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 2022 earnings call. I have here with me Finner's CEO, Mr. Topi Manner, and he is joined by the CFO, Mr. Christian Pullola, for the Q&A session. I will now turn this call over to you, Topi. Please, go ahead.

Thank you Erkka and good day everybody. Welcome to this Q4 earnings call. So the main headline for us today is that our comparable EBIT was positive for the second consecutive quarter and the work to restore our profitability continues. When we look at the Q4, the comparable operating profit landed at plus 18 million euros, and also the net result was positive for the first time in three years. The dollar moved to our favor, namely euro strengthened, and that was visible in the net result that landed at plus 53 million euros. During the quarter we carried 2.5 million passengers. We operated 71% of our 2019 capacity as our own flights, as our own revenue service. And then when we add the wet leases, and we have currently two Airbus 350s wet leased to Lufthansa Group, then the capacity would be corresponding to 79% of the 2019 capacity. We are making significant progress in terms of improving sales and optimizing revenues and that produced the desired results. Our RASC unit revenues increased with 25% when we compare with Q4 2019. The loads improved in all traffic categories and one of the highlights for the quarter was that we started the cooperation agreement with Qatar Airways now having daily operations from Helsinki, Copenhagen and Stockholm to Doha and these routes have started with the right foot and they are basically meeting and even a bit exceeding the targets that we have been setting for these routes. Fuel price is still exceptionally high, and this curve basically speaks for itself. So, when we look at the end-year levels, we are still, in terms of Euro price, we are higher than we have ever been since 2005, even though, you know, from the highest levels back in spring and in June, the fuel price has been coming down somewhat. The customer satisfaction for the full year remained on a good level. Our NPS score was 40 with some monthly volatility. We received quite many acknowledgments and rewards during the year. For example, APEX, Airline Passenger Experience Association, rated us as a five-star airline. And we are currently going through a cap in renewal. as we speak, 12 long-haul aircraft with the new cappings. And we received a number of awards related to that. Best capping innovation was one of them. Best new business class for our new air lounge business class seat was another one. And then generally a design innovation award for the business class. So when we look at what we have been doing with the long-haul cabins and how we have been further developing and investing into digital solutions both in terms of sales and self-service for our customers and when we take the new Helsinki airport the brand new well-functioning Helsinki airport into the equation we can say that the customer experience has taken a notable step forward during the during the past year and when we add to that the reliability that we have demonstrated we have been one of the most reliable airlines in Europe since summer in terms of on-time performance and the overall good service that we are receiving good feedback from our customers during the flights and also at the airport, then all that sums up to the kind of customer experience that is visible in the score of 40. So our crew has been taking good care of our customers during the roller coaster year of 22. When we look at the P&L in a bit more detailed fashion, we see that the revenue landed at 687 million euros, EBITDA 99 million euros, and then the comparable EBIT was 18 million euros. Operating results with items affecting comparability 38, and as stated, given the dollar weakening then the result for the period was 53 million euros and with that we can say that as a company we are turning a page right now so we are leaving the acute crisis of three years behind, and we are moving into a new phase that will be all about nurturing Finnair back to full health again. The operating environment certainly has still many, many uncertainties, but there's a little bit more predictability, more stability in our operating environment and therefore our sole focus is to bring the company first back to profitability on full year basis and then to realize our strategy targets and the key target there being that we will reach pre-pandemic profitability 5% EBIT level from mid-24 onwards. The cash developed positively during the quarter in a sense that our operating cash flow was 30 million euros positive. After investments and loan and release payments, other items, we landed at a bit more than 1.5 billion euros of cash. And when we compare that to the revenue of last year, our cash to sales ratio is 65%. So that ratio is strong and that is the way we want it to be going forward as stated when we are entering into new phase, implementing our strategy and nurturing Finnair back to full health again. During the quarter we extended the pension premium loan up until May 25 and there's an adjusted repayment schedule now with 100 million euros biannual repayments and then a final final payment of 200 million euros in May 2025. Looking at the balance sheet, it is of course visible that we are weakened by the pandemic, so the pandemic toll clearly impacts the numbers, but it's good to know that now the ratios are turning to a better direction, equity being roughly 10% with a step forward on that respect, and then similar step toward the right direction in terms of The currency exchange helped definitely also in this aspect. Looking at the travel restrictions, I mean, of course, a lot has happened during the quarter. China, of course, the most notable development in this space. China ended up opening clearly earlier and more suddenly than we and probably many others expected. And that is something to note. A positive development certainly for us, but we expect that The demand that eventually will be sizable, even huge from to and from China will materialize with a bit of a time lag. So first, China will need to sort out the passport and visa issues before the travel can really get started to and from Europe. And we are currently observing the development of the demand closely. We have two weekly flights to Shanghai, but we stand ready to increase the number of flights, the number of frequencies during the summer. first and foremost to Shanghai, and then we plan to reopen Beijing during the summer. But what is the exact timing and what are the exact frequencies and the capacity that we will be allocating to the Chinese market will be dependent on how we see demand unfolding. We are also adding some flights to other Asian destinations. We resume flights to Osaka during the summer seasons with three weekly frequencies. And in addition to our daily flights to Haneda, we are now introducing new frequencies to Tokyo Narita Airport, as well as to Hong Kong and Delhi. So, Then an update in terms of how we are progressing with the strategy implementation and how that work will continue. So one of the key focus areas for our strategy was a geographically more balanced network and related to that an optimized fleet. So what we have done is that