Europe’s airlines defy turmoil as sky-high fares spur profits

AS VACATION-BOUND Europeans suffer airport chaos unleashed by staffing shortages and strikes, the peak travel season is proving to be lucrative for the region’s airlines.

Capacity caps introduced to ease delays and cancellations may have crimped passenger numbers, but they’ve also bolstered fares in a sector where demand was already close to matching supply on many routes.

British Airways parent IAG SA and Air France-KLM on Friday posted positive earnings for the first time since global travel was roiled by the coronavirus crisis, with second-quarter results that beat analyst forecasts.

The airlines are also upbeat about future prospects in light of current booking trends and levels of pent-up demand, even in an environment of spiraling inflation and tighter household spending. Air France-KLM plans to hike capacity close to pre-coronavirus levels in the final three months of 2022 and IAG is predicting higher earnings this current quarter and a positive full-year result.

“We see a very strong yield, and we see demand recovering and load factor increasing,” IAG Chief Executive Officer Luis Gallego said on a media call. While visibility deeper into the year is limited to key dates such as Christmas, “what we see is very strong,” he said.

Shares of Air France-KLM rose as much as 7.2% and were priced 5.6% higher as of 11 a.m. in Paris. IAG advanced 3.3% in early trading in London and was later up 0.1%.

North Atlantic

Premium leisure bookings had almost recovered to 2019 levels by the end of the second quarter and business travel was at 60%, according to IAG. Routes to Latin America have even outstripped the pre-Covid market in recent weeks, while Spanish domestic sales are strong and North Atlantic demand growing.

Fares have been exceptionally strong across all segments, Gallego said. That helped IAG post an operating profit of 287 million euros (US$293 million) for the quarter, even after BA scrapped 13% of its schedule from April through October as it struggles for staff and its London Heathrow hub caps passenger numbers.

Those curbs will limit IAG’s overall capacity to 80% of 2019 levels over the summer and 85% in the fourth quarter, a reduction of 5% for the second half of the year versus previous guidance. Gallego said Heathrow is now performing in line with other hubs and that he expects operations to be much more stable by the end of the year.

BA dismissed 10,000 workers during the coronavirus pandemic. The UK carrier hired 4,000 people this year to help fill the gap, 80% of whom are now in operational roles, according to Gallego. It has also poached KLM’s chief operating officer to help improve operational resilience.

Testing Times

Air France-KLM reported a better-than-expected net income of 324 million euros in the three months through June. The Franco-Dutch carrier has also had to dial back its ambitions for the summer peak, operating 80% to 85% of pre-pandemic flight volumes, a drop from the up to 90% forecast in May.

CEO Ben Smith said the strength of the European travel rebound has put “the entire aviation industry to the test” and that disruption is likely to persist, though the company plans to raise capacity closer to pre-pandemic levels by the end of the year.

Air France-KLM will pay 70 million euros in compensation costs to travelers who lost out. That’s after UK discounter EasyJet Plc said Tuesday it had taken a £133 million charge. IAG didn’t comment on any hit from canceling services. –BLOOMBERG