Europe’s High Hopes

Gordon Smith and Jay Shabat
May 2024
31 min read

Pushing Back: Inside the Issue

Their first quarter figures weren’t pretty. But Lufthansa and Air France/KLM remain hopeful that strong demand—combined with short supply—will help them overcome rising costs. The all-important summer peak is fast approaching and, as of now, bookings look good.

Never underestimate the power of foreign exchange markets to influence airline markets. In Japan, an extremely weak yen is reshaping traffic and cost trends for All Nippon and Japan Airlines, luring foreign visitors, stifling outbound travel, and inflating expenses like fuel. Overall though, both carriers expect a solidly profitable 2024, thanks first and foremost to robust overall demand.

That’s the case for Air Canada too, which incidentally cited Japan as one of its best performing markets right now. Latam, with its bankruptcy-cleansed cost structure, reported excellent Q1 results. Same for Philippine Airlines. But not Frontier—the Denver-based LCC had another rough quarter as it reallocated capacity away from the Florida swamps and Las Vegas casinos. But plowing a heavy amount of capacity into mature markets like Cleveland is a gamble too.     

IndiGo’s gamble on widebodies rests on sound reasoning, the airline argued last week. Brazil’s Embraer is reportedly entertaining a gamble on creating a new Neo/Max competitor. An Australian airline called Bonza gambled on the hope of competing effectively with Qantas and Virgin Australia. Alas, it looks like it lost.

Airline Weekly Lounge Podcast

In this week’s episode, Gordon Smith and Jay Shabat take a deep-dive into the latest earnings from carriers across the European continent. From airline supergroups to more niche Nordic players, we make sense of the big numbers and ask what they could mean for the coming summer season. Listen to the episode here, and find a full archive of the Lounge here.

Weekly Skies

ANA vs. JAL: The Battle in Japan

  • During the first quarter of 2023, Japan’s two leading airlines managed modest operating profits—that’s a triumph for what’s an offpeak period. In this year’s first quarter though, both lost money at the operating level. For All Nippon, the larger of the two, the loss was just a hair below breakeven. For Japan Airlines, operating margin was negative 2.5%. Recall that throughout the 2010s, starting with JAL’s extreme makeover in bankruptcy, ANA consistently lagged its rival in profitability. This seems to have reversed in the post-pandemic era. 
  • One reason why? Think pineapples. JAL’s large Hawaiian business was a jewel in its crown, generating what were surely outsized profits—we can infer this from the extraordinary success of JAL’s partner Hawaiian Airlines during the latter half of the 2010s specifically. But Hawaiian is struggling badly now, and in big part because Japanese tourism to Hawaii hasn’t recovered to anything like it was pre-Covid. Note that JAL has greatly downsized its Hawaiian capacity since Covid, while ANA has done the opposite, leaving their Hawaiian networks roughly comparable in size today, in terms of seat capacity (JAL still offers more flights but ANA operates with larger planes including A380s). 
  • The demise of the Japan-Hawaii market (will it ever come back?) has two main causes: 1) a shortage of affordable accommodation in Hawaii and 2) the weak yen-dollar exchange rate. Both have made it much more expensive for Japanese tourists to visit Hawaii. The weak yen is more generally shaping the fortunes of the entire Japanese airline market—and to some degree its entire economy. Foreigners are flocking to Japan in record numbers to take advantage of the weak yen. At the same time, ANA and JAL are having trouble generating much outbound international demand. The weak yen is also inflating the airline sector’s dollar-denominated costs, most importantly for fuel and airplanes. 
  • Domestically, meanwhile—roughly 45% of each carrier’s mainline revenues stem from domestic markets—leisure demand is solid but business demand is still shy of what it was in 2019. The government’s subsidies to stimulate domestic tourism ended, which did cause some demand tapering. 
  • Back on the international front, North American routes are strongest, aided by connecting traffic to markets like the ASEAN region through Tokyo. But China is recovering more slowly than anticipated, and yields are under some pressure to Europe and the ASEAN region. Also, if China restores more nonstop flights to North America, fewer travelers will connect via Tokyo, though that will impact ANA more than JAL (which said it’s not currently handling much U.S.-China demand) In the meantime, both ANA and JAL are currently developing separate widebody- and narrowbody-based low-cost carriers, hoping to capture more of the inbound tourism boom. 
  • The carriers diverge somewhat on fleet purchasing, with JAL for example betting big on A350-1000s while ANA buys B777-9s. Both rely heavily on B787s, but ANA has alone opted for some -10s for use domestically. On the narrowbody end, ANA is dealing with GTF-troubled A320/21-Neos, while JAL only a year ago placed its first order for B737-Maxs (it was the last major airline in the world to order latest generation narrowbodies). 
  • On the network front, new ANA markets include Milan, Istanbul, and Stockholm. For JAL, a new route to Doha provides access to Africa, the Middle East, Europe, and even South America in cooperation with oneworld partner Qatar Airways. In the U.S. and Europe, respectively, JAL’s key partners are American, IAG, and Finnair. ANA’s leading partners include United, Lufthansa, and Singapore Airlines

