh the headline numbers if you will from Air France KM. Sure. Uh so Air France KM reported a a 9% operating margin which was a little bit I mean if you want to get real precise 8.7 and that compares to Lufanza’s 8.4. So essentially neck andneck with Lufansza there. Uh I won’t tell you what I AG uh reported because I don’t want to embarrass anybody. Um I I I preferred your original saying there. I didn’t know if you were going in for a big merger. Oh, did I see International Airlines J Group? No. J Group. Just just a uh Yeah, just a misprononunciation there. No, so I uh in all seriousness had a 19% operating margin. So you can see they’re just kind of at a they’re playing in a different stratosphere, but but Air France KM in a 9% for them that’s that’s pretty solid. Uh Air France itself, the Paris-based airline 9.5% and they actually improved their results from 4% last year. Now the comparison was a little bit you have to be a little careful because there was the Olympics last year that kind of messed up traffic. But let’s put that aside and just say if France itself had a had an excellent second quarter. Um and we we’ll talk a little bit about why in a moment. KM on the other hand continues to struggle. Um it wasn’t a terrible quarter by any means. Uh they had a 6% operating margin, but uh that was down from 8% a year ago. Uh that also uh kind of conflicts with the way things used to work within the Air France KM group. used to always be like KLM was the superstar, you know, they were they were kind of like the Swiss of of the Air France KM group. And if you know what I’m talking about there, Swiss is always kind of the superstar airline for the tons of group. KM was like that, but it’s not like that anymore. Just 6%. Transavia poor quarter just 1%. Um they have a big pretty, you know, sizable maintenance business too, which is was actually bigger than Transavia. Uh that did fairly well, 5%. And then they have a very profitable loyalty program with about I think they said 20 million members. And that that’s that’s a very very very high margin business. Um a little bit smaller though just just a couple hundred million dollars in revenue. So that is the uh the lay kind of the lay of the land there between uh you know which which airlines how they’re how each airline is performing within the group. Uh shall I get into a little more detail for each Gordon? I was going to try and impress you, Jay, by saying, you know, sort of something smart in French uh to kick off our Air France specific conversation, but uh I’m not going to embarrass myself. Go ahead. Tell us uh in very English terms, why was Air France Q2 so good? Um you want to speak in French? Uh I would love to hear that. I’m not going to uh stop you. But uh for now, we’ll stay in English. Let’s go for Uh yeah, so Air France um they what the question is why did they have such a good quarter? So the a big um this is not going to surprise anyone but uh premium demand is just very very very strong pretty much everywhere in the world and Air France is a very premium airline. Uh they’ve pushed in that direction very hard. They’ve increased their premium capacity. uh that’s you know they have a first class, they have a business class, they have uh you know premium economy and they are um they’re doing doing very well uh uh on all those um th those that segment of the business. In fact they they literally I mean this is a quote they said they saw a huge quote unquote huge increase in our performance of La Premier. That’s their kind of business section there businessfirst section. Um and even more interestingly they said that um a lot of that increase is coming from the leisure passenger not the business passenger. So they said leisure is now about is more than half of all the premium demand that they’re getting. Um so it’s very different in the past when you know business class would be for business travelers. Not anymore. Um and they’re also including premium economy in that statistic as well. But um you can see just more people flying uh to a place like Paris, obviously a giant tourism destination. A lot of people just spending that extra money uh on vacation to sit in the the nicer seats. Another quote here, it’s absolutely unbelievable if you look at how the performance has improved over the last few years talking about the La Premier section. So there you go, Air France. Let me say a minute. There’s only a few areas of the business that they said were a little bit on the weaker end. So they did say that um as as other airlines have said that the transatlantic US demand a little bit weaker on the price sensitive side. So the economy class you know going between Paris and the US uh a little bit weaker there. Um that’s that’s true to Amsterdam as well. They did mention some short hall European capacity pressures. Okay not you know whole whole uh not not terribly interesting there. Um the only other uh region that they mentioned where there was some uh level of distress was the Caribbean and sounds like that’s just a capacity thing. You know, people going either on vacation from Europe to the Caribbean or there’s some family visit traffic there as well. U but keep those in