Finnair Oyj (FIA1S) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. I'm Erkka Salonen from Finnair IR, and it's my pleasure to welcome you all to this Finnair First Quarter 2020 Earnings Call. I have here with me Finnair's CEO, Mr. Topi Manner; and he is joined by the CFO, Mr. Mika Stirkkinen, for the Q&A session. And now I will turn this call over to Topi Manner. Please, Topi.

Thank you, Erkka, and welcome, everybody, also on my behalf to this Finnair Q1 earnings call. Thank you for putting the time aside and then coming to attend this event. In terms of Q1 results, I think that this opening picture here tells the whole story. A winter has come to aviation, a cold breeze is blowing in aviation at large, and that suddenly applies to Finnair as well. So our Q1 numbers are heavily impacted by the coronavirus situation. And our Q2 numbers will be even more impacted by the coronavirus situation. So if we just briefly recap how events unfolded during the Q1. The year started very well for us. January was a strong month. In retrospect, it feels almost like perfect. Then of course, towards the end of January, the COVID-19 situation started to unfold in China, in Wuhan, in Hubei with the lockdown measures. And in early February, we suspended our China flights. From mid-February onwards, we started to see decreasing demand on the back of the virus-related fears, also in our other traffic categories, namely Europe domestic and North American traffic. Come to March, then we first decreased our European network capacity with 20%. Then the travel restrictions, border closures started to come in from different countries. On the 18th of March, U.S. closed its borders effectively seizing the transatlantic traffic. And during the course of that, we also announced that we will be moving into a minimum network that is less than 10% of our capacity. Aurinkomatkat also canceled all package tours until end of June at that point. Due to this, our revenue fell with 16% during the quarter. We took decisive measures to adjust our network and our capacity. Our original plan was that during Q1, our capacity would have grown with some 10%, and now it ended up as decreasing with close to 10%. We also took decisive and timely measures to reduce our costs, basically going through all of our costs, also putting all of our staff on temporary layoffs. But due to the typical delay of these kind of measures, our costs decreased with close to 5%. And this resulted to an operating loss of EUR 91.1 million, which is to be compared with EUR 60 million on equivalent period during the previous year. Our passenger volumes fell with close to 16%, pretty much hand-in-hand with the revenue. During this unprecedented time, the really good thing to see has been the feedback from our customers, which has been very positive, and they have appreciated our service. We have been communicating actively in all channels, not least, the social media. In March, we gave the opportunity for our customers to reschedule their flights up until end of November. We automatically extended the tier status of our Finnair Plus loyalty customers by 6 months because we felt that, that is a fair thing to do because these customers, under these circumstances, cannot fly and renew their tier status. We also introduced a voucher, a gift card as an alternative for the refunds. Given the magnitude of our flight cancellations and given the magnitude of the refunds, there has been queues in our customer service. But our customer service staff has been doing exceptionally good work in terms of servicing the customers in a good and gearing way. And this is certainly being acknowledged by the customers also in their feedback. And basically, this picture tells the whole story. Our customer satisfaction, measured with Net Promoter Score, has been already on the high level vis-à-vis our peer group of airlines during the course of 2019. And now lately, we have seen the NPS improving. And in Q1, it reached the level of 43 as a quarterly average. And I think that, that is just a great result in this hardest of circumstances. Our customer satisfaction is increasing. So we believe that this will be strengthening our brand on the long run. During times like this, customers' memory is long, and we also believe that this will make customers come back to fly with us as soon as it is possible and the safety and health concerns are being addressed. So this is something that we are proud of and I think that I'm particularly proud of the fantastic work that our -- all of our staff have been doing in servicing the customers. This picture basically tells another story of how the events unfolded during the Q1. During the course of the Q1, we gave 2 profit warnings. The gray line here is our seat capacity indexed and the blue line is our passenger numbers, effectively our demand. And what you see here is that after the Chinese New Year peak in the very beginning of the year, things were relatively stable. We suspended our China flights this early February. It's typically the slowest period in terms of China flying. And you cannot really see the impact of that in the passenger demand because that was at the time compensated by a strong demand in our European flying. But then towards the end of February, we started to see the decline of forward-looking booking curves also in other traffic categories, especially in Europe, and that is where we gave our first profit warning. Then after the travel ban in U.S., after our decision to move into minimum network, after the forward-booking curves were heavily impacted after the mid-March, then we gave a second profit warning, also stating that our full year will be ending up with a clear loss. So the demand effectively came off a