Air Canada Presses Pause on Europe
The airline will slow its transatlantic growth amid a glut of competitive capacity.
Dear readers,
Air Canada pinned a lot of its hopes for the second quarter on transatlantic routes, betting that the sky-high demand it saw in 2023 would last for at least one more year. But it did not happen.
That’s not to say business is bad. Some areas in Europe remain extremely lucrative, especially the beach destinations in Greece, Portugal, and the South of France that well-off Canadians and Americans prefer for vacation. But in other spots, Air Canada executives said, the market is too saturated.
"We continue to see strong demand for leisure travel to Europe," said Mark Galardo, executive vice president for revenue and network planning. "The result of our Q2 performance in Europe is less about consumer weakness and more about competitive supply growth above what the market can sustain in the short term."
We know what happened: long-haul carriers all saw the same trends in summer 2023 and rushed to sop up what they hoped would be a second peak season with record revenues. Galardo said Air Canada’s competitors were growing transatlantic seat capacity (from Canada) by nearly 20 percent for the full year. Both Air Transat and Air France (50 weekly summer flights to five Canadian cities) have made robust capacity additions.
But a supply-demand imbalance is just one of two problems. Another issue is European point-of-sale, particularly in France and Germany. Both countries had major events this summer that depressed demand — the Olympics in France and the UEFA Euro 2024 soccer tournament in Germany — but Galardo said it was more than that. Through its joint venture with United and Lufthansa Group, Air Canada expects to sell tickets to North America in France and Germany, and that business “was quite weak," Galardo said. "The European economy is stagnant right now."
Europe is huge for Canadian airlines in spring and early summer, so it should be no surprise that Air Canada's second quarter profit dropped significantly compared to the same period in 2023. The airline’s operating income was $466 million Canadian ($340 million U.S.) compared to $802 million a year earlier. Operating margin fell 6.4 points to 8.4 percent, while PRASM decreased 4.4 percent year-over-year.
Air Canada will make changes. During the second quarter earnings call (held August 7), Galardo said Air Canada was cutting its full-year transatlantic capacity by eight points from its earlier plan. It will grow the market only 3 percent in 2024, year-over-year.
Heading into 2025, Galardo plans to double-down on what worked this summer. "Demand to the Mediterranean really, really held up, and we'll be looking to do a little bit more of that in 2025," Galardo said.1
Now to other topics I found interesting, including Galardo's comments about where he will send some airplanes that had been flying across the Atlantic and why Air Canada is seeing muted growth in corporate revenues compared to U.S. competitors.