In the third quarter of 2024, the aviation group Air France-KLM recorded a noticeable decline in profits. Despite a slight increase in revenue, profits fell significantly due to several factors, including increased personnel costs, higher operating expenses and the impact of the Olympic Games in Paris.
The decline in margins has also caused disillusionment on the stock market: the company's shares experienced a slump and temporarily lost more than twelve percent of their value. CEO Ben Smith said that he expects costs to continue to rise for the year as a whole, especially at the Dutch subsidiary KLM, which is struggling with its own challenges.
Reasons for the decline in profits: Higher salaries and operating costs
Air France-KLM's revenues increased slightly to just under nine billion euros in the third quarter of 2024 compared to the same period last year, an increase of around four percent. However, increased operating expenses, in particular the significantly increased personnel costs, overshadowed this increase in revenue. The group, which had suffered greatly from the effects of the pandemic in recent years, is in a phase of recovery and growth, which brings new challenges in the area of personnel and operating costs. Labor costs are a key factor in the aviation industry, and in times of scarce human resources, such as those currently prevailing in the labor market, salary costs have continued to rise.
For the whole of 2024, Air France-KLM expects unit costs to rise by three percent, according to Smith. Originally, only a two percent increase had been forecast. The increase in unit costs is a key indicator of the financial pressure the airline is under. According to analyst Alexander Irving of Bernstein Research, the adjustment of the forecast points to particularly ongoing difficulties at KLM, whose unit costs have also increased.
Problems and cost-cutting measures at KLM
The Dutch subsidiary KLM, which has distinguished itself in recent years through cost discipline and efficiency, is currently facing significant financial challenges. To counteract rising costs, management has introduced a cost-cutting program and a freeze on investments. The planned fleet renewal, including the introduction of the modern long-haul jet Airbus A350, is now also subject to reservation. Deliveries of this new aircraft type, originally planned from 2026, could be delayed or adjusted if the financial situation does not recover quickly. With these measures, KLM aims to stabilize its falling margins and reduce costs sustainably.
This development is part of a broader context: the pan-European aviation market has recently been hit by a number of financial pressures, exacerbated by the economic impact of the pandemic, inflation and the lack of qualified staff. For KLM, which has traditionally been able to operate somewhat more independently due to its size and market structure, this development represents a new challenge.
Olympic Games put a strain on the summer: decline in travel bookings
An additional and unexpected factor in the decline in profits at Air France-KLM was the Olympic Games in Paris. During this sporting event, which was expected to increase demand in the tourism industry, bookings were instead recorded as falling. Many international travelers apparently avoided the French capital during the Olympic Games, which led to lower passenger numbers. According to management estimates, this cost the group around 160 million euros in revenue in the third quarter. Many French passengers also apparently postponed their trips, as they either followed the Olympic events in the capital or stayed away from the city due to the increased number of visitors.
Such effects associated with major events are not uncommon in the aviation industry, but the impact on Air France-KLM was particularly strong due to the size of the Olympic Games and the international audience. The group hopes that these effects will balance out over time and that bookings will normalise in the coming months.
Stock market slide: reactions of the financial markets
The news of the drop in profits was met with scepticism on the stock market. On Thursday morning, when the company's figures were announced, Air France-KLM's share price temporarily lost more than twelve percent, falling to its lowest level since August 2024. By midday, the loss was still around eleven percent. The stock market's reaction reflects investors' concerns about rising costs and the ongoing challenges the group faces in its operating business.
Analysts had expected a better result for the summer quarter, but increased personnel and operating costs as well as the burden of the Olympics led to a result that fell short of expectations. These developments have affected investors' confidence in the group's short-term recovery, and it remains to be seen whether Air France-KLM can improve cost efficiency in the coming year and successfully implement the planned savings measures at KLM.
future perspectives and challenges
Air France-KLM continues to face significant challenges. While air traffic is slowly recovering from the crisis and demand for international flights is increasing in many regions, the economic pressure on airlines remains high. The continued high price of kerosene and increasing investments in sustainable technologies, such as more environmentally friendly aircraft models and the introduction of Sustainable Aviation Fuels (SAF), are other factors that are exacerbating the cost situation in aviation. Competition from other major European airlines such as Lufthansa and British Airways as well as low-cost airlines such as Ryanair and EasyJet also continues to put pressure on Air France-KLM.
In addition, it remains to be seen whether and how the planned measures at KLM - including the cost-cutting program and the investment freeze - can help stabilize margins and restore the profitability of the Dutch subsidiary. CEO Ben Smith has stressed that the group's long-term strategy is aimed at modernizing and making the fleet sustainable. Nevertheless, short-term adjustments are necessary to cushion the rising costs and the weak increase in profits in the summer quarter.
Overall, Air France-KLM is faced with a balancing act between short-term savings and long-term investments, which are essential for a sustainable future. The development of unit costs will be crucial to successfully assert itself in a challenging market environment.
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