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 third quarter 2022 earnings call. I have here with me Finner's CEO, Mr. Topi Manner, and it's my pleasure to introduce you to our new CFO, Mr. Christian Pullola, who is joining the Q&A session. I will now turn this call over to you, Topi. Please.

Thank you, Erkka, and good day for all of you. And thanks for joining this Q3 earnings call. The main entries related to Finnair Q3 are that our net result was still negative. However, the comparable EBIT was positive, landed at 35 million euros. driven by seasonality and the pent-up demand that we experienced. And in early September we introduced new strategy and the implementation of that strategy has now begun and is proceeding at pace. I will be covering some points of that later in the presentation. As stated, the comparable EBIT was positive for the first time in almost three years. So the long and hard pandemic quarters are behind us. Ten quarters of negative operating result now turning to a positive EBIT. But as stated, the net result is still negative. Number of passengers during the quarter increased to 2.8 million and we saw the demand coming back across Europe beginning with leisure demand and now lately especially after the summer vacations also corporate travel has been really coming back, coming roaring back effectively. During the quarter we operated 66% of our capacity in comparison to pre-pandemic levels when it comes to our own scheduled traffic and then together with the wet lease operations to Lufthansa Group and British Airways we operated some 80% of our capacity. The high point of the quarter was that our unit revenues, RASC, and the yields increased quite significantly. When we compare with pre-pandemic levels, the increase was 25%, even if we introduced new routes and deployed new capacity, those routes, and it typically takes some time to build the unit revenues on new routes. During the quarter, load factors were hovering around 80% and we also introduced a new deep partnership with Qatar Airways, an extensive co-chair agreement that will see us starting now flights during beginning of November, during next week from Stockholm Island to Doha and Copenhagen to Doha first. and then Helsinki-Doha route will commence later during this year around mid-December. The high point of the quarter was that our customer satisfaction continued to be at good level, so measured with Net Promoter Score, we are around 40%, even if the operating environment in European aviation especially was quite challenging during the summer months, given the shortages of staffing and other resources. In the midst of this environment, our punctuality was one of the best in Europe. Point-to-point short-haul carriers like Eurowings were better in terms of on-time performance with a couple of decimals, and we were neck-to-neck together with Norwegian, but of network carriers also having long-haul operations, we were the best. goes to show that our operational quality is strong and also the new Helsinki hub, the new airport in Helsinki is functioning well. We were chosen the best airline in Northern Europe for the 12th consecutive time in the Skytrax survey. So when we look at the P&L, The revenue development was boosted by the pent-up demand and the unit revenues, as we stated. But what is behind all of this is that during the last couple of years, we have been making a significant commercial transformation that now starts to be visible when there's more traffic. Prior to the pandemic, the share of direct sales in Finnair amounted to some one third. And at present time, we are looking at direct sales through Finnair.com and the mobile app amounting to up to 60% of our ticket sales. And when we consider The way we run our e-commerce site Finnair.com, the way we manage sales and the conversion rates in the funnel, And how we combine that with our revenue management, there is a very good story to tell. And the results are encouraging in the sense that we think that there is plenty of opportunity for added revenue going forward, which is part of our strategy in terms of boosting unit revenues. The wet lease operations are visible in the other operating income during the quarter. Costs, of course, were heavily impacted by the historically high fuel price and further magnified by the strengthening of the dollar. But ex-fuel, ex-currencies The work that we have been doing during the past couple of years to get rid of cost, enable structural cost savings is visible in the cost base. So therefore the costs developed as planned and the sizable work that has been conducted now also starts to be visible if you look closely enough. With this, the comparable operating result landed at 35 million euros and as stated for the first time in 10 quarters. The net profit was still negative and that was driven by especially the financial expenses. Approximately half of the financial expenses were related to currencies and other half related to interest rate expenses and leases. The normal seasonality patterns start to be visible in our operation also when we look at the sales or the booking curve on daily level and from one week to another. And this is of course also applicable for the quarterly level. This picture illustrates the pandemic toll quite a bit. Even though the 35 