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 Third Quarter 2020 Earnings Call. I have here with me Finnair CEO, Mr. Topi Manner, and he is joined by the CFO, Mr. Mika Stirkkinen, for the Q&A session. I will now turn this call over to you, Topi.

Okay. Thank you. Thank you, Erkka, and hello, everybody, also on my behalf and welcome to this Q3 earnings call. Thank you for putting the time aside. When we look at the Q3 of Finnair, it is clear that the pandemic continued to weigh heavily on us, but at the same time, it is important to acknowledge that we proceeded well in terms of our savings targets, and we are now in a position to exceed or increase our saving target, and we also progressed well in terms of strengthening our cash position and our equity. All in all, we have significant headwinds in terms of the surrounding environment and all of those things that we cannot control. On the other hand, those things that we can control are progressing well. And that 2 sidedness is visible in the quarter. So moving forward, when we look at the Q3, I mean, our run rate of daily passengers during Q3 was approximately 10% vis-à-vis to 2019 levels. The travel restrictions continued to limit our possibilities to operate in a significant fashion. Because Finland, as our domestic market, has one of the most stringent if not the most stringent, travel restriction regimes in Europe. The demand that we experienced in the cargo side of business was still on good level and the proportion of cargo, out of our total turnover, is clearly bigger than in normal times. We also, some time ago, we released our winter traffic program and according to that, we are -- during the winter time, we will be flying to some 50 destinations on average flying 75 daily flights. And that corresponds approximately 20% of the flights that we flew in 2019 and translates into little bit less than 15% of our capacity measured with available seat kilometers. What is important to note is that we maintain readiness to increase the amount of flying as soon as the demand recovers if, for example, the travel restrictions are being lifted. And that is indeed something that we would hope to see in the near future. So our guidance for the Q3 was that we will see a similar operating loss of similar magnitude than we saw in Q2. And that is indeed how it turned out to be. Our operating loss landed at minus EUR 167 million so approximately EUR 1.8 million, EUR 1.9 million per day. Our revenue fell with 89%, so the run rate of revenues is 11%, as I mentioned earlier. And our capacity decreased with 87%, pretty much hand-in-hand with the revenue. During the quarter, we decreased our costs significantly with immediate measures to adapt to the new environment. We took out 0.5 -- approximately EUR 0.5 billion of cost also during the Q3, as we did during Q2 and with that, during the course of the pandemic, we have been reducing our cost with more than EUR 1 billion. The bright spot of the quarter was the increase of Net Promoter Score to all-time high levels. So our Net Promoter Score during the quarter was 56, and the sample size is similar to the sample size that we had in Q2 last year and Q3 last year when our Net Promoter Score hovered between 38 and 40. We see this clearly as a vote of confidence from our customers in terms of how we are handling the health-safety measures on board our aircraft. And customers clearly think and more importantly, feel that they can fly safely also in terms of in terms of the virus concerns. And this is certainly something that we will hope will bring customers back rather sooner than later once the virus situation clears out. In terms of customer service, another big theme during the quarter was the refund processing. Starting from March, when we were forced to cancel flights on the back of the border closures, we have now handled refunds of approximately 1 million customers. We have been adding resources to refund processing. We have been developing new tools like robots to handle some of the refunds automatically. And now we are back to normal handling times in terms of refunds. Altogether, we have been paying more than EUR 400 million of refund -- cash refunds to our customers. As stated, we made good progress in terms of our cost savings and permanent cost savings. And therefore, we are in a position to increase our target from EUR 100 million to EUR 140 million, with full run rate impact in year '22. It's clear that when we are now reviewing our organization and our operational processes, changing our way of working. This is yielding to structural cost savings across Finnair and especially on the land side of our operations. We have made better-than-anticipated progress and identified new opportunities for savings in areas like maintenance and repair, real estate, IT cost, and then we have been renegotiating and doing some competitive biddings, generally, with our suppliers and this is clearly yielding results. And given these steps forward, we now increased the target to EUR 140 million. In terms of personnel implications, during the quarter, we handled the so-called codetermination process leading to reduction of people of 700 across our operating countries. This corresponds to approximately 30% reduction in our land side operations, especially in the headquarter and support functions. Altogether, when we take retirement into account when we take the natural churn into account and after these redundancies, during this year, we have been reducing the amount of our personnel with 1,100 approximately. At the same time, we have been in intense talks with our unions in terms of agreeing upon savings. And we have been agreeing upon permanent cost savings with some of our employee groups, with some of our unions, and those unions, those employee groups, will be eligible for a rebuilt incentive that we'll be paying out in 3 years if our rebuilt targets will materialize. Some of the unions, some of the employee groups have agreed on fixed-term savings. And then those are certainly also very welcome in terms of our rebuilt planning and savings targets to be met. Finnair has a pension fund, predominantly, for flying personnel, for pilots and capping crew and especially for more senior staff. And as part of the talks with the unions, we have now agreed about index removal for those pensions, for those additional pensions. And that will be leading to a reduced pension liability for Finnair. And on the back of that, during Q4, we will be making a one-off positive booking that amounts to EUR 85 million. That EUR 85 million will not be part of our comparable EBIT, but it will be contributing to the EBIT number in the items affecting comparability. And therefore, it will be flowing through the P&L and ultimately, it will be strengthening the equity in our balance sheet. Beyond this EUR 85 