Finnair Oyj

from Finner IR, and it's my pleasure to welcome you all to this Finner second quarter and half year 2021 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, please.

Thank you, Erkka, and good day, everybody. Thank you for joining this quarterly call. The Q2 of Finnair was flavored by continued cost adjustment measures and financing measures. And now travel is opening up across Europe, and there's new legislation that opens the travel also in Finland that came into force on Monday this week. And therefore, we expect that the demand will gradually increase during the fall. So if we look at the Q2 just briefly, during the quarter we prepared for the traffic recovery, we take note of the fact that travel started in some parts of Europe during Q2, most notably in June in Central Europe, in German-speaking Europe, and in the Southern Europe. Finland has chosen a more cautious approach related to travel restrictions, and that is why there is a delay in terms of travel opening in Finland. But now, as stated, the legislation is in place. intra-Schengen border controls will be lifted on the 25th of July for Finland, and that also enables tourism to Finland. So that is a noteworthy development in our case. During the quarter, we brought some aircraft back to Helsinki from storage in more sort of warmer climate in Europe during the winter and spring. we continued crew trainings to gradually get them back from furloughs and to ready the organization for upcoming increase in the traffics. During the quarter, Travel was not really encouraged or permitted in the case of Finland, and that is why we still operated a relatively limited network with only 70 flights per day. The passenger numbers rose a bit from Q1, but of course we're still far from pre-pandemic levels. Customer satisfaction remained high in terms of net promoter score. The score of the quarter was 45. And during the quarter, we also announced an important joint business with Junjiao Air from Shanghai, eastern China. And that was especially a tailored partnership for Helsinki-Shanghai route. This basically signals our long-term commitment to the Chinese market, and we believe that the partnership will improve our long-term foothold of the Chinese market, also improving our distribution capability in China. We continued the development around our offering, bringing more choice, more personalization possibilities for our customers. And as one example, we introduced business light tickets to customers in June. So when we look at the Q2 numbers just briefly, the revenue and the other operating income altogether landed at 120 million euros. More than half of that was still generated by our cargo business, although during the month of June, the passenger income for the first time for quite a while grew above the cargo income. So that's an early indication of the passenger income gradually coming back. The comparable operating result landed at minus 151 million euros. So in accordance with our guidance of the operating loss being of similar magnitude than during the previous quarters, we had one item affecting comparability, a positive 12 million euro item stemming from our pension fund. And with that, the operating result was minus 39 million euros. The net financial income and expenses decreased from previous quarters a bit, especially because the USD rate moved to our favor. And that is why the net result for the period landed at minus 120 million euros. So a little bit less than during the previous quarters. But of course, still a heavy, heavy loss, devastating loss to bear and reflecting the harsh realities of the pandemic. We started the quarter with cash funds of 665 million euros. And of course, given the loss, we're burning some cash in terms of operations. But what is notable in this cash flow statement is that the working capital started to work for our favor, especially because now we have a bit of increase in the bookings and the sales intake is flowing in and therefore the tide is now turned in terms of working capital after six pandemic quarters. During the quarter, we also raised new debt. We refinanced our bond, doubled it to 400 million euros, and on the back of that, our cash funds at the end of the quarter stood at 834 million euros. In addition to that, we have 575 million euros of undrawn credit facilities, 400 of which are are related to the hybrid loan from the government of Finland, which remains undrawn. So with this, the available liquidity amounting to 1.4 billion euros at this point of time, our cash reserves remain strong despite of the prolonged pandemic. On the back of the operating laws, our equity ratio took a hit and now roughly stands at 19%. So still an okay level, but of course we are accumulating quite a bit of debt. So the indebtedness measured with gearing percentage grew to 222%. And this debt obviously needs to be paid back and that therefore we will need structurally better profitability post-pandemic. But as stated, the balance sheet and the cash position remains solid, and that enables us to focus on what is the most important, and that is the customer service, you know, ramping up our operations gradually and also bringing our people back from furloughs. And that is indeed our sole focus at this point of time. I stated we need structurally better profitability going forward and the cost savings program that we have been communicating plays a very important role in that respect. On the right hand side in the graph you can see the history and our track record of increasing these cost savings targets as the pandemic has moved on. And we have been proceeding in this work in a very good way, and we have reached the target of 170 million euros ahead of time. And therefore, we are now increasing the target to 200 million euros, which we will be reaching by the end of the year. And this also winds up the cost savings program. So the separate reporting on this one will cease from now on. But we, of course, will continue our cost savings measures by means of continuous improvement, by means of continuous efficiency work, for example, around digitalization, around optimization, and so forth. It's worthwhile to note that the permanent cost savings of 200 million euros are measured with 2019 volumes. And as you can see on the right hand side of the picture, 75 million euros of these savings are fixed cost savings and 125 million euros, the remainder is related to permanent variable unit cost reductions. And those will be, of course, then based on the volumes that we will be having going forward. But as stated, very good work has been done on this space, and we are renewing the company to a great extent. The flight operations pretty much remain intact. But when we come to the land side of our operations, when we come to the headquarters looking into IT infrastructure, looking into