mind. There’s one more and this is going to be my segue into KM but there’s one more segment that is having a difficult time right now and that is transfer traffic or connecting traffic to the US. So for example uh Air France and KM are seeing less uh connecting traffic to from example or let’s say from example India, Africa, Middle East to the US and that kind of runs in tandem with just the overall general decline in visitation to the US for whole variety of reasons that many of you are familiar with but um seeing less of that connecting traffic. Now, which airline is more dependent on six freedom, let’s call connecting traffic, Air France or KM? It’s KLM. And so KM is the one feeling the the pain of that more than Air France. So that’s a good kind of start in trying to understand why KM is underperforming Air France all of a sudden. They have less premium, more connecting. So they’re kind of in the wrong place the wrong time, whereas Air France is in the right place at the wrong time. You can think about that way. Um, there are other things going on in KM. They’ve seen very big increase in cost, particularly labor cost. They’re still trying to negotiate a new pilot agreement. They’ve had some operational issues. And then, um, very, very serious issue to them. Um, and I’m looking for the exact words they used here, but, uh, do I have it here? Yeah. the quote unquote crazy increase of the tariffs which they’re talking about the the just just the charges and um at at Skippo airport. So Amsterdam airport has has increased the the fees and the and and the rates to fly there dramatically and that’s been they said about 41% they said about 40%. Yeah. Yeah. So you can imagine how that is weighing on KM as well. So uh they also I guess one one last point here that they gave about KM they did introduce a new kind of premium economy they call premium comfort class and seems to be doing very well but they throwing in another quote here so it’s not me talking it’s them talking quote unquote we were late to this market so they wish they you know maybe moved a little bit earlier on that but they weren’t able to take full advantage in in the second quarter so pretty clear about Air France and KM Gordon can I move on of Transavia. I actually remember J KM launching premium comfort. I was on the very first flight. Oh, cool. September September 1st, 2022, I want to say. Okay. Off the off the top of my head. And yeah, they admitted at the time this was a product that they should have introduced a long time ago, but as we’re recording here today to on August 5th, I’ve still got my head in July. I don’t know why this summer was going so quickly. Uh Korean Air just announced separately that they are finally rolling out their premium economy on a select number of around 11 uh Boeing trip 7s from midepptember. So never too late to join the the premium economy party. That’s the message from my side. Yeah. About time for Korean. Wow. They must have seen their their friends over their sky team friends over at KM and Air France say we got to do this too. Indeed. Uh okay. I didn’t get to say in French why Air France’s Q2 was so good. and you had a very very slick segue with uh KLM so I didn’t get to jump in there but how is this for Transvia because Transavia as you know will be Transvia France and Transavia Holland here’s a bit of Dutch just to make sure that we’re making everyone feel uh nice and international here today varum vasal vanavia Holland [Music] uh that is that that was me asking why was the second quarter for Transavia Holland uh so bad. Okay. Well, I’m going to do this in English, but uh so so for for one, they had a strike in France or Transavia has two kind of uh double identities. Let’s say they have a a French Transavia and a Dutch Transavia. The French one got hit by uh some strikes. Um both of those airlines were hit by heavy competition on Spanish routes. Um those are big leisure routes particularly, you know, think about Sec Quarter. a lot of uh a lot of uh you know leisure travelers in that quarter. A lot of leisure travel. Um Transavia Dutch, they were subject to the uh airport jarges that I mentioned in Amsterdam, the the hike there, the big hike. They even said that people um from and I was kind of looking at the map and it kind of makes sense for probably the people in southern Netherlands like Einhovven, they’re driving over to or take maybe taking the train over to Dusseldorf or Brussels. You can do that. It’s not that that far. So they’re losing traffic because of the increased charges at Amsterdam airport and you can see trans you know the Air France KM Transavia manage management kind of you know they’re trying to send a message to the government to the airport like hey look you gota you know be careful don’t don’t kill the golden goose here don’t uh drive away you know this uh our air traffic which is very important to the economy. Um so they made that point and then finally Trans Salvia they are um they are pretty exposed to the Middle East. So if you think about routes like the Lebanon, Israel, some other routes in that area and because of the you know geopolitical unrest and things like that um that was uh