million, we have potential other similar measures that will materialize during Q4. We have a negotiation result with our unions but some of these arrangements are pending regulatory approval. And once we get those regulatory approvals, we will get back to this and announce the result during the course of Q4. As part of the job redundancies, we introduced a next program for our people that is aiming to support those who will lose their jobs in finding their next chapter in their professional careers, and this is something that we feel is very important to us in terms of us being a responsible employer and offering social support for those who are in need. In terms of cash, we started the quarter with a cash balance of EUR 851 million. The comparable EBITDA was EUR 82 million. The change in working capital was quite significant during the quarter because we especially handled the backlog of refunds that amounted to EUR 129 million. And then there was additional working capital elements, especially coming from various hedge and derivative impacts during the quarter. Going forward, it should be noted that the working capital changes should be clearly smaller especially when we look at the refunds because the outstanding refund backlog currently is EUR 40 million. And therefore, this particular item will be clearly different in the quarters to come. We took delivery of one Airbus 350 based on earlier arrangements prior to the pandemic and therefore, invested the remainder of the purchase price to that aircraft. We did one divestment of sale and leaseback arrangement of one Airbus 350 aircraft. The remainder of the right issue came in, in July, hybrid bond net proceeds impact the cash, and we also drew EUR 200 million out of our pension premium loan during the quarter. We paid back the revolving credit facility of EUR 175 million, but the revolving credit facility remains at our disposal at this time and that basically led to the quarter end cash balance of EUR 725 million. And I stated, revolving credit facility and EUR 200 million of pension premium loan remain undrawn in terms of liquidity at this point of time. We continue to negotiate financing arrangements, especially aircraft transactions and thereby raising debt. And once those discussions mature, we will be coming back to that with separate announcements. When we look at our balance sheet, the equity ratio is on year-end 2019 levels, thanks to the rights issue that we conducted during the summer. And now looking into Q4, the one-off bookings out of the pension fund will be supportive for our equity as well. Gearing levels remain at Q1 levels at this point of time. All in all, when we look at our balance sheet, the balance sheet is healthy, and it provides a solid platform for us to rebuild Finnair during the quarters to come when the pandemic develops and hopefully gradually starts to ease in. In terms of fuel cost, I mean, the price development was basically compensated by currency and hedging deviations. So our fuel build basically pretty much developed hand-in-hand with our volume. In the IFRS accounting, we still were in an overhedged position during the quarter, and we dismantled -- unwound those overhedges and that resulted into net financial expenses of EUR 54 million during the quarter. Now our sort of level of hedging is relatively small going forward. And therefore, these net financial effects are expected to be limited in Q4 and beyond. When we look forward, the winter traffic program I already covered. We estimate that the ramp-up in terms of the demand starting to pick up, will materialize in bigger scale at the start of the summer season so basically, end of March, April, next spring. And we will be making sort of further decisions related to the summer traffic program in early next year. At this point of time, we are flying some of our aircraft, approximately half of our fleet, to winter storage in warmer countries and one of those is Czech Republic and Prague where we are also doing some maintenance for our aircraft. But we maintain adequate fleet in our home base so that if the demand is picking up, we can react to that quickly and increase the amount of our flights. During the quarter, we have been working on our revenue program as well. And in an effort to find all revenue pockets that can be found in this challenging marketplace where we find ourselves in, Suntours, are [indiscernible] launched, package travel options, not Mediterranean countries where they are flying typically but to Finnish Lapland, where the sun also shines during the winter time. And then those travel options have been received well by our customers. Another pilot that we have been doing is a taste of Finnair. So we are selling premium packaged fruit inspired by our business class to local supermarkets. And this has been received really, really well and we are looking at possibilities to scale up this fast. When we announced the initiative, some time ago, the news went viral. And then actually, the news was covered in more than 60 countries across the globe. So this is an example of how we are staying relevant in the minds of our customers, and how we are keeping up the brand value of Finnair, which indeed is a great asset for us during this time. We have been also doing travel responsible campaigning, reminding our customers that we are ready to fly when they are ready to fly. And there is also an important message to governments across Europe in this one. And that message is a message of travel restrictions. What the travel industry needs is consistent and predictable travel guidance and especially common standards, common testing regimes based on rapid testing, and we do hope that across Europe, governments will be harmonizing their practices and take steps forward in this very, very important matter in order to save jobs in the travel industry in Europe during the winter. And that brings me to the guidance of the quarter. So looking ahead, we see the Q4 operating loss to be of similar magnitude that we had during Q2 and Q3. This one of booking out of the pension funds is not included in comparable operating profit as such. And as stated, that EUR 85 million and potentially some more will flow into the P&L as part of the operating result and thereby will be strengthening the balance sheet and equity. Based on our current assumptions, we estimate that the revenue and the capacity will both decrease more than 70% in 2020 compared to 2019. So this pretty much sums up the Q3 from Finnair perspective. And as stated, what we have been able to accomplish during the quarter is especially the progress in the permanent savings, in adopting our business to new reality and also the measures in terms of cash and equity have been high on our agenda. And then progress on those fronts has been according to our plans. So thank you.

