A luxury airplane seat – more spacious than economycheaper than business class – made for happy faces at Air France-KLM on Friday. The chair is a new profit maker. In the past, the French-Dutch group had to rely mainly on business travellers, but now the company also earns more from tourists who buy a more expensive ticket to fly more widely, especially intercontinentally.
The success of these ‘Premium Comfort’ seats from KLM and the comparable luxury at Air France (partly) pushed the financial results in 2022 to pre-pandemic levels.
Air France-KLM returned to profit for the first time since the crisis. This was mainly due to the higher fares for airline tickets. The group has not yet been able to restore its entire network after the pandemic. But the results were higher than analysts had expected.
The recovery of Air France-KLM marks the economic situation throughout aviation. EasyJet and Ryanair previously reported strong growth, and the same is expected from IAG (British Airways, Iberia) and Lufthansa in the coming weeks.
In summary, this is the situation: ticket prices remain high, because demand remains high. And the supply, the capacity of airlines and airports, is still limited. However, all this does not always lead to substantial profits, because costs remain high, from kerosene to salaries.
The limited capacity is mainly due to staff shortages that are prevalent everywhere. In addition, the contraction that the cabinet wishes to reduce due to noise nuisance will apply to Schiphol in the long term. “It is incomprehensible that there is no more discussion in the Netherlands about the damage that the proposed contraction will cause to the Dutch economy,” Air France-KLM CEO Ben Smith said on Friday at the presentation of the annual figures. “We think we can also limit our noise in other ways, such as with quieter aircraft.”
Tickets considerably more expensive
For 10 euros to Barcelona? That time is over. Ryanair CEO Michael O’Leary said it last year. And all aviation experts have been saying it ever since. The time of the dirt cheap ticket is over for now. An airline ticket was on average 16 percent more expensive last year than in 2021, according to research agency Eurocontrol in Brussels. In the summer of 2022, a ticket even cost 29 percent more than a year earlier.
“If you compare today’s rates with 2019, the last year before the crisis, they are still 15 percent higher in many cases,” says John Grant, aviation analyst at the British agency OAG. “I don’t see any reason why tickets won’t stay at the current, higher level in 2023 and beyond,” said Grant.
Consumer demand remains quite strong, says analyst Geoff van Klaveren of the British aviation agency IBA. “It is mainly a delayed demand for air travel for holidays and leisure. Business trips are still lagging behind.”
The question is whether business flights will ever return to pre-corona levels. Large Dutch employers, united in the Coalitie Anders Reizen, reported in early February that in 2025 they will reduce the CO2emissions from business air travel reduced by 25 percent compared to 2019. They have agreed to only fly for distances above 700 kilometers.
It is very different for tourists. People still like to go on holiday by plane, despite inflation and geopolitical unrest, says Petra Kok of TUI, the largest tour operator in the Netherlands. “The travel sums are higher because the costs are higher for, among other things, kerosene and Schiphol’s aviation tax. Local suppliers, such as hotels, also pass on cost increases.”
Flights to distant destinations are therefore more expensive than before, says Kok. But that doesn’t stop travelers from booking. Aruba, Bonaire and Curaçao are popular.”
You see a similar picture at tour operator Sunweb. “Due to rising costs, holidays are 20 to 30 percent more expensive this year than in 2022,” says Martine Langerak of Sunweb. “We see that the Dutch do not go on holiday less because of this.” For example, holidaymakers booked 41 percent more trips to the winter sun (Canary Islands, Egypt) with Sunweb than last year.
The unexpectedly rapid return of passengers on board in 2022 put aviation to the organizational test in 2022, write market analysts from ING Research. Air traffic to and from European airports was back at 87 percent of the pre-pandemic level (2019) in January 2023, according to ING.
At Schiphol, the number of travelers and flights in 2022 was 73 percent of the number of passengers and 80 percent of the number of flights in 2019, the airport said on Friday. That could have been more if Schiphol had not had to introduce restrictions in 2022 due to operational problems. “A bad chapter in our history books,” said Schiphol CEO Ruud Sondag. The airport suffered a loss of 28 million in 2022; repairing the operational problems cost Schiphol 120 million.
The consequences of the current staff shortage at the airport for the May holiday will only become clear after the weekend. The airport is still discussing final departure restrictions with the airlines.
But not only external companies at Schiphol, such as security firms and handling companies, suffered from staff shortages. That was and is also true for airlines: they have too few pilots, aviation technicians and cabin crew. And the current staff is sometimes so dissatisfied with the working conditions that strikes threaten. For example, easyJet employees want to campaign at Schiphol during the May holiday.
