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 second quarter and half year 2022 earnings call. I have here with me Finner's 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 the Q2 earnings call. The main headline for second quarter in Finnair was that the demand started to normalize, but the closed Russian airspace and especially The historically high fuel price burdened our profitability and that is why we were still on the red. The comparable operating profit landed at minus 84 million euros. So looking at the Q2 just quickly, the pent-up demand started to materialize as stated. During the quarter, we carried 2.4 million passengers and we operated 64% of our capacity measured by ASKs in terms of our own service. And then from the latter part of May, we started to operate VET leases for Lufthansa and British Airways. and that amounted to some six percent of capacity during the quarter. The passenger load factor started to improve in all traffic categories including Asia, but of course in Asia our overall capacity was clearly lower than it was before the pandemic. China is a case of its own as we know and we only have one weekly flight to China, and then the longer routings around the Russian airspace have had the impact that we have been decreasing our capacity to Asia, to many markets, especially to the secondary cities. And then still, especially in Japan, the COVID-related travel restrictions still play a role. June was the month when our demand started to normalize and our load factor ended around 80%, so that is somewhat normal or close to normal as a first month after the pandemic. You all are knowledgeable about the operational challenges that the European Airlines and the whole aviation system is facing at this point of time. We are not immune to those challenges, especially on our outer stations. But what needs to be stated is that our brand new home hub, the new Helsinki airport is functioning well. The queues in the security checks are manageable. and nothing like you would meet in the bigger airports in Europe. We have had very few cancellations during the summer and our on-time performance is decent at this point of time. So we are comparing well to almost any other airline in in Europe and also the transfer experience in Helsinki is very good at this point of time. And our customer satisfaction measured by Net Promoter Score is 42. So operationally we have reliability, we have stability in our business. During the quarter, we also started to sell premium economy and introduced the new gap-ins, the long-haul gap-ins, including the new business class seat that you can see in the picture. And both the new business class and the premium economy travel class have been received well by our customers, and the customer feedback is positive. The operating environment of Finnair has dramatically changed. And of course, pandemic is... a factor that is known to everybody with all of its consequences. And now during the quarter, the consequences of Russia's attack to Ukraine were very visible in our P&L. The historically high fuel price is clearly one big source of uncertainty in our business currently, especially given the fact that our hedging ratio is at this point of time around 10%. The uncertainty related to the duration of the Russian airspace closure certainly is another one. And unfortunately, there's no end in sight for the war in Ukraine. And that is why we estimate that the Russian airspace closure will prevail for quite a long time. And we are adapting to the reality of closed Russian airspace. The pandemic is not over yet so the minimum is that going forward there still will be infections and that will be impacting our operations and we will need to take the COVID pandemic into account especially in terms of higher standby levels in terms of our staffing to achieve operational reliability and stability. And still, of course, in Asia we have COVID-related travel restrictions. Impact of inflation to demand and costs is yet another uncertainty, and we estimate that that also will be present for longer. Right now we have pent-up demand, and that is definitely good to see. we would estimate that there would be a degree of cooling down in terms of demand going forward when we go into fall and winter. But it needs to be stated though that there are a lot of unrealized travel plans with customers currently and therefore we estimate that travel demand will be somewhat resilient even in an inflationary environment. And then, of course, the competitive environment is changing because of the impacts of the pandemic and the Ukrainian war. Many of our competitors are reshaping themselves. The latest is that SAS has filed for Chapter 11 and will come out from that process as a restructured company. So putting all of these things together, our conclusion is clear. And the conclusion is that we need to renew our strategy. And we have started to work during the spring after the Ukrainian war broke out. And we have been proceeding with that work during the summer. And we'll come out with further information during the course of the fall. When we look at the fuel price, you all know these curves. The dollar-based jet fuel price peaked in June. And in order to go back to the same levels, we will need to go back almost 15 years back in time, back to 2008, when jet fuel prices were at the same levels measured by dollars. But during that time in 2008, euro was notably