Thank you, Topi. Now would be a convenient time for any potential questions you may have. So please go ahead.

[Operator Instructions] Our first question is from Pasi Väisänen of Nordea.

Great. This is Pasi Väisänen of Nordea Bank. Well, we can start with this kind of cash position. I mean I would like to know what is your current run rate for the cash burn? And what's your kind of hurdle rate or the base cash position you actually need to run your ordinary operations? And then well, secondly, looking at kind of these reductions, you actually laid off some 700 people, if I am right, from the ground personnel. So is there now kind of a mismatch between the flying personnel and the ground personnel? So are we going to see kind of somehow kind of -- are you going to call back to people in the first quarter or are we going to see the next round in the layoffs regarding playing personnel in the first quarter of next year? And if we start with these 2 ones, I have a follow-up also coming?

So if you, Mika, take the first one, I can take the second one.

Operating cash flow. We guided that the comparable EBIT is at Q2, Q3 levels. And hence, EBITDA will be around EUR 80 million to EUR 90 million per quarter. And then on top of that, we guided that the refunds will be -- the estimated refunds are EUR 40 million during Q4. And then after that, we anticipate that there wouldn't be any refunds in Q1, Q2. On top of those 2 items, we will have on operating cash flow, financial expenses paid net line. And over there, we have the interest expense and hedging costs. So you can do the math over there. And then on top of those, we have the debt repayments and costs of investments -- sorry, investment cash flows. So that answers hopefully, your question on the cash flow.