It’s Shaping Up to Be Another Good Year for Air Canada 

  • Though it reported a net loss, Air Canada eked out a tiny operating profit for the first quarter. And that’s a victory of sorts for this highly seasonal airline. With peak summer demand looking good, Canada’s largest carrier appears on track for a second strong year in a row—last year its operating margin was 10.6%, just a point behind Delta’s North America-leading figure. 
  • It wasn’t all fun and games this winter. Air Canada’s cargo business weakened. The airline is not seeing quite the corporate revival that U.S. rivals are reporting (albeit with some encouraging signs ahead). Transatlantic profits remain robust but with yields down from last year’s scorching highs. U.S. transborder routes are seeing lots of new capacity. Caribbean sunshine markets appear oversupplied too. At the same time, Canada’s economy has underperformed relative to the U.S., owing to factors like greater sensitivity to higher interest rates and lower commodity prices. Management added, “2023 was a particular demand environment in which we experienced strong yields and load factors driven by pent-up demand and challenged capacity. We did not expect to replicate those exact same conditions in the first quarter, nor do we expect them going forward.” 
  • Yet Air Canada is thriving, with help from a strong comeback in transpacific markets, corporate demand that’s “steady,” robust premium demand, and domestic yields that are outpacing capacity growth—note the recent collapse of LCC rival Lynx Air. The airline’s sixth-freedom strategy, whereby its hubs serve as gateways between the U.S. and the wider world, is a powerful enabler of international network expansion. Further support comes from joint ventures with United and Lufthansa, a fast-growing loyalty plan, Canada’s surge in immigration, and a fleet of new B787s and—starting next year—A321 Neo XLRs. Closer to home, Air Canada is re-fleeting with B737-Maxs and A220s. “We’re encouraged by the overall healthy demand signals.” 
  • In Asia, “demand to Japan continues to stand out.” And in Europe, “we continue to see strength in the Mediterranean markets, and we’ve increased capacity at various points in Italy, Greece, and Spain.” Air Canada says more generally, “Looking further out into a decade, we believe that we are poised to capture structural growth in our key markets, driven by immigration trends, the continued evolution of our sixth-freedom franchise… higher propensity to travel, and a growing Canadian population.” It also mentioned “sustained demand for leisure travel from retiring baby boomers, established Gen Xers and millennials, and a Gen Z cohort eager to explore.”