now we have effectively executed on the more balanced network and we are happy to report that we see strong demand on the new routes related to the new network. I already covered the situation with Doha from Helsinki, Stockholm and Copenhagen. We see also encouraging demand for our Dallas route in the US and the same goes for Mumbai route in India. And the connecting flows between India and US are also interesting flows that we want to tap into. And clearly with the Delhi-Mumbai routes and with our increased offering in US, we are able to tap into those flows. Related to US, the extended network and clearly the stronger distribution power by way of our one world partners, American Airlines and Alaskan Airlines selling and distributing our tickets is a significant factor. The point of commencement US is very important for for the US routes in terms of sales, and that was very visible last summer, but certainly has continued also during the winter season. As stated, the cooperation with Qatar Airways is important to us and has started out well. In terms of fleet, what we are doing currently is that we are optimizing our aircraft lease agreements we are discussing about extending lease durations and on the back of that we are negotiating new lease rates realizing cost savings in the process The wet leases increased the utilization of our fleet currently, and the wet lease operations will continue during the summer seasons. We have now recently signed a new wet lease agreement with British Airways. We will be wet leasing four Airbus 320s to them starting end of March for next 12 months. So flying the wet lease operations for British Airways during the summer season as well as during the winter season. I think that probably the most significant progress we have been making in the area of strengthening the unit revenues. So unit revenues have increased with 25%, as I stated. There are many individual activities that go into that number. We have been, as one of the first airlines in the world, we have been taking this new revenue management module by Amadeus into use, dynamic and continuous pricing and the value added that we are getting to our revenue management performance seems actually very promising at this point of time. And now we are rolling it out to basically full utilization, namely the application area for this revenue management tool is all other than Edifact, all other distribution than the ones using Edifact technology. The distribution efforts we have been seeing during the past couple of years, a remarkable shift in the share of our direct channels, that including Finnair.com, the mobile app, call centers, and also our package travel arm Aurinko Matkat. So the share of direct distribution is 65% at this point of time as opposite to close to 40% in 2019. And this in turn enables us to boost revenues by being smarter and more relevant for customers in terms of selling ancillaries. And then as the share of the GDS distribution is decreasing, we are able to cut middlemen and thereby decrease the costs as well. When we continue down this lane, we will be increasingly investing on and progressing in terms of NDC usage. And there we are already relatively advanced, and we will continue with that agenda. Finnair.com during 22 had a total sales of 800 million euros. When we look forward, The share of that will certainly continue to increase. We will be passing one billion euros during the course of this year. And we are managing the Finnair.com as a true e-commerce platform, and our capabilities on that front have already improved significantly, and we hope to see further revenue upside coming out of this in the months and years to come. On the back of that, on the back of the whole distribution and sales, digital sales improvement, we have been able to increase the ancillary revenue per passenger with 13% during last year, when we compared to the baseline of 2019. In terms of reducing unit revenue costs, perhaps the single biggest item has been the negotiations with our various employee groups around savings agreements. And at this point of time, we are happy to report that we now have either a savings agreement or a negotiation result with all of our key personnel groups. So we have a finalized savings agreement with pilots, with our office employees, with people from tech ops and with significant parts of ground handling and ground services. And with our cabin crew, we have a negotiation result that was finalized just very, very recently. And now the negotiation result is going to final decision making for both parties, namely on the company side, but also on the union side. And we expect this to be confirmed in the coming days. As you would know, we have been previously streamlining our support functions, also reducing number of employees in the headquarter and support functions. We carried out that during the course of the fall. And yet again, Like we did during the pandemic, we are renegotiating with all of our suppliers and aiming to find cost savings. And that is the work that is currently ongoing and also delivering results. So, tangible progress also on the unit cost side. In terms of sustainability, progress is more incremental of nature. Recently, we joined SAF purchase agreements with One World Partners. Now, starting from this quarter, we are increasing gradually the usage of SAF. And when we have been needing to say goodbye to employees, like with the headquarter and support functions, we have been investing in re-employment programs with very good results. So that basically brings me to the guidance part of it. And when we look forward, we estimate that during the course of this year, we will be flying an average capacity between 80 to 85 percent. And how it will unfold will be impacted by the development that we generally see on the market, but also especially on the Chinese routes. And then potential red leases, i.e. leases of aircraft and crew to other airlines. We estimate that the strong demand environment for travel that we are currently seeing will continue in the short term, and that will be supporting our unit revenues in the short term, like it did with the second half of last year. But certainly, The general economic uncertainties are out there, and those are weakening the visibility of travel demand when we continue to the second half of this year. With the fading impacts of the pandemic, now China being open, we expect that the normal seasonality will return to our business. And with the normal seasonality, we also will see or would see a typically negative EBIT during the first quarter. And then the summer months are the peak season for travel, as you well know. We have all the uncertainties still out there. Unfortunately, no end in sight for the war in Ukraine and thereby for the Russian airspace closure. We are adapting to that. And we estimate, summing all of this up, that our revenue will significantly increase on year-on-year basis, especially because Q1 and part of Q2 were weak last year. But at the same time, we estimate that the revenue won't yet reach the level of 2019 on full year basis. We will come back with further updates during Q1. So I think that that covers the presentation and the introduction, and now we would be ready to go for the questions part of it.