that that did take a toll on on Transavia. So uh as I mentioned their their their margins are very weak in the second quarter. There’s one thing I I should mention about Transavia. I think it’s an important point to make is that Air France took a lot of their kind of short hall traffic, domestic traffic, short hall, you know, within Europe. Um, that was losing money and they kind of pushed it over to Transavia at Orley airport. Basically everything that Air France flew at Orley airport, that’s the secondary Parisian airport. Um, they push it over to Transavia. So some of that stuff is going to be a little bit lossmaking perhaps, but in the kind of in the strategic thinking of of management, better to have it lose less at Transavia, which has lower cost, than to have it lose more at at Air France. So um you know, maybe forgive a couple points of margin for that. Uh so I think we we covered pretty much the uh all three uh of the uh the the subgroups there, the sub airlines. Um, but there is one airline that’s in the group now that’s uh not quite fully in the group, but uh a new arrival, Jay. What’s that? A new arrival. A new arrival. Yeah, a new arrival. And that would be SAS in Scandinavia. Absolutely. Yep. And they uh they they own 20% but they’re they’re moving up to uh to more like 60%. So they’re going to have full control before long. And so that uh is a clear indication that um the integration and the uh consolidation has has gone pretty well to date otherwise they wouldn’t have um have made that decision to to to control. So things are probably going pretty well. Um now with SAS the the very big key for them um is joining that transatlantic joint venture with Delta Air France. Sorry Delta Air France with Delta and Virgin Atlantic. if they can get into that uh Air France KM is willing to or so they say willing to commit to more wide bodies for SAS that will open up more opportunities for them to fly long haul for Copenhogen. So I thought that was that was interesting. Final thing I’ll say uh about SAS uh they are clearly and I say they I mean Air France Kalin management is clearly starting to use Copenhogen and SAS a as leverage against Amsterdam in particular but even even France and Paris I would say basically you know putting up the the threat hey look if if you’re going to you know increase Skipple’s fees by you know more than 40% we’re going to have to consider Copenhogen as an alternative uh place of growth. So, bit of the old Oolir playbook, the old Olyri playbook and even the IG does that to to a very uh you know very aggressively uh whereas they’ll say you know hey Voiling you’re not uh your costs are not uh not not down where we like them. will give these uh these max jets to tolling or I’m just using that example, but um the you you could see how you can when you have these kind of European multiple multiple airline groups, you could sort of play them off one another and you could sort of use them as leverage against the government. So, um they literally I mean they were they were pretty they weren’t too subtle about it either. Okay, I have the quote is a little bit uh uh awkward here, but uh it’s it says we do have Copenhagen as an alternative. Ideally, we would have organic growth uh out of SAS, but we could move some capex or slow down some capex at Air France or KM to allocate to SAS. So, you can see they’re not even like being shy or uh you know, subtle about it. Yeah. No, that’s that’s pretty explicit, Jay. And we should say if anyone missed it uh we did have an interview with the SAS CEO Anchor Vanderbuff uh in the last I think it was two issues ago of Alan Weekly. So go have a look through the archives there alongweekly.com uh and get more detail. Yeah, definitely check that out because the some of these things we mentioned look at the JV yeah Gordon and uh I go talk about that. So yeah, that’s uh check that out. Lots of additional nuance and background. Uh thank you for that Jay. Uh enjoyed our tour across continental Europe. We are sticking with the international theme this week. We’re going to be discussing Latam in part two. But before that, a quick reminder to send any questions or comments that you might have for us to podcasts.com. That’s podcast with an s at the end. And please don’t forget to follow or subscribe to the podcast wherever you’re listening or watching. And if you are enjoying the show, please rate us five stars or leave us a positive review so we can continue to spread the word about the Airline Weekly Lounge. Don’t go anywhere. We’ll be right back. Hello and welcome back to the Airline Weekly Lounge. I’m Gordon Smith joined as usual by co-host Jay Shabet. Part one we’ll be discussing Air France KLM and a few other assorted European tidbits. Part two we are turning our attention to South America Latam Airlines Group to be precise Jay because we’ve had numbers out of them as well. What do our listeners need to know about about LATAM? They they are just doing fantastically well. And if you if you want to um listen to if you’re if you’re in a bad mood and you just you want to you feel like smiling, you know, just listen to the Latam earnings call for Q2. It just it’s just a