Finnair Oyj

Good day, ladies and gentlemen. I'm Erkka Salonen from Finnair Investor Relations, and it's my pleasure to welcome you all to this Finnair's first quarter 2023 earnings call. I have here with me Finnair CEO, Mr. Topi Mannar, and we're joined by our CFO, Mr. Kristian Pullola for the Q&A session. I will now turn this call over to you, Topi, please.

Thank you, Erkka, and good day, everybody, and welcome to this Finnair Q1 earnings call. The main headline for our Q1 is that the strong demand And well progressing strategy implementation led to break even result during this seasonally weakest quarter. So our comparable operating profit was one million euros on the positive side. That would not be a good result for any other quarter, but for Q1, that's a solid start for the year. This was the third consecutive quarter of comparable operating profit after the impacts of the pandemic easened. And then this was also second quarter in a row when we achieved a positive net result, this time the net result being plus 3 million euros. The strong demand was reflected in the number of passengers that we carried. That was 2.6 million passengers during the quarter. And our load factors basically normalized to pre-pandemic levels, the Q1 number being 75%. We operated 80% of our capacity in terms of great circle mile ASKs as our own scheduled flights. And then when we calculate in the wet lease operations for our partners, that number is extended to 86%. Our unit revenues, RASC, developed strongly during the quarter with plus 30% improvement in comparison to Q1 2019. And this is This is reflecting on one hand the strong demand, but also the numerous initiatives that we have been taking during the past years to improve our commercial performance. One of them being the dynamic continuous pricing that we have been taking into use in our revenue management as one of the first airlines in the world. And also, the transformation that has taken place in our distribution as increasing the share of direct distribution to 65% and in parallel to that as improving and intensifying the digital sales and marketing and the relevance of our offers to customers. Also, we are gradually getting better in terms of ancillary sales and all that goes into this one number, which is the single biggest lever behind the result this quarter. The customer satisfaction remained at a good level, net promoter score being 42. So that edged upwards from last year, where the last year average was at 40 in terms of net promoter score. The net promoter score and customer satisfaction was greatly helped by the on-time performance, which was 82% for the quarter, which can be regarded as a good number remembering that the wintery conditions in Finland in January and February are making the on-time performance more challenging during this quarter than during the summer months. Well, after the pandemic and the Russian airspace closure, it is worthwhile to take a bit of perspective into Q1 numbers. And there we of course see the sort of heavy drain of the pandemic during the last three years. But when we look back to 2019, which is probably the best comparison year in terms of operating environment, Q1 EBIT in 2019 was minus 16 million euros, whereas the full year EBIT for the year 19 was a plus 163 million euros. 2018 was the all-time best year in the history of Finnair, in the soon 100-year history of Finnair, us enjoying upcycle in terms of economy and also getting new Airbus 350 deliveries and increasing Asian traffic at that time. This year differs from all the other years in this picture in a sense that Russian airspace has been closed and that suddenly has been increasing our operating costs significantly on the Asian routes. So it has been a solid, a good start for the year. But we need to remember that the uncertain operating environment persists, despite of the strong demand that we are seeing per se. Fuel price, as you know, is still high. And given that there's a war in Europe, the development remains uncertain. Unfortunately, there's no end in sight for the Russian airspace closure. High inflation, higher interest rates, all come into this equation. And then, of course, we will need to remember that during the double crisis of last three years, Finnair has been accumulating a lot of debt. So that means that we will need to stay the course. We will determinedly continue to implement our strategy both in terms of increasing revenue and in terms of increasing the efficiency, reducing the unit costs of the company. When we look at our individual businesses, Aurinkomatkat, our packaged travel arm, had a strong quarter. Overall, Aurinkomatkat Sun Tours, the share of it from total revenue, has recovered well from the pandemic. Aurinkomatkat has an excellent customer satisfaction with a net promoter score of 55. During the course of last year, we got the best customer experience award in Finland, all industries, all companies included. And we are indeed seeing a strong demand for the summer in the package travel business clearly, whereas a couple of years ago there was a discussion of a trend light weakening of the package travel product prospects. What we see now is that package travel is appealing to customers in the uncertain economic environment. And we are also attracting new types of customers for the package travel product. more premium type of leisure travelers. And in this environment, Aurekomatkat has been able to increase its market share. And clearly what we are seeing that based on the way the bookings in Aurekomatkat are developing, we will be basically selling out our capacity for the summer months. And therefore for For friends and family, it's good advice to book the summer trips now. The same applies to the rest of our business. So when we look at our ticket sales, first of all, we see our booking curve normalizing. And when we look at the sold tickets at the end of March, we see that we have the order book for the summer is notably more full than it was at the same time last year. And we see strong demand of travel for the summer months up until end of the summer season in September. And clearly we are looking toward a busy summer season where the capacity constraints of airlines are contributing, together with the strong demand, to a positive yield