Here’s your captain: Despite turbulent times, Air France-KLM is healthy

The presentation of Air France-KLM’s annual figures continues quietly on Thursday. The group achieved more turnover than ever in its twenty-year history and its profits are also a record. The company carried more than 93 million passengers in 2023, almost as many as before the pandemic.

And even for the loss-making Transavia France, chairman Ben Smith has reassuring words. He is his hypocritical self as he goes through the results.

But as soon as Smith is asked about Schiphol, the Canadian almost stumbles over the fierce words. He calls the shrinkage, postponed but not adjusted, “unheard of.” He finds the Dutch cabinet’s plan “extremely shocking.” “A big disappointment, while we contribute a lot to the Dutch economy.”

KLM is in the “most difficult circumstances to work in, when an airport is against you”. Schiphol itself is also in favor of downsizing, including at night, to reduce the nuisance to the surrounding area. “Usually an airport wants more traffic, not less.” KLM is “unjustly attacked, day in and day out”.

Smith’s fierce response reflects Air France-KLM’s concerns about the position of its Dutch airline at Schiphol’s home port. Air France-KLM’s results may be better than ever in total, but KLM suffered from setbacks at an operational level in the last months of 2023. For example, there is a shortage of mechanics and there are not enough pilots to fly some aircraft.

All ongoing lawsuits surrounding Schiphol – in the Netherlands and in Europe – do not make the situation any more certain for KLM. Air France-KLM is by far the largest user of Amsterdam airport.

Six conclusions based on the results of Air France-KLM.

1 People still want to fly en masse. The supply of tickets is limited due to operational problems, which results in higher ticket prices. But people seem willing to pay it.

With fewer passengers than in 2019, Air France-KLM achieved higher turnover than ever in 2023. Thanks to more expensive tickets, turnover rose to 30 billion euros. That is a record for the group. The profit was 934 million (2022: 206 million), also a record.

Competitor International Airlines Group (IAG), parent company of British Airways and Iberia, among others, also reported financial records on Wednesday. There, turnover increased by about 28 percent to 29.5 billion euros. IAG made a profit of 2.7 billion euros.

Budget airlines Ryanair and easyJet have previously reported good results. Lufthansa will announce annual figures next week. Aviation also expects a high demand for tickets for the coming summer. Particularly from holidaymakers. Business travelers are not yet fully back after the Covid-19 crisis.

Air traffic to some destinations has also not yet recovered from the pandemic. Air France-KLM, for example, still flies half the number of flights to China in 2019. This is mainly because Chinese tourists travel to Europe much less than before the pandemic. The capacity for the whole of Asia is still only 77 percent. On the other hand, Air France-KLM flies to the US at a capacity of 114 percent compared to 2019.

According to Air France-KLM financial director Steven Zaat, this explains his company’s lower turnover compared to IAG. The Spanish-British group mainly concentrates on destinations in North America and Latin America and is less affected by the situation in Asia.

2 Budget airlines such as Ryanair and easyJet have recovered faster from the corona crisis than ‘traditional’ airlines such as Air France-KLM, British Airways and Lufthansa. This is partly due to geopolitical problems.

Passengers certainly want to fly again – and that is the basis for the positive results of Air France-KLM and IAG – but not at any price. It explains the success of Ryanair and esayJet.

Budget airlines recovered faster than traditional airlines from all travel restrictions during the corona crisis. During the corona pandemic, they grounded their aircraft and laid off many staff; afterward they kept costs low. If you compare the number of flights by Ryanair in 2022 and 2023, for example, you will see that the Irish price fighter already operated 21 percent more flights last year than in 2019.

Furthermore, the budget airlines that fly within Europe are less affected by the geopolitical problems that KLM, for example, has. Lucrative routes to Asia now generate less money, Air France-KLM reiterated during Thursday’s presentation, because flying over Russia is not allowed. KLM sometimes has to take four pilots instead of three because the detour routes are considerably longer.

Air France, a major operator to and from Africa, suffered a lot from unrest in West Africa in 2023. After the coup in Niger in July, it was no longer possible to fly into (and over) the country. And budget subsidiary Transavia canceled many flights to popular holiday destinations in Egypt and Jordan last fall due to the conflict in Gaza.

Transavia suffered an operating loss of 97 million euros last year. According to CEO Smith, this is due to the renewed French branch of Transavia. Smith: “Transavia Netherlands is making a profit and is doing very well.”

3 KLM, the best-performing part of the group for years, is losing ground to Air France. The fourth quarter was very bad for KLM.

The old rivalry between Air France and KLM is no longer there, Ben Smith said on Thursday. “We are an international company that operates all over the world. I am not French, I am not Dutch,” said the Canadian. “And take SAS – not French and not Dutch.” Last year, Air France-KLM took a 19.9 percent share in the Scandinavian airline SAS.

Anyone who compares the results of Air France and KLM will see that the Dutch airline is losing ground in the group. Air France and KLM both recorded approximately 13 percent more turnover (Air France: 13.7 percent, KLM: 12.8 percent). The French still provide more than 60 percent of the turnover, the Dutch for roughly 40 percent.

