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 first quarter 2022 earnings call. I have here with me Finner's CEO, Mr. Topi Mannar, and he is joined by the CFO, Mr. Mikko Styrkkinen, 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 earnings call. The main headline for Finnair Q1 is that recovery from the pandemic progresses now at pace, whilst we adapt to the reality of closed Russian airspace. When we look at the Q1, it is notable that the travel started to revive after the Omicron dip in early part of the year. The Omicron dip clearly had a negative impact on the number of passengers, demand and profitability. It was a relatively steep dip. but short-lived predominantly for January and February. From the late February onwards, from the Finnish winter holidays, we started to see demand gradually recover despite of Russian invasion of Ukraine. And now, booking behavior is normalizing quite fast. Advanced bookings are clearly strengthening. And when we look at the bookings for the past couple of weeks, and when we especially look at Europe, United States, and South Asia, we are close to pre-pandemic levels of bookings. And we will need to remember that our schedule for summer is 70% of pre-pandemic levels. So if we compare the bookings on absolute terms versus the schedule adjusting for the capacity, then we are already above the pre-pandemic levels as stated for the last couple of weeks. The Q1 result was also impacted quite significantly in terms of the fuel prices that further increased because of the war. And then suddenly there were also Omicron related additional costs. During Q1, for example, we needed to maintain excess staffing levels because of the sickness rate throughout our operations. There were parts of our operations that suffered sickness rate of up to 25% during the early part of Q1. The closure of Russian airspace impacts thinner flights. The longer routings mean longer flight times between 10 to or increased flight times between 10 to 40 percent. to Asia and the largest impact clearly is on North Asian roots, namely in Japan, South Korea and China. South Asia is clearly less affected. In terms of flight times and in South Asia, namely in India, in Singapore, in Thailand, also the COVID curbs have been lifted quite fast and they are being lifted right now quite fast. So we clearly see demand coming back on those flights. those markets. Going forward, we will be emphasizing more the westbound markets as well as South Asia in our network. But we are not turning our backs to North Asia. We continue to fly to places like Tokyo and Seoul and Shanghai. And the high-yield cargo demand continues to support those routes, even in this high fuel cost environment and with the longer routings. Cargo continues to be strong during the Q1. When we look at the average cargo yield, that is still 150% above the pre-pandemic levels. And the variation between cargo yields between various routes has increased quite significantly on the back of the war. For those routes that were most affected by the Russian airspace closure, the cargo yields more than doubled after the war. So from Europe to Japan, we have been seeing an increasing of 115%. From Japan to Europe, 120%. From Europe to South Korea, 164%. But interestingly, from South Korea to Europe, there has basically not been any change. In Europe, in North America, the cargo yields for us have more or less stayed on the same levels than before the war. So in this environment, we really need to And optimize on route specific basis also our cargo business and that our cargo people are doing great work with that. The fuel price impacts, of course, our business significantly at this point of time. You all would remember that in April 20, the jet fuel price hit a low point of approximately $180 per tonne. And now at the end of the year during Q4, we were approximately at $700 per ton level. Since that, the price has been increasing 70%. So that is certainly penalizing our profitability at this point of time. And especially because we have limited hedging levels as we speak. So the comparable operating loss landed at the minus 33 million euros. Revenue was 400 million euros. And below the comparable operating profit line, there was Two developments, first to north. We took an impairment on four of our owned Airbus 330s on the back of the Russian airspace closure. So in the environment after the Russian airspace closure, the range of 330s limits the usability of those aircrafts. We basically can use them only to India when it comes to Asia. And therefore, in order to be prudent, we took this impairment. We also stopped recognizing the deferred tax assets. And that was made due to the increased uncertainty related to the Russian airspace closure. In terms of cash, we started the quarter with approximately 1.3 billion euros of cash. The positive was that our operating cash flow remained positive, 35 million euros on the back of the sales intake during the quarter. Also, the free cash flow was positive because investments amounted to 30 million euros only. We made a relatively significant repayment of loans and leases amounting to 155 million euros and landed at a bit more than 1.1 billion euros. in terms of available liquidity. And what should be calculated on top of that is the 400 million euros of capital loan granted by the state of Finland, which remains fully undrawn at this point of time. The devastating pandemic toll that now amounts to more than 1.2 billion euros of losses in the case of Finnair is visible in our balance sheet. So the equity ratio landed at 7% and the gearing climbed to 550%. What should be noted here is that the 400 million euro capital loan granted by the state clearly supports the balance sheet. And we will now begin the drawdowns in Q2. And that will sort of stabilize these key ratios in terms of the balance sheet as the 400 million euro capital loan is not factored in at this point of time because it remains undrawn. Today we also communicated in parallel to the state of Finland that the 400 million loan that was originally granted as a hybrid loan will be converted into a capital loan subject to final EU approval. What is important to state is that the terms and conditions of the loan remain unchanged. So there are no new covenants included in the capital loan, and the other terms remain unchanged in comparison to what was originally agreed in the context of the hybrid loan. The question obviously is that how are we responding to the Russian airspace closure? And I guess it's fair to say that nobody really knows that how long Russian airspace will remain closed. What is clear is that first a peace in Ukraine would be needed. And then after that, the political discussion of the willingness to lift at least some of the sanctions would start. But we estimate that that also would be a lengthy process, even if peace would be achieved. So that means that we are adapting to the reality of closed Russian airspace and we have started determined measures to adapt as we