Air France-KLM Cautious on Potential Bid For Italy’s ITA

Air France-KLM is not champing at the bit to buy a stake in Italy’s ITA Airways. After two failed attempts to invest in predecessor Alitalia, Air France-KLM CEO Ben Smith said the group’s inability to make a bid for the Italian carrier is not “something that we lose sleep over.”

The Paris-based airline group is barred from taking more than a 10 percent stake in another airline until three-quarters of the €4 billion ($4.5 billion) in aid it received from the French government has been repaid. This effectively blocks it from participating in the bidding for ITA, which has already received a preliminary offer for a majority stake from a consortium made up of the Lufthansa Group and shipping giant MSC. Air France-KLM partner Delta Air Lines, which also has expressed interest in ITA, has not yet made any public offer. The Italian government officially launched the sale on February 11.

“We’ve had two attempts taking an equity position in Alitalia, which shut its doors in October. Both have not been successful, so to do it a third time, when and if we have the flexibility to do so, will be under much more risk-comfortable zone,” said Smith during Air France-KLM’s fourth-quarter results call on Thursday. The group first bid for a stake in Alitalia in 2008, and then seriously considered a second bid in 2018.

Air France-KLM’s main interest is acquiring more slots at Milan’s close-in Linate Airport. However, Smith noted that it has already received some at “no cost,” and expects more to become available “through either remedies or through the reduction in activity” by ITA.

Air France and KLM will operate up to eight daily departures from Linate by June, according to Cirium schedules. They had just three departures during the same period in 2019.

While a bid for other airlines may be off the table for now, the group is watching market conditions closely to raise up to €4.5 billion through a combination of new debt and equity, said Air France-KLM Chief Financial Officer Steven Zaat.

“It is our intention to pay the states back as soon as possible,” he said. “We know that it is a strategic constraint on our company … We have all the scenarios ready to get quick in repaying the state aids to the states.”

Air France-KLM is bullish for the travel recovery this year. The group plans to fly more capacity across the North Atlantic this summer than it did in 2019 in a bet on the strength of pent-up demand.

“We’re quite confident and optimistic that, if the rules that we’re currently sitting [with] today where there’s very few restrictions for Europeans to enter the United States and vice versa, that we should see the benefits of pent-up demand,” said Smith. Other pluses he cited include fleet changes at American Airlines and British Airways that limit their recoveries in the market; the closure of Norwegian Air’s long-haul operation; and he expressed skepticism over the pending launch of Norse Atlantic Airways, which plans to connect Norway with the U.S.

United Airlines also plans a bumper summer on the transatlantic. Despite scaling back its 2022 capacity plans due to the Omicron variant surge, the carrier still plans to fly as much — if not more — capacity between the U.S. and Europe this summer. CEO Scott Kirby has cited similar structural changes for United’s optimism as those mentioned by Smith.

Major European competitors, International Airlines Group (IAG) and the Lufthansa Group, have not yet released their results for last year or provided their outlooks for 2022.

One big question mark for Air France-KLM — and really every airline — is what happens in Ukraine. A Russian invasion would place “tremendous” upward pressure on fuel prices, said Zaat. And a deescalation in tensions would likely push fuel prices down, he added.

In the fourth quarter, Air France-KLM lost €127 million. Revenues, while more than double a year ago, were down 27 percent compared to 2019 to €4.8 billion. Zaat, citing the group’s earnings before interest, taxes, depreciation, and amortization (EBITDA) profit of €827 million, said that financial performance exceeded 2019 levels for the first time since the crisis began. Air France, KLM, and Transavia flew 72 percent of their 2019 capacity during the period, though passenger traffic stood at 60 percent of two years prior.

Air France-KLM lost €3.3 billion in 2022. Revenues recovered to €14.3 billion, or 53 percent of 2019 levels. Cargo was a bright spot for the group with revenues up 67 percent year-over-two-years to €3.6 billion.

The group forecasts breakeven EBITDA on 73-78 percent of 2019 capacity in the first quarter, said Zaat. He declined to provide full-year guidance citing the uncertain international travel environment.