“KLM is currently experiencing shortages in many ground and flying functions,” notes Hugo Lantain of the Association of Dutch Airline Pilots (VNV). “That puts pressure on the operation. We see that many KLM pilots have not yet been trained for the aircraft they are needed for.” According to the VNV, partly due to the pandemic, KLM has not trained and retrained pilots quickly enough to meet the recovered demand for flying.
The shortage of pilots is even greater in North America, says Geoff van Klaveren of IBA. “There, too, airlines do not like to spend time and money on pilot training. Another factor is that companies have taken many older aircraft off the air. For example, British Airways, the largest user of Boeing 747s, discontinued all 31 jumbo jets. Now BA is short of capacity, especially on its intercontinental flights.” KLM also accelerated its retirement of its 747s during the corona crisis.
Shortage of engines and raw materials
Why not order new planes? That is not so fast. Airlines are eager to purchase new aircraft (which are more economical, quieter and cleaner than older models). Last week, Air India announced another mega order divided between Airbus and Boeing. But Airbus and Boeing, the world’s largest aircraft manufacturers, are struggling to ramp up production, partly due to a shortage of engines and raw materials. “That is very frustrating,” said Guillaume Faury, CEO of market leader Airbus, on Thursday when the figures were presented.
The European company, which also makes helicopters, fighter jets and satellites, made a profit of 4.2 billion euros (+1 percent) last year on a turnover of 58.5 billion euros (+11 percent), but that could have been much higher are. Faury: “We had strong headwinds in the supply chain.” Airbus is struggling to gain independence from Russia as a supplier of titanium and aluminum. “That takes more time than we expected,” said Faury.
The war in Ukraine and the sanctions against Russia are still affecting aviation. European airlines cannot take the shortest route to Asia – over Siberia – and have to detour via more southerly routes. “That could limit the number of flights to Asia,” says aviation analyst Van Klaveren (IBA). “The number of alternative routes to Asian destinations is limited. Airlines cannot expand indefinitely to Asia. They will regret that now that China’s Covid-19 restrictions have been lifted and Asia is reopening.”
“Operating costs such as fuel and salaries are all higher now,” says aviation analyst John Grant (OAG). “Airlines will try to cover those costs with higher ticket prices. We can assume that tickets will continue to be higher in 2023 and beyond.”
Kerosene now costs about $114 a barrel, according to the international aviation organization IATA. Three years ago, in February 2019, a barrel of kerosene still cost $75. The peak was June 2022: USD 182 per barrel.
Air France-KLM spent 7.2 billion euros on kerosene last year; in 2021 this was still 2.7 billion euros. Like many other airlines, Air France-KLM has made price agreements with fuel suppliers. At the moment, 50 percent of the fuel for 2023 has already been purchased at a fixed rate.
The war in Ukraine and the sanctions are still affecting the aviation industry
It is unlikely that fuel costs will become much lower, say the experts. And that’s not just because of the war in Ukraine. The price is also related to the European climate measures in the so-called Fit for 55-package. The European Commission wants to tax kerosene, which is currently exempt from tax. That will drive up ticket prices. In addition, the Commission will require airlines to replace a certain percentage of fuel with more sustainable and more expensive fuel (sustainable aviation fuel or SAF).
In addition, aviation will be included in the European emissions trading system EU-ETS: airlines will have to pay for their emissions. Add to that the increased Dutch ticket tax (from 7.95 to 26.43 euros per ticket) and flying will become much more expensive. ABN Amro previously stated that a ticket from Amsterdam to Barcelona will cost roughly 47 euros extra due to all environmental measures.
Read also: Climate neutral flying in 2050, that is the agreement, but how is still unclear
Airlines for Europe, the aviation lobby organization, stated earlier in the Financial Times that flying via European hubs such as Amsterdam, Paris or Frankfurt will become 23 to 29 percent more expensive in 2023. As a result, the number of passengers via EU hubs could fall by 17 percent.
Aviation analyst Geoff van Klaveren (IBA) does not expect rising ticket prices to structurally change the relationships in European aviation. Ryanair remains the largest airline in Europe. “Ryanair has gained a lot of market share during the pandemic. If Ryanair has to raise its prices, so must the other airlines. Ryanair has such low fixed costs that their flights remain attractive to consumers. They still opt for the cheapest tickets.”
A version of this article also appeared in the newspaper of February 18, 2023