Finnair Oyj

Good day, ladies and gentlemen. I'm Erkka Solonen from Finner IR, and it's my pleasure to welcome you all to this Finner third quarter 2020 earnings call. I have here with me Finner CEO, Mr. Topi Manner, and he is joined by the CFO, Mr. Mika Stirkkinen, for the Q&A session. I will now turn this call over to you, Topi.

Okay. Thank you, Erkka. And hello, everybody, also on my behalf. Welcome to this Q3 earnings call. Thank you for putting the time aside. When we look at the Q3 of Finnair, it is clear that the pandemic continued to weigh heavily on us. But at the same time, it is important to acknowledge that we proceeded well in terms of our savings targets, and we are now in a position to exceed or increase our saving target. And we also progressed well in terms of strengthening our cash position and our equity. All in all, we have significant headwinds in terms of the surrounding environment and all of those things that we cannot control. On the other hand, those things that we can control are progressing well, and that two-sidedness is visible in the quarter. So moving forward, When we look at the Q3, I mean, our run rate of daily passengers during Q3 was approximately 10% vis-à-vis the 2019 levels. The travel restrictions continued to limit our possibilities to operate in a significant fashion, because Finland, as our domestic market has one of the most stringent, if not the most stringent travel restriction regimes in Europe. The demand that we experienced in the cargo side of business was still on good level and the proportion of cargo out of our total turnover is clearly bigger than in normal times. We also some time ago we released our winter traffic program and according to that we are during the winter time we will be flying to some 50 destinations on average flying 75 daily flights and that corresponds approximately 20 percent of the flights that we flew in 2019 and translates into a little bit less than 15% of our capacity measured with available seat kilometers. What is important to note is that we maintain readiness to increase the amount of flying as soon as the demand recovers. If, for example, the travel restrictions are being lifted. And that is indeed something that we would hope to see in the near future. So our guidance for the Q3 was that we will see a similar operating loss of similar magnitude than we saw in Q2. And that is indeed how it turned out to be. Our operating loss landed at minus 167 million euros. So approximately 1.8, 1.9 million euros per day. Our revenue fell with 89%, so the run rate of revenues is 11%, as I mentioned earlier, and our capacity decreased with 87%, pretty much hand in hand with the revenue. During the quarter we decreased our cost significantly with immediate measures to adapt to the new environment. We took out approximately half a billion euros of cost also during the Q3 as we did during Q2. And with that, during the course of the pandemic, we have been reducing our costs with more than 1 billion euros. The bright spot of the quarter was the increase of net promoter score to all time high levels. our net promoter score during the quarter was 56. And the sample size is similar to the sample size that we had in Q2 last year and Q3 last year when our net promoter score hovered between 38 and 40. We see this clearly as a vote of confidence from our customers in terms of how we are handling the health safety measures on board our aircraft. And customers clearly think and more importantly feel that they can fly safely also in terms of the virus concerns. And this is certainly something that we will hope will bring customers back rather sooner than later, once the virus situation clears out. In terms of customer service, another big theme during the quarter was the refund processing. Starting from March, when we were forced to cancel flights on the back of the border closures, we have now handled refunds of approximately one million customers. We have been adding resources to refund processing. We have been developing new tools like robots to handle some of the refunds automatically. And now we are back to normal handling times in terms of refunds. Altogether, we have been paying more than 400 million euros of cash refunds to our customers. As stated, we made good progress in terms of our cost savings and permanent cost savings, and therefore we are in a position to increase our target from 100 million euros to 140 million euros. with full run rate impact in year 2022. It's clear that when we are now reviewing our organization and our operational processes, changing our way of working, this is yielding to structural cost savings across Finnair and especially on the land side of our operations. We have made better than anticipated progress and identified new opportunities for savings in areas like maintenance and repair, real estate, IT cost and then we have been renegotiating and doing some competitive biddings generally with our suppliers and this is clearly yielding results. Given these steps forward, we now increase the target to 140 million euros. In terms of personal implications, during the quarter we handled the so-called co-determination process, leading to reduction of people of 700 across our operating countries. This corresponds to approximately 30% reduction in our land side operations, especially in the headquarter and support functions. Altogether, when we take retirement into account, when we take the natural churn into account, and after these redundancies during this year, we have been reducing the amount of our personnel with 1,100 approximately. At the same time, we have been in intense talks with our unions in terms of agreeing upon savings and we have been agreeing upon permanent cost savings with some of our employee groups, with some of our unions and those unions, those employee groups will be eligible for a rebuild incentive that will be paying out in three years if our rebuild targets will materialize. Some of the unions, some of the employee groups have agreed on fixed term savings. And those are certainly also very welcome in terms of our rebuild planning and savings targets to be met. Finnair has a pension fund predominantly for flying personnel, for pilots and capping crew, and especially for more senior staff. And as part of the talks with the unions, we have now agreed about index removal for those pensions, for those additional pensions. And that will be leading to a reduced pension liability for Finnair. And on the back of that, during Q4, we will be making a one-off positive booking that amounts to 85 million euros. That 85 million euros will not be part of our comparable EBIT, but it will be contributing to the EBIT number in the items affecting comparability. And therefore it will be flowing through the P&L and ultimately it will be strengthening the equity in our balance sheet. Beyond this 85 million euros, we have potential other similar