Other Q1 Earnings Updates

  • South America’s largest airline had another strong quarter. Latam’s Q1 operating margin was 14%, way above the 3% it reported in the same quarter of 2019. In last year’s Q1, its operating margin was 10.5%. Bankruptcy clearly had a cathartic effect for Latam, wiping away many of its legacy obligations and leaving it with a much healthier cost base—its new aircraft lease contracts are particularly favorable. Note that rivals Gol and Azul in Brazil are restructuring their aircraft obligations in a much tighter aircraft market, limiting their leverage. That aside, the Brazilian market—dominated by Latam, Azul, and Gol—is enjoying strong yields. Longhaul markets are generally performing well too. And Latam is achieving cost efficiencies by growing at a roughly 15% annual pace—its longhaul international operation will grow closer to 20% this year. Most importantly, the company expects a full-year 2024 operating margin of between 11% and 13% (it earned 11% last year).  
  • Struggling low-cost carrier Frontier, based in the booming but competitive city of Denver, stumbled to another loss in the opening quarter of 2024. The animal-themed airline is having a bear of a time dealing with overcapacity in leisure markets like Florida and Las Vegas. So, it’s reallocating capacity to markets where it hopes to capture higher yields, including several in the U.S. midwest; Puerto Rico is another growth target. Frontier’s Q1 operating margin was negative 4%, but that includes hefty gains from sale-leaseback transactions on Neos for which it was lucky enough to secure favorable prices from Airbus. Frontier insists its cost advantages versus other airlines is “indeed real.” On the revenue side, it sees big potential in growing loyalty revenues and attracting more business travelers. With demand still looking good overall, management is therefore optimistic. But make no mistake, undertaking a large-scale network pivot is risky.  
  • Philippine Airlines continues to enjoy its status as an unlikely profit champion in the post-Covid world. Like rival Thai Airways, the long-troubled airline used bankruptcy to cleanse its cost base, just as demand began to revive. With lots of competitive capacity also cleared from its home markets, PAL recorded an excellent 15% Q1 operating margin. The Philippines is notable for its large contingent of citizens working overseas, from the oil fields of the Gulf to the hospitals of North America. These are workers that periodically want to come home, and PAL is in a struggle with rivals like Emirates to serve them. 
  • Jazeera Airways, an LCC in Kuwait, ran into a storm of new competitive capacity last year, mostly from other Gulf carriers. It now says it’s experienced a “soft landing,” with conditions more stable. It managed a positive 3% Q1 operating margin. Things would have been better were it not for currency troubles in the key Egyptian market. The date shift for Ramadan travel also impacted the quarter. Looking ahead, Jazeera is developing a new loyalty plan, hoping to launch a new Saudi Arabian joint venture airline, and promising new destination announcements soon. 

Tech Troubles Ahead?

  • Frontier Airlines CEO Barry Biffle has said the U.S. airline industry doesn’t have the technology to comply with the latest Department of Transportation rules. “I think the way they’ve written it, I think the reason why some of the industry’s having a challenge is because I think there’s not the technology in place today to do exactly what they’re looking for,” Biffle said during a call with analysts on May 2. “But hopefully we can all get there.” 
  • The DOT recently rolled out a set of rules that mandate airlines to refund passengers if a flight is significantly delayed or canceled and to disclose all “junk fees.” The airline industry hasn’t warmed up to the new standards, with trade group Airlines for America criticizing the DOT for creating these rules “without collaboration.” Biffle said Frontier was revamping its website and app, adding that he believes it would address the issue of junk fees. 
  • As Airline Weekly reported in our last issue, the new DOT rules on junk fees require airlines to disclose all baggage, cancellation and change fees; explain fee policies before ticket purchase; share fee information with third parties; and tell customers that seats are guaranteed. It also prohibits airlines from advertising any promotional discounts on airfare without disclosing the carrier-imposed fees. 
  • The Frontier CEO added that he didn’t expect the changes to impact the carrier’s bottom line. “We refunded over $300 million last year, all in these same categories,” Biffle said. “We believe largely we’re compliant with what they’re looking for. We don’t see any financial impact from this.” Biffle is the latest airline executive to voice concerns about the enforceability of the new DOT rules. American Airlines CEO Robert Isom said during an analyst call that he thought the automatic refunds rule had some “gray” areas. 

Clear as Third

  • The U.S. Transportation Security Administration has confirmed a third addition to its Pre-check program. Travelers will now be able to enroll through Clear, a company that uses biometrics to verify passengers’ identities. It will offer TSA Pre-check enrollments at airports in Orlando, Sacramento and Newark from 6 a.m. to 8 p.m. It is expected that Clear will expand enrollments at more airports in due course. “This is a win-win for U.S. travelers who will have access to more enrollment locations, expanded hours and other benefits,” said Clear CEO Caryn Seidman-Baker in a statement.
  • The partnership is a product of the TSA and Federal Aviation Administration Reauthorization Act of 2018 which required the agency to enter an enrollment agreement with at least two private sector entities to give flyers more enrollment methods. Travelers can also enroll for Pre-check with Idemia or Telos.
  • Clear has dealt with scrutiny from lawmakers and travelers over its program. Some travelers have complained about long lines, which the company’s use of biometrics was supposed to eliminate. Others have also complained about the price: Clear costs $189 a year versus $85 or less for Pre-check, which lasts five years. Lawmakers in California are also considering a bill that would limit Clear’s ability to expand in the state. The bill passed California’s Senate Transportation Committee April 24 and would hinder Clear’s ability to expand at airports until it has its own dedicated security lane. 