million comparable operating profit is a step to the right direction, it is not enough in order for us to be positive for the whole year in terms of comparable operating profit. If we compare to pre-pandemic levels, Q3 in 2019, we made a comparable EBIT of approximately 100 million euros. So there still is a significant job to be done in order to restore profitability in full. In terms of cash, we started out the quarter with a little less than 1.6 billion euros of cash at hand. Epita, of course, was driving the operating cash flow changes. The working capital was impacted by seasonality and also the invoicing of the wedleys operations, as an example. During the quarter, we drew down 110 million euros of the capital loan granted by the state of Finland. And that means that now the 400 million capital loan is drawn in full. And we ended the quarter with 1.6 billion euros of cash. So the cash is still healthy and strong. With the 110 million drawdown of the capital loan, the equity ratio landed at 8% and gearing was decreased with a notch or two to 320%. It is all about implementing the new strategy and it is all about restoring the profitability. That is the agenda in Finnair as we speak. We published the new strategy in September. And the key focus areas there being the more geographically balanced network, fleet optimization, us strengthening unit revenues through sales distribution transformation, but also in terms of building on existing and new partnerships. Reduction of unit costs with 15% is a really, really significant part of the strategy and aims to make us competitive on those markets that are open for us, even if Russian airspace would be closed to our Asia flights for a really long period of time. As stated, the target of the new strategy is to reach pre-pandemic levels of profitability with EBIT of 5% by mid-2024. And when we come about implementing this new strategy, it is clear that we need support from all stakeholders. and as stated the strategy implementation now has started it proceeds at pace but it will be a long haul during the quarter we announced new destinations to Mumbai or new route to Mumbai and as stated now next week we will be starting our Doha flights from Stockholm Alanda and Copenhagen I already covered the significant commercial transformation that we have been doing. And as stated, we believe that there's a story to be told there. And that is encouraging also in terms of what new initiatives we can build on the success that we have been achieving so far. We are at present time negotiating with our unions of further savings and changes in the terms and conditions of employment. And those discussions are progressing. We have now a conditional negotiating result with two of our unions, namely the pilot union and the senior white collars union in headquarter functions and support functions. The discussions with remaining unions, most notably the cabin crew union and the union handling tech ops and ground handling are proceeding as we speak. The condition in the negotiating result is related to us reaching a similar negotiating result with symmetric levels of savings with all of the unions Or alternatively, us taking home similar cost savings in the respective domains of the unions by means of employer-desired initiatives. We are also streamlining the structures, our organization structures globally, and currently we are in the middle of a process to reduce up to 200 employees in headquarters and support functions across the organization globally. Having said this, we are looking at every single cost item. We did that during the pandemic, but we did that with the ambition to come back to our Asia strategy. And now we are applying a new lens to the cost savings according to the new strategy. and therefore feel confident that there is new opportunity in terms of reducing cost in the months to come. So in terms of the outlook, During Q4, we estimate that we will be operating an average of 70% of our capacity in terms of our own scheduled service. And then the VED leases will decrease a bit. They will amount to some 10% of our pre-pandemic capacity. So altogether, the same 80% of capacity will be deployed as in Q3. When we look at our booking curve, We see that the strong demand for travel will continue during the remainder of the year. And we estimate that that in turn will support Finnair's unit revenues as we have experienced during Q3. The significant uncertainties in our operating environment will prevail. Historically high fuel cost, prolonged Russian airspace closure, strengthening of the dollar, remaining impacts of the pandemic, especially by means of strict travel restrictions still in China, and then possible looming recession with inflationary pressures also potentially over medium term impacting customers' willingness to travel. The bottom line is that in order to get ready for these uncertainties, partially realizing, and in order to make sure that we will restore profitability, we will need to be implementing our strategy and all the measures that go with it at pace. And that we will be doing during the remainder of the year. And we will be giving a further update of the progress in connection to the next quarterly report in the beginning of the year. So I will stop at that. Thank you for listening.