very happy call. Everything is going well and all is all is well in LATAM land. Uh they they actually produced a 13% operating margin in the uh second quarter and that’s an off peak quarter for them. So um 13% is excellent. Uh they did only 9% in the same quarter last year. So, they’re going to have just a really really good year. Um, if they’re, you know, if they come in even at the lower end of their operating margin guidance, um, it’s they’re probably going to be one of the most profitable airlines in the world this year. Um, and why is that? Well, some of you at this point have already uh gotten to read our feature story um which kind of goes in depth uh from from the airline weekly issue this week that goes in depth explaining what exactly is going on, what’s what’s kind of driving this uh this very hap these happy circumstances. But it’s just to be very brief. Uh their cost structure is basically the same now. in non-fuel cost basically the same now as it was in 2019 before co it’s almost as if co you know never happened or as if the all the inflation postco never happened um and you can see we you know in in our feature story this week there’s some numbers comparing them to you know I think did we did we compare them to delta I think um just a dramatic difference in in inflation has basically experienced no inflation really in the past six years so that’s been super super helpful how have they been able to achieve that? Well, they went through a very uh thorough restructuring in bankruptcy and they did it at a very very good time when they were able to lock in very very low rates for aircraft leases. So, they are paying well well below market on a big portion of their fleet and a lot of those that that cost advantage is going to be locked in for the really through the end of the decade more or less. So, they’re they’re in a very very nice situation. Now, as far as revenues go, um unit revenues, they’ve been they’ve increased significantly. So, you had your costs um remain flat, but unit revenues went way up. So, it’s just a much stronger airline now than it was. Um why are the unit revenues up? I if if I said that word that starts with a P again. Well, that will well that well that uh I I every time I uh it seems seems to be universal every time I talk about any airline, but the the premium segment has really been ding ding ding that there it is. Yep. The uh it’s just been great for everybody and Lam sure enough has has said, “Yeah, our premium is just, you know, it’s it’s what what do we call it? The rock of Jibralter. Is that what we call it here at Airline Weekly? The uh the premium premium demand has just been rock solid for for airlines.” Uh really without without the crazy monkeys. Yeah, without the crazy monkeys. Yeah, they’re uh yeah, that’s I don’t know some some of the US lowcost carriers have seen those crazy monkeys uh in some other uh as a metaphor for some of their uh you know their troubles. But um but no, a lot of time doing doing really really well. And um they uh are doing so well in fact that they look at their bookings, they look at, you know, what they foresee coming down the pike and they’re like, “You know what? We want more planes. We want to grow even more than we’re growing.” They grew 8% last year. They’re growing by double digits, I think, this for the full year. Um they want to grow even more than that. They want, you know, give us more planes. We’re we’re hungry. We want we want to add more. So you can see it’s uh very very bullish. and Jay, you know, just taking a few highlights from the the feature story in the in the most recent issue of Airline Weekly. Uh, measured by ASK capacity, Lat’s passenger business is 1717% larger today than it was in 2019. Leby costs have increased just 4%. What would you say to a listener saying, “Of course, they’re going to do well. They’ve basically got a monopoly on anything vaguely approaching a legacy carrier out of not just Brazil, not just out of Chile, but out of the best part of South America. This is a license to print money. Yeah, I I probably wouldn’t go that far, but I would I would particularly on the you know, it is they they do compete with uh European Airlines and European routes and US airlines on routes to the United States. So, um it’s not like they don’t have any competition, but your point is very well taken that South America as a whole is a very very consolidated uh airline industry with very very few competitors. Uh so yes, if you’re in Chile, uh you know, maybe if you’re going up to Peru or something or flying domestically, you have a few lowcost options. Um but but you’re right, Latam dominates most of the Latin American, South American markets that they serve. And then of course, Brazil is the big giant market in South America. And there’s really only three players in the Brazilian market. Laten being one of them. Um, that’s uh, you know, pretty big market for just three airlines. Uh, it’s, I don’t know, is it the fifth or sixth biggest domestic market in the world? I mean, something like that. The population is huge. Um, and we might even be playing a game of further subtraction here. We might be going from three to