measures that will materialize during Q4. We have a negotiation result with our unions, but some of these arrangements are pending regulatory approval. And once we get those regulatory approvals, we will get back to this and announce the result during the course of Q4. As part of the job redundancies, we introduced a next program for our people that is aiming to support those who will lose their jobs in finding their next chapter in their professional careers. And this is something that we feel is very important. to us in terms of us being a responsible employer and offering social support for those who are in need. In terms of cash, we started the quarter with a cash balance of 851 million euros. The comparable EBITDA was 82 million euros. The change in working capital was quite significant during the quarter because we especially handled the backlog of refunds that amounted to 129 million euros. And then there was additional working capital elements, especially coming from various hedge and derivative impacts during the quarter. Going forward, it should be noted that the working capital changes should be clearly smaller, especially when we look at the refunds, because the outstanding refund backlog currently is 40 million euros, and therefore this particular item will be clearly different in the quarters to come. We took delivery of one Airbus 350 based on earlier arrangements prior to the pandemic and therefore invested the remainder of the purchase price to that aircraft. We did one divestment of sale and lease back arrangement of one Airbus 350 aircraft. The remainder of the rights issue came in in July. Hybrid bond net proceeds impact the cash, and we also drew 200 million out of our pension premium loan during the quarter. We paid back the revolving credit facility of 175 million euros, but the revolving credit facility remains at our disposal at this time. And that basically led to the quarter end cash balance of 725 million euros. And I stated the revolving credit facility and 200 million euros of pension premium loan remain undrawn in terms of liquidity at this point of time. We continue to negotiate financing arrangements, especially aircraft transactions and thereby raising debt. And once those discussions mature, we will be coming back to that with separate announcements. When we look at our balance sheet, the equity ratio is on year-end 2019 levels, thanks to the rights issue that we conducted during the summer. And now looking into Q4, one of bookings out of the pension fund will be supportive for our equity as well. Curing levels remain at Q1 levels at this point of time. All in all, when we look at our balance sheet, the balance sheet is healthy and it provides a solid platform for us to rebuild Finnair during the quarters to come when the pandemic develops and hopefully gradually starts to ease in. In terms of fuel cost, I mean, the price development was basically compensated by currency and hedging deviations. So fuel bill basically pretty much developed hand in hand with our volume. In the IFRS accounting, we still were in an over-hedged position during the quarter and we dismantled, unwound those over-hedges and that resulted into net financial expenses of 54 million euros during the quarter. Now our So the level of hedging is relatively small going forward and therefore these net financial effects are expected to be limited in Q4 and beyond. When we look forward, the winter traffic program I already covered, we estimate that the ramp up in terms of the demand starting to pick up will materialize in bigger scale at the start of the summer season. So basically end of March, April, next spring. And we will be making sort of further decisions related to the summer traffic program in early next year. At this point of time, we are flying some of our aircraft, approximately half of our fleet, to winter storage in warmer countries. And one of those is Czech Republic and Prague, where we are also doing some maintenance for our aircraft. But we maintain adequate fleet in our home base so that if the demand is picking up, we can react to that quickly and increase the amount of our flights. During the quarter, we have been working on our revenue program as well, and in an effort to find all revenue pockets that can be found in this challenging marketplace where we find ourselves in. Sun Tours, Aurenko Matkat launched package travel options Not to Mediterranean countries where they are flying typically, but to Finnish Lapland where the sun also shines during the winter time. And then those travel options have been received well by our customers. another pilot that we have been doing is a taste of finner so we are selling premium packaged food inspired by our business class to local supermarkets and this this has been received really really well and we are looking at possibilities to scale up this this fast when we announced the initiative Some time ago, the news went viral and actually the news was covered in more than 60 countries across the globe. So this is an example of how we are staying relevant in the minds of our customers and how we are keeping up the brand value of Finnair, which indeed is a great asset for us during this time. We have been also doing travel responsible campaigning, reminding our customers that we are ready to fly when they are ready to fly. And there is also an important message to governments across Europe in this one, and that message is a message of travel restrictions. What the travel industry needs is consistent and predictable travel guidance and especially common standards, common testing regimes based on rapid testing. And we do hope that across Europe, governments will be harmonizing their practices and take steps forward in this very, very important matter in order to save jobs in the travel industry in Europe during the winter. And that brings me to the guidance of the quarter. So looking ahead, we see the Q4 operating loss to be of similar magnitude than we had during Q2 and Q3. This one of booking out of the pension funds is not included in comparable operating profit as such. And as stated, that 85 million and potentially some more will flow in to the P&L as part of the operating result and thereby will be strengthening the balance sheet and equity. Based on our current assumptions, we estimate that the revenue and the capacity will both decrease more than 70% in 2020 compared to 2019. So this pretty much sums up the Q3 from Finnair perspective. And as stated, what we have been able to accomplish during the quarter is especially the progress in the permanent savings, in adopting our business to new reality, and also the measures in terms of cash and equity have been high on our agenda. And then progress on those fronts has been according to our plans. So, thank you.

Thank you, Toppi. And now would be a convenient time for any potential questions you may have. So, please go ahead.