Jay Shabat, Meghna Maharishi and Gordon Smith


IndiGo’s A350 Decision 

  • India’s IndiGo finally answered the question many across the airline industry were asking for years. Yes, it will become a widebody flier. Late last month, the low-cost carrier—which dominates India’s domestic market—announced an order for 30 Rolls Royce-powered A350-900s. The transaction could reach 100 units if all purchase rights are exercised. 
  • CEO Pieter Elbers and his team addressed questions at an event last week, while reminding skeptics that all Indian carriers today operate a mere 70 widebodies. IndiGo, he said, won’t get its first A350 until 2027, giving it time to consider its inflight product and seating configuration. This will be among the most important things required to get right for its widebody plans to succeed. It will surely add premium cabins for the first time, but how luxurious will they be? How dense will it configure its economy seating? Will there be a premium economy product? Elbers said these are questions for another day. Same for questions about where IndiGo will fly its big new birds; North America and Europe seem obvious candidates. 
  • IndiGo has in fact familiarized itself with widebody flying thanks to the B777-300ERs it’s been leasing from partner Turkish Airlines. These are not flown by its own crews though, and don’t feature its own cabin design. It does fly its A320s and A321s internationally, adding ever-more distant destinations from India as Neos with longer range capabilities arrive. Next year, it will start taking A321-Neo XLRs, allowing for flights to key markets in Africa like Nairobi, for example. 
  • For IndiGo to build a truly intercontinental network, it will surely need more than just a good premium product. It will need a popular loyalty plan too, and deeper partnerships with more overseas airlines (to tap their interior markets through codeshares). Whatever happens, Elbers insists: “What will not change for us is our four customer promises,” namely 1) hassle-free service, 2) on-time performance, 3) affordable fares, and 4) an unparalleled network.

China’s C919 Surge

  • Chinese efforts to break the Airbus and Boeing duopoly took another step forward last week as one of the nation’s largest airlines agreed a major order. China Southern is buying 100 locally built C919 planes. The carrier is China’s biggest domestic operator and also boasts a large international network. The C919 is produced by Commercial Aircraft Corporation of China (COMAC), a state-owned firm founded in 2008 to develop passenger airliners. The plane is considered an emerging competitor to Airbus’ A320 and the Boeing 737.
  • While COMAC’s first product, the ARJ21, has only chalked up around 130 deliveries to date, there are much higher hopes for the C919. Last month Air China signed a similar agreement with COMAC for 100 C919 jets. It means all three of the nation’s largest airlines now have major orders pending for the aircraft.
  • According to the latest schedules, China Southern’s new C919s will be delivered in stages from 2024 to 2031. Both Airbus and Boeing have long waiting lists, with delivery slots booked out until the end of the decade. However, COMAC’s step up on international competitors could be short-lived. The C919’s engines and many of its systems come from foreign suppliers. China’s Global Times newspaper reported that at least 40% of the components of the aircraft are internationally sourced. This means the Chinese OEM could yet run into worldwide supply chain headaches that are plaguing its more established rivals, especially as it ramps up production. 
  • COMAC’s list price for the latest deal was approximately US$9.9 billion, comprising the aircraft itself and associated engines. However in a market filing, China Southern confirmed that a discount was negotiated. The discount referenced in the China Southern deal appears to echo that of China Eastern. In September 2023, the airline also bought 100 C919 jets, with Reuters reporting a “substantial discount.” China Eastern was the launch customer for the C919. It currently has five in its fleet of more than 600 aircraft. All of China’s biggest airlines maintain large order backlogs with Airbus and or Boeing. Before this latest deal, COMAC had around 1,100 orders for the C919, mainly from Chinese aircraft leasing companies and airlines. International operators, at least for the time being, seem less keen. In March, Air Lease executive chairman Steven Udvar-Hazy said he wasn’t interested in Chinese planes. He described discussions as “a one-way dating relationship.” 

Air India’s Subtle A350 Signal? 