environment. So, taking a deeper look at the Q1 numbers, of course, when you compare to Q1 last year, that was still heavily impacted by the pandemic and the Russian airspace closure, there has been a remarkable shift in terms of the profitability numbers as witnessed by the comparable operating result or the result for the period. But as stated, Q1 2019 is a more meaningful comparison in terms of operating environment. And there we see that our revenue increased from that quarter. The same goes for comparable EBITDA as well as for comparable EBIT and net result. So in addition to successful commercial management to boost the revenues, we have been able to proceed with our agenda of reducing unit costs, and our expense management has been successful. Clearly, when reading the numbers and interpreting the numbers, you will need to take into account the fact that the increased flight time to Asia has significantly increased the costs of these routes. Our unit cost decreased excluding fuel with 3% when we compared to the same period last year. So in terms of cash, our cash flow during the quarter was strong, especially the sales intake for the summer months is visible in the changes in the working capital. During the quarter, we also made a bit of investments. We bought three narrow-body aircraft that we have been having as leased aircraft in our fleet, and that is visible in the CAPEX part of the cash flow chart. The cash flow and the cash reserves at the end of the quarter were 1.6 billion euros roughly. And when we look at the cash to sales ratio for the past 12 months, we are close to 60%. That can be regarded as a strong number. So in terms of balance sheet, the strong operating cash flow has contributed to gearing becoming better now at 240 level roughly. And of course, a notable shift from Q1 last year, as stated on the back of the cash flow. When looking at the equity ratio, the equity ratio decreased with a notch, despite of the positive net results. And that was attributable to a decline in fuel price, which negatively impacted our fair value reserve. So then when we dig deeper into the strategy implementation and the progress in strategy implementation during the quarter, we successfully stabilized the new, more balanced network. On the back of that, we have now also optimized our fleet, and we don't see any big changes happening in our fleet from now on. Of course, we will continuously optimize the fleet when it comes to sort of individual tails, but now the big changes have taken place. We also adjusted the delivery schedule. during the quarter of our two upcoming Airbus 350s. The first one of those will be entering the fleet in Q4 2024. And then the last one we extended a bit until Q2 26. So those are the changes that took place on the fleet side. Network wise, we stopped the shortest domestic flights with flight times little above 20 minutes to Tampere and Turku, simply because the load factors were around 30% and thereby nowhere near the commercial feasibility. In terms of strengthening unit revenues, I think that the number of 30% improvement in RASC speaks for itself, and I basically touched upon all the measures that we have been doing in that space already. We will continue with that agenda and we see that there's further upside to be realized also in terms of unit revenues. In terms of unit cost during the quarter, we achieved an agreement with Gap Inc. on new savings. This means that 90% of our employees now have agreed to a savings package with the company and for the remaining 10% of employee groups, we have already implemented alternative savings measures of similar size. We stopped our in-flight sales, not the food and beverage sales in flight, but but other categories like cosmetics, liquor, candy, simply because we did the math and we had seen deteriorating customer demand for these products over the years and then the revenue did not warrant the cost and resource investment to this piece of the operation, and then therefore we decided to stop the sales. We also did some changes to our service concepts on our flights, and all of these measures are part of the agenda to improve the efficiency of the company and to reduce the unit costs, as stated. In terms of sustainability, we purchased so far the biggest individual batch of sustainable aviation fuel from Neste, 750 tons. And while this is a small portion of our total jet fuel consumption. It is still a meaningful step in our long-term journey to scale up sustainable aviation fuel usage. Also, the shortest flight connections to Turku and Tampere, replacing them with buses, moving forward with intermodality agenda has a sustainability angle to it. So in terms of guidance, we reiterate that during this year, we will be operating between 80 to 85% of our capacity measured with ASKs, the Great Circle Miles. And that will be depending on the development on the Chinese market, as well as potential leases of aircraft and crew to other airlines. When we look at our booking curve, as stated, we see the strong demand for travel to continue and especially for the summer period that will be supporting our revenues. Beyond the summer period, based on booking curve, we still do not have more visibility. And of course, as stated in the operating environment, all of these uncertainties that I listed previously prevail and that we have been repeating in our outlook. So putting all of this together, we estimate that during whole of this year, our revenue as well as profitability, comparable EBIT, will significantly improve year on year. But at the same time even though Q1 revenue and Q1 comparable EBIT were better than in 2019, we estimate that the revenue and comparable EBIT will not yet reach the level of 2019. And this is especially because the latter half of 2019 was a strong one and therefore a tougher compare. So that basically wraps up our outlook and guidance from here onward. And we will be, as per usual, updating this in connection to Q2. But as stated, solid start for the year. We are clearly progressing according to plan. in terms of our strategy implementation. And now when we look into the summer, we are seeing strong demand, and we are getting ready for a busy summer season. I will stop at that. Thank you.

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