Many thanks Topi. Now would be a convenient time for any questions you may have. Please follow the operator's instructions to present them.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Jonas Ilvenen from Evli. Please go ahead.

Hi, it's Jonas from Edli. First, congratulations with respect to the positive EBIT. I have one question related to the underlying ticket price inflation. So your RASC improved by some 20% in Q3, quarter on quarter. So that was partly driven by the increased load factors, which, I mean, you are not going to see similar kinds of increases going forward. When I calculate the, so I guess it would be more appropriate to calculate the kind of ticket price inflation based on RPK and I get a figure something like 10% when I use that. So I was just hoping more color on this issue. I mean, you say you continue to see similar kind of strong unit revenue development going forward. So could you give some sort of color what kind of pricing levels which are you seeing going forward?

Well, currently, if we look at the RPK yields, we see the RPK yields holding up now on the short run. But it is important to note that we also see the normal seasonality patterns coming back to the business. So in the context of Q4, that would be meaning that October is still a relatively good traveling month. and November is a seasonally soft traveling month before the travel will pick up, especially during the latter part of December and the Christmas holidays. So I hope that that goes at least some way to answering your question.

And what about, I mean, this jet fuel price situation? Do you see that you have still some sort of catching up to do with that, even if there has been some stabilization in price levels?

If we look at the pass-through rates from the fuel price, we have been able to pass through a significant portion of the increased jet fuel price, but not all of it. So there's still a job to be done on this one. Whether that will be possible, that will be driven by the demand. that we will be seeing on the market.

Christian will continue. Maybe just kind of taking one step back. In the end, the pricing environment is driven by capacity in the overall industry and demand from consumers. And now we have seen that industry capacity is constrained because of the reasons that Topi talked about. And demand has still been good, but we are of course now looking at demand on a daily basis, trying to understand how consumers will react to the higher bills that they will receive from electricity companies and from financial institutions and so on. And that ultimately will drive the pricing environment going into next year and for the remainder of Q4.

Okay, that's clear. And could you also remind us of these revenue management projects from your new strategy point of view? So my feeling is that these are still somewhat in development and they are still to bear major fruit. How are you going to differentiate yourselves from competitors with this respect?

I would divide this into two parts. The other one is the change in distribution that we have been doing, increasing significantly the share of direct distribution up to 60%. that is also driven by partially by geographical mix that has changed especially some of the Asian markets before the pandemic being very GDS driven in terms of distribution. So that's the other part of it and then the revenue management is the other side of it. So I think that when we look at this equation during Q3 we were relatively successful in terms of capacity management and the revenue management initiatives that we have been taking. So that is That is important that we prevail that capacity discipline also going forward. We have been also introducing new tools like dynamic revenue management that are relatively fresh but the early indications are that there are some encouraging results out of that. And then when it comes to distribution and sales, the way we manage the sales funnel, how we are obsessed about conversion rates, in the sales funnel and how good we are in terms of cross and upselling different fare types and ancillaries. I think that there we have taken significant steps forward and I would estimate that there's still some opportunity left to capture on that space.

All right, thanks. That's all from my side.

The next question comes from Pia Rosquist-Heinzalmi from Carnegie. Please go ahead.

Yeah, hi, it's Pia from Carnegie. Thanks for taking my question. So I got a few ones, and one is regarding the wet leases for Q4 and looking into 2023. So based on your current contracts, for how long Do you still have, or for how long are the current contracts still in force?

So during the winter, we are deploying two white bodies, namely two Airbus 350s to Lufthansa Group to Eurowings Discovery. And that goes until the end of IADA winter season, so end of March.

All right, thanks. And then regarding the cost savings and the negotiations ongoing with the unions, by when do you expect the new contracts to enter into force? I mean, when should we expect to see the impacts from these new agreements?

We hope to proceed with the talks ASAP, so during the upcoming weeks. And then we hope to log in the negotiation results during the course of Q4, which would be meaning that we would be seeing the run rate impact from these in 2023.