sales, marketing, distribution, all our supplier contracts, all cost items, we are achieving structural cost savings and we are changing the way of working and we are changing also the identity of the company. Going forward, we will be We will be less hierarchical. We will be more entrepreneurial. And that is definitely also a big, big culture change that will be improving our competitiveness going forward. And yes, the travel is now finally opening. The new entry model that came into force Monday this week in Finland enables all travel to and from Finland. So the fully vaccinated customers and the customers who have had the disease during the past six months and also all passengers under 16 years of age, whether they are vaccinated or not, can come to Finland freely, without tests, without quarantines. And as the penetration of fully vaccinated people increases in Europe, and in Finland now very fast. And come September, I think that majority of the adult population in Europe will be fully vaccinated. Then this will be opening up travel or enabling the travel opening and then return of demand in a very clear fashion. Also, the customers who have had one dose of vaccine can enter Finland without quarantines, but they will need to take a test within 72 to 120 hours after the arrival, and then they are good to go. On the back of this, we discontinued our policy of requiring corona certificates and pretests as a prerequisite of entering our aircraft. And that change has already been completed. So on the back of the travel being opened, we are reintroducing services and we are increasing the number of our flights. So what we have seen during the past weeks is that the bookings are gradually increasing, but we are still well below the pre-pandemic levels. Aurinkomatkat, our packaged travel company, relaunched its operations in early July, and more destinations will be introduced later this summer. It is clear that the Mediterranean destinations are popular in late late summer, although the weather for the past month in Finland has been way too good. I mean, we are currently at above 30 degrees of Celsius, so the Mediterranean climate here up north is not exactly promoting travel as we speak. We do believe that European city destinations will be more popular during late summer or early fall, and also North America will attract travelers during the course of the autumn. Finnish families are clearly on the move during the autumn holiday break, and bookings for those weeks are now flowing in. So during the winter, we plan to operate 70 destinations altogether. But at the same time, it's worthwhile to note that we are observing the demand very, very closely, and we stand ready to increase the number of flights, the number of destinations hand in hand with the demand. We're also gradually reintroducing services, so priority security at the Helsinki airport opens on July 26th, and the Schengen lounge opens on August 25th. And the Nordic kitchen starting onboard our aircraft, that sales concept starting in the beginning of September. Also, the travel experience from customer point of view will be normalizing gradually. And of course, the priority lanes are important for business travelers, and we do expect the business traveling to gradually come back also after the summer break. We are constantly observing the opportunities on the market, and we're also tapping into these opportunities. An example of this is that now we have announced that we are starting non-stop long-haul flights from Stockholm, Ålanda, during the winter season to Thailand, to Bangkok and Phuket, and to Florida, Miami. These flights will employ approximately 270 persons, and the pilots will be Finnair pilots, and the cabin service is provided to us by Airpro. And we see this as something that is strengthening the offering of Finnair in the Swedish market, which has been important for us before the pandemic and will be increasingly important for us after the pandemic. As part of our guidance, we are stating that we expect Asian countries to open up for travel with a delay of some months versus Europe. And this estimation is in alignment with that of IAIDA. We do take note of that the vaccination progress in Asia has been speeding up quite a bit during the past month or one month and a half. Asia was a slow starter in terms of vaccinations, but now the speed has been picking up tremendously. that has a little bit earlier happened in Singapore. China is vaccinating at speed currently. Hong Kong is picking up. And now during the past month, especially Japan is picking up and has now also bypassed South Korea, which has had a little bit difficulties with vaccine supply lately. So this is very important for us, and this is also really good to see. And as stated, this is something that is the enabler for our assessment of Asia countries opening up for travel, especially for fully vaccinated people with a delay of some months vis-à-vis Europe. And just as a reminder, we do expect that the 70% fully vaccinated coverage will be reached in Asia during Q4. And when we look at our capacity to various Asian markets, Japan in 2019 before the pandemic was the biggest market to us in terms of capacity, followed by China. Thailand is also relatively big. And now on the back of the launch of flights from Stockholm to Thailand, Thailand should on relative terms be even bigger. And then you see the numbers for Hong Kong, South Korea and Singapore respectively. In terms of guidance, as stated, we expect that the demand will increase gradually during the fall, as now Finland is also opening travel. And in terms of operating cash flow, we estimate that our operating cash flow will turn positive by the end of the year. And then we reiterate what I just stated in terms of Asia countries opening up with a delay of some months. In terms of EBIT, comparable EBIT guidance, although our revenue will be picking up gradually during this quarter. We also estimate that there will be ramp-up related cost, and therefore the EBIT is likely to be still of similar magnitude than it has been during the previous five quarters. But as stated, the bottom line is that now the travel is opening in Europe. It is opening in Finland, and therefore we see that the demand is gradually coming back during the course of the fall. So thank you. This was it in short, and I think that now we are ready to go for questions.

indeed if you if you have any questions now would be a perfect time so please go ahead thank you ladies and gentlemen if you have a question for the speakers please press zero one on your telephone keypad now if you wish to withdraw your question you may do so by pressing zero two to cancel it will be a brief pause until we have the first question Our first question comes from the line of Jakob Travainen of SEB. Please go ahead. Your line is now open.