cliff. And this is something that commercial aviation has never seen in its 100-year history. The speed in collapse of demand has been unprecedented, as you well know. When we just look at our traffic categories, I mean, the numbers tell a story of how the events unfolded from 1 geography to another during the quarter. Asia traffic category was the first hit, and there, our revenue fell with 25% during the quarter. Europe held up well during January and February but was hit in March. And there, the revenue decreased with 10%. In North America, that was the latest hit by the virus, our capacity increased with 16%, our revenue fell with only 3%. But of course, at this point of time, the virus is a global phenomenon and all of the airlines are in the same boat, no matter whether we are speaking Asia, Europe or North America. As you know, we are hedging our fuel and our hedging policy has been that for next 6 months always, we hedge 75% of our fuel bill. And in these extraordinary circumstances, this very good practice backfired on us for 2 reasons. First of all, given the reduction of flying, we did not consume the fuel that we were hedging for in the first place. And secondly, the oil market went crazy with Saudi Arabia and Russia, quarreling about supply restrictions, and the oversupply of oil basically led to these completely unreal numbers in terms of oil price. During Q1, we benefited from the volume and price decrease a bit, but that was fully compensated by the hedging deviation and the strengthening of the dollar. So therefore, on a quarterly comparison, our fuel bill basically stayed the same. In terms of hedging, we are utilizing IFRS rules in our accounting. And the oversupply, overhead situation that we ended up with in Q2, given the minimum amount of flying, also meant that we needed to reclassify some of the financing expenses and book an additional cost item of EUR 55 million to Q1. In this kind of situation, of course, all eyes are turned on cash. Cash is king. And we started the quarter with good cash reserves, EUR 953 million, to be exact. Our working capital has been changing, especially on the back of the refunds that we have been paying out. We have been paying altogether, EUR 144 million in terms of refunds. We also acquired 1 Airbus 350 during the quarter. We raised new debt in the form of revolving credit facility. And with that, at the end of the quarter, we had liquid assets amounting to EUR 833 million, which is a good figure, given the size and scope of our operations. And to be precise, that figure is not excluding the EUR 600 million pension premium loan that we have as a backup facility. And that is also being guaranteed by the government of Finland. The EUR 833 million is not including also the sale and leasebacks arrangements that are part of our funding plan, where we have been advancing during the past weeks and days. And currently, we are in an advanced stage in those negotiations. Coming into the crisis, we had a strong cash to sales ratio of 31%. And if we compare that with European network airlines, the average there has been 17%. So we have been -- on relative terms, we have been having almost twice as much cash. And just a couple of months back, we were accused of being too conservative in terms of cash because, of course, that is costly in a 0 interest rate environment. But now that is working to our benefit. There are only 2 airlines in Europe, namely Ryanair and Wizz Air that have better cash-to-sales ratio than us. In addition to cash, of course, balance sheet is part of the main focus for all stakeholders with respect to any given airline. Given the losses that we booked during the Q1, our equity ratio is decreasing from 25% to less than 20%. During second quarter, we will be making an operating loss of EUR 2 million per day, meaning that there will be a further decrease of equity, once we announce Q2 results. Today, we have also announced a rights issue of EUR 500 million that will be restoring our balance sheet. And that is a key element of our plan to come through the crisis as a competitive airline, as a strong airline that can also utilize the opportunities that might arise in competitive landscape or possibilities that might arise, for example, in the area of refleeting, making fleet investments. The EUR 500 million rights issue is underwritten by our 2 arranger banks. And government of Finland, as our main owner, has been communicating that they are participating on pro rata basis on this rights issue. So this is strengthening us in this very difficult situation tremendously, and as stated is a key part of our plan to come out strong from this crisis. We have been adjusting our cost base decisively. So if we take depreciation out of the equation as a noncash flow impacting item, we have been reducing our cost with 80% and are operating with that minimum cost level currently. So we have basically taken all of those costs that can be taken out from the system. The remainder, the less than 20% that we have are related to the minimum capacity of -- minimum network of flying that we are currently doing, the cargo-only operations that are profitable on their own right that we are currently doing. And then, of course, we need to take care of all of our fleet, including the grounded fleet so have those cost in technical services, we have minimum IT premises cost, and all of those things. So a lot of work has gone into adjusting our cost base. Of the operating loss of approximately EUR 2 million that we have per day during the Q2, roughly half is depreciations and half is operating cost. So there, you can do the math, that what is our cash burn in terms of operating cost in this very minimum scenario. If we look at that -- how are we