Finnair Oyj

Good day, ladies and gentlemen. I'm Erkka Salonen from Finner Investor Relations, and it's my pleasure to welcome you all to this Finner's fourth quarter and full year 2021 earnings call. I have here with me Finner's CEO, Mr. Topi Manner, and we're 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.

And good day, everybody. Welcome to this Q4 earnings call. So the main headline for Finnair Q4 is that our travel increased, the recovery progressed and EBITDA turned positive for the first time since Q4 2019. Omicron obviously was a phenomenon related to Q4. And during Q1, it will be having a notable negative impact. But based on our booking development, we see that the impact will be short term. So moving on in the presentation, I think that the One of the clear observations related to Q4 was that it was a clear indication of strong pent-up demand on the travel market. Even in the midst of very high uncertainty in December. Customers kept their holiday travel plans and that was visible in our passenger numbers during the Christmas period. The volumes during the quarter increased according to our expectations. Passenger numbers grew from one month to the other. We flew on average 200 flights per day, including the cargo only flights. And of course, The quarter was important for us in the sense that in November, our long haul operations started for real. When United States and Thailand opened for traffic early in November and a little bit later, Singapore and India followed suit. And then those markets have been operating ever since. During the quarter, we also started direct flights from Stockholm Arlanda to Thailand and United States. And those flights have been pretty much working according to our expectations. And we have had even some positive surprises like cargo demand from Arlanda. Omicron impact suddenly started to be visible in December and the travel restrictions were reintroduced and that suddenly impacted some of our operations. At the end of the year we reached our target of 200 million euros of permanent cost savings. Those cost savings are already visible in our full year results for 2021, and the full run rate impact of these savings will be visible for the entirety of this year and going forward. But we remind that these savings are partially fixed cost savings and partially variable cost savings. So related to the volume that we are operating at any given point of time. As stated, Omicron posed challenges to our operations, especially at the turn of the year. Our net promoter score was 29, so still on a good level, but a little bit below than it has traditionally been for us. Traditionally, it has been around 40 points or even above. We, as so many other airlines out there, including the whole aviation value chain experienced a lot of employee sick leaves. The mentioned quick changes in travel restrictions definitely had an impact, and there was quite a bit of congestion in our customer service channels because, for example, the call center volumes were four times as much per passenger as they used to be before the pandemic. We have now taken determined measures to solve these operational issues, and they are taking positive impact as we speak, and they have already taken positive impact. We, for example, shaved off some 20% of our February traffic programme while keeping the staffing levels, so effectively creating a buffer for the cyclists. We have taken a range of measures to improve the situation in our call centres. One of them was that we got 50 new agents from training to join our ranks. We have also accelerated the development of our self-service channels by recruiting more coders. The whole year of 21 was very strong for Cargo and Q4 was the crown of the year. we achieved record high revenue on quarterly basis by a mile in comparison to previous record quarters. During the quarter the cargo revenue was one third of our total revenue and during the During the full year, it was 40% of our total revenue. The average cargo yield still is almost 2.5 times the level that we experienced before the pandemic. So this is a very profitable operation. We estimate that the strong demand in cargo will continue throughout the first half of this year, although it is worthwhile to note that Q1 is always seasonally weaker compared to Q4 in the cargo business. So looking at the Q4 result, it is still heavily negative, but our revenue doubled and more than doubled from the previous quarter. Comparable EBITDA, as stated, was positive for the first time since Q4 2019. And the comparable operating result landed at minus 65%. million euros. So we managed to decrease the operating loss during the quarter. When comparing to Q4 2020 and especially when comparing the lines below comparable operating result, we will need to remember that in Q4 2020, we had a one-off booking that was related to the changes in the terms and conditions of our pension fund, and that is very visible in the numbers. So even though our revenue for the quarter was four times as much than year before and doubled from the previous quarter, of course, it's still worthwhile to note that it was only a bit more than half than we used to have before the pandemic. So