Airlines caution Israel-Hamas war clouds travel outlook

Two of Europe’s biggest airline groups cautioned that the war between Israel and Hamas is clouding the outlook for travel in the Middle East, as customers start to avoid nearby destinations. 

British Airways parent IAG SA and Air France-KLM each reported record third-quarter operating profit on Friday, driven by booming summer demand, especially between Europe and North America. 

But the chief executive officers of both carriers signaled a careful stance going forward. While most airlines have halted flights to Israel — a small part of most major carriers’ revenue — some travelers are also staying away from nearby countries like Egypt and Oman.

“We are seeing some slight reduction in demand to some of the other destinations we serve around Israel,” Chief Executive Officer Ben Smith said on a conference call after reporting results that missed analysts’ estimates. The company said it hasn’t yet seen any material impact from the war.

IAG CEO Luis Gallego said the group, which also includes Aer Lingus and Iberia, would maintain its fourth-quarter forecast as it monitors developments. The company is seeing “limited revenue impact” on flights to Egypt and Oman.

“We’re very mindful of the geopolitical and macroeconomic uncertainty, in particular the events happening in the Middle East,” Gallego said on an earnings call.  

Shares of Air France-KLM fell as much as 9.4% to record intraday lows, recovering most of the drop to trade 0.6% lower as of 11:04 a.m. in Paris. IAG was down 0.7% after falling as much as 3.8% in London.

Deutsche Lufthansa AG, which reports quarterly results next week, slipped 0.9% in Frankfurt.

Airlines have benefited from a bumper summer as travel got close to pre-Covid levels and the last remaining travel restrictions were lifted. It’s allowed companies like IAG and Air France-KLM to mend balance sheets damaged during the pandemic and set their sights on consolidation.  

But the rest of the year looks more challenging, with cost of living pressures in key markets, higher interest rates and growing geopolitical difficulties, as the Israel-Gaza conflict adds to the continued closure of airspace over Ukraine.

“The potential for consumers to pull back on spending — after a softening in yield trends, conflict in the Middle East and higher fuel costs — add to the threat of a more difficult environment going into next year,” Bloomberg Intelligence analyst Conroy Gaynor said in a report.

Virgin Atlantic, IAG

The comments from Air France-KLM and IAG echo earlier warnings from the heads of Virgin Atlantic Airways Ltd and United Airlines Holdings Inc. The French hotelier Accor SA also said it’s seeing a “very small” volume of hotel booking cancellations in the Middle East.

Following attacks by Hamas earlier this month, concerns are now growing that Israel’s planned ground invasion of the Gaza Strip will trigger a wider conflict. 

“People are not flying into Israel and they’re not flying also to the area — into Jordan, into Egypt, into other locations,” Virgin Atlantic CEO Shai Weiss said Monday in an interview on Bloomberg TV. 

United said last week that the war would drag on profit this quarter. 

IAG reported an operating profit of €1.75 billion ($1.85 billion) for the period. The company pulled back its capacity target for this year, predicting 96% of pre-Covid levels for 2023, from a prior forecast of 100%.

Chief Financial Officer Nicholas Cadbury said on a call that the airline is “pretty well hedged” on fuel prices into the middle of next year but is monitoring further potential impact.

Air France-KLM reported third-quarter revenue, profit and passenger figures that fell slightly below analysts’ estimates. 

The company has been hit by a spate of regional airport and museum evacuations in France caused by terror alerts. Its Air France unit also canceled flights to three African destinations, in Niger, Mali and Burkina Faso, because of geographical tensions.  

While the results were “broadly in line” with expectations, analysts at Citi said said fourth-quarter bookings at Air France-KLM were lagging 2022 levels. 

(Updates with further analyst, CEO comments from seventh paragraph)

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