Air France, IAG caution on capacity growth as peak travel looms

Air France-KLM and IAG SA cautioned that some capacity growth may slow this year as geopolitical tensions deter the flying public and corporate travel remains below pre-pandemic levels, suggesting an uneven recovery as the European aviation industry heads into the busiest season of the year.

Shares of Air France-KLM fell as much as 9.9% in Paris, their biggest intraday drop since mid November, after the Franco-Dutch group reported earnings. IAG, the owner of British Airways and Iberia, also dipped shortly after the open, before recouping losses in mid-morning trading and gaining as much as 1.2%. Deutsche Lufthansa AG, which reports earnings next week, also declined. 

Air France-KLM has been particularly hard hit by the fallout from conflicts in the Middle East and parts of Africa. The company said traffic to Egypt and Jordan on its Transavia budget airline had “dried up,” while avoiding some flight paths over western Africa is driving up the fuel bill. IAG, which also reported earnings on Thursday, said trans-Atlantic travel in the last few months was hurt by the Israel-Hamas conflict, and that capacity to the crucial US market won’t grow as much this year.

For 2024, Air France-KLM predicted capacity growth of about 5%, while IAG is targeting 7%. The Franco-Dutch airline group fell short of its goal for that metric last year by reaching 93% of 2019 capacity, compared with its guidance of about 95%. The company’s target for 2024 is also lower than estimates by Deutsche Bank AG, which expected 11% growth for this year. 

While traffic has come back from the pandemic in the past few years, particularly with a boom in more expensive leisure travel, airlines have had to grapple with new challenges like circumnavigating conflict zones and a slower-than-expected rebound in corporate travel. Some airlines have also had to contend with longer maintenance cycles of their aircraft amid a shortage in parts and slower deliveries of new models as Airbus SA and Boeing Co. struggle to produce their bestselling models at a faster pace. 

At IAG, profit after tax jumped to €504 million ($546 million) from €232 million a year earlier, on revenue of €7.2 billion, it said Thursday. The company said it’s confident of generating “significant” free cash flow this year, though it won’t return to paying a dividend for the time being.

Conversely, Air France-KLM surprised investors with a net loss of €256 million in the final quarter after positing a profit in the year-earlier period. The company said business was affected by travelers avoiding countries close to Israel, as well as fewer flights to conflict-prone countries in Africa like Mali, Burkina Faso and Niger. 

Air France-KLM said it encountered about €70 million in what it called disruption costs, as well as €65 million tied to geopolitical issues and another €30 million linked to an employee share plan. Unit costs will rise 4% in the first quarter amid a “continuation of high disruption cost” and one-time salary payments, before settling down to a range of 1% to 2% for the year, Air France-KLM said.

Still, making sure that seats are available remains more complicated than selling tickets, the company said. Staff disruption on the engineering and maintenance side also is still impacting operations.