we took steps forward in terms of recovery. We are on our way, but there's still a way to go in order for us to reach profitability. In terms of full year, the revenue plus the other operating income landed at almost exactly on the same level as it was during year 20. Nevertheless, the comparable EBITDA and the comparable operating result was clearly smaller than during year 20. And that is all accountable to the cost savings program that we have been completing. And that cost savings program of permanent cost savings i.e. resetting the cost base of Finnair really plays a pivotal role in us getting back to profitability as soon as possible. So the comparable operating result for the year was minus 469 million euros, a heavy loss to bear. When we put both of these two years together, then we see that on comparable operating result level, the pandemic toll already is in excess of 1 billion euros. And as we are guiding, the whole first half of this year will be also generating and operating loss. So the full pandemic invoice, if you will, will still continue to accumulate. Nevertheless, our cash reserves are strong. So we started the Q4 with 1.2 billion roughly on our cash funds and the operating cash flow was 125 million euros positive. with EBITDA and especially changes in the working capital due to the positive sales intake. At the end of the year, the cash reserves amounted to 1.27 billion euros. On top of that, we have the 400 million hybrid loan, which remains undrawn as we speak. We had earlier received an EU approval for 350 million euros of that. And now today we communicated the approval for the remaining 50 million euros. All of that 400 million euros now is EU approved and thus remains in full in our disposal. Equity ratio took a hit on the back of the operating loss. The equity ratio now is 11.8% and the gearing is 321.8%. But the mentioned 400 million hybrid loan will strengthen the balance sheet. And we will be drawing on that one as needed going forward. So on the back of the Omicron variant, the operating environment remains unpredictable. But having said that, it is also important to note that we do believe that on the back of Omicron, we are gradually moving out from the pandemic and moving into an endemic phase. So in that sense, Omicron just might be a blessing in disguise. And things are increasingly looking that it indeed is a blessing in disguise. And especially in Europe, in North America, and in those Asian markets that are opened, we will be quicker back to more normal operations after the Omicron variant. Currently in Asia, India, Singapore, Thailand are open. We estimate that on the back of Omicron, countries like Japan and South Korea will gradually open toward the end of Q2. Both of these countries are experiencing an Omicron wave as we speak. And that wave is something like six weeks behind Europe in those two countries. For China and Hong Kong, there is prolonged uncertainty in terms of opening. And this is very much related to the zero COVID policy that both of these countries are committed to. In Hong Kong, We take note of the fact that there is a clear Omicron outbreak as we speak, and it will be interesting to see how things unfold in terms of restrictions on that market. Some recent developments on the map and in terms of travel restrictions are related to Australia. So Australia opening for tourism for the fully vaccinated starting from 21st of February. situation on our employee relations front has developed positively recently. We as late as yesterday formed a two-year CLA agreement with our capping crew. A year ago we made a very long-term new CLA contract for three and a half years with our pilots and there's still two and a half years remaining of that contract. Also on the office workers side there are developments going forward and then we have now a negotiation result of a three-year CLA. So these new agreements enable some structural change and renewal in the contracts. And they also provide stability and work piece, if you will, for us to focus on the most important thing, namely ramping up our traffic, taking good care of our customers and thereby coming back to profitability. And yes, we are preparing for the summer season as we speak. We will have a strong network in Europe and in the United States. So while we are waiting for some Asian countries to open, we are partially pivoting to North America and introducing new destinations in our network. For example, we are introducing a new route to Dallas, which is the home hub of our One World partner, American Airlines. We are also introducing a new route to Seattle, a three-weekly frequency to Seattle, which is the home hub of Alaskan Airlines, another of our North American One World partners. Later during the summer, and the date remains to be specified, we will be opening a route to Busan, to South Korea, and the same applies to Tokyo Haneda Airport. Both of these are very exciting new routes and an important part of our Asia network. And as we ramp up our flights, we are gradually calling people back from furloughs and all of our cabin crew has now been called back to the flight eligibility trainings that to large extent have already taken