Thank you. Thank you, Topi. So as Topi mentioned, now would be a convenient time for any questions you may have. To present them, please follow the operator's instructions.

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 Pia Roskvist-Heinzalmi from Carnegie Investment Bank. Please go ahead.

Hi, this is Pia. Thank you for taking my questions. I come back to your comment in the press release where you say that you expect the strengthening of unit revenues to play a bigger role than you previously anticipated in achieving your target. So does this mean that your targets are more dependent on unit revenues and their development, meaning external factors outside of your control. So yeah, compared to your earlier anticipation.

Well, it means that we see opportunities on the market. So we see strong demand environment on one hand, and that clearly will be supportive to our unit revenues. At the same time, we see the inflationary pressures impacting our cost base. And therefore, there is a shift in terms of how we think that we will realize the target of our strategy. And the shift is a bit more from cost to revenue side. But at the same time, the target of reaching the 5% EBIT in mid-2024 and onwards. I mean, that remains intact. And we believe that we are on our way of delivering on that target. And we certainly stay very, very focused on all aspects of the cost. and we move forward with the cost agenda in a very determined fashion.

Maybe just to highlight on the point that Topi mentioned about inflation and the overall, I would say, industry environment, you have to keep in mind that at the time when we set the original targets, you know, The industry environment wasn't as strong as it is today, nor was the inflationary pressures as high as they ended up being. And as a result of that, achieving some of the reductions, the absolute reductions on the cost side is harder today. On the other hand, as said, in the more positive industry environment achieving some of the upsides on revenue is seen more achievable.