Yes. And in terms of the second question about the mismatch of redundancies. There is no mismatch and we do not have any further plans for people reductions either. When we look at the headquarter and support functions, we are changing the processes. We are changing the way of working, and there is a true productivity gain out of the structural changes in those units. And then when we look at the flying crews, what we will need to remember is that the furlough legislation in Finland is very flexible. So meaning that we can do furloughs until further notice. And when we do furloughs until further notice, we get rid of the entire salary cost of those employees. And in flying crews, we will utilize those furloughs until further notice and some of these furloughs will be relatively long. I mean they might be 2 years or even 3 years at times. By doing the redundancies, the way we have done, we aim to safeguard the possibility for us to increase the amount of flying relatively fast post pandemic while improving the efficiency and the support functions significantly. And this is part of our rebuild plan. This is part of our plan to come out strong from the pandemic.

And just if I may continue with the kind of the cash issue and investments. So well, what you are going to do for this kind of multibillion [indiscernible] investment program, which actually is supposed to start in a couple of years of period? Is it going to be postponed or kind of canceled or are you going to run it in any case? And then looking at the investments, I mean, this year, you have had quite a high investment figure and are you able to reduce investments in next year compared to this year? And lastly, regarding kind of the recovery kind of period you were speaking about 2 to 3 years period and kind of a traveling would be kind of close to the more normal levels or at least into year '19 levels? But some carriers in Europe have actually highlighted 3 to 4 years recovery period. So I would like to know where Finnair estimates are coming from and to what they are based at?

Yes. I mean, if we start from the investments, comparing the investments this year and next year, we are -- based on our order book, we have still 3 Airbus 350s coming up, and they constitute the bulk of our future investments during the upcoming 2 years. Now we have been in intense talks with Airbus about the deferral of these 3 Airbus 350s and we are at finalizing stages of those discussions. And based on the current status, we see it possible to defer these 350s. So that the investment number, the CapEx number would come down for next couple of years. Once these discussions mature, we will come back with further information and more specific information. In terms of the narrow-body investment, that is not actual at this point of time. So we are postponing it, but we are keeping it on our agenda. So eventually, once the pandemic clears out, then we see a need for narrow-body renewal. And then, therefore, we will take up that investment possibility at that point of time, but for the time being, we don't have usage for those aircraft that we have in our fleet. So therefore, any CapEx to new aircraft at this point of time is not advisable. And then when it comes to the third part of your question about the recovery time of aviation. We are estimating that aviation will be coming back to 2019 levels in 3 years. That is our base case estimate. We see that some airlines are saying the same, then some are talking about 3 to 4 years. If we look at our situation and our plans, it does not really matter whether we are saying whether the recovery will take in 3 years or 4 years. All the actions that we are doing will need to be done in any case and then that is something that should be noted in connection to this particular issue.

Great. And lastly, if I may for, Mika Stirkkinen, ask about the cash position. So what is the ordinary base cash you need to run operations? Is it EUR 400 million, EUR 450 million or EUR 350 million?

This is an interesting question. What do you actually mean by that? So that on a monthly basis, we might need approximately EUR 100 million, the valuation during the month, this might be something like that. But then the question is that what do you mean by that? So typically, you have cash in and cash out. So within a month, as I said, it's EUR 100 million, is the difference between max and min. So -- but we -- let's say that we -- it feels comfortable if we have cash balance in excess of EUR 400 million, let's say.

Yes. I was looking at 10, 15 years average, and it -- maxed is pretty close to , EUR 350 million, EUR 450 million in the last 10, 15 years plus average?

Yes, I can reveal the inner feelings of myself and Topi. So we like -- more cash is better. So...

Surprisingly.

Our next question is from Joonas Häyhä from OP Financial Group.

Yes. It's Joonas Häyhä from OP. Firstly, could you update us on the sale and leaseback market, is the market still functioning in a relatively normal fashion or has it changed in any way recently?

It was almost completely frozen, let's say, in May, then it started to open up again. The market is still there, although naturally, it's not as deep as, let's say, in 2019. We are in the progress of finalizing one sale-leaseback transaction and we are in final stages of another aircraft financing transactions. And hopefully, we are able to come out with the stock exchange release on those 2 transactions, rather soon.