operating as of now. We operate the minimum network that consists of 20 routes in Finland and in Europe currently. We have operated repatriation flights and that we have been arranging in collaboration with Finnish Foreign Ministry. And then we are operating cargo-only flights that serve a very important societal purpose. For example, the cargo that we are flying currently includes a lot of personal protective equipment, other medical supplies, for example, corona test samples from Finland to South Korea. And then, of course, also normal air cargo. We have something like 8 wide-bodies or will soon, next week, have 8 wide-bodies flying cargo-only flights. And as stated, given the fact that the price of cargo per tonne has been increasing on the global market during the coronavirus hit, these flights are profitable on their own right. Looking forward, we expect that flying will start to gradually and slowly increase from beginning of July onwards. This, of course, will be heavily impacted by the pace with which the countries will be lifting the travel restrictions and the border closures, and we are observing that development very closely. During May, during the next couple of weeks, we will be releasing our traffic program for the rest of the year. But at the same time, we are preparing to flexibly adjust that program as we learn more about how the development of demand unfolds during the next weeks and months. Many airlines, by now, and especially during the recent days, have been announcing drastic job cuts. Lately, British Airways, SAS and some of the others, Icelandair. In our case, our plan is that we will continue with temporary layoffs. The Finnish legislation related to temporary layoffs is actually very flexible. And it suits this situation well because we are able to adjust our cost base as need be. And then, of course, we are able to see how the demand develops and take actions. Once we have more certainty about the demand, when it comes to permanent jobs. We cannot rule out that we wouldn't be doing permanent job reductions later in the game, but as stated, for the time being, we are observing how the demand develops and taking steps accordingly. Then if we look how the aviation will develop during the next couple of years and what is our base case scenario, for that, our estimate is that the recovery of flying will be slow, and it will be taking 2 to 3 years before the passenger volumes, in our case, will be returning to the levels of 2019. So this 2 to 3 years will be effectively a rebuild period for Finnair. And we expect that the whole aviation industry is not coming back to where it was in January. We are going into a new normal, into a new place, and there will be structural changes in our industry. There will be airlines that are not making it through the crisis, many will be entering into a form of debt restructuring. Many airlines, almost all airlines, will be cutting capacity. The competitive dynamics will change. And all of the airlines, including us, will need to put a lot of focus on cost efficiency, including structural measures, to remain competitive in the new normal of aviation. And that is why we will be updating also our strategy. We think that the main parts of the strategy will be valid also in post-corona world. Sustainability being in the core of our strategy, us aspiring to be a modern premium airline, providing choice for our customers, us putting focus on operational excellence and operational efficiency, doing even more on that space, focusing on on-time performance, all of that. But what we will be reviewing is the growth rate of Finnair over the long run. And on the back of that, we will be reviewing the size and scope of our fleet investments and also, the timing of our fleet investments. What all of this will mean is that the long-term financial targets that we communicated on our Capital Markets Day in November will be pushed out in time. At the same time, our hypothesis is that after this rebuild period of 2 to 3 years, aviation will come back to growth. And the growth might be smaller than we have seen in the past, and that would be affecting the growth rate of Finnair as well. But when aviation at large returns to growth, then Finnair aims to come back to sustainable, profitable growth. What needs to be stated is that these numbers that we have been today communicated, of course, tell nothing about the underlying profitability of Finnair or the underlying competitiveness of Finnair. Our core strengths remain intact. We have fantastic people. We have unique Finnair spirit. We have loyal customer base. We have a strong brand. Our strategy of connecting Europe and Asia is based on sustainable geographical competitive advantage. We have a resilient culture, and we can operate in agile fashion with the one company model that we are having. And we have a good ownership structure as witnessed by the willingness of our owners to support us with fresh capital. So coming back to Q2 guidance. The visibility currently is low. We will be operating this minimum network of approximately 5% plus cargo-only flights. And we estimate that we will be making a daily operating loss of approximately EUR 2 million. We have built various scenarios of how the development will be in aviation. You heard the base case, but we have especially operationally increased our flexibility and agility so that we can react fast when we have more clarity on the demand. And then we will be coming back with further updates in relation to our Q2 result in July. The key thing here is that we can see our way through the crisis. The capital injection that we will be receiving is a key part of that. We have a plan, and we intend to come out strong from this situation. Thank you.