  • Air India’s new flagship has made its debut on the international stage. On May 1, Flight AI995 departed Delhi for Dubai, operated by an Airbus A350-900 for the first time. Until last week, the new widebody plane had been flying domestically, linking key Indian cities including Chennai and Hyderabad.
  • While Air India had to choose somewhere for the A350’s international launch, the UAE is an interesting choice. Almost a million passengers fly through Dubai each week. Data from Cirium Diio shows Emirates alone provides tens of thousands of seats a week to and from India. The revitalized Air India wants a much bigger slice of this lucrative segment. 
  • The national airline is in the middle of a five-year transformation plan that promises to bring Air India back to its world-class glory. One of the key metrics for success is removing the need for so many Indian passengers to transit through the Middle East. By bringing the A350 to Emirates’ home and hub, Air India is making a statement of intent. The airline wants to fly more people directly to India, as well as being a notable onward transit location in its own right. 
  • Speaking at the Skift India Summit in March, Air India’s CEO Campbell Wilson, identified what he believes to be the carrier’s competitive advantage over ‘one-stop’ regional rivals. “It’s no wonder that some relatively small geographies or population bases want to tap larger, faster growing ones to augment what they don’t have themselves. Upwards of 70% to 90% of people are not going to that place, they’re going through that place,” he said. 
  • Sir Tim Clark, the president of Emirates Airline has previously rebuffed the competitive threat posed by the ‘new’ Air India. “I have never looked at Air India as a foe or threatened by it. I do not consider them as a threat now,” he said in comments to the Mint Indian newspaper. Sir Tim suggested that the two airlines could in fact be complementary, with potential synergies for both parties: “Rather than considering Emirates as a threat to India, look at us as someone who is going to help Air India in doing all things it needs to do.” 
  • Up to 40 A350s are on their way to Air India, with 20 of the -900 variant, and 20 of the larger -1000 type. The airline currently operates a total of 72 flights a week to Dubai from five Indian cities, of which 32 are from Delhi. Flights AI995/6 were previously served by the carrier’s Boeing 787-8 Dreamliner.

Gordon Smith and Jay Shabat

Routes and Networks

Trouble at Bonza

  • The future of Australia’s newest low-cost airline is in the balance. On April 30, Bonza suddenly canceled its entire flying program and entered voluntary administration, a form of protection from creditors. The carrier has been flying for a little over a year. Its first revenue service was in January 2023. In a statement, the company said it had temporarily suspended services “as discussions are currently underway regarding the ongoing viability of the business.”
  • The airline said on May 2 that Bonza flights due to be operated up to and including May 7 have been canceled.  A notice was filed to the Australian Securities & Investments Commission confirming that accounting firm Hall Chadwick has been appointed as an external administrator. At the time of writing, no public comments have been made regarding possible third parties rescuing Bonza, or how the airline may be restructured.
  • Bonza, meaning ‘excellent’ in Aussie slang, operates a fleet of new Boeing 737 Max 8 aircraft. At its launch, the carrier promised to “open up Australia,” by bringing new competition to the market. Its current route map comprises three bases serving 36 routes to 21 destinations with a focus on “unserved and underserved markets.” Bonza’s CEO Tim Jordan previously held senior roles at major low-cost airlines including Cebu Pacific and Indian carrier GoAir (later known as Go First). The airline is backed by investment firm 777 Partners. The group also has a minority holding in Canadian airline Flair as part of its wider portfolio. 777 Partners did not respond to a request for comment. 

Dubai Doubles Down

  • Dubai is no stranger to building things and tearing them down, and one day, its global airport could meet the same fate. Last week Dubai’s ruler announced a $35 billion expansion for DWC (Dubai World Central — Al Maktoum International Airport), with hopes of turning it into the world’s biggest airport within the next decade. Once complete, DWC will have five runways, five terminals, and capacity for 260 million passengers. The scale of the new project could render the existing hub – Dubai International Airport (DXB) – obsolete.
  • Speaking on local radio, Dubai Airports CEO Paul Griffiths said: “If you look at the size of the city, [the new airport] is actually closer for those living on Palm Jumeirah. We’ve got to look at journey time. Journey time will get lower and lower. All of the expansion in Dubai is to the south. I really don’t think we need two airports. The proximity of the new airport will make it very clear, one airport, with the sort of capacity and proximity to the center of new Dubai, will be enough.”
  • DXB is one of the busiest airports in the world and the base for Emirates – an airline credited with helping put Dubai on the proverbial and literal map. In 2023, DXB received 86.9 million passengers. Its annual traffic in 2019 was 86.3 million. The hub expects to receive 88.8 million guests this year, close to its 2018 all-time high of 89.1 million passengers. DXB doesn’t post its financials, but we know its duty free business had $2.16 billion in sales turnover last year. 
  • Griffiths said “Dubai absolutely needs” the new airport as DXB will run out of space in the next decade. He said: “Although we are doing incredibly well at DXB, with the two runways, we are limited on aircraft movements. We do need those additional movements as the average size of aircraft is going down. I’m just so relieved this has been announced. It’ll be very challenging to move a hub in a short space of time, it’ll be a phased move.”