Okay, but you have not decided to change your savings target in absolute numbers?

So the key target remains the 5% EBIT from mid-2024 onwards.

All right. Thanks. Then if I may ask still on the pension premium loan, can you give some or shed some light on the pricing of the pension premium loan?

So as is the nature of the loan, it is attractive. It is market based. And in that sense, we do feel that it was a good source of liquidity for the period when our focus will be on transforming and improving the profitability of the company.

Okay, and maybe continuing still on the financing part, so can you give any comment on your plans for the hybrid bond expiring in June?

So we will come back to the hybrid decision before that deadline. The only thing we can say at the moment is, you know, building on my earlier answer, that a strong balance sheet and a strong liquidity position during the transformation period that we are focused on is seen important, but no decision has been made on the hybrid at this stage.

Okay, so we can't draw any conclusions yet on you maybe redeeming that hybrid bond to avoid the step up.

So, as I said, our focus is on bringing back profitability during the committed period, i.e. between now and mid-24, and during that time period, we do see that a strong balance sheet and a healthy liquidity position is critical.

Okay, thank you.

The next question comes from Achol Kumar from HSBC. Please go ahead.

Thank you for the opportunity. Can I ask about your profitability on different regions? If you could please provide some flavor as in your current profitability on Asian, European, North Atlantic regions, please.

Well, as you would know, we are not disclosing the profitability of various geographical traffic categories. So on that one, I wouldn't comment, but what we can say is that The demand picture is right now positive related to all travel categories. Clearly, further opening has happened in Q4 in Asia. and that is being reflected in the Asian loads. And the good demand also is reflected on the revenue side of things, on these routes. China opening will be... a case in point during this summer, as we mentioned. And then when we look at our US routes, you know, those are performing quite well. We are clearly benefiting from the distribution capacity of our one world partners, namely American Airlines and Alaskan Airlines. The joint business set up, the Atlantic joint business that we have with AA, BA and Iberia is clearly benefiting us as well. And the same partnership analogy when it comes to one world applies also in Middle East, where Qatar Airways is an important partner for us and Middle East is becoming a more sizeable geographical travel category for us, also including Dubai, also including Israeli destinations.

Right. In terms of Qatar, I mean, you said that it is in line with the expectation or sometimes even better than expectation. Could you please give us a bit more color on, you know, what's your expectation, what kind of contribution your Qatar operations are doing?

As David, I mean, our target for those routes has been that they would be basically profitable from day one. And the start of those routes has been positive. So the partnership is meeting and even a bit exceeding the targets we have been setting for the routes.

Right. My second point, second question about the capacity. So you guided that your capacity in 2020 should be 80% to 85% of 2019. So now, could you please give us a bit more color in terms of how we should look at the capacity, Apple to Apple versus 2019? I mean, if you remove impact of Qatar, if you remove impact of wet leasing, if we remove the impact of the increased flight length due to, as you ordered, Russian airspace. So, apple to apple, how this 80-25% should look like in 2023. And then, in terms of wet leasing, you mentioned that you have at least two aircraft, and then already you're operating two aircraft for wet lease, and you're adding four AC-20s to BA for this year. Anything else are you trying at the moment, or we should expect that's it for this year?

So I think on your first question, the biggest difference between 2019 and 2023, when you look at it through the lens of the the way ASKs are calculated is that we fly less Asia. And that's where the reduction is coming from. Some of the reduction is then offset by us flying somewhat more into destinations in the Middle East, and also then kind of taking into account India. So I think those are the biggest changes when looking at like for like comparison on the ASK side.

And then when we calculate the wet leases for this year, I mean, for the first quarter, we have the current wet lease operation with Lufthansa. So, two Airbus 350s. And then, as stated, for the remainder of the year, in terms of what we know now, we will have the four narrowbodies with British Airways.

So, sorry, these two Lufthansa, when are they expiring? When the contract is expiring?

At the end of the IAIDA winter season, so at the end of March.