And now would be a good time for questions. So please go ahead.

[Operator Instructions] Our first questioner.

It's Jaakko Tyrväinen from SEB, Helsinki. Can you hear me?

We can, Jaakko.

Yes. I would like to ask more about the -- hello? I would like to ask more about the expected recovery in the second half of the year. I mean it must be rather difficult also to you to start to put capacity in place with really, really uncertain demand. So what should we expect in terms of capacity for the second half of the year?

As stated, we will be releasing our traffic program in couple of weeks. And what we will be doing now during these upcoming days is that we are really observing closely what countries will be doing in terms of lifting their travel restrictions. We, for example, see -- for example, saw Greece announcing their decisions just lately. And we would be expecting these kind of news coming in now during the next couple of days and some weeks. So that will be providing more clarity to the schedule. As stated, we expect the traffic to be sort of restarted beyond this minimum network, gradually from 1st of July onwards. And the way we expect things to go is that domestic flying will come back relatively soon. The flying in the Nordics as well as in Northern Europe will be the next in line. But we also expect that we can introduce, already during this summer, some long-haul destinations. And what is helping us in this respect is that the cargo-only traffic, which, as stated, is profitable on its own right, is already there. And therefore, we only need to add the passenger part to the flying. And we are currently flying cargo-only flights for example, to Tokyo, Osaka, Seoul, Shanghai, and we will be adding some individual flights to Beijing, Hong Kong and Bangkok.

Good. And then secondly, could you give me -- give us some kind of a flavor or indications of the current cargo volumes given that you're flying with 8 aircraft, full cargo. So what are the cargo volumes, for example, in year-over-year terms?

Mika Stirkkinen here. The volumes are not that great, but as such, the yields are so good that we are seeing healthy cash returns on those flights, but volumes are not especially great.

Okay. Okay. Are the 8 wide-body flying daily? Or is the frequency a bit lower than daily flights?

Yes. The 8-body -- I mean if we look back now a couple of weeks, it has been increasing incrementally during the last couple of weeks and days. So the 8 wide-body figure is effective into the situation today and from here onwards, flying daily. That would be daily.

Okay. Okay. Understand. And then my last one. Given the rather long expected recovery period of the aviation, are you considering running permanently some of your oldest aircraft?

