Finnair Oyj

Good day, ladies and gentlemen. I'm Erkka Salonen from Finner IR, and it's my pleasure to welcome you all to this Finner's first quarter 2021 earnings call. I have here with me Finner's CEO, Mr. Topi Manner, and he's joined by the CFO, Mr. Mika Stirkkinen, for the Q&A session. I will now turn this call over to you, Topi. Please, go ahead.

Thank you Erkan and good day everybody. Thank you for joining this quarterly earnings call once again and let's recap the Q1 this year from a Finnair perspective. This was another pandemic quarter for us and the pandemic mitigation actions continued at Finnair. We adjusted costs, both temporary costs as well as permanent costs, and we continued the financing actions. And now, on the back of the progress in vaccinations, You most likely noticed that during the weekend, the global vaccinations passed the milestone of one billion vaccinations. We see that the vaccinations are accelerating in speed and that will be enabling a gradual lift of travel restrictions during the course of the summer and thereby we expect that a more meaningful travel recovery will gradually take place from late summer onwards. So if we look at the Q1, we flew approximately 75 passenger flights per day, carrying on average 3,000 passengers. something like 10% of the pre-pandemic levels. In terms of destinations, the Finnish Lapland destinations were among the most popular, and that traffic was effectively a bright spot in our offering. After a year of not flying to North America, we were able to reopen our flights to New York in March, and that is heavily supported by cargo demand. Since the end of January, we have requested from all passengers a pre-flight negative COVID test in accordance with the recommendation of Finnish health authorities. We also during the quarter we introduced one-way fares and those have been welcomed by our customers and a meaningful share of our tickets are now sold as one-way fares. Customer satisfaction remained at very high levels, actually record high levels. The net promoter score for the quarter being 54. For Cargill, the quarter was very strong while the passenger revenue remained weak. We flew 547 cargo-only flights during the quarter and actually on monthly basis the month of March was our all-time best in terms of cargo revenue. The Suez Canal blockage did not have a big impact on cargo revenue during the Q1, but we see that the impact of that blockage to global supply change and to the cargo market overall will be supportive of air freight demand during the course of Q2. As we have been mentioning previously, the good cargo demand also enables long-haul passenger flights. That is the case with New York and that is the case with our long-haul flights to Asia. The price development per ton has been notable during the past months and during the course of the whole pandemic. In comparison to previous quarter, the prices increased by one third. And in comparison to pre-pandemic levels, the prices have increased 200%. So very notable development taking place on that front. What we see increasingly also in cargo business that the short northern route being also the most CO2 efficient is a competitive advantage, because our customers, for example, the Norwegian salmon companies and others are increasingly focused on their sustainability goals and increasingly mindful of the CO2 emissions in their entire value chain. And this is something that we can leverage in the cargo business now and going forward. Altogether during Q1, Cargo was clearly more than 50% of our total revenue as illustrated by the bars on the right hand side of the picture. When we look at the Q1 numbers, the revenue landed at 114 million euros. So a notch better than during the Q4. And this was clearly driven by the cargo business, as mentioned. In terms of costs, we basically proceeded as expected. And our comparable operating result landed at minus 143 million euros. When comparing with the previous quarter we will need to remember that there we had this one very sizable positive one-off related to our pension arrangements and in comparison to Q1 last year we will need to remember that that was The first quarter when the pandemic started to take its toll, especially during the course of March when we needed to ramp down basically the entire network as the lockdown started across the world. We are taking good steps forward in our savings program, cost saving program that aims for permanent cost savings. And we will be reaching our target of 140 million euros ahead of time. And with that, we are able to increase the target to 170 million euros. We have been taking significant steps forward. We have been basically revamping all of our headquarter functions, applying sort of zero budgeting as a method to these units. And we have been reducing during the course of the fall and winter approximately 30% of our staff in these units. Um, As late as yesterday, we completed a significant project related to our IT infrastructure, moving all of our data from a physical data center to a cloud-based IT architecture. And that means that as of today, we are an all-cloud company when it comes to data. We are reducing the square meters in our office premises quite significantly, up to 40% reduction in these premises. This is partially driven by the decreased headcount in the headquarter functions, but also partially driven by the fact that we estimate that people will be at least partly working more remotely going forward. And this kind of a hybrid way of working will be reducing our office space need going forward. On the maintenance and operations side, we have been also able to realize some significant cost savings on that space as well as across the board we have been renegotiating basically all of our supplier agreements and we have been able to materialize significant cost savings in the process so all of these measures are examples of the kind of measures where we have been exceeding our original targets and these are enabling us to increase the permanent cost savings target right now. We will turn every stone in order to find these cost savings. And we push forward. We have been setting stretch targets for our entire organization. And we are confident that we will be reaching the new target of 170 million euros. And if and when we reach that, we are not stopping at that. We will be pushing for more as we do realize that cost competitiveness will be crucially important for us to be competitive on the marketplace post-pandemic and us to be able to pay back the debt that we are accumulating by means of increased profitability. So when we look at the headline number of 170 million euros of permanent cost savings, I think that the good comparison point would be the operating result of 2019, which was 162 million euros in terms of EBIT. So all other things equal. this would be doubling our profitability in comparison to 2019. When we take a closer look at the composition of the cost saving target, 65 million euros of the saving target are related to fixed costs and 105 million euros are related to variable unit costs that are of permanent nature. So that gives you an idea of the dynamics and how that will be reflected in our P&L depending on how the volumes will be coming back. In terms of cash, the negative cash flow during the quarter amounted to 158 million euros. What