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Air France-KLM Eyes Expansion in Booming South America With Potential TAP Deal

Edward Russell

May 8th, 2023

TAP Air Portugal and KLM planes at Schiphol airport

Air France-KLM, International Airlines Group, and the Lufthansa Group shared more than just a bullish outlook for travel demand during recent investor calls. They all want a bigger piece of the standout Latin or South America region, and they are not averse to capturing it through acquisitions.

Air France-KLM is eyeing TAP Air Portugal, IAG has its sights set on Spain’s Air Europa, and Lufthansa is near a deal for Italy’s ITA Airways. Each transaction, if they happen, would give these respective groups a larger share of the booming Europe-Latin America market.

“TAP has a very strong position geographically at the southernmost point in Europe towards South America, and they do have a very strong network to Brazil with 11 cities online nonstop out of Lisbon,” Air France-KLM CEO Ben Smith said during an earnings call on May 5. “So it’s very interesting, and could be potentially eventually accretive to our bottom line performance.”

Air France-KLM, for now, is just eyeing a deal with TAP. The Portuguese government must initiate a sale first, which Smith thinks should happen around summertime. And if the parameters meet the group’s requirements — for one, not diluting its target of a 7-8 percent operating margin from 2024 — it plans to “participate in that process.”

The interest in Latin America is for good reason. In the first quarter, Air France-KLM saw South Atlantic yields jump nearly 33 percent compared to 2019 on just 4 percent less capacity. Lufthansa saw group yields on Latin America routes jump nearly 43 percent over the same period. IAG, which did not publish a comparison to 2019, saw Latin America passenger unit revenues increase 33 percent compared to last year. At all three groups, Latin yield performance was the strongest across their global networks except for Asia, where capacity remained artificially constrained.

Industry capacity between Europe and Latin America was down just 2 percent compared to pre-pandemic during the first half of the year, according to Diio by Cirium schedules.

Air France-KLM is the largest of the European groups to Latin America with a 21 percent share of capacity during the first six months of the year, Diio data show. IAG comes in a close second with a 19 percent share, and the Lufthansa Group lags with just a 7 percent share. Iberia, however, is the single largest carrier ahead of Air France.

“We are missing a southern hub compared to our European competitors, especially for the growing — the [origin and destination] traffic in and out of Africa and Latin America,” Lufthansa Group CEO Carsten Spohr said earlier in May. This is one reason for the group’s planned investment in ITA, which it has until May 12 to finalize with the Italian government.

IAG renewed plans to buy Air Europa in February, with a new €400 million ($443 million) deal that it thinks can pass European Commission antitrust scrutiny. Executives have long argued that merging the airline with Iberia would create a “360-degree” hub in Madrid that could compete better with Air France’s Paris and Lufthansa’s Frankfurt hubs as they exist today.

“We are starting to talk with the European Commission and other authorities in the different jurisdictions in order to try to close the deal,” IAG CEO Luis Gallego said earlier in May. “As we said before, we expect that this process is going to take 18 months.”

If all of the deals were to go through — far from a certainty — Air France-KLM and TAP would have a 29 percent share of Europe-Latin America capacity, based on Diio data for the first six months of the year. IAG plus Air Europa a 28 percent share, and Lufthansa plus ITA a 9 percent share.

None of the European Big Three have an immunized joint venture with a Latin American airline covering intercontinental flights. Air France has a close partnership with Gol but that focuses on the Brazilian domestic market. British Airways and Iberia have loyalty partnerships with Latam Airlines, which was formerly a member of the Oneworld alliance. And the Lufthansa Group has codeshares with Star Alliance members Avianca and Copa Airlines.

During the first quarter, Air France-KLM repaid the last of its French state aid. The move, as Smith put it, allows the group its “full strategic autonomy going forward” — for example, it would have been barred from bidding for TAP if the loan were still outstanding. And the emphasis on maintaining margin targets comes as it appears set to hit them earlier than forecast, as one investment analyst suggested earlier in May. Travel demand, particularly the lucrative premium leisure segment, continues to be torrid with summer set to be “particularly dynamic” for the group.

Air France-KLM posted a €306 million operating loss, equal to a negative 4.8 percent operating margin, and a €344 million net loss during the three months ending in March. Revenues of €6.3 billion were up 42 percent year-over-year, and up 5 percent from four years earlier. Group capacity was down 8 percent from 2019 levels.

Looking ahead, Air France-KLM plans to continue its capacity recovery to around 95 percent of 2019 levels for the rest of the year. It did not provide margin guidance but Chief Financial Officer Steven Zaat said it was “getting close” to hitting its full year 2024 margin targets.

Edward Russell

May 8th, 2023

Tags: Europe Latin America

Photo credit: TAP Air Portugal and KLM planes at Schiphol airport Flickr / Steve Knight

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