stronger. Euro dollar was something like 1.3 at the time. And therefore measured in euros, the price per ton was only a little bit above 800 euros per ton. And now in June, we were at $1,300. So when we compare to the same quarter last year the impact of the steep increase in jet fuel price for the same period was 126 million euros so a massive swing in terms of our costs in a very rapid time frame and it was not possible for us to price in to the ticket prices with the hedging levels that we have been having. With that, our revenue landed to 550, developed very much according to our expectations, supported by the RASC improvement on the back of a good degree of demand. But then the costs were especially high driven by the fuel price. We also had some additional costs driven by the additional standby buffers in terms of crew and also some extraordinary one-time costs that were booked during the quarter that amounted to some 10 million euros. When we look at the result below EBIT especially the financial income and expenses is worthwhile to note it amounted to 76 million euros and this is especially related to our USD denominated liabilities. We are hedged some 70% against currency fluctuations But even with that, the swings in terms of currencies were of the magnitude that it had this impact to our net financial expenses. In terms of income taxes, we did not recognize any benefit from the loss that was accumulated during the quarter. And we also made a write down to the deferred tax assets that we have booked during the pandemic, on the back of the pandemic losses. And this write down we made due to the fact that there's increased uncertainty related to us being able to use those tax losses. going forward and that in turn is related to Russian airspace closure and the impact of Russian airspace closure to our profitability. The bright spot of the quarter was the cash development. We started the quarter with 1.1 billion euros of cash. The operating cash flow was 182 million euros positive on the back of strong sales intake. We also made a drawdown of 290 million euros of the 400 million capital loan that we have from the state of Finland. So 110 million euros remains to be undrawn of that facility. And with that our cash balance ended at approximately 1.6 billion euros. So the liquidity is strong and if we compare to historic levels of cash at Finnair we are looking at a very strong figure. In terms of balance sheet, it's worthwhile to note that the capital loan does not imply any new covenants for Finnair. The equity ratio remains stable. 290 million euro drawdown of capital loan was evened out by the net loss of the quarter, including the write-down of the deferred tax asset. Gearing improved to 380% because of the fact that the capital loan decreased the net interest bearing liabilities while the equity remained stable. During the spring we introduced an additional cost savings program of 60 million euros, an incremental step as a first response measure to the closure of the Russian airspace. That program is proceeding as planned and during the quarter we made a landmark deal with Amadeus, a new distribution agreement, multi-year distribution agreement that will enable us to transform and continue the transformation of our distribution, but at the same time, it will result in cost savings for us. We are also making progress with Sabre to reach similar arrangements. We are continuing our strategy work and it is foreseeable that there will be new cost related elements in our new strategy. It is clear that given the Russian airspace closure, we will be operating more of our capacity on the markets where the structural profitability is less than it is on Asia flights and therefore improved cost competitiveness is critical for our new strategy. When we look at the outlook and guidance for the second half of the year, the good news is that demand has almost normalized in Europe and in North America, also in some parts of Asia, in southern parts of Asia. We estimate that during Q3 we will be operating an average of 70% of our own capacity as our own service and then during Q4 we will operate 70% or a little bit more. When we take the vet lease deals into account, then during Q3, we will be operating 80% of our capacity or a bit more. And during Q4, the capacity will fall into the range of 80 to 85%, depending on future lease agreements that we will be forming. As stated, there's significant uncertainty in our operating environment related to the Russian airspace closure, record high fuel price, the impact of inflation, both the demand and cost, and also keeping in mind that COVID-19 pandemic is not entirely over yet, even though some of the more severe impacts have been easening. And that is why we say that it is clear that this year will be the third consecutive year of heavy losses for Finnair. And we also say that these uncertainties in the operating environment will prevail for longer and we need to update our strategy, renew our strategy in order to come back to profitability and in order to strengthen our financial position. And that is exactly what we are doing and we will come back with further details during the autumn. So this was the sum up of our Q2 and I will stop at this and then Erkka probably we can move over to the Q&A. Yes.

Thank you, Toppi. So now would be a convenient time for any questions you may have. Please follow the operator's instructions to present them. Thank you.