Network ContrAActions

  • American Airlines will reduce some of its international routes during the second half of the year and early into 2025 because of ongoing Boeing 787 Dreamliner delays. The carrier is the latest to trim its schedule as a result of delivery bottlenecks. “We’re making these adjustments now to ensure we’re able to re-accommodate customers on affected flights. We’ll be proactively reaching out to impacted customers to offer alternate travel arrangements,” American said. The airline will suspend multiple routes to Europe from the end of the summer. Core developments include:
    • JFK to Athens seasonal flights will be suspended earlier, starting September 3. Previously, service was supposed to end October 26. 
    • Philadelphia to Venice will be suspended October 5. 
    • O’Hare to Paris will be suspended September 3; service will resume in summer 2025.
    • JFK to Barcelona will be suspended September 3; service will resume in summer 2025. Previously, the route was year-round. 
    • Dallas-Fort Worth to Dublin and Rome service will end October 26; service will resume in summer 2025. Both routes were originally scheduled as year-round. 
    • American said it will also reduce flights from Miami to Rio de Janeiro, JFK to Buenos Aires and JFK to Rome. Some of the carrier’s Hawaii routes will also see reductions. For example, American said it would no longer fly from Dallas-Fort Worth to Kona this winter.
  • Despite the cuts, American is actually increasing capacity on other routes. Philadelphia to Barcelona flights will fly daily starting in January. The company said it would also operate flights from Miami to Sao Paulo three times a day from October 27 to March 25.
  • Boeing said it would delay the production of the 787 due to a shortage of certain parts. The plane maker previously halted 787 deliveries in 2021 due to manufacturing issues. American isn’t the only carrier to be affected by the Boeing delivery delays. Southwest Airlines said in an earnings release last month that it would make a rare move and exit from four airports: Syracuse, New York, Houston (IAH), Cozumel, Mexico and Bellingham, Washington. 

Korean’s Quick Vacation

  • Korean Air is launching nonstop flights from its Seoul hub to Lisbon, Portugal – but there’s a catch. They’ll only operate for a six-week season on a charter basis. The airline will fly three-times weekly between September 11 and October 25 on Wednesdays, Fridays and Sundays, comprising a total of 20 round trips. The route, which will be the only nonstop flight between the Portuguese capital and Northeast Asia, will be served by the Boeing 787-9 Dreamliner. Despite being a charter service, seats can be booked via the Korean Air website. 

Norse Boosts Paris Ops

  • Norse Atlantic Airways has added another city pairing to its transatlantic network. On May 1, the long-haul, low-cost carrier launched services between Paris Charles de Gaulle and Los Angeles. The route complements existing Norse flights from London Gatwick and Oslo to LAX. The new Paris departure operates four-times weekly, with headline fares from $238 one-way for Norse’s unbundled basic economy fare. All flights are operated by two-class Boeing 787 Dreamliners. 

Etihad Expands Interlines

  • Etihad Airways has bolstered its already huge list of interline partnerships. On May 3 it announced five further airlines were joining the club. These are Kam Air in Afghanistan, SKY express in Greece, Rex Airlines in Australia, Jeju Air in Korea and Myanmar Airways International. The agreements allow passengers the ability to book an entire itinerary on a single ticket with luggage checked through to the end destination. Etihad says it now has 123 “interline, codeshare and strategic partnerships” with global carriers.

Gordon Smith and Meghna Maharishi

Additional reporting by Josh Corder

Feature Story

Demand Strong, Supply Tight

Lufthansa and Air France/KLM Share Their Thoughts 

Two of Europe’s ‘Big Three’ giants reported their first quarter earnings last week. This followed updates from several airlines in the Nordic region (see last week’s Airline Weekly issue). Wizz Air gave a market update too. What’s the overall prognosis?

