Air France-KLM Unsure of Potential ITA Acquisition

Edward Russell

February 22nd, 2022

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. 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.

Edward Russell

Air Canada Sees Promise in Sixth-Freedom Hubs This Summer

Air Canada is betting on the strength of its connecting hubs to funnel what it expects will be strong transatlantic leisure demand this summer between North America and Europe. The carrier reported advance bookings for summer travel are strong, and that transatlantic capacity this summer will be only 30 percent lower than in 2019.

Capacity in the first quarter of this year is up 243 percent from last year and only 44 percent below 2019 levels, despite the Omicron surge dampening first-quarter demand, Chief Commercial Officer Lucie Guillemette said. Transborder, including sixth-freedom flights, and Latin America demand remains robust, particularly seasonal flights to sun destinations. Asia-Pacific routes, especially to China, are down sharply compared with pre-pandemic levels, with no clarity on when the recovery may occur, Guillemette said. But last year, Air Canada added flights to India from Toronto and Montreal to serve the visiting friends and relatives (VFR) markets in Eastern Canada, and these are performing above expectations. “We have found other opportunities,” she said.

Corporate travel continues to lag, but Guillemette is encouraged by the willingness of small- and medium-sized businesses to travel, and is confident that Air Canada’s large accounts will return to travel once more workers are recalled to their offices.

Air Canada is sure enough that recovery is around the corner that it recalled 3,900 furloughed employees in the fourth quarter, and a total of 10,000 last year. The carrier plans to resume hiring new employees this year. The cost of wages and salaries rose 31 percent in the fourth quarter over 2020 as a result.

The carrier has become increasingly reliant on cargo. Air Canada operated 10,000 cargo-only flights last year, compared with 4,000 in 2020. But in a sign that the carrier believes passenger demand will return, Air Canada is converting its Boeing 777 and Airbus A330 preighters back to passenger aircraft this year. However, Air Canada is returning to dedicated freighters. It took delivery of its first 767F last year, and three more will join the fleet this year. Cargo generated C$490 million ($384 million) in the quarter, or 150 percent more than in 2019, and C$1.5 billion in the year, a record. The sector has the added benefit of offsetting seasonality in the passenger market. “This validates our decision to return to dedicated freighter aircraft,” Guillemette said.

But freighters are not the only aircraft the carrier is adding. Orders announced last year ultimately will bring Air Canada’s fleet of Airbus A220s to 45 by 2025, and its fleet of Boeing 737-8s to 40. It expects to take delivery of one 787 this year and two more next year. The carrier believes Boeing’s delivery issues will be sorted out in time for it to take its 787s. Transport Canada, the country’s regulator, will not subject the 787s to further inspections. The FAA last week said it will take over the job of issuing certificates for they type (see Fleet section for more).

The carrier exited the Canadian government’s relief program, except for a fund that will support refunding passengers for nonrefundable tickets. This fund is expected to be in effect for seven years, the carrier said.

CEO Michael Rousseau called on the Canadian government to lift its remaining quarantining and pre-departure testing requirements for inbound travelers, noting that many other countries have done so. “It is time for Canada to do the same,” he said. “There is no reason to single out travel.”

Air Canada reported a fourth-quarter loss of C$503 million on revenues of C$2.7 billion, which were 30 percent higher than last year. For the full-year, Air Canada’s loss was C$3 billion in C$6 billion in revenue.