We will see how the demand will develop. And then, of course, based on this scenario, it is foreseeable that we will be a smaller airline for a while as will so many other airlines in the world be. And we will be operating on a less-than-normal capacity during the remainder of this year. And then that capacity will gradually, gradually increase. So that means that we would need to have a temporary groundings of airplanes. Yes.

Our next questioner.

This is Achal from HSBC. I wanted to understand a couple of things. So first of all, I wanted to understand what is -- what is your fleet plan looks like? Obviously, you just talked about -- you can -- you might be a smaller airline for a short period. But what I wanted to understand that at the moment, of course, you have grounded many planes. So in that scenario, at the moment, are you trying to return a few leased planes earlier than originally planned? And then like many other carriers across the world, are you also talking to your lessors in regards to deferring the lease payments? And what sort of changes do you see? I mean do you expect -- if you need to ground some more planes or if you need to return planes, are you planning to return wide-bodies? Or are you planning to return narrow-bodies at the moment? So what sort of -- so if you could please talk about your fleet plan broadly, that would be very helpful.

Thank you. If you, Mika, start with the lessor part and those negotiations...

Yes. We have contacted all of our lessors. We have discussed both deferrals and actual lease rental reductions. So that's ongoing. And naturally, we have discussed with our landlords on facilities so. And actually, we have discussed with all of our vendors on our terms and conditions of our agreements so as well as naturally with -- well, the staff cost has been handled through temporary layoffs. But yes, lessors are part of the cost plan.

And generally speaking, we see an opportunity over the long run in terms of refleeting. So that is definitely part of our plans. And when it comes to the new aircraft that we are supposed to take delivery of, 1 Airbus 350 during the course of this year and 2 Airbus 350 during the course of next year, we will be negotiating the delivery time line of those aircraft together with Airbus.

Right. Right. The other thing I want to understand that you said that you are doing sale and leaseback transactions and you're already in discussion. Just want to understand, given that the most of the planes are grounded across the world and the demand is not there at all, how easy it is to do the sales and transactions -- sale-and-leaseback transactions? Do you find the lessors? And then moreover, even if you do the sales-and-leaseback transactions, don't you think you will get -- you will probably get the lower price of the aircraft, given that aircraft values have come down since January? So just want to understand your views on that.

On the sale-and-leaseback transactions, so we are in advanced stage with 1 lessor. So that's all we can say at this stage.

And when it comes to the lessor market in general, I think that in the discussions, many of the lessors as well as many, many of the suppliers, in general, see that Finnair is among the strong ones in an industry that is being very hard hit by the virus. We have a strong cash position on relative terms. We have a healthy balance sheet. And now we are strengthening the balance sheet with fresh equity. We have a strong ownership structure. So in the relative game that many of the suppliers in aviation are looking at, we have important strengths.

Right. The other thing I wanted to understand is about -- you said that the roads to the recovery is slow, and it will take at least 2 to 3 years for the traffic to come back at 2019 level. Do you feel the same for the profitability also? I mean do you think it will take 2 to 3 years for the profits to come back? And then related to that, if you think that for the profitability, that's not the case, and then that means there will be some structural changes to the industry, which you just talked about. So it would be very helpful if you could please talk about what sort of structural changes you see to the industry going forward so your profitability and then the structural changes, if you could talk about that, please?

In terms of profitability, I mean, this year, and this is no news to anybody at this point of time, will be very, very difficult to all of the airlines. So effectively, a lost year. And when we look at our base case scenario and the hypothesis that the demand will go back to 2019 levels in 2 to 3 years, this would be meaning that we -- with our base case plans, we believe that it would be possible to restore profitability and come back to positive EBIT numbers already in '21. Not significant numbers, but still positive numbers. And then further improving in '22, coming back to sort of normalized, normalized profitability levels in '23. And then the structural changes...

And then about the structural changes? Yes.