we are seeing now is that the working capital impact on the cash flow is clearly stabilising in comparison to last fall when we still had quite a bit of the refunds to take care of. At the end of the quarter, we had 665 million euros of cash at hand, and available undrawn credit facilities amounted to 575 million euros. That includes the 400 million hybrid loan that we have been agreeing with the government of Finland. to which we have an EU commission approval to 350 million euros. We will be seeking for the additional approval from EU commission for the remaining 50 million euros at a later stage. We also renegotiated our revolving credit facility, the curing covenant during the quarter, and that revolver remains in our disposal. So altogether, putting this liquidity together, it amounts to 1.2 billion euros roughly. And that would be with the burn rate of Q1, that would be enough for eight quarters to come. But as stated, we do expect that the demand will be gradually picking up from late summer onwards. Taking a look at the balance sheet, our equity ratio is currently at 22.7%, so still on healthy levels after more than a year of the pandemic situation. The gearing is increasing, but what is worthwhile to note is that the 400 million hybrid loan increases our equity buffers and it's not included in the numbers on this page. As stated, it is all about building the long-term competitiveness now, and cost competitiveness will be a big part of this. We have been comparing ourselves vis-à-vis the competitors in the Asian long-haul traffic, And when we look at the CASC numbers, we see that we are comparing well toward our Asian competitors and even better toward our European competitors. Customer and product is another major headline for us. And here we will be redefining and refocusing our core product, the basic product, what is included in the basic fare. And we will be creating new revenue streams to ourselves from ancillary business. And we will be focusing strongly, much more strongly than previously to direct distribution and with the help of retailing capabilities boost the usage of Finnair.com not only in our Nordic home markets but internationally, gradually in Europe and in our key markets in Asia. So the distribution transformation is a big part of our agenda. We have also continued investments to in-flight customer experience and premium economy as a new travel class will be part of our plans going forward and we do think that premium leisure as a segment will be increasingly important for an airline like us post pandemic. In terms of agility and flexibility, I think that during the pandemic, we have been really learning new ways of working. As an organization, we are less hierarchical, more entrepreneurial now, and I'm sure that that will be serving our purpose going forward. Committed personnel is really key to our plans. On that front, we have been taking steps forward during the past days. We just yesterday announced that we have come to an agreement with our pilots, with our pilot union, of a new collective agreement for three and a half years to come. The CLA is a groundbreaking agreement in many ways. It brings predictability to our business. It increases the flexibility of our business. We already have a quite seasonal demand structure. We estimate that that seasonality will be further increasing post-pandemic. if there will be a degree of hit in the corporate travel. And this CLA enables us to address that seasonality better going forward. We are also moving from a purely seniority based salary model into a vacancy based salary model and therefore we are simplifying many of the old structures in our CLA and optimizing the usage of our pilot resources. So a very important deal and a very important building block in the rebuild efforts of Finne. Looking forward, we are now preparing for a gradual increase in the traffic during the course of the summer. The first eligibility trainings for our flying crews have begun. The pilots will go through simulator training, the cabin crews go through their sort of travel and service related training for several days. But when the trainings are done, they will go back to furloughs and once we start flying more, then they will be called back on a relatively short notice. And this enables us to flexibly manage the cost and manage the resourcing. We yesterday announced our summer network, the network that we are starting with, and that includes over 60 destinations. So the summer destinations include countries like Spain, Italy and Greece. And on the back of a rapidly increasing vaccine penetration in the US, we estimate that the travel restrictions will be lifted toward the end of June. And thereby we are introducing and reopening Chicago and Los Angeles as new destinations. And we will be also adding frequencies to New York. We will be keeping a close eye on the demand development and we stand ready to add frequencies and flights hand in hand with demand as travel restrictions are loosened. We are continuing our comprehensive flight, health and safety related measures. And last week we also announced that we are from 11th of May onwards accepting vaccination certificate as an alternative to negative COVID test as the vaccine coverage increases rapidly in the markets that are relevant to us. We also able the customers to book with confidence so that they can transfer their bookings without any fees flexibly if the bookings are made before 1st of September. Also the corona cover is extended for bookings made by end of June at the latest. And with this we hope that customers are able to move from travel related dreaming to travel booking and then onwards to actual travel experience during the course of the summer. There has been a lot of talk of government exit plans. I guess in many countries, the Finnish government also announced its own exit plan. And while that plan is a very high level plan, a very good part of it is that the Finnish government is committed to EU digital green certificate as the basis for reopening travel. and EU digital green certificate which by definition restores free movement in EU indeed is a big part of our plans and we expect that to promote travel across Europe from late June onwards when it is supposed to be decided. Getting travel arrangements and travel agreements with countries outside of EU will be very important, and we will be working very closely with our government to get those arrangements in place, both in Asia as well as in North America. And we do understand that especially related to US, EU is also taking steps steps forward. We have been having a joint task force with a number of local parties that are relevant to health and safety measures and that we will be separately publishing a report on those recommendations later today. So when we look at the outlook and guidance for Q2, we are reiterating the essence of our guidance for previous quarters. And as stated, we expect that the gradual recovery of demand will take place from late summer onwards and thereby from Q3 onwards. I stop at this. So thank you for listening. And then I think that it is time to go for questions.

Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will just be a brief pause where any questions are being registered. And we have a question from the line of Jaakko Tyrvänen from SEB. Please go ahead.