move forward. The first response measures include adjusted network, a new cost savings program, wet lease deals with other airlines, and a review of our fleet plan. In terms of the network, we are pivoting to the West and to South Asia, also tapping into, for example, India and U.S. flows. We have recently opened a new route to Dallas. And later in the summer, we will be opening another one to Seattle in U.S. And then you would remember that earlier last year, we started to operate from Stockholm to U.S. And during the summer, we will be flying to New York and Lax from Stockholm. Later in the summer, we are also opening a new route to Mumbai in India, and we are seeing a good degree of demand now from India in the form of our Delhi route. During the summer, we will be operating 70% of our schedule, pre-pandemic schedule. And when we calculate the wet leases that I will cover in a minute into the capacity, then we are close to 80% levels. And this means that almost all of our flying staff will be at work. And in our home base of Finland, there are no no furloughs among cabin crew or pilots. As stated, we are introducing a new cost program and the first part of that program targets savings of 60 million euros. This is a very targeted program with no personal implications. So the first part of the savings is coming from continuous improvement of operations. We have a very structured, systematic way of working with this stemming from the earlier cost program of where the target was 200 million euros. So we continue to do that. Then we will renegotiate our distribution agreements and also seek cost savings from aircraft financing, basically our lease agreements with less source. We will continue to work with finding new cost savings and we will be updating this target as our work progresses. What should be noted is that all of these savings come on top of the already achieved 200 million euros of permanent course savings during the pandemic. During the past month our team has been working hard to find profitable usage for our idle capacity after the Russian airspace closure. And we have been seeing a good degree of wet lease demand for our services, for our aircraft and crew. for the summer, but some of these discussions are also continuing for the winter period. Now, for summer, we have made two important deals, one with Lufthansa Group, releasing three Airbus 350s for the summer season, and one with British Airways red-leasing four Airbus 321s to British Airways. So altogether the employment impact of these two deals will be 600 people during the course of the summer and that means that we are able to cancel furloughs for the summer season. We have started to review our fleet plan already earlier and now just lately we finalized a sale of four owned Airbus 321 aircraft. So they are coming out of our fleet and now our current fleet is 80 aircraft. This impairment related to Airbus 330s is part of the ongoing review of our fleet plan. And what we will be doing next is that we will be analyzing in parallel wet lease opportunities out there in the market, also for the winter season and the potential sale of idle capacity individual aircraft. And that is certainly part of our first response measures. And we will be giving updates on this one as the work evolves. So that was the response to the Russian airspace closure. When we now look at the summer season, we have a strong offering for the summer season. We will be flying something like 300 flights per day, 70 destinations in Europe, five in United States from Helsinki, two additional destinations from Al-Anda, and then eight destinations in Asia. We have just opened a new airport in Finland, and it is really a modern, really premium, beautiful, beautiful airport. And the passenger experience, for example, related to security checks. is greatly upgraded with modern technology. The new capping experience, the new long-haul experience is launched with new service concepts on the 11th of May on routes to Singapore, Dallas and New York. So also on that part of the customer experience, we are moving forward with the new premium economy travel class and the new business class seat. So that is really exciting. And now when we have been flying with those aircraft as part of our network, you know, some long haul and some short haul routes, the feedback that we are getting from customers is really positive. So that is good to see. Also, the mask requirement we dropped early this week. So all in all, the customer experience, the passenger experience is normalizing fast related to aviation and also related to our operations. The work around the sustainability continues. We have been continuing that all through the pandemic. And it's clear that now when the demand is coming back rapidly and more and more people are traveling, this is more top of mind for the wider audience as well as for us at Finnair. So during the quarter, we committed to science-based targets initiative. We launched a commitment to participate one world SAF purchases going forward from California. We have enabled, again, based on some legislation changes in Finland for customers to compensate their flight demissions We are starting with intermodality pilots with domestic routes, two domestic routes here in Finland. And we are supporting the Ukrainian refugees, the war refugees, by giving them really significant discounts to fly to Helsinki. So many things are happening in terms of sustainability as well. When we look forward, our operating environment is two-sided. In Europe, in United States, in South Asia, we see that travel is normalizing and the impacts of the pandemic have already eased and are being eased as we speak very rapidly. So here the travel is normalizing fast. And then in contrast, the travel restrictions impact significantly our operations in North Asia with the Russian airspace closure, but also with the COVID curbs that are still in force, most notably in China, but also in Japan. We estimate that during the summer we will be, together with the med leases, deploying capacity of almost 80%. And during Q2, our losses will narrow. We estimate that they will be of similar magnitude as in Q4-21. supported by the strong rebound in demand, but also burdened by the high fuel price and the level of North Asian traffic. We estimate that in Q3, the demand in Europe, North America and South Asia increased. And that basically constitutes, you know, the big, big majority of our network there. The demand will be closer to pre-pandemic levels. So here we are signaling that our operating environment is stabilizing, the predictability of the operating environment is improving and we see the demand coming back and therefore We are breaking the pattern of only commenting the next quarter that we have been using during the pandemic and including comments related to Q3 as well. We will, as always, update this when we give our half-year report after Q2. So I stop at this. Thank you very much for listening. And now I think we go for questions.