two, right? Oh, yeah. You know, in terms of Azul and Gal, Azul and Gal might be merging. Those are the only two two that that compete with Latam essentially in in Brazil. um and they are very closely affiliated or goal is very closely affiliated with Avianca. So we may arrive at a point where there’s essentially two major airlines in all of South America. you’d have that kind of Aviana go uh Azul Group and then Latam and then on the margins you know Aerinus Argentinis competing on a few routes here and there maybe you know Jet Smart a lowcost carrier things like that but you uh yeah it’s it’s it’s it might be like an entire continent duopolized fascinating stuff Jay and uh you know you did touch this in the feature story just last week would de relaunch another airline in in Argentina well I mean you know It’s uh I think they probably have many scars, many bad memories, maybe too many to ever want to step its foot into that, you know, Viper’s Den again. But uh you know it’s at some point it sounds like as I talked about before they have plenty of expansion opportunities with the hubs that they already have with the airline operating certificates they already have. But you know there’s got to be some you know back in the recesses of their mind uh some area thinking that you know maybe one day if Argentina you know Argentina market is is doing pretty well like I think I think tourism is doing pretty well there. um there have been some, you know, some economic stability. So, it may, you know, it may have crossed their mind, but I I wouldn’t I wouldn’t bet on it. The the scars may be too the scars run too deep. Perhaps maybe an opportunity for IJ to get down there and uh open up a new uh IJ is not going to Argentina. That’s not Oh, okay. That’s a Is that an AK? We’re we’re gonna send We’re going to send uh International Airlines Gordon Group down there. Oh. Oh. Well, I’m I’m up for the challenge. GG. I’ve been called worse. Uh thank you for that, Jay. That is uh a comprehensive insight. And I I wouldn’t do that to you, Gord. I wouldn’t I would I wouldn’t send you down to Argentina to start an cruel. Uh never say another. Maybe Brazil. There might be some opportunities there. If there’s just two airlines, you would think that that would open up some windows. Now, Brazil is a very difficult market for startups. There’s all sorts of cost issues. There’s a lot of very heavily regulated market. There’s all sorts of legal ramifications, legal exposure, uh, etc., etc. So, um I’m not sure I’d be doing you any favors to send the International Gordon Group down there, but um it is probably a you know there there are there are going to be opportunities there. For sure. Yeah. I think I need to sharpen up my Portuguese as well before I uh down in Lisbon. You’re already uh you’re uh already kind of in preparation mode there exposed to the language. Uh thank you for that, Jay. uh a sort of bit of a global whistle stop tour. Was that a sincere? Thank you. I don’t think so. I I’ll let our listeners decide. You can uh you can rewind go back 5 seconds and uh try and decipher if that was sincere or not. Um a quick reminder that as an airline weekly subscriber, you get access to all the airline news on skiff.com, plus researchers, airline reports. And that’s not all. If you are an airline weekly subscriber, you get to join us in person in Fort Worth in Texas. December 3rd, uh, we’re bringing back the skiff aviation forum for 2025. Go to live.skift.com for all the details. Uh, and if you are in the mood to come and join us in person, uh, we’ve also got New York, the Skiff global forum. That’s midepptember in New York City. From an airlines perspective, already confirmed, Tony Douglas from Riad Air and Tony Fernandez as well of Capitalway/airasia fame. Live dossgift.com for all the details, the tickets and the agenda uh, there. Um, but I think that’s all we’ve got time for this week. Um, thanks to Jay for joining me and thanks also to our producers Monica and Will. Wherever you are in the world, thanks for listening and we’ll catch you next time. Bye for now. [Music] Whether you’re listening to us on Spotify, Apple, or wherever you get your podcasts, please make sure to subscribe, rate us five stars, or leave us a positive review. This really helps us get the word out about the airline weekly launch so we can continue to bring you this podcast every week absolutely free of charge. And if you’re watching us on YouTube, make sure to subscribe to the Skiff channel and hit the notification bell to find out whenever a new video drops.
In part one, Gordon and Jay unpack the latest financials from the Air France-KLM Group and explore a mixed set of results. In part two, the discussion turns to a superstar performance from South America’s Latam Airlines Group.
Connect with Airline Weekly
LinkedIn: https://www.linkedin.com/company/airline-weekly/
X: https://x.com/Airline_Weekly/
Facebook: https://www.facebook.com/airlineweekly/
Instagram: https://www.instagram.com/skiftnews/
WhatsApp: https://whatsapp.com/channel/0029VaAL375LikgIXmNPYQ0L/
Subscribe to @SkiftNews (https://www.youtube.com/@SkiftNews) and never miss an update from the airline and travel industries.