In 2023, all right, thanks. Good. Then I had the question on yields. That was maybe already answered. Then coming back to your strategy and the point you did not touch upon in your presentation, namely ensuring a sustainable balance sheet. So is there any news you can share at this point with regards to the actions to to ensure a sustainable balance sheet?

I think actually Topi talked about it. You know, the balance sheet will be worked through the improved profitability. Our focus now is on improving the profitability in a sustainable manner by turning every stone and driving that implementation with force. And with that, we can then also generate cash flow and retained earnings, which will help us to improve the financial position of the company.

All right. Thank you. That's all for me.

The next question comes from Joko Turveinen from SEB. Please go ahead.

Yes, good afternoon. It's Joko from SEB. Coming back to the yields, you said, Topi, that the corporate travel is returning. How should we expect this to impact the yields? And a follow-up on the corporate travel, how the demand there is splitting between the geographies.

After the summer vacations, we have seen corporate travel coming back. The return rate of corporate travel in comparison to pre-pandemic levels, adjusting to the capacity that we are now flying, is approximately 80%, by and large. And that is something that we are seeing. So clearly supportive in terms of yield development. And the geographical spread is that there's a lot of short haul in Europe in corporate travel. There has been quite a bit of corporate travel to North America. And now lately, Asian Asian corporate travel has been picking up on the back of countries like Japan, South Korea opening travel from all COVID-related restrictions. And then there are individual markets like Singapore that are very strong flows to Singapore, also supported by the Australian flows beyond Singapore. And now lately, when we have been seeing Hong Kong easing the travel restrictions somewhat, we have seen a big up on the Hong Kong market.

Excellent. Thanks. Continuing on the Asian traffic and what is the situation with the Chinese COVID restrictions? What are your expectations when you could kind of open more routes to China?

I mean, we all saw the party congress in China last week, and there the sort of high level communication is that President Xi and the party is committed to the dynamic zero COVID policy. So we think that the dynamic part means that there might be individual flight permits that we as well as other airlines will be getting during the winter months, but that will be very small of nature. So we don't expect a more significant opening in China during the winter months. Then the question remains that what kind of opening we might be seeing for the summer period.

Okay, I understand. But this takes me to my next question. It would be very helpful if you could shed some light on the 23 capacity plans, how much less you are about to fly compared to the pre-pandemic levels. Understand that you don't want to give any guidance, but any light there would be nice.

Well, this is something that we are looking at. We have been publishing a summer schedule for next summer, which I would characterize as a base schedule. So during the upcoming months here, during the winter, we will be looking at the demand picture over the medium term until the end of 2023. And we will be making decisions related to how much we will be deploying capacity in connection to that. And of course, the fleet optimization is a key part of our strategy. So any capacity deployments will be considered hand in hand with fleet optimization.

Okay, thanks. Then a bit of a technical one on the port. Firstly, traffic charges were kind of surprisingly low compared to the rising in volumes. Was there any kind of unusual items impacting that?

A relatively big one, which is that we are not flying over Russia.

Okay. But if I just look at the kind of a quarter-to-quarter development, it was a bit Bit muted, kind of rising in that coastline, but that surprised me.

Yeah, I mean, of course, there are sort of individual developments. I mean, if we compare to previous, I mean, given the capacity constraints in some of the European airports, like Heathrow or Ship Hall, we could not fly as much to those airports as we would have wanted to. And these are expensive airports. So these kind of individual developments are impacting the number.

Okay. That explains then. Then on maintenance costs, which were significantly up, was this just because of the dollar or were there some extra items there?

No, the currency impacts materialize at the maintenance event. And then therefore, the maintenance costs were largely driven by the forex impacts.

All right. Thanks. That's all from my side.

Please state your name and company. Please go ahead.