Yes, indeed. Thank you, Topi. So, now would be a convenient time for any potential questions you may have. Please follow the operator's instruction to present them.

Ladies and gentlemen, if you have a question for our speakers, please press 0 and 1 on your telephone keypad. The first question is from Jake for Trivian, SEB, your line is now open. Please go ahead.

Yes, good afternoon, gentlemen. It's Jaakko Trivian from SEB. Thanks for taking my questions. I have a couple of them, and I'll take them one by one, starting with the South Asian roots. and the demand over there, are you seeing any transfer traffic demand on those flights, or is it mainly point-to-point traffic you're evidencing there?

We are certainly seeing transfer demand, I mean, from routes like Delhi, Singapore, and, for example, the India-US flows are important. So flows from India to US and vice versa are supporting the capacity increases that we are putting to Atlantic.

Okay, great. So could we consider that you might change the strong Northeast Asian strategy towards U.S.-India or U.S.-South Asian traffic going forward, or at least for the time being?

Yeah, I think that that is the way you should be reading the new network. So we have been adjusting the network quite significantly. And we are increasing our capacity to the Atlantic, new routes being introduced. But we have been also increasing capacity to India, Mumbai. being introduced as an example. So when you fly from India to U.S. and vice versa, you know, it makes sense to fly through Helsinki hub. So we have a competitive offering in that.

I understand that. That sounds reasonable. My second question regarding the yield aspect. environment looking towards the summer season are you seeing also the rivals hiking prices accordingly and the follow up on the price hikes is that what is your understanding of the price elasticity of the demand when the prices are so high or are the prices becoming so high that it starts to impact negatively on the demand side

I think that what we are seeing is a strong pent-up demand realizing right now. And after the pandemic, you know, many people have been dreaming of traveling. They have a list of places that they want to go, but they also have savings. And many of them, you know, they have renovated the house. They have bought the new furniture and, you know, all of those things. So, clearly, we would anticipate a shift in terms of consumption to services and then travel, and we think that we are seeing some of that in our booking development. The prices, obviously, will be always determined by the competition on the market, and they will also differ on route-specific basis. But in this environment, of course, all the airlines have a need to price in the fuel increase to tickets. And we see some of that happening, especially in Europe, the yields have been relatively okay. And we would estimate that that will continue during the summer. But as we all know, it all depends on demand. In our case, the 70% of capacity puts a bit of constraint. 70% in terms of capacity basically means that there also will be flights, that will be rather full and that of course represents an opportunity for our revenue management really to optimize the yields and the loads on individual flight bases. Mika would like to continue.

