A year-and-a-half into the crisis, the airline industry still has little clarity on the structural changes expected from the Covid-19 pandemic. But Air France-KLM has found one: A permanent reduction in domestic French flying.
“We’re never going to go back — we’re not going to go back to the [pre-crisis] levels,” Air France-KLM Chief Financial Officer Steven Zaat said on domestic France capacity during the group’s second-quarter earnings call on Friday. At this point, the airline forecasts a recovery to 85 percent of 2019 capacity during the peak summer month of July before tapering to just 28 percent in September. He did not provide guidance beyond the third quarter, but said the group maintains its full recovery target of 2024.
But the structural reduction in France is emblematic of what many anticipate will happen in domestic markets — and hopefully some multi-national markets within the EU bloc — in the coming years. As a condition of its aid to Air France-KLM, the French government prohibited flights on routes where competing train service takes less than two-and-a-half hours. The rule was subsequently codified and applied to all airlines in a broad climate bill that the French legislature passed in July. This limit forced Air France to suspend flights on three route from Paris Orly — to Bordeaux, Lyon and Nantes — though it can continue flights that serve connecting travelers from Paris Charles de Gaulle. There is talk of other countries in Europe following France’s lead, including Germany and Spain.
Zaat did not say whether the climate legislation drove the group’s view of a structural reduction in domestic capacity. However, with demand recovering quickly from the Covid-19 pandemic when markets reopen, the new rules are the only other major change affecting French domestic flying.
Air France is also moving to streamline its “Train + Air” partnership with French rail operator SNCF. The airline is piloting a new “fully digitalized service” that could simplifying the check-in and travel process, including eliminating the need to stop at a train station for a ticket. Air France and SNCF offer air-rail connections via Charles de Gaulle Airport to 18 destinations in France.
Outside of domestic France, Air France-KLM is optimistic for the broader travel recovery in the coming months. The group has ramped up capacity to 60 percent of 2019 in July from less than 50 percent in May. It plans to fly 60-70 percent of what it flew two years ago in the third quarter. However, travel restrictions — and the unknown timeline for when they will ease — remain the biggest factor slowing the recovery.
“There’s a big travel appetite,” said Zaat. “Where if people can travel, they will travel.”
Asked when Air France-KLM anticipates the U.S. to reopen to European visitors, CEO Ben Smith admitted that the company has no idea, despite being “hopeful” that this will occur by October. American travelers can visit many countries in Europe with either proof of vaccination or a negative Covid-19 test, but the U.S. has yet to remove restrictions on European visitors, which continues to limit demand and resulted in a very one-sided flow of traffic.
However, if the U.S. reopens by the end of 2021, Smith expects group capacity could recover to more than 75 percent of 2019 levels next year.
As at Ryanair and other European carriers, Air France-KLM continued to face significant Covid-19 headwinds in the second quarter. It posted a €1.5 billion ($1.8 billion) net loss for the period, which was on par with the first quarter despite improving trends. A €938 million one-time pension charge contributed to the second-quarter loss. Revenues decreased 61 percent to €2.8 billion year-over-two-years, but increased 27 percent from the first quarter.
Looking ahead, the group forecasts positive EBITDA in the third quarter — its first since the crisis began. Air France-KLM posted a €248 million EBITDA loss during the June quarter. In addition, it continues to make progress on its broader restructuring program, including achieving an 11,000 full-time equivalent (FTE) reduction in staffing by June and expectation of a 14,000 FTE reduction by the end of 2022.