Amsterdam, Paris Keys to Air France-KLM’s Recovery

Madhu Unnikrishnan

February 22nd, 2021 at 6:30 AM EST

Air France-KLM is optimistic about the strength of its dual Amsterdam and Paris hubs in the coronavirus pandemic recovery. 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, during the Paris-based group’s fourth-quarter earnings call last week.

“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 IATA.

The group has 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.

Edward Russell

Less Belly-Hold Capacity Redounds to Atlas’ Benefit

If there is any bright spot for the industry in this pandemic, cargo is it. Somebody has to carry all those goods homebound consumers are buying online. And Atlas Air Worldwide certainly was no exception, swinging from a loss of $293 million in 2019 to $360 million in profits last year.

Consumer confidence is ticking up in many large economies, even as the world’s macroeconomic outlook is cloudy. And unlike earlier in the pandemic, many consumers feel more comfortable spending money now rather than saving it. Atlas has capitalized on this boom, forecasting that it will operate more than 85,000 block hours in the first quarter. Beyond that, the company would not offer guidance, citing uncertain economic conditions for the balance of this year as the distribution of vaccines is patchy and new variants of the virus surge.

Atlas benefited from two additional trends last year. First, international passenger flights essentially ground to a halt, so shippers had less access to belly-hold capacity. Second, congestion at West Coast ports forced shippers to turn to air cargo carriers to get their goods to market. “Shippers are increasingly using airfreight to avoid bottlenecks in their supply chains, and that’s driving even further near-term demand,” Atlas CEO John Dietrich told analysts last week.

A third, unexpected, factor in Atlas’ favor is the continued strength of air freight in the first two months of this year, usually a down period for freight. Factories in China usually close during the Lunar New Year but have stayed open this year as the government has placed new restrictions on internal travel. This has accrued to the cargo company’s benefit, as it has softened some of the seasonality in the industry, a situation Dietrich called “unprecedented.”

Freight rates are likely to remain high this year, Cowen & Co. analyst Helane Becker said in a note to investors, but yields could fall from the highs fueled by panic-buying early in the pandemic.

Labor costs could rise. The company gave its pilots a pay raise last year and is negotiating a new collective bargaining agreement with its pilots. At issue is incorporating pilots from Southern Air, which Atlas acquired in 2016. Arbitration is expected to begin next month. This has upset its pilots union “This is an abdication of power and leadership,” said Robert Kirchner, head of the International Aviation Professionals. “Every stakeholder in this company should be concerned that this management team is wiping their hands of responsibility.”

Atlas ordered four Boeing 747-8 freighters recently, with delivery beginning this year and continuing into next year. The window for 747-400 passenger-to-cargo conversions is closing, as existing airframes are aging. Atlas is considering more -8s, Dietrich said.

Atlas reported full-year 2020 revenues of $3.2 billion, up from $2.7 billion in 2019. Amazon, for which Atlas operates freighters, increased its holding in the company to 9 percent.

Madhu Unnikrishnan

In Other News

  • A court in Europe ruled that state aid to airlines is legal during the Covid pandemic, quashing Ryanair’s challenge to government aid. Specifically, the court said French aid to Air France and Swedish aid to SAS are in the interests of the European Union by throwing those companies a lifeline during the pandemic. Ryanair has been vocal in its opposition to what it calls “illegal” state aid, arguing it is market-distorting. The Irish discounter adds that it plans to challenge the lower court’s ruling in the European Court of Justice.
  • Etihad and Bahrain’s Gulf Air have signed a “strategic commercial cooperation agreement” that would let the two carriers’ relationship deepen beyond the current codesharing, which started in 2019, to coordination on routes and schedules to 30 destinations from Abu Dhabi and Bahrain. The agreement also allows for reciprocal frequent-flier and premium benefits. The two companies may coordinate on MRO, cargo, and pilot and crew training. The agreement is subject to regulatory review in Bahrain and the UAE.
  • A long-running spat between Canada and Brazil in the World Trade Organization (WTO) is coming to the end, now that Brazil is withdrawing from the dispute. At issue was Brazil’s contention that Canada and the provincial government of Quebec supplied Bombardier with illegal aid for the development of the C-Series. The issue became complicated, Brazil said, when Airbus acquired the C-Series program (now the Airbus A220) and opened a production line in the U.S. Brazil said is withdrawing from the dispute because it does not believe the WTO is the best venue to settle the issue.
  •  Global Crossing struck a deal with Venezuelan carrier Estelar to restore service between Miami and Caracas and Maracaibo. Direct flights between the U.S. and Venezuela currently are prohibited, but Global Crossing said it expects the new administration and Congress will lift the ban soon. When it does, the two airlines plan to fly a daily Miami-Caracas flight and thrice-weekly Miami-Maracaibo with a Global Crossing Airbus A320.

Madhu Unnikrishnan

Madhu Unnikrishnan

February 22nd, 2021 at 6:30 AM EST