So naturally when you That's a difficult question because if you have identical capacity last year and then you compare to this year, then it's easier. But now the comparison period supply was so limited, the capacity was so limited. But we have early signs that the yields are better, but it's somewhat early still to say because we need to wait, let's say, until June to properly see the development.

Okay, I understand. But jumping on the web leases, how you will report these web leases, this web lease revenue, mainly speaking on what line of the P&L, and will those web leases impact on your monthly traffic data? Just kindly asking some some tools to operate from kind of an analyst side here?

The revenue is not posted under revenue, but under other operating income. And then the costs are posted accordingly, according to the real cost. And then ASKs are not posted under our traffic report. Because it's the marketing carrier who is reporting the capacity, i.e. Lufthansa Group or BA.

Of course. Right. Thanks. And a follow-up here. Could you indicate or give some tools to understand the magnitude of that other operating income? How large that is? could be going forward.

We are talking about tens of millions, something between 10 and 100.

And I think that what needs to be stated is that British Airways and Lufthansa are turning to Finnair to have access to capacity. And they are turning to us because they want quality. So that means that the price of these deals is set according to the quality that they are receiving. So therefore, the EBIT of the deals, by definition, is clearly positive.

Yeah, that's what counts, not the revenue or the operating income as such.

Of course, of course. Thanks. Then my final one. On the fleet side, could you indicate the kind of the maturity structure of the leased aircraft and how many aircraft leases will mature still in 2020 and then in 2023? Are you kind of naturally able to get rid of some of the leases?

We don't disclose it, but you can have an educated guess when you look at our interest-bearing liabilities, the maturity structure there, because there we have leases. And when the lease payments decline, then naturally the leases end. So you can have an educated guess when you look at that table.

Okay. We'll look at that one then. Thank you, gentlemen. That's all from my side at this point. Thank you.

The next question is from Atra Kumar, HSBC. The line is now open. Please go ahead.

Hi. Thank you for the opportunity, gentlemen. So I had a couple of questions. First of all, on the cargo side, so you mentioned the cargo yields remain strong, and the demand is strong, and that is kind of subsidizing the your passenger operations, and that's why you're continuing to fly in Asia. Now, could you please bifurcate that, first of all, as in, you know, despite having long flight routes, you know, the flight length has been increased by 10% to 40%. How that has impacted the demand, passenger demand, basically, So if you could please bifurcate, you know, that increase in flight length, has that still continued to sort of hold on into the passenger demand or has that weakened? So if you could do the kind of breakup on that. Secondly, on the same question, so now, of course, in this quarter, the cargo revenue was down about 20% versus the previous quarter. Is it mainly because of you see some softness in the cargo demand, or is that a kind of a seasonal impact? How do you see? And then finally, the same question is that how do you see going ahead? Because, you know, the cargo demand is exceptionally high because of these kind of abnormal situations. But what happens when the cargo demand softens? How would you adopt to that strategy? I mean, would you still continue to fly to Asia despite a weak cargo demand, which is currently subsidizing your overall operation, Asian operations? So if you could please help me in these three things, please. Yes.

If we start from the travel time question, we haven't seen an impact from the travel times to demand that we could single out at this point of time. I stated we have been continuing to fly to places like Tokyo and Seoul. And in both of these places, the COVID curbs have been lifted and that has been actually increasing the demand, the passenger demand gradually. despite of the longer travel times. So that is the phenomenon. But then you, of course, need to remember that the capacity that we are deploying on these two routes right now is relatively small. And then the next question was related to cargo and, you know, could there potentially be softness of cargo? What you will need to remember is that right after the Russian airspace closure at the end of February, we stopped our flights, including the cargo flights, to Northeast Asia for a week, basically. So that was... that was visible in the cargo revenue in Q1. Other than that, we haven't seen any softness in cargo demand as such. It continues to be strong, but of course, Russian airspace closure, the longer routings, the increased operating costs in this fuel environment mean that some of the cargo only flying that we have been doing previously is not viable anymore in this environment.

Mm-hmm. And how about the strategy going ahead if the cargo demand remains go soft? I mean, what will be your strategy? Would you still fly? Would you still continue all services to Asia?