place and some of them are still taking place during Q1. Last week we announced our 200 million euro investment to new elevated long haul experience. This is an investment that has been long in the making. It started four years ago and this is a major step in positioning Finnair as a modern premium airline. So what we are doing here is that we are introducing a completely new travel class, premium economy, with new seat, which offers more space and comfort to our customers and purpose-built service concepts for premium economy customers. So this is a completely separate cabin separated by walls from business class and economy. We have also completely rethought the way we are serving customers in the business class. And at the core of this is a new business class seat called the Air Lounge. There's more privacy, more space for our customers, more comfort. The really sort of groundbreaking feature and forward leaning feature in this seat is that the seat does not recline. And part of that is or a consequence of that is that the seat is lighter. So there is an impact in terms of fuel efficiency, in terms of CO2 efficiency. You can get comfortable in the seat with extra pillows and modifying your seat position. And then when you put the leg rest up, then you get a full horizontal bed, which with mattresses and extra duvets translates into a very, very good sleeping experience that brings the customer experience to a completely new level. And on top of all of this, we are also renewing and refreshing our economy class with new seats and a new in-flight entertainment system. So as stated, we are positioning ourselves as a modern premium airline. And to us, modern premium is different from the premium of the past. Modern premium is about focusing on the essential. It is about being authentic. In our case, authentically Finnair, authentically Nordic with the design. It is about offering customers choice and it is about being sustainable. And all of these elements are very visible in the concept development. And the international press has welcomed really this launch and I think that we have excited feedback, very positive feedback from the travel journalists especially and for the traveling public in general. So I think that in order for you to get a little bit better understanding that what we have created and what we are launching to the customers, let's quickly look at a video that will sort of give you a better flavor. So we are certainly very proud of it. We think that this looks good and we already have some of these aircraft in our Helsinki hub. The first one has flown last weekend. We will be implementing this renewal across our long-haul fleet so across our Airbus 350s and Airbus 330s and it will be a relatively fast rollout so by the end of 23 when Finnair has its 100th anniversary where we hope to have all of our white bodies refurbished with these new cabins. The sales will start on the 1st of March and until that time there are surprise upgrades for our customers. So the business case in this one is that with premium economy we are tapping into the premium leisure demand that we see increasing as a trend. And we think that this trend has only been accelerated by the pandemic. In a grand scheme of things, we are a niche airline connecting Europe and Asia and providing good connections also to North America, and we want to differentiate with quality. We want to take good care of our loyal customers so that they come for repeat business, but we also want to attract completely new customers. And we do believe that with this customer experience, it is very possible because we clearly are very competitive on the marketplace after the pandemic. So to wrap up, coming back to our guidance, as stated, currently in Asia, Thailand, Singapore and India are open. We see this prolonged uncertainty in China and Hong Kong due to the zero COVID policy commitment. And we see that the rest of the Asian markets will be gradually opening toward the end of Q2. while North America and Europe have already lifted largely the travel restrictions and are open for traffic. We estimate that Q1 operating loss will land on the same level will be of similar magnitude than the operating loss was in Q1 2021, when it was minus 143 million euros. And when we compare to Q4, the reasons behind the development are related to Omicron. So the notable but short-lived Omicron dip in terms of revenue, There's also some additional cost, for example, due to sick leaves coming out of Omicron. And then certainly the increased fuel price and also the costs that are related for us to be fit for the summer, related to ramping up the capacity for summer, play a role behind the Q1 development. But we also foresee that Q2 will be clearly better, but we repeat the earlier guidance that it will also be still loss making. And then during the second half of this year, we estimate that we will be closer to normal operating environment excluding China and Hong Kong with the prolonged uncertainty. So, thank you. I will stop at that and hand back to you, Erkko.

Thank you, Topi. Now would be a perfect time for any questions you may have, so you can present them by following the operator's instructions.