Okay, perfect. Coming to the cost, so you mentioned that you have negotiated with pilots, crews, and vendors. I mean, if you talk about in terms of cost, maybe an absolute number, and that's for the modeling purpose. So, for example, the staff cost, you reported $450 million for this year. What kind of cost should we expect going into 2023 if we incorporate all those sort of negotiations that you have done, staff cost and the other vendor cost, maybe in terms of percentage decline, if you may highlight, if you may say something.

Maybe on the cost side and in general, it's good for you to to take into account that when it comes to improving the profitability, it's early days. We have a long road ahead. The target we've set for ourselves is 5% and it is from mid-24 onwards. We are... operating in an environment where inflation is high. And in that sense, we do need reductions to even stay at same absolute levels. And that's good to keep in mind. Secondly, the company did take out 200 million of costs during the pandemic, which means that Many of the cost reduction measures that we are currently pursuing are structural in nature, and as a result, the impacts are not visible immediately. They are visible over time, so over the the next 12 to 18 month period when we improve the profitability towards that 5% level that we've set for ourselves. So in that sense, take that into account when you model costs for the year and going into 2024.

And to build on that answer, when we look at the savings agreements with various employee groups, I mean, those savings agreements are put together of a number of individual items. And some of them will have quick impact in terms of shaving off some of the sort of salary inflation that we would be otherwise seeing but this is a minority of the content of the savings agreement then there would be elements that would be more structural of nature and they would be falling into the category that Christian alluded to, so that the impact would actually come over time to the P&L.

And then also some deal with the longer flight times and the cost increases that come from the longer flight times to Asia. So in that sense, they are limiting cost increases that would otherwise have been coming through.

Perfect. Going slightly deeper on Asian operations, so now you're saying that you're increasing presence in China. So just wanted to understand a bit more about kind of traffic segmentation. You know, if you need to talk about like if you want to differentiate between sort of recovery in the corporate demand versus leisure demand on your Chinese and broader Asian routes, how do you define that? and in terms of how the cargo operations in terms of volumes and yields are behaving on Chinese and broader Asian routes in terms of volume and yields. So would really appreciate your thoughts on that.

First thing to note related to the China opening and the Chinese market going forward in general is that this is the first and only one of the Asian markets where there will be an uneven playing field. the Chinese carriers will be flying through the Russian airspace, and that obviously means that they will be having a significant cost advantage, whilst all European carriers are going around the Russian airspace, and that will be increasing the costs of the European carriers. We think that what this will mean is that it will be very hard to make secondary cities of China profitable in terms of flying. So therefore, From our perspective, the Chinese market especially focuses on Shanghai and Beijing to start with. And then when you look at the segments of travel, we are definitely on those two cities, we are very much focused on individual travel. not that much on group travel. So high yielding customers where the willingness to pay is more significant. And that is why the sort of passport and visa issuance is quite important to us in terms of seeing the demand unfold. It will be interesting to see how the corporate travel develops to and from China. You know, one viable hypothesis perhaps is that especially the Europe corporates won't be allowing their employees to fly with Chinese carriers through the Russian airspace because of the sanctions. And therefore, we think that the corporate travel from Europe to China, especially as well as much of the leisure travel, the individual travel, will be directed towards the European carriers. And then the question is that how much will demand outplay the available capacity on the market when it comes to Chinese people traveling from China to Europe? So what is the degree of spill in that and the flow over to to European carriers, and our hypothesis would be that that spill will be significant, and that will be enabling airlines to yield up in the Chinese traffic.

And in terms of cargo? Sorry.

Yeah, I mean, what we have seen in general with the cargo is that basically hand in hand with allocating more capacity to the market, passenger capacity to the market, the cargo yields have been coming down. So we would expect that this is happening also in the Chinese market.

Okay, perfect. Thank you so much.

The next question comes from Jonas Ilvenen from Evli Bank. Please go ahead.