First, the bad news: The first quarter was—as usual—a loss-making one across the continent. That’s a normal seasonal pattern; nothing new there. But for most of the carriers reporting, Q1 loss margins were worse this year than last, heavily influenced by labor unrest and a significantly weaker cargo market. But there’s good news too: All six airlines that have reported so far—Lufthansa, Air France/KLM, Finnair, Norwegian, Icelandair, and Play—say demand for the upcoming summer peak appears unequivocally strong. Wizz Air expressed the same sentiment in an April 25 trading update. What’s more, the supportive demand environment is joined by a highly restrained supply environment, owing to an industry-wide aircraft shortage. That can only mean one thing: upward pressure on unit revenues. 

The giant Lufthansa Group—make no mistake—had an awful first quarter. Its operating margin was negative 11.5%, with net losses amounting to almost $800m. The biggest reason was widespread labor unrest, costing the company an estimated $380m. Strikes affected various units within the group, including its cargo and maintenance operations. Most importantly, hundreds of thousands of passengers had their travel disrupted, as Lufthansa was forced to cancel about 6% of all flights last quarter. In total, unions have staged more than 550 hours of strike action this year. And that doesn’t count disruptions from strikes by, for example, airport security staff in Germany. In addition to the $380m hit Lufthansa suffered in Q1, management estimates another $110m in lost earnings from strikes in the current April-to-June quarter.

Mercifully, Lufthansa now has new agreements secured with most of its unions, largely removing strike threats going forward. But even if the costs of the unrest are ignored, the company still would have reported a not-so-pleasant negative 7% operating margin. That’s  worse than the negative 4% it registered in last year’s Q1; it also posted a negative 4% figure in Q1 of 2019. 

The decline is disappointing given the strong state of passenger demand, which included the Easter holiday in this year’s Q1. Unfortunately, Lufthansa’s large cargo business tumbled to a negative 3% operating margin, from a supersized positive 18% a year earlier. Strikes explain part of that descent into darkness but more importantly, the cargo market simply isn’t as strong as it was a year ago.

The group also faces severe inflationary headwinds, amplified by recent labor agreements. In addition, the company’s airlines can’t grow as much as they’d like due to aircraft shortages, curtailing opportunities to lower unit costs through economies of scale. As CEO Carsten Spohr explained, “Delayed aircraft, delayed seats, delayed engines, unplanned engine overhauls, ongoing training requirements… staff shortages at system partners [airports and ground handling companies]. As a result… our growth in the Lufthansa Group is lower than originally planned.”

That’s hardly unique to Lufthansa though. All airlines are dealing with growth constraints. More unique is the group’s battle with Germany’s government over airport fees and taxes. “Our key hubs, especially in Germany,” Spohr complains, “are suffering from significant cost increases, taxes, fees… Charges in Germany, for example, have increased by more than 80% since 2019.” That doesn’t include yet another near-20% increase last week, bringing taxes per passenger to between 16 and 71 euros, depending on the route. IATA last week piped in: “The tax will make Germany less competitive in key economic areas such as exports, tourism, and jobs. It will further affect Germany’s air transport recovery from the pandemic, which is one of the slowest in the EU. Germany’s international passenger numbers, for example, are still 20% below pre-pandemic levels.”

In one sense, a high-cost home market is helpful—many low-cost carriers have left or sharply downsized their German flying, leaving Lufthansa with less competition. But Spohr’s criticism makes clear the company’s displeasure. More costs are coming, by the way, as Europe imposes greater usage of sustainable aviation fuels next year; these are typically three or four times the cost of conventional petroleum-based jet fuel. Collectively, regarding the government policies and labor unrest, Spohr said simply, “These are financial burdens and losses in demand that no company in our industry can simply compensate for.”

Maybe not. But he also said, “These airplanes not being produced right now will be lacking for many years in the industry, and in my view, will have a very healthy impact on the number one formula of success for our industry, which is demand versus supply. And I just met with my counterpart from United a few days ago, we are fully aligned here… this development for the airline industry will be positive for many years.”

Like many airlines, therefore, Lufthansa and its various sister carriers should have a fighting chance to overcome their inflationary headwinds with strong revenue gains. Not everything on the demand side is rosy. Lufthansa has been more affected by the Ukraine war than most airlines, for example. The latest Middle Eastern conflicts have had some negative impact. More significantly, China remains weak for Lufthansa, especially on routes to smaller markets (in 2019, it served Nanjing, Shenyang, and Qingdao). Travel between Germany and China is in fact growing, propelled by heavy corporate investment. But China-originating travelers are opting to fly on Chinese airlines, which can still fly over Russia and therefore reach Europe faster.

