Air France-KLM Sees Strength in Amsterdam, Paris Hubs During Recovery

Air France-KLM is optimistic about the strength of its dual Amsterdam and Paris hubs in the coronavirus pandemic recovery, betting that they will be strong performers as flyers begin to come back in significant numbers.

During the Paris-based group's fourth-quarter earnings call on Thursday, CEO Benjamin Smith described Amsterdam Schiphol as the "best connecting" hub in Europe, and Paris — including Charles de Gaulle and Orly airports — as the continent's largest origin-and-destination market, particularly for the leisure flyers leading the recovery. This combo should bode well for Air France-KLM as it navigates out of the Covid-19 crisis, he added.

"We are well-positioned as a group," said Smith. In addition to the benefits of its pre-Covid route map, he cited fleet simplification and other efficiencies achieved during the crisis as tailwinds in the recovery.

Many expect large hubs to benefit in the recovery as airlines pull back to their core. At the same time, leisure flyers continue to return ahead of their business counterparts benefitting airlines with more service to destinations popular with vacationers.

However, Air France-KLM is not out of the woods despite Smith's comments. The airline reported a net loss of nearly $8.6 billion (€7.08 billion) in 2020. This included a $1.2 billion net loss in the fourth quarter alone that is expected to deepen in the first quarter amid new travel restrictions in Europe.

In 2020, the airline's revenues decreased 59 percent to $13.4 billion during the year. Cargo was the only bright spot with revenues jumping 22 percent to $2.7 billion. Group passenger traffic fell 69 percent on a nearly 43 percent reduction in capacity.

“The situation is still extremely uncertain," group Chief Financial Officer Frédérick Gagey said during the presentation. In the first quarter, Air France-KLM plans to fly roughly 40 percent of the capacity it flew during the same period in 2019 — this represents a decrease from the nearly 46 percent it flew in the final quarter of 2020.

The airline is betting traffic will pick up by the summer as vaccination programs accelerate, said Gagey.

Air France-KLM maintains an outlook that it will return to 2019 capacity levels by 2024. This aligns with other recovery forecasts, including that of the International Air Transport Association (IATA).

The group made significant strides on the cost cutting program it launched in late 2019. Air France-KLM is on track to trim annual expenses by $1.9 billion by the end of the year, with a further $483 million in savings forecast in 2022. In addition, it aims to cut full-time equivalent employees by 14,500 by the end of next year.

Fleet simplification is driving a significant amount of savings. The group removed all of its Airbus A340s and A380s, and passenger Boeing 747s from operation in 2020. However, one A340, nine A380s and two 747-400s remained on its books at the end of the year. The group also continues to fly four 747-400 freighters.

"Basically all the aircraft with four engines have now left the group fleet," said Gagey. Air France-KLM's remaining widebody fleet consists of Airbus A330s and A350s, and Boeing 777s and 787s.

And in addition to retiring four-engine jets, the group continues to move towards consolidating its Airbus widebodies at Air France and Boeing widebodies at KLM. The 13 A330s at KLM are slated for removal, though executives have not provided a timeline.

Relief talks with with the Dutch and French governments continue for Air France-KLM. The group hopes to convert some of the state aid that it received in the form of debt to equity to reduce the burden on its balance sheet, said Gagey. Other European competitors, including Lufthansa Group and SAS, received aid packages that included some combination of cash, debt and equity.

"It's clear that this situation has to be corrected, corrected — modified," said Gagey.