

Discover more from The Airline Observer
IAG and Air France-KLM's Monster Earnings
Both groups have benefited from the premium leisure boom.
Dear readers,
By now, you've probably digested the big third quarter profits for International Airlines Group and Air France-KLM, both of which benefited from a big boost in long-haul demand. Excluding special items, IAG reported an operating profit of €1.745 billion ($1.853 billion) with an operating margin of 20.2 percent, while Air France-KLM said it made €1.3 billion in operating profit with an operating margin of 15.5 percent.
Every segment of IAG and Air France-KLM made money, but the top performer was IAG's Vueling. It recorded a 26.1 percent margin, a slight improvement over last summer. The worst segment was Air France-KLM's maintenance division, which eked out a 6 percent operating margin.
Compared to IAG's other business segments, British Airways looks like an under-performer, reporting an operating margin 10 points lower than Aer Lingus’s and eight points lower than Iberia’s. But judged against Air France and KLM, which have similar models, British Airways did fine. Air France, KLM and British Airways all reported operating margins around 15 percent, suggesting that airlines that never relied on gobs of business travelers for their profits are doing better than those that did.
It's important to share numbers for context, but this is not a financial newsletter. I follow earnings to collect nuggets about commercial strategy. Here's what I found most interesting from Air France-KLM's and IAG’s Oct. 27 interactions with analysts.
First to Air France-KLM.
Why is Air France leaving Paris Orly?
By 2026, Air France will no longer operate from Paris Orly, except for a single route to Corsica. Instead, Air France will transfer flying to its low-cost arm, Transavia, which will hold slightly more than 50 percent of Orly's slots. Air France-KLM CEO Ben Smith said the company had no choice, telling analysts that Air France's Orly operation has been "extremely loss-making." He blamed a slew of factors, including the rising popularity of video conferencing, reduced interest in business travel, and a preference for rail. The domestic franchise has been in real trouble: Between 2019 and 2023, Smith said, demand on domestic point-to-point routes from Orly decreased by 40 percent, while the number of same-day return trips went down by 60 percent.1
Air France already had trimmed at Orly, but it has not been enough. "The operating margin for this business segment continues to falter and is getting worse than before the Covid crisis," Smith said. Given this dynamic, you might wonder if Air France-KLM considered a bigger pullback, but Smith suggested the company is bullish about Transavia. "The airport is going to be a very attractive airport for both business and leisure travelers, in particular, to Europe," he said. "And we are going to be very well positioned with a highly competitive, cost-structured brand in … Transavia."
Depending on the stage length, Smith said, Transavia has a cost advantage over Air France of between 15 percent and 40 percent.
Could Transavia participate in European consolidation?
All three of the major European network airline companies are in the process of bulking up, assuming regulators approve the consolidation — IAG is trying to pick up Air Europa, while Lufthansa Group is buying a piece of ITA and Air France-KLM is taking a slice of SAS — but one analyst wanted to know about the low-cost space. Could Air France-KLM buy an airline to merge with Transavia?
Smith said it could, but said he has installed the pieces to to grow Transavia organically. When he arrived at Air France-KLM five years ago, he said, Transavia’s French arm could fly only 40 airplanes, had a difficult relations with its pilot union, and could not fly domestic France routes. None of those issues exist anymore — not even the pilot troubles, as pilots have the same contract guidelines as at Air France, with different work rules that "enable us to get the same productivity and overall unit cost versus, as an example, easyJet," Smith said. "We have full flexibility now commercially to put Transavia into the markets where we believe they would outperform Air France, and into markets that Air France had pulled back from in previous years."
Transavia could be boosted by an acquisition, but Smith said it's not a priority. "We are transitioning and have a lot of growth that will take place in all the airports, so we have our hands full there," said. "But if the right opportunity obviously came about, then it's not impossible."
Why did Air France-KLM covet SAS?
Smith doesn't try to reinvent the airline business. At Air Canada and now at Air France-KLM, he has used a standard playbook — winning labor peace, making cabin layouts more efficient, selling a premium product at network airlines, investing in a low-cost subsidiary, and optimizing hubs.
So when an analyst asked him what he plans for SAS now that Air France-KLM is buying a nearly 20 percent stake with an option for more, I was not surprised by his answer. Smith believes he can wring extra profits out of SAS by helping the airline catch up with modern times: airlines that succeed participate in joint ventures (SAS never joined United and Lufthansa's across the Atlantic) and operate as a segment of a larger group.
"If you look at the SAS route structure, it completely underperforms from a long-haul perspective," Smith said. "If you look at KLM and Amsterdam versus, as an example, Copenhagen or Stockholm from SAS, it doesn't compare whatsoever.” But as part of a “friendly group," Smith said, the airline can reach its potential, particularly because of its geographical advantage in Northern Europe.