But these are exceptions. Japan and India are performing much better. The transatlantic market remains red hot, with even corporate demand now reviving (especially from U.S. points of sale but also to some extent from European points of sale). “Encouragingly, momentum in our home markets [led by Germany, Austria, and Switzerland] has picked up markedly in the past couple of months, catching up with the existing strength of the U.S. market, which has been visible for quite some time.” 

Swiss, as usual, reported great results last quarter (a small profit in the slowest period of the year). Eurowings enjoyed strong Easter holiday demand. Demand at Lufthansa’s giant maintenance unit is extremely strong. In the meantime, management still hopes to secure E.U. approval for its takeover of Alitalia’s successor ITA (a few issues like slots at Milan’s Linate airport are holding things up). Lufthansa is creating a new unit called City Airlines, aimed at improving the economics of its shorthaul feeder flights into Frankfurt and Munich. It’s finally getting its messy widebody fleet in shape with A350s and B787s (B777-9s are coming too). And thanks to the favorable demand trends in premium travel, the company can justify investment in an all-new business class product for both Lufthansa and Swiss. “We are confident that we have another very good summer ahead of us.”

Air France/KLM too, is upbeat about the summer, which will feature the Olympic Games in Paris. Its first quarter was also dented by some labor unrest, notably from striking air traffic controllers. It was dented by weaker cargo results too, and a slow passenger recovery in China, leading to a company-wide negative 7% operating margin. Air France alone came in at negative 6%, roughly in line with its pre-Covid performance. KLM, however, continues to be a significantly less profitable carrier than it was pre-2020—its Q1 margin this year was negative 11%. The latter’s results were impacted by one-time salary payments to KLM workers. In addition, “We are still having a real challenge in getting KLM’s production up to where we’d like it to be,” said group CEO Ben Smith. “We still have a shortage of maintenance personnel and we’ve still got challenges with training of our pilots under the right equipment.” More encouragingly, he said KLM’s latest labor agreements sufficiently “address operationally, the flexibility that we need.” He adds, “The cost structure of KLM, I don’t believe it’s gone above its major competitors in Europe with the increases that we put out and definitely nowhere near what we’re seeing across the Atlantic in the U.S.”

Air France/KLM aims to earn annual operating margins of about 7% to 8%, a level incidentally that it never reached even once during the 2010s—its best effort was 6% in 2017. But Smith and his team think they have some powerful weapons at their disposal, to supplement the strong demand they hope to see. A bevy of new planes (most importantly A350s, B787-10s, A320/21 Neos, A220s, and E195s) will lower unit costs and offer more optimal seating configurations. Air France is addressing domestic losses by moving more capacity to Transavia. The group’s loyalty plan—Flying Blue—earned a 23% operating margin on more than $200m in Q1 revenue. More flexible labor contracts improve network maneuverability. Corporate travel on longhaul routes is stable but not yet reviving like it is for U.S. carriers, which presents a potential upside. Separately, Air France/KLM said it renegotiated its transatlantic joint venture with Delta and Virgin Atlantic to give it a fairer allotment of value in light of the strong U.S. dollar.  

Air France/KLM, once a major shareholder in Alitalia, is set to lose some of the Italian market to Lufthansa. But what it loseth in Italy, it will gaineth in Scandinavia, thanks to an investment in SAS. It continues to watch developments as they unfold at TAP Air Portugal. It’s watching what happens with Air Europa as well, perhaps ready to pounce if regulators nix IAG’s takeover. “We do strongly believe consolidation in Europe is a must,” Smith asserted. He’s also keeping close tabs on the situation in Brazil as Air France/KLM’s bankrupt partner Gol reportedly discusses a merger with Azul.

The airline’s immediate focus, however, is ensuring a smooth operation during this summer’s Olympics. The games alone won’t bring much direct financial benefit. But the summer overall is nevertheless shaping up well. “Forward ticket sales are holding firm and point to a promising summer season.” Note that Lufthansa said it lost some summer bookings while it was suffering through its labor unrest—perhaps it spilled some demand to Paris and Amsterdam. One notable market that management highlighted for strength: the ASEAN region, specifically Thailand and Vietnam.

IAG (May 10th), EasyJet (May 16th), and Ryanair (May 20th) will soon provide additional insight on Europe’s airline trends. Bet on them delivering a similar message: That demand looks strong and supply looks tight.  

Jay Shabat