It's Jonas from Evli. First, a question related to your Middle Eastern route capacities. Would you be able to provide some color on how do you see that capacity developing going forward? I mean, beyond the initial January traffic figures. And second question related to, you already touched on ticket pricing, but How do you see ticket prices developing in Q1 now that the situation is kind of mixed? I mean, there's still some inflation. On the other hand, petrol price is a little bit down. So where do you see the delta like in Q1? Do they still increase like flat or maybe some downward pressure?

I mean, to start with your question related to Middle East, I think that you should look at the Doha traffic and the daily frequencies as a very stable element throughout the year in that traffic. And then when it comes to other parts of Middle East, Dubai and Israel, I mean, some of these destinations and also the frequencies are seasonal of nature. So following the sort of seasonal schedules that we publish will give you a good idea in terms of how the capacity develops in the Middle East category. So I think that that would be the answer related to the first question. And then coming back to your second question and how do we see the yield developing, there I would refer to our guidance. So we see strong demand as we speak. We have seen the booking curves normalize. We have seen that consumers prioritize their spending perhaps differently than they have been doing in the past. So travel is very high. in the priority list of consumers prioritizing their spending. And basically travel is one of the last things that they will let go of when they consider their spending. And that is certainly something that we see continuing now on the short run. And therefore, We see that that phenomenon will be supporting our unit revenues the way it did during the Q4 last year.

And then maybe just to comment, I think, you know, please keep in mind that jet fuel prices are still at a very, very high level, as Topi said in his prepared remarks that We are basically on year-end levels, and now, of course, also with the increased level of hedging that we have, you know, more of the future purchases have been fixed at these levels.

All right, thanks. That's all from me.

The next question comes from Pasi Verzenin from Nordea. Please go ahead.

Great, thanks. This is Pasi from Nordea. Firstly, looking at the kind of the full year and especially RASC development. Would it be a reasonable assumption that your RASC is going to be something between 8 and 9 euro cents for the full year and practically this kind of 20-25 percent increase is to kind of RASC probably is not going to be the case for the full year and maybe secondly When you are going to reach your 5% EBIT margin target, is your net result also going to be positive when taking into account kind of for interest expenses and especially kind of for lease related expenses after the EBIT? Thanks.

So, maybe on the first one, We are not guiding RASC in general, so I will not comment on the absolute level. The only thing I'll say is that in the guidance, we do feel that we have given you the tools to have a decent view on what we think will happen to RASC during the year. You know, we are... saying that capacity will be between 80 and 85, but that revenues will not reach the 2019 level. So that kind of sets, in our understanding, an upper limit on what can happen to Rask in our guidance. And clearly, of course, the second half, is further away and more of the economic uncertainty that we see around us can have an impact on both demand as well as then the ability to price in that environment. Then to your second question, we have set our financial targets in such a way that we will be able to further strengthen the company with those results. Clearly, none of us knows at what levels interest rates will be at that point in time fully. The thing I would say there is that we are fairly well hedged against short-term raises in interest rates because of the fact that a big portion of our financial liabilities are fixed and against the variable part, we hold a sizeable cash position that also generates interest income at those higher rates. So that would be the comment to your second question.

So by kind of reading between the lines, you are getting a kind of positive net result when the EBIT margin is 5%.

I would say that that's maybe even on the line and not only in between the line. Yes, yes.

Yeah, I hear you precisely. Thanks.

Please state your name and company. Please go ahead.

Hello, can you hear me?

Yes, we can hear you.

Hi, thank you for taking my question. I actually had a question. My question has been answered. I had a question on your hybrid bond. Apologies if you mentioned this, but when do you expect to communicate a decision? And just as a quick follow-up, Does the government funding have any conditionality with regards to the repayment of this perpetual bond?

No, it does not. And again, we'll communicate before anything happens. And of course, the next logical time for us to take a view on the topic will be after the Q1 results.

And generally related to the EU remedies, I stated the EU remedies are not impacting the hybrid bond, the ones that we got when we did our rights issue back in spring and early summer 2020. Those EU remedies are now expiring at the end of June this year.

Thank you.

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

It would seem that there are no further questions, so we shall then conclude the call. Many thanks for excellent questions and joining the session. We wish you a nice day.

Thank you very much for participating. Thank you. Thank you. Bye bye.