Air France-KLM trims capacity outlook amid Olympics impact

Air France-KLM trimmed its full-year capacity outlook amid a bigger-than-expected shortfall from tourists avoiding Paris during the Summer Olympics, with the group initiating a hiring freeze and additional cost cuts.

Group capacity is now expected to rise 4% from last year’s level, compared with a previous estimate of 5%, Air France-KLM said in a statement on Thursday. It also tweaked its 2024 capital-expenditure target to below €3 billion ($3.3 billion) from an already revised April goal of €3 billion.

The second quarter “confirmed an increasingly challenging environment for aviation,” Chief Executive Officer Ben Smith said in the statement.

Passengers avoiding Paris to skirt possible disruptions and high prices during the Olympic Games kicking off Friday is now expected to result in a shortfall of about €200 million, the company said, more than a previous estimate of €160 million to €180 million.

French residents have been postponing holidays until after the Olympics, while international customers are staying away, it said. Citizens also traveled slightly less in June and early July due European elections first and then snap French legislative vote, the company added. 

Air France-KLM’s report adds to a series of gloomy outlooks by international carriers in recent weeks, hurt by a decline in ticket prices, delays in aircraft deliveries and higher costs. Deutsche Lufthansa AG said it will struggle to break even at its namesake airline unit this year, and Ryanair Holdings Plc warned on Monday that yields will be materially lower as travelers cut back on spending during the most important months of travel.

Airlines poured capacity into Paris in the run-up to the Olympic Games, with Air France and its low-budget Transavia airline, as well as Ryanair leading the charge. While it’s typical for corporate travelers to avoid a host city during the Olympics, just 24 hours before the opening ceremony the French capital’s streets and restaurants remain empty as more residents work remotely or have left teh city, while tourists have yet to show up. 

After the Olympics, Air France — which is one of the event sponsors — expects travel to and from Paris to return to normal, with the summer games likely to spark renewed interest in the destination, it said. Japan is among other destinations gaining in popularity this year, thanks to the weak yen, the company said.

Air France-KLM dropped as much as 1.2% in Paris trading, extending this year’s decline to 42%.

Second-quarter operating result slumped 30% to €513 million, lagging consensus estimates, also due to higher fuel cost and lower cargo unit revenue. The company cited higher salary costs following collective labor agreements at Air France and KLM and flight-related expenses due to airport tariff increases at Charles de Gaulle and Schiphol airports.

It said it will continue simplifying operations amid efforts to rein in costs. Air France-KLM plans to slash marketing expenses and lower costs not directly linked to operations, including consultant fees, by 20%. That’s on top of a previously announced support-staff hiring freeze. The company has also started scrutinizing headcount at its headquarters.

The cost from a global IT failure that led to thousands of delayed or canceled flights last week, mostly impacting Dutch carrier KLM and Transavia, should be about €10 million, the company said.