Okay. And then another one on CapEx. You talked about this already a little, but could you elaborate perhaps what is kind of the minimum level? How low could CapEx go if needed with this level of flying, I guess, the maintenance and other items similar to that are not needed in the same fashion than normally?

So it's less than EUR 100 million. It really -- it's a function of the operations. So we will -- we need to have some overhaul, especially engine overhauls. So if we anticipate more flying, the maintenance investment will be a bit bigger, but in any case, that's below EUR 100 million, let's say, between EUR 50 million and EUR 80 million would be the ballpark. And we are working very heavily to postpone [ A350 ] investment cash flows as well as other investment cash flows related to fleet. So all the other than maintenance investments are pushed back a lot as fast as possible. Once more. So we -- our target is to come out with both Airbus transaction news then news on the A350 aircraft financing, 2x, and then potentially even also other fleet-related investment news, but those are not mature enough to be announced and all of these actions would support our cash flow.

Our next question is from Jaakko Tyrväinen.

Yes. Jaakko here from SEB. Regarding the recovery and the possible advanced testing methods for COVID, meaning the rapid testing, do you see that the travel restrictions could be lifted if we could deploy this testing across the Europe, for example? And how do you see this kind of testing would -- or common methods across the Europe would impact your demand?

Yes. I mean, this is a million-dollar question or more than $1 million question, perhaps $1 billion question in aviation in Europe, right, right now. I mean if we start from the EU, I mean, one of the basic principles and pillars of EU is the free movement of people. And therefore, what EU countries need to do relatively soon now is to find new practices because the border controls on EU internal borders will cease to exist relatively soon, the so-called Schengen exemption that for many countries was taken into use in March at the start of the pandemic expires relatively soon. In the case of Finland, that expiry will take place on the 23rd of November. And therefore, the Finnish government for one is in a hurry to come up with new legislation related to testing and related to travel restrictions. And this basically goes across countries in Europe. So our view is, and this is in line with IATA, and this is in line with Airlines for Europe is that rapid testing, especially prior to departure is the means to implement across Europe, a common testing regime. And once that testing regime would be in place, and once that would be based on rapid testing technology, then it would be less -- clearly less cumbersome to be an airline passenger. And we think that it is possible to take care of health, safety and control the spread of the virus with rapid testing. Because based on the data that aviation industry has collected across Europe and the health authorities have collected across Europe, and this goes also for Finland, there is no virus transmission effectively on board aircraft. And then also, when looking at people entering, for example, Finland from the high-risk countries, the number of infected people is very low. In case of Helsinki Airport, 0.9% of passengers from high-risk countries are COVID positive, and vast majority of those passengers are not in a stage where there could be anymore infecting other people because they have been having the virus and the disease previously. So therefore, we feel that this testing regime is possible and that would be a key enabler for aviation to start to recover and the amount of passengers to start to increase.

Okay. Very helpful. Another one -- in your report today, you stated that in your laser bookings, you are seeing relatively strong demand towards summer 2021, does this tell you that there is a significant pent-up demand after the staycation period in 2020?

I mean what we saw during the course of the past summary that whenever travel restrictions were lifted on certain routes, then the demand was relatively quick to come back. And then that, to us, is a clear indication that there is a strong pent-up demand out there. There's a big social need for flying. I mean many people, for example, have families in other countries. And then this kind of travel is not enabled for the time being. Businesses need travel. And people do want to travel, people do want to experience new things. So therefore, we think that there is pent-up demand, and we do think that travel restrictions play a key role in terms of enabling the demand to come back.

Still referring to your report out today, you're expecting that the competition to be fierce once the recovery starts. Could you elaborate a bit more around this view, i.e., are you seeing that the rivals are likely to prefer cash flow over the profit rather than building -- rebuilding their equity? So do you see overcapacity once the recovery starts?