But Air France’s share of gross profit (before interest, taxes, depreciation and other charges) rose significantly last year. Air France achieved a result of 2.66 billion euros; that is 63 percent of the total gross profit, compared to 54 percent in 2022. KLM contributed a gross profit of 1.57 billion (a share of 37 percent; that was still 47 percent in 2022).

KLM suffered a very bad fourth quarter of 2023. “Operational problems,” according to the company. KLM had to cancel flights due to limited runway capacity at Schiphol as a result of the stormy weather and reduced deployability of the fleet.

Marjan Rintel, CEO of KLM, stated on Thursday that the problems were partly caused by a faltering supply chain. KLM’s maintenance branch often has to wait a long time for a few final parts before an aircraft can be sent back into the air.

Furthermore, KLM is “trying to catch up” when hiring technicians and pilots, according to Rintel. The Dutch Association of Aviation Technicians (NVLT) has been warning for some time that there is a threat of a staff shortage at KLM’s maintenance branch. Many experienced technicians, who are allowed to certify a repair, retire. KLM has recently started having maintenance work carried out in the UK and Belgium.

4 Air France-KLM now seems financially healthy, but the company had to pull out all the stops to achieve this. For example, the company sold its Flying Blue program to a venture investor.

The French-Dutch group ended 2023 with a net debt of 5 billion euros. That is 1.3 billion lower than a year earlier. The group has a net debt/gross profit ratio of 1.2. That was 1.8 last year. Below 3 is considered financially healthy. Competitor IAG (British Airways, Iberia) reported a ratio of 1.7 on Thursday (2022: 3.1).

Air France-KLM has managed to reduce its debt with all kinds of financial instruments. For example, the company introduced sustainability-oriented bonds a year ago. If the group achieves a number of ‘green goals’, such as lower CO₂emissions, it will receive more favorable conditions for a loan of 1 billion euros. The group made no announcements about this financing on Thursday.

Furthermore, Air France-KLM partly sold its loyalty program for loyal customers, Flying Blue, to investment company Apollo. This will generate an estimated 1.5 billion. Apollo now participates in the company that operates the Flying Blue savings program for Air France-KLM, in the long term customers of Transavia and SAS should also be able to participate.

KLM still has to pay back 1.3 billion euros to the Dutch tax authorities. Like other companies in the Netherlands, the company received a tax deferral during the pandemic.

5 Consolidation in the fragmented European aviation sector is not making progress. The European Commission opposes takeovers of ITA, Air Europa and possibly also SAS.

Chairman Ben Smith had little news to report on Thursday about mergers and acquisitions in European aviation. Last year, Air France-KLM took a stake of almost 20 percent in SAS for 145 million euros. But he did not want to say what plans Smith has for that company. SAS must sooner come out of suspension of payments completely. That will probably be this spring.

Nor was Smith able to report any news about his interest in TAP. Air France-KLM would like to incorporate the small Portuguese company – and the Portuguese government wants to sell part of its share package – but more clarity will probably only come after the Portuguese elections at the end of March. TAP is strong on routes to the growth market Brazil.

The takeover of the Spanish airline Air Europa by IAG is also stagnating. Brussels also wants more research there. Ben Smith understands that, he said on Thursday. “With Air Europa, IAG, also owner of Iberia, gets… [de Spaanse budgetmaatschappij] Vueling has a very strong position at Madrid airport. We are concerned about that.”

No news about mergers and acquisitions may be good news for European passengers. Travel agencies, tour operators and airports have long expressed concerns about the rising concentration in European aviation. If the takeovers of SAS, ITA, Air Europa and TAP go through, the five major airlines in Europe (Lufthansa, IAG, Air France-KLM, Ryanair and easyJet) will control almost three-quarters of the market. Twenty years ago their combined share was less than 50 percent. The travel sector fears that competition on thousands of flight routes will be severely limited.

6 These remain uncertain times for Air France-KLM, especially at Schiphol. In the first two months, the group experienced “high disruption costs”, due to bad weather. But all legal procedures in the Netherlands also cause uncertainty.

A large number of procedures make the situation at Schiphol a legal quagmire.

The Supreme Court is expected to rule this spring in the case of KLM and other airlines and organizations against the government’s plans for Schiphol. Furthermore, the European Commission must issue advice on the European procedure that the Netherlands must follow for shrinkage at airports to limit noise pollution.

In addition, the Right to Protection Foundation’s lawsuit against Aircraft Nuisance is ongoing. Residents living near Schiphol demand that the Dutch state better protect them against noise.

The fourth case concerns corona support for KLM. The Commission has approved this state aid, but the European court has already reprimanded the Commission twice. It is unclear how this will proceed, Ben Smith said on Thursday.

The fifth procedure concerns the working conditions of KLM staff and service companies that work on the Schiphol platform. They should be better protected against (carcinogenic) emissions from kerosene and diesel engines, according to the Labor Inspectorate. If KLM is held responsible for serious employee illness, this could have major consequences.

And finally, there is a threat of a lawsuit against the issuance of the nature permit to Schiphol. If this case eventually leads to fewer flights at Amsterdam airport, it will directly affect KLM.

In the meantime, Ben Smith said during Thursday’s presentation, the group is looking at other airports outside the Netherlands. Transavia has been flying from Brussels more often this summer.

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