Margin performance hit by higher fuel costs

All three major European network airline groups saw operating margin fall year-on-year (YoY) as fuel costs rose but strong premium and long-haul revenue were able to offset much of the damage.

Unsurprisingly, IAG delivered the highest margin and the smallest YoY deterioration. Lufthansa Group came in with the weakest margin and the most pronounced YoY deterioration.

Strong revenue generation partially offset the fuel bill

In contrast to the European LCCs, unit revenue was a strong point for all three network airline groups.  Air France-KLM noted that 85% of the higher fuel bill was recaptured through improved revenue.

A few themes stand out:

  1. Long-haul was stronger than short-haul. IAG’s Domestic unit revenue grew by only 1% in Q2 after a banner Q1 which delivered RASK growth of 17%. Air France and KLM saw short-haul yields grow by just under 4% against 11% on long-haul while Transavia’s yield fell slightly by 0.2%.
  2. The Asia Pacific region performed exceptionally well as customers rerouted around the Gulf hubs. IAG’s APAC RASK grew by 13%, Lufthansa Group’s APAC yield grew by 13%, and Air France-KLM’s APAC yield grew by a barn-storming 20%.
  3. Lufthansa Group delivered impressive unit revenue performance across the board. Eurowings saw RASK grow by 9% YoY while the network airlines saw RASK growth of 6%. This should serve the group in good stead for its turnaround plan once costs start to behave.

Mixed capacity management

The three network groups took slightly differing approaches to capacity management:

  • Air France-KLM delivered a 3% uplift in ASK production, mainly driven by 7% growth at Transavia.
  • IAG held capacity flat with all portfolio airlines except Iberia stable or shrinking slightly.
  • Lufthansa Group reduced capacity by 4%, partially reflecting the closure of Lufthansa CityLine.

IAG portfolio airlines continue to outperform

IAG airlines occupy the top four spots with the group’s lowest-margin airline (Vueling) delivering a higher operating margin than the best-performer at either Air France-KLM or Lufthansa Group.

Within Lufthansa Group, Swiss continues to lead performance while KLM pipped Air France to the post this quarter, delivering a 0.4ppt higher margin than its French counterpart.

Every individual airline within the three groups saw its operating margin contract compared to last year. British Airways and KLM did an impressive job of keeping margins within 2% of 2Q25 while Vueling, Aer Lingus and Eurowings saw the sharpest declines (Eurowings’ strong unit revenue performance notwithstanding).

Outlook

Lufthansa Group was the only group to publish full-year guidance with adjusted EBIT expected to fall in the range of €1.7 - €2.2 billion. This is roughly symmetric around last year’s €1.96 billion.

IAG guided flat capacity for the full financial year and expects to “recover around 60% of higher fuel cost through revenue and cost initiatives” while Air France-KLM expects to grow capacity by 2-3%.

Overall, the operating environment remains challenging but Europe's network airline groups are at least able to lean on premium and long-haul revenue strength to at least partially offset the impact of elevated fuel prices.

Photo credit: Acroterion via Wikimedia Commons

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