BREAKINGVIEWS-Tariffs leave Europe’s airlines high and dry

By Oliver Taslic

LONDON, April 8 (Reuters Breakingviews) - Western Europe’s flag carriers have flown into a storm. The continent’s leading groups – Air France-KLM AIRF.PA, British Airways and Iberia owner IAG ICAG.L, and Deutsche Lufthansa LHAG.DE – have seen their western and eastern fortunes diverge since the pandemic. Unfortunately, U.S. tariffs and a wobbly economic picture could mean flying in either direction gets tougher to do profitably.

Long-haul flying is generally more lucrative for full-service airlines, given, for instance, the greater potential to sell high-margin premium seating. Yet carriers that do a lot of business flying east, like Lufthansa, have been battling a competitiveness problem for years. A key culprit has been the need to avoid Russian airspace, adding time and fuel costs on Asian routes.

Before it was discontinued in October, Lufthansa said it was losing as much as $550,000 on each of its Frankfurt to Beijing flights. A recent EU mandate demanding greater use of pricey sustainable aviation fuel (SAF) will further raise costs for flights departing from Europe. Executives at an industry summit in Brussels last month fretted that increasingly uncompetitive European carriers would simply drive more passengers to fly to Asia via hubs like Dubai and Istanbul.

Still, eastern pain hasn’t proved existential in recent years. Western long-haul travel has largely picked up the slack, helped by wealthy American tourists splashing out on trips to Europe as part of an industry-wide, post-pandemic “premium leisure” boom. Airlines don’t disclose the details, but Barclays analysts estimated in March that North Atlantic flying accounted for well over half of European flag carriers’ operating profit, despite only amounting to between roughly 20% and 30% of revenue.

The principal beneficiary has been IAG, whose Dublin, London and Madrid bases are conspicuously westward facing. Its “passenger revenue per available seat kilometre” on North Atlantic routes – a proxy for demand strength – grew over 6% year-on-year in 2024, far outpacing other regions. But Lufthansa is growing its own transatlantic capacity, while Air France recently renewed its first-class cabin to lure high rollers.

A key risk, then, is a deteriorating economic backdrop. Even before U.S. President Donald Trump’s tariff announcement, Atlanta-based Delta Air Lines DAL.N had sounded the alarm on domestic demand and consumer confidence, which Barclays speculated could spill over to international travel. While airline bosses in Brussels insisted they had seen no signs of transatlantic weakness, Virgin Atlantic last week warned of slowing demand for travel from the U.S. to the UK, with IAG shares falling almost 7% on the day.

New tariffs could further imperil the long-haul cash cow. Plummeting stock markets and trade wars may make travellers less likely to go premium or cross the Atlantic. IAG now trades around 4 times forward earnings, per LSEG data, compared to 7 times in early February. Investors are strapping in for turbulence.

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CONTEXT NEWS

European airline groups Air France-KLM, British Airways and Iberia owner IAG, and Deutsche Lufthansa, whose brands include its German namesake, Austrian Airlines and Eurowings, saw their shares fall around 13% between U.S. President Donald Trump’s unveiling of his “reciprocal” tariff plan on April 2 and their close on April 7. The benchmark STOXX Europe 600 fell around 12% in that time.

Virgin Atlantic warned on March 31 that demand for travel from the U.S. to Britain had slowed of late after a “very strong” start to the year. “When we say signals of a slowdown in demand … we’ve had weeks where it’s been flat, we’ve had a few weeks where it’s been negative,” Chief Financial Officer Oli Byers told reporters. “We think that’s quite a natural reaction to the general consumer uncertainty there is in the U.S. at the minute.”

U.S. carrier Delta Air Lines on March 10 slashed its forecast for first-quarter earnings, citing a “recent reduction in consumer and corporate confidence caused by increased macro uncertainty” driving softness in domestic demand. Delta said at the time that premium, international and loyalty revenue growth trends were consistent with expectations.

Delta reports first-quarter results on April 9. Lufthansa, Air France-KLM and IAG report first-quarter earnings in late April and early May.