Madhu Unnikrishnan

In Other News

  • Aeromexico reported an earnings before interest, taxes, depreciation, amortization, and restructuring (EBITDAR) profit of 5 billion Mexican pesos ($246 million) profit in the fourth quarter. However, that profit turned to a loss after one-time restructuring expenses of 10.6 billion Mexican pesos. Revenues were 15.4 billion Mexican pesos, which was up quarter-over-quarter but down 10.8 percent compared to 2019. Unit revenues were up 10.3 percent year-over-two-years and unit costs excluding fuel and restructuring expenses were down 7.6 percent.
  • Finnair rode the booming air cargo wave in 2021, which CEO Topi Manner described as the “crown” of its fourth-quarter and full-year results last week. Freight revenues, at €335 million, made up 40 percent of the carrier’s €838 million in total revenues during the year. But that was not enough to push Finnair into the black. The airline lost €464 million during the year despite achieving €200 million in permanent cost savings by the end of December, said Manner. The Omicron variant hit Finnair towards the end of the fourth quarter and will continue to pressure its first half results — in part because some of the Asian economies it bet would begin reopening have delayed doing so — said Manner. He expects Japan and South Korea to begin reopening towards the end of the second quarter, though China and Hong Kong are expected to remain closed for the time being. In the meantime, the airline’s pivot towards more U.S. flying, and a new long-haul base at Stockholm’s Arlanda airport are meeting expectations.
  • Norwegian Air‘s restructuring continues to pay off with a fourth quarter profit of 112 million Norwegian kroner ($12.5 million). CEO Geir Karlsen said he was “happy” with the result, which included a 281 percent year-over-year jump in revenues to 2.5 billion Norwegian kroner. The airline also increased its available liquidity to 7.7 billion Norwegian kroner through the sale of some of its unused London Gatwick slots. But despite the profit, Karlsen said Omicron hit demand during the period prompting Norwegian to reduce capacity, and he described the first quarter as “challenging.” The carrier will fly just 60-65 percent of its available capacity during the three months ending in March.

    The carrier is already focused on its summer schedule, which includes the addition of 19 more Boeing 737s — including two 737-8s — for a total of 70 aircraft. Karlsen said yields for July are already tracking to be on par with those in 2019. And Norwegian Air is already on the hunt for roughly 15 aircraft — all of which will be “brand-new aircraft” said Karlsen, though he did not say whether they would be 737 Maxes or Airbus A320neo family jets — to add in 2023. He added that the carrier’s target fleet is 95-100 aircraft, at which point it can “really scale [the] cost side of the business.”

    In 2021, Norwegian Air made a 1.9 billion Norwegian kroner profit on revenues of 5.1 billion Norwegian kroner. Revenues were down 44 percent year-over-year
  • Norwegian startup Flyr lost 187 million Norwegian kroner ($21 million) in the fourth quarter. Revenues grew 117 percent quarter-over-quarter — Flyr only launched in June — to 86 million Norwegian kroner. CEO Tonje Wikstrøm Frislid said the airline was “progressing according to plan,” and added that bookings are improving for the summer after they took an Omicron hit in the fourth and first quarters. Flyr had five Boeing 737s at the end of December, and plans to grow to 12 aircraft by the end of August including six 737-8s due this year that it will lease from Air Lease Corp. The airline plans to fly between 12 and 18 aircraft by the end of 2022.
  • Tata Sons, the Indian conglomerate the bought (or regained) Air India from the government last year, has named Ilker Ayci as CEO of the former state-owned carrier. Ayci stepped down as chairman of Turkish Airlines on January 27. Tata CEO Natarajan Chandrasekeran said Ayci’s appointment will lead the carrier into a “new era,” and he is expected to start in his new role on April 1.
  • Avelo has a new chief financial officer, and it’s a familiar name to people who follow the U.S. airline industry. Hunter Keay, a long-serving analyst for investment firm Wolfe Research, takes the financial helm of the startup carrier this week. Keay previously worked for Stifel Nicolaus and Legg Mason. Avelo CEO Andrew Levy called Keay’s hire a “ringing endorsement” of Avelo’s business model.
  • FAA Administrator Steve Dickson will step down next month, just halfway through his five-year term. Dickson, appointed by President Donald Trump in 2019, said he told President Joseph Biden he wants to spend more time with his family. Dickson presided over a tumultuous period in the FAA, with the Boeing 737 Max grounding and resulting scandal, the 5G wireless network kerfuffle, and the ongoing 787 certification issue, most of that against the backdrop of a global pandemic. The Biden administration has not hinted at who might replace Dickson, but getting a nominee for a five-year term through an evenly divided Senate in an election year will be an uphill climb no matter whom Biden names.

Edward Russell & Madhu Unnikrishnan

Edward Russell

February 22nd, 2022