Yes. I think that during the next 1 or 2 years, when we -- the aviation climbs back to demand levels of 2019. By definition, there will be overcapacity on the market, even though fleets are optimized, even though aircraft are retired and so on and so forth. But after that, the equation can change because clearly, airlines are not making investments to new aircraft. And then that will be impacting the competitive dynamics going forward. When it comes to the question of whether airlines, how airlines will behave in the future, it is clear that airlines will accumulate a lot of debt right now and that debt needs to be paid back. So there would need to be some discipline in terms of profitability and pricing going forward. So that is one of the driving forces. On the other hand, history tells us that this industry is a very competitive industry. And at times, airlines are prioritizing sales intake and cash flow over profitability. And that is driving force that points to the opposite direction. And then how exactly this will be playing out remains to be seen. But I mean, our logic is that set your sails for storm but hope for good weather. And then we want to be prepared for tough competition out there in the marketplace post pandemic, and we want to come out strong from the pandemic, and we would rather be on the winning side, obviously, post pandemic.

Right. If I may, so one more on your own current fleet and capacity planning, given the current situation, will you be downsizing your own fleet over the next few years? And should we expect any kind of a material financial impact from the possible divestment of the oldest aircraft?

We will be optimizing our fleet. So some of the things that we will be doing, we start with a couple of our older narrow bodies, we start to part out. And then that is an example of the measures that we are taking. We are observing the aircraft market at this point of time. And then we maintain readiness to do both narrow-body as well as wide-body sales, if we find the right deals out in the marketplace. So optimization of fleet means that we are getting ready to reduce number of aircraft in our fleet, but that process is like to be step-wise and gradual and no drastic moves as such. And when it comes to the balance sheet values of those aircraft, I mean, based on the deals that we can find, there might be some sort of booking needs in this one. But I mean in terms of order of magnitude, they shouldn't be that material.

And, Mika Stirkkinen here. And yes, the potential sales value won't be huge and the potential write-off won't be huge. However, the key driver here is that we want to avoid the potential maintenance cost for those individual aircraft. And that maintenance cost would materialize next year. So that's the key driver here. So in our contemplation of exiting certain units of our fleet.

So all in all, when we look at our balance sheet, we think the balance sheet is solid.

Yes, understand. And I agree. If I still may, could you disclose that do you have any leases maturing in 2021?

Nothing material.

Our next question is from Achal Kumar from HSBC.

I had few questions. First of all, basically, I wanted to understand the trading environment. So basically, you have you already have opened few flights to Asia. So basically, what I wanted to understand from you is that, of course, although the demand is slow, but what kind of change or what kind of change in the behavior patron of the bookings you are noticing at the moment? And what is the sort of timeline for opening the China market for the passenger? And then how the fares look like? So if you could please talk about that, the overall trading environment as such?

The whole -- I mean, of course, the whole trading environment is very, very subdued, given the external factors that we are seeing. And when we look at the long-haul traffic, especially, I mean, the load factors on some of the long-haul fruit -- routes are low. They are in teens, approximately could be seat load factor of 20%. So that is the sort of order of magnitude that we are talking about, meaning that when it comes to long-haul routes, those routes are cash positive because of the cargo impact on those routes. When it comes to China, in particular, I mean the Chinese routes, and we are currently flying once per week to Shanghai, once per week to Nanjing, they are the best-performing long-haul routes that we are currently having. The seat load factors are approximately 70%. So under this environment, relatively good. And this is, of course, on the back of the overall capacity of international flights being very, very limited to China at this point of time.

But what kind of -- what kind of behavior change or booking pattern, what kind of change are you noticing at the moment? And what kind of change in the kind of mix of traffic basically on Chinese routes? That's what I want to understand.

Yes. I mean, as stated, when we look at the overall traffic and the overall trading environment, all routes included, what we clearly see is a late booking behavior. So the bookings come in very late in general. And I think that this is the behavior that many, many airlines have been mentioning in the commentary recently. When we talk about China specifically, I think that what we need to remember here is that we are effectively talking about 2 flights per week, one to Shanghai, another one to Nanjing. Therefore, we cannot really talk about trading environment as such. We can talk about anecdotal evidence related to a couple of flights, but the stated load factors on those 2 flights are good, the profitability of those flights is good. So we would definitely want to fly more to China if we would be allowed by the Chinese authorities.

Is there any time line driven by change authority for market to open, or is that -- this is still not very clear?

And you are referring specifically to China now?