Air France-KLM, British Airways to lift capacity despite outlook

Air France-KLM and British Airways owner IAG SA unveiled plans to lift passenger capacity close to pre-Covid levels, despite widespread concerns regarding the impact of higher living costs on demand.

Available seating at London-based IAG is expected to reach around 95% of the 2019 figure in the first quarter of 2023, while its Franco-Dutch rival is targeting 90%, according to statements Friday.

IAG Chief Executive Officer Luis Gallego said that the recovery continues to be spurred by a pent-up desire for vacations and visits to friends and family following the coronavirus crisis.

The capacity hikes represent a gamble on leisure bookings remaining strong in an increasingly challenging economic environment, with consumer spending pinched by rising inflation and a jump in energy costs. Business travel, vital to network carriers like BA and Air France, is returning more slowly, Gallego said.

Investors appeared less confident in the outlook for the firms, with shares of Air France-KLM trading 7.9% lower as of 10:22 a.m. in Paris and IAG priced down 1.3%.

Deutsche Lufthansa AG, the region’s other main full-service carrier, on Thursday also predicted that the desire to travel will remain strong. The stock traded little changed Friday.

IAG, which also owns Iberia of Spain, Ireland’s Aer Lingus and discount specialist Vueling, will lift capacity from 87% of 2019 levels during the current quarter, and Air France-KLM from 85%.

Airport Hurdles

Other brakes on growth remain, with Gallego saying that British Airways, hamstrung by labor shortages at London Heathrow airport, will lift first-quarter capacity to about 90% of normal levels, lower than at some other units.

His Air France-KLM counterpart Ben Smith said that issues remain at KLM’s Amsterdam Schiphol hub, which has capped capacity, though there have been “significant” operational improvements elsewhere.

IAG reported an operating profit of €1.21 billion for the quarter through September on the back of a bumper holiday season, confirming guidance issued on Oct. 13 that far exceeded analyst estimates at the time. It predicted a full year-operating profit of €1.1 billion, before exceptional items.

Air France-KLM reported third-quarter net income of €460 million and said the full-year operating result will be above €900 million, aided by booming North American bookings fueled by the strong dollar.

The group has said it wants to reimburse three quarters of the state aid that helped it survive the pandemic as soon as possible.

The group had €12.3 billion of liquidity and credit lines as of Sept. 30, with a €1 billion reimbursement planned next month followed by a possible hybrid bond issue of as much as €1.2 billion, depending on market conditions.

Still, Stifel analyst Johannes Braun said in a note that Air France-KLM’s balance sheet remains uncomfortable “in light of next year’s deteriorating market fundamentals.”