Hi, this is Giovanni from Lexical Capital. Good afternoon, everybody. Good to see the numbers inflecting positively. Two questions for us coming from our perspective as bondholders of the company. Have you stated any intention regarding if you want to call the perpetual bond in June next year? And does that in effect put a deadline to the timing of any capital measure that you're contemplating. And then the second question is, so I noted that you stopped recognizing any deferred tax assets from your past tax losses, and that you wrote down the deferred tax assets from the previous years. Is the implication that you've updated your business plan and that your tax losses were exceeding the expected profits for, I believe, the next 10 years? I think that 10 years is what the Finnish tax law allows you to carry forward the tax laws to cut down taxes in the future? Thanks.

Yeah, so maybe on the last one, so yes, the reason for that change previously in the year is that there is uncertainty around if we can utilize the losses in the time period permitted, and in that sense, that's why why we are not accruing for additional benefits from the losses that we have, that we've now had also on a net basis in the third quarter. And I think to your first question, we have not made such decisions when it comes to the step up in the rates and what actions that will drive. Our focus is now on ensuring that the profitability improvement measures get identified and the implementation starts. And as I said earlier, through that we will also create the capacity to improve the financial position of the company.

And to add on that... If I can ask a follow-up on the losses. Are you basically assuming that you will not be able to generate a profit for the next few years? Or are you just trying to be prudent?

I think we are being prudent here. And when we look at the totality, are we able to utilize all of them or not? That's what's also driving partly the decision.

And to add on what Christian stated about our balance sheet structure and different debt types, I think that what we need to remember is that the EU Commission has permitted the government to extend the guarantee for the existing pension premium loan. That decision has been publicly communicated. So that extension of the guarantee is in our disposal going forward, if we so choose.

So is the intention to refinance, I guess, to also extend the pension loan? Because now you have the guarantees extended, but will the maturity of the loan also be extended?

So that would be the usage of that extended guarantee if we so decide to do. So we are talking about the maturities now in the fourth quarter and in 2023.

And would the terms of the loan also change, or would they be similar to when you signed the loan a couple of years ago? Because of course, rates have gone up quite a bit in the last two months.

Yes, as you said, I think when you make extensions in the current environment, it's difficult to find lenders who are willing to extend on old terms. So in that sense, it would be based on the current current terms for those type of pension loan facilities.

The next question comes from Pia Roskvist-Heinzalmi from Carnegie. Please go ahead.

Hi, it's Pia from Carnegie again. Thanks for taking my question. So please, a follow-up with regards to the pension premium loans. If those loans or the period would be extended, would this also mean that the rules and regulations then stipulated under the state aid packages, they would also be extended over this new period?

No, not necessarily. I mean, the earlier remedies from the EU were more related to the rights issue and the combination of the guarantee and the rights issue. So... So that needs to be kept in mind.

Okay, thank you. That's clear, thanks.

Please state your name and company. Please go ahead.

Hi, this is Giovanni again from Luxor Capital. I guess my follow-up question on the pension loan is, would you consider using those proceeds to call the perpetual bond next year? because it will make quite a difference on your interest payments.

So, I will only repeat what I said earlier. We have made no such decisions and have no such plans. We will now focus on improving the profitability of the company through the implementation of the new strategy, and that creates then cash flows and profitability, which will enable us to strengthen also the financial position of the company.

Thank you.

As a reminder, if you wish to ask a question please dial star 5 on your telephone keypad.

Okay. It seems that there are no further questions, so we will then conclude the session. Ah, seems that there would be one question more, so please go ahead.

Please state your name and company. Please go ahead.

Hi, this is again Giovanni Gent. Back to the previous question on the use of the potential proceeds of potential loan or the capital loan or whatever cash that you have in your balance sheet to repay the hybrid. Would the Finnish government object to that or the European Commission object to that, to use of your current cash in balance sheet to repay, I guess, the hybrid, the perpetual?

No, I mean, the usage of the money is not earmarked to anything.

So you have full legal freedom to use that process to even repay other liabilities?

Yeah, I mean, it's part of our financing structure and part of the balance sheet structure. So there are no sort of... specific terms in terms of earmarked usage.

Okay. Thank you. Thank you very much.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. No questions left. We will conclude the session. Many thanks for the excellent questions and joining the call. We wish you a nice weekend.

Thank you very much for joining. Thank you.