"Yields that we derive out of there are quite strong, and the growth opportunity for shifting traffic or attracting traffic from our competitors we think is quite strong," Smith said.
What's going on in global hotspots?
Like most global airline groups, Air France-KLM has suspended service to Israel, but that will not be material to fourth-quarter earnings because "this route was financially not a top performer during the winter," Smith said. Perhaps more concerning, Smith said: "We are seeing some slight reduction in demand to some of the other destinations we serve around Israel."
Air France also has challenges due to unrest in West Africa, including in Mali, where the airline had been scheduled to resume flights in October. But it did not receive government permission. "In Western Africa, we have suspended service to four points, and we've restarted to one point," Smith said. "So out of the 26 destinations we have in Africa — that's at Air France plus the destinations we have at KLM — the impact is rather immaterial," Smith said. "We do have an enormous pressure on the number of aircraft. We have plenty of destinations to reassign. And as we're planning out our summer '24 schedule, we will see if things do not improve in Western Africa. We've got other places to redeploy these airplanes."
And here are two quick items I found interesting.
Smith still loves premium economy. "KLM was the last major transatlantic carrier to introduce a premium economy cabin, so we expect that to be just as successful as what we have at the Air France brand,” he said. “We are planning to increase the size of that cabin throughout the Air France fleet as well.”
He's also bullish on Asia. This winter season, Air France's capacity to Asia will grow 60 percent, while KLM's will increase 30 percent, both figures year-over-year, though overall capacity remains well below 2019 levels. Japan, South Korea and Singapore "have come back very strong," Smith said, while Hong Kong is "not too bad." China is slower, he said, because Chinese citizens have trouble getting European visas. "With the strength of the transatlantic market and the South American market, we're not short of opportunities to deploy the airplanes that were originally assigned to China," Smith said.
Now let’s look at IAG, which has less exciting earnings calls now that the always-honest Willie Walsh no longer leads them.
Aer Lingus is riding a premium wave
Aer Lingus is not the first airline I think of when I hear “premium.” It has no premium economy section, and its business class seat is a bare-bones affair that had its heyday in 2014 when JetBlue installed it. But Aer Lingus is a premium leisure airline, and that's the hot segment — so hot the carrier rode the dynamic to a 25.5 percent operating margin.
"We saw particularly strong demand in premium cabins across the Atlantic with record load factors in the business cabin," IAG CEO Luis Gallego said.
Aer Lingus is growing in the United States. It added Cleveland for summer 2023 and will add Denver next year. It is also resuming its Minneapolis route.
One analyst asked Aer Lingus CEO Lynne Embleton if she is worried about JetBlue's expansion into Dublin. JetBlue will fly from New York and Boston between March and September. Of course not, she answered — politely.
"We are used to competition across the Atlantic," she said. "In terms of our fares and our product, I think we'll be competing really well there. And if I look ahead, we've got the XLR coming into the fleet in the next couple of years, and that will enable us to strengthen our schedule proposition further."
London business traffic is way down, but in Spain...
Business traffic continues to lag for British Airways, with volume in the third quarter stuck at 64 percent of pre-Covid levels and revenue at 74 percent of pre-Covid levels. Gallego said long-haul business traffic of two days or more has recovered faster than shorter trips of shorter distances. Other executives said the number of day trips have fallen considerably.
Of all the IAG airlines, Iberia has had the swiftest British travel recovery, with volume 86 percent restored and revenue 96 percent recovered. “Iberia is seeing a strong demand across all of its network and its corporate demand is much closer to getting back to pre-Covid levels,” Gallego said. “The Latin America network is seeing particularly good performance where Iberia is using its newer aircraft to serve those markets more efficiently through better aircraft utilization.”
Loyalty was not as profitable as last year
IAG Loyalty is the only non-airline business segment to report results. It also was the only segment to report a decline in year-over-year operating margin, down 2.6 points to 21.3 percent. However, total revenue increased 58 percent year-over-year.
IAG Loyalty added 1.3 million members in what IAG called a record quarter. Asked how many of them are considered active members, Adam Daniels, who runs the program, demurred.
"That increase that you saw is members joining the program, and we think that's because they're seeing the changes that we're making — the easier redemptions, the easier collections — and the partners that we've signed up with," he said. "So the number of 1.3 million, we expect the majority of those to be active, and that's doing something within a 12-month period.”
That’s all for me today. And possibly for this week, as I am at the Skift Aviation Forum. Thank you for reading and subscribing.
I should mention France’s new ban on short domestic flights, now in effect. Many people have correctly noted the law has plenty of exceptions and the ban itself may be following consumer behavior — it is possible that travelers are starting to consider domestic rail service as a “true viable alternative” (Ben Smith’s words) and choose it over short domestic flights.