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.