We will be very observant about profitability of the flights. So we will be trimming our capacity accordingly. So that's basically banned. For the time being, we don't have any risk of losing slots in Northeast Asia because the COVID curbs are still in place and therefore the slot discussion is not there.

Coming back to the first one, Toby, you said that, you know, you don't see any impact on the demand, although you have a very small capacity deployed on Japan and all. But don't you think you can lose two Japanese carriers who will not have any restrictions in terms of using Russian airspace? I mean, of course, you know. So how do you see that? I mean, in terms of... For the time being...

For the time being, it's a level playing field because the Japanese carriers are not using the Russian airspace either. So the relative game has not changed.

Okay. My second question is about your performance on the North Atlantic operations. I mean, of course, initially you said that you're doing a bit of a test on how these flights work. So now how do you see, I mean, in terms of operationally, in terms of financially, how your North Atlantic operations are doing?

Yeah, I mean, we think that it will be a busy summer season for the Atlantic traffic. And when we look at how the bookings are now coming in and what are the expected loads for our Atlantic flights, I think that these are working in accordance of our expectations. Naturally, there's always the phenomenon that the new routes will take some time to build their sort of respective customer base. So we are calibrating our expectations accordingly. But there seems to be a good degree of demand to the Atlantic travel and tourism. I think that that goes back to the sort of wider consumer behavior question. So many customers have savings. They clearly want to travel, and they will be spending that money that they have allocated to travel, and then they will just travel to those places that are open for travel. So I think that we will be seeing some shifts in the travel patterns, during the summer. And I think Mediterranean will be, you know, will be busy this year in terms of European traffic. And then certainly the long haul demand will be directed toward Atlantic.

Right. Fair enough. My final two questions. One is about about the competitive landscape and that sort of in terms of region. So how do you see the competitive landscape developing in Europe and, you know, on North Atlantic? So if you could talk about a bit on that in terms of region-wise competitive landscape. And finally, in terms of advance sale, you said that advance sale has picked up. So, I mean, so... Do you see advanced sale picking up because of, at the moment, a lot of pent-up demand, as you rightly said? Or is it generally you think that advanced sale has picked up? And if you compare to your pre-COVID levels, do you think advanced sale is sort of getting closer to pre-COVID levels or is it still far from that? Thank you. Yeah.

So in terms of competitive landscape, I think that there hasn't been very, very big changes in Helsinki hub. So Norwegian has been announcing their summer schedule. They are certainly increasing from what it was during the winter. But they are still below the pre-pandemic levels in terms of capacity that they are deploying in Helsinki. And they are our main competitor in Helsinki Hub. And when we also look at the rest of the airlines in Helsinki Hub, the capacity that they are deploying is basically in accordance with what we have seen before the pandemic. Our market share is strong in Helsinki hub and it actually has increased with a notch if we compare to pre-pandemic levels. So I think that that's good to note. Then in terms of Atlantic, there will be a lot of capacity that will be deployed in the Atlantic by many airlines. I think that We are supported by two things in the Atlantic traffic. One is that we are part of the Atlantic joint business together with American and British Airways and Hyperia. So we have established forms of cooperation and distribution cooperation in place for the Atlantic traffic. And then One World as an alliance fits well with our increased ambition in U.S. because both American and Alaskan airlines have distribution power in U.S. So I think that is definitely worth to note. Then in terms of advanced sales and advanced bookings, yes, the bookings are coming in. And as I stated, we are relatively close to pre-pandemic levels of bookings on absolute terms now for the last couple of weeks. And then we need to remember that we are deploying only 70% of our capacity for scheduled traffic during the summer. So if we adjust for that capacity, our bookings for the last couple of weeks are higher than they were before the pandemic. So... The bookings are coming in, travel is coming back, and there's clearly willingness to travel among customers. Leisure demand is driving the development, but we also see signs of life in business travel. And even though business travel is trailing, we see a pickup in business travel as well.

Perfect. Thank you so much. Thank you, and good luck. Thank you.

There are no further questions at this time. As a reminder, to ask a question, you have to press 0 and 1 on your telephone. We haven't received any further questions. I hand back to you.

so if there are no further questions I guess that would conclude the call so thanks for excellent questions and thank you for joining the call we wish you a great day thank you very much thank you