Finnair Oyj (FIA1S) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. I'm Erkka Salonen, I'm from Finnair IR, and it's my pleasure to welcome you all to this Finnair Fourth Quarter and Full Year 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. I will now turn this call over to you, Topi. Please, Topi.

Thank you, Erkka, and good day, everybody. Thank you for joining this earnings call. And it is time to wrap up year '20 for Finnair. Some of you might remember that early on in the pandemic, when the lockdown started in March, we stated that we will be facing the worst crisis ever in the 100-year history of commercial aviation, at least during the [ peace ] time. And with the benefit of the hindsight, we really can say that so it has been. Yet in this uncharted territory, we at Finnair, we have been creating a path for ourselves through the pandemic. And we have been doing that with extensive recapitalization and by resetting our cost base where -- which have secured a healthy financial position and cash position for ourselves. So looking at the Q4 just very quickly. We still flew very little during the Q4, only 70 flights per day, carrying 8% of the passengers that we carried in 2019. We saw that towards the end of the quarter, end of the year, many countries, many airlines started to introduce negative COVID tests as a prerequisite of entering the aircraft, and we have been doing that as well, and that has been operationally very smooth and something -- the requirement is something that is well understood by our customers. And setting that requirement has not had any further negative impact to our passenger numbers. The routes domestically in Finland, especially to Lapland, continue to be among the most popular routes that we are currently operating. Cargo continues to play a significant role in our business. Currently, more than 50% of our revenue comes from cargo. And the cargo-only flights given the current market prices per ton for air cargo are profitable on their own right. The highlight of the year and the highlight of Q4 also is that our customer satisfaction is on record high levels. So measured with Net Promoter Score, the Net Promoter Score is at 52% and clearly trending above the previous year. At present, we still have, unfortunately, majority of our staff furloughed. We have aircraft parked in [ Prague ] and in Southern France, and we are proceeding with our cost savings initiatives, and we are proceeding well according to plan on those, both in terms of immediate temporary cost savings as well as structural permanent cost savings. So just quickly running through the Q4 numbers. Our revenue landed at EUR 102 million, which was approximately 13% of that of Q4 2019. Our comparable operating result landed at minus EUR 163 million. So we have been previously stating that our daily loss is approximately EUR 2 million. Now we have been able to bring that down a bit. So it's something like EUR 1.8 million per day as we speak. We booked a significant positive one-off from changes in our defined benefit pension plans. And the impact of that was EUR 133 million. We also reversed or returned part of the restructuring provision that we made earlier during the fall due to the fact that the redundancies realized lower than we originally expected. And due to all of this, the operating result was minus EUR 15 million. The result for the period was minus EUR 9 million. And as stated, heavily supported by the exceptional items but nevertheless, at this point of time, almost every single aspect of our business is exceptional in some ways. And therefore, the limited results, the limited loss for the period, is a welcome relief from the pandemic. And of course, thereby the hit to balance sheet is being minimized. So looking at year '20, we focused especially on focus areas, taking care of our customers, and we really succeeded in that one when stated our customer satisfaction was record high. Customers clearly appreciate the health related safety measures that we have been doing on board, and they feel safe flying with Finnair. We have been putting a lot of focus and energy to securing our cash and equity position, I will go through that in more detail in a minute, and we have been adjusting basically all aspects our operations and costs. So when we compare our cost level to 2019, we have been taking out more than EUR 1.5 billion of cost. Some of that has been easy. When we stopped flying the jet fuel [ pail ], obviously, comes down automatically, but more than EUR 1 billion of the EUR 1.5 billion from other sources than fuel and then that is certainly where all other cost elements come into play. And as stated, we have been proceeding according to plan in minimizing those cost elements. While doing all of this, we have worked hard to ensure our long-term competitiveness. We remain committed to our strategy of connecting Europe and Asia. We want to position ourselves as a modern premium airline going forward, because we believe that after the pandemic, there is willingness to pay among customers and customers will be more focused on service and quality. Perhaps even more focused on those elements than before the pandemic. We do realize that the industry is changing, and there is no going back to 2019. And the marketplace after the pandemic will be very competitive. And that is why we introduced the savings program of EUR 140 million of permanent cost savings, the operative word there being permanent. And we are proceeding well with the implementation of those measures. We are actually a little bit ahead of schedule, and we do believe that this will be helping us post pandemic. So moving on to full year figures. The revenue landed at EUR 829 million, more than 70% drop in terms of revenue. We carried EUR 3.5 million passengers, also more than 70% drop on that figure. The comparable operating result was minus EUR 595 million, which, of course, tells basically everything about the sheer magnitude of the crisis and how it has treated aviation at large. Then we have the one-offs from the defined benefit pension plans and in the financial income and expenses, we have the negative one-off from unwinding the jet fuel hedges that took place during Q2 and Q3. The result for the period was minus EUR 523 million, which is roughly comparable with the rights issue that we conducted during the early summer. And now with the benefit of hindsight, we are very happy with that rights issue, with that transaction, both in terms of timing as well as in terms of sizing. And as you would remember, we were the first airline in EMEA region during the pandemic conducting a rights issue. And with this, our balance sheet and our equity ratio actually is largely stable. So in terms of the recapitalization plan that I mentioned during past year, we raised EUR 1.8 billion of new financing. This is not including the EUR 400 million hybrid loan that we are currently preparing with the State of Finland. And there, we are at finalizing stages and then we'll be communicating separately in the near future. So if we just go back a bit and look at how the recapitalization proceeded in March. We renegotiated our revolving credit facility of EUR 175 million. In May, we drew EUR 600 million pension premium loan. The rights issue took place in July. Then during the course of the fall, we did several sale and leaseback deals. And also in September, refinanced our hybrid loan, which was also the first bond transaction for an airline in EMEA region during the pandemic. Putting all of this together and including the hybrid loan under preparation and waiting for EU approval, we raised or we are in the progress of raising altogether EUR 2.2 billion. And as stated, this recapitalization plan has been all important in terms of stabilizing our financial situation and in us being able to say right now that our financial situation, balance sheet and cash is on a healthy level. So looking at cash, we started the year with strong cash reserves with EUR 953 million. EBITDA took its toll. The change in working capital was heavily negative, especially due to the refunds. Other operating cash flow includes the unwinding of the jet fuel hedges and then we did EUR 325 million of investments. EUR 1.8 million of funding raised is visible in the graph and then the loan repayments and the hybrid loan repayment is also there, ending with a cash balance of EUR 824 million. And then when we look at that number, that is a healthy number. And even if the pandemic would be significantly prolonged, even if for next 12 months and beyond, we would be having the revenue -- the kind of revenue that we are currently having. We would be having enough of cash. And as stated, the EUR 400 million hybrid loan as well as the RCF as well as our commercial paper program, they are not included in this figure. So in terms of customer refunds, we processed a backlog of EUR 464 million during the course of the year. We were one of the few airlines in Europe that predominantly used cash in refunds, and that has been truly appreciated by our customers, and that is something that is visible in the Net Promoter Score number. Now the backlog, as you can see from the right-hand side graph, is processed. And we have almost no refunds currently. And that also means that going forward, the tide will turn with respect to working capital. And as we expect that the demand will start on meaningful levels from summer onwards, then we will be getting the prepayments or the presales from the tickets. And with that, we hope that we will be seeing positive working capital development going forward gradually. This is an important picture in the deck and comes back to what I stated before about timing and sizing about our rights issue. So the equity ratio is basically unchanged, landing at 24.6%. And then we haven't seen the numbers for that many airlines across Europe or the world for that matter. But I would anticipate that there are not that many airlines who would be -- who would be able to show a similar picture in terms of their balance sheet and equity ratio during this year. Gearing, obviously, went up a bit on the back of net interest-bearing debt increasing. But here, we will also need to remember that these figures are not including the EUR 400 million hybrid that we are preparing with the state. One of the surprises for the year for us was that our number of shareholders more than tripled and actually has continued to grow after -- at the end of the year. And for us, this is really an important sign that retail investors who actually represent much of the increase, have strong trust in Finnair being able to survive the crisis and being able to be competitive post pandemic. To us, it also is a clear indication that investors believe that travel will come swinging back after the pandemic. And this is indeed something that we see also from our customer surveys. There clearly seems to be a strong pent-up demand out there on the market. During the year, we have been turning to our shareholders in the rights issue. And the support from our shareholders, all of the shareholders, including our majority shareholder, State of Finland, has been critically important in us stabilizing our healthy financial situation. And then that certainly is very important to acknowledge. So looking forward, we estimate that the demand will pick up in the summer. So of course, that will be dependent on increasing vaccine coverage and the speed of the vaccinations as well as the speed of governments lifting the travel restrictions. We do believe, when we look at the numbers and also on the back of the recent Johnson & Johnson announcement for them applying for sales permit from EMA already now, we believe that the European target of being able to vaccinate 70% of the adult population during summer is a realistic target. We, nevertheless, prepare for different ramp-up scenarios. We have 3 basic scenarios, the most optimistic of them basically is based on traffic coming back to more meaningful levels from start of June onwards. Our base case scenario looks at the traffic coming back in August, starting in July, but materially in August. And then the pessimistic scenario basically looks at the traffic coming back in October. We have been building agility and flexibility to our operations so that we can put in capacity to the market hand-in-hand with the demand and that we can react fast so that we are ready to fly when our customers are ready to travel. We have been also securing that customers can book flights for the summer with peace of mind, meaning that they can change their reservations without any cost until end of August. We have also introduced a new one-way pricing that brings flexibility to customers and especially under the pandemic circumstances where the flight plans can change. This is something that is really being welcomed by our customers. And the early feedback and the early experiences are very good in this respect. When we look a bit further, there are opportunities that the recovery of the air traffic will bring to us as well as for Finland as a destination. So what is very, very important in this one throughout the Europe is that Finland as well as all the countries in Europe will be lifting travel restrictions in coordinated fashion. And what is also of utmost important is that there will be international standards that made travel more seamless and also support the travel recovery. And vaccination passport certificates, certainly, will be important travel documents going forward. And then we at Finnair are getting ready to start using them as soon as possible. We think that when it comes to Finland as a destination, many of the megatrends in travel will be favoring Finland post pandemic. Finland has a reputation as a country that has been handling the pandemic well. We have fantastic nature, clean air, social and health care infrastructure that works, functioning society and also sustainability is high on the agenda throughout the society. And we have seen, during the pandemic, that sustainability and especially environmental sustainability has been significantly growing in importance in the minds of Asian consumers, especially the Chinese consumers. And therefore, we will be doing destination marketing. We will be doing product development related to Finland travel and we see that as one of the opportunities going forward. So wrapping up, when we look at the outlook and guidance, I mean, our guidance pretty much or our Q4 result was pretty much in accordance with the earlier guidance. And then for the sake of Q1, we say that the comparable operating loss will be of a similar magnitude than it has been during the previous quarters. And beyond that, given the uncertainty, given the visibility, we are not guiding any further. But we will be, of course, updating this during the course of the year when we have the quarterly results. So I'll stop at that. Thank you for listening. And now we open up for questions and comments.

Thank you, Topi. So as Topi mentioned, now would be a convenient time for any questions you may have. Please go ahead.

[Operator Instructions] Our first question comes from Patrick [ Cedar ] from [ Rogue ].

Just on the bond refinancing, just a quick question. I was wondering whether that was going to be refinanced with an additional bond or whether you're looking at other avenues for -- to refinancing that possibly with the hybrid loan from the Finnish state?

Okay. Thank you. Mika, do you want to take this?

Yes. Bond refinancing, if you are referring to senior unsecured bond maturing in March '22, so we will -- the preferred choices to refinance it with a new senior unsecured. So we will study carefully when we would potentially issue the bond. As you know, the first potential window would be after Q1 and then the next, after that, after Q2 release. So we are contemplating those options.

Our next question comes from Jaakko Tyrvainen from SEB.

I noted that the temporary slot rules were extended in Europe throughout the coming summer. But what is the situation with the slots on Asian airport? And then do you see a risk that you would lose some slots over there or either in Europe?

Yes. I mean, you would be right that the slot rules are clearing out currently across the world. And if I start from the European, and then I think that the slot rules for summer '21 and summer '22 basically turned out to be quite okay for Finnair. You might have noticed that there is an exemption for smaller airports where airlines have less than 29 frequencies per week, so effectively a double daily operation. And that covers actually the majority of the European airports for us. So that puts us in a relatively good position. In the bigger airports, we can return 50% of the slots. And with that, we can safeguard our slots for summer '22. So for summer '21 then, we will reapply those lots on ad hoc basis. And then we think that, that process is manageable. So as stated, these slot rules are treating Finnair quite okay. And in the relative game, the smaller airlines are probably in a good position, vis-à-vis some of the bigger airlines having more frequencies in the bigger airports. So that is the European picture. In Asia, the situation is unfolding at this point of time, but we don't see any sizable risks in terms of losing slots in Asia. So therefore, this is something that we have followed, and we continue to follow very carefully. In comparison to a situation where the slot rules would have been opened up completely for next summer, that would have been a high-risk situation. But now with the current developments, this is something that we are not sleepless about.

Okay. Good. Then regarding your guidance for the first quarter, which indicates kind of a similar loss level than seen in the past quarters. However, is this despite the implemented savings or should we expect that most of the EUR 140 million savings will be materialized when the volumes return?

Yes. I mean, when we look at the EUR 140 million savings, I mean, that includes both fixed cost and that includes the kind of reductions to variable unit costs that will be of permanent nature. And what we have been stating about those costs is that they will be fully visible on run rate basis from start of '22 onwards. So that will need to be remembered. As stated, with the cost efficiency measures, we have been able to bring down our daily loss from approximately EUR 2 million now to EUR 1.88 million. And our guidance is basically based on that. So we are looking at the similar magnitude of losses in Q1, all cost initiatives included.

Okay. And finally, on your recovery scenario, you gave us kind of the time lines or the months when you expect recovery to start in each scenario. But could you indicate what kind of volumes in terms of capacity we should assume for the third quarter of a kind of a full recovery?

I'm not giving kind of exact numbers here, but our base case scenario there, the volume will come back more materially during Q3. But as you know, we can adjust it quite well, depending on the demand picture. I'm a tad hesitant to give you exact capacity figure there, but what we see and we have been discussing with our, for instance, with our Board members as well and with our Asian sales force, is that there is pent-up demand in the market in aviation and in other tourist sectors. So we see that whenever the travel restrictions are lifted, then we see that the speed of capacity increase could be quite substantial when it is allowed to take place. So.

And the general rule being that the further the recovery of -- or the restart of the traffic will be pending, the faster the pent-up demand is likely to be materializing.

Okay. Okay. I understand. And then perhaps a follow-up here. We can assume that the Europe and domestic travel will be the first ones to recover. But in your kind of a base case scenario, what is the lag between Asian traffic recovery and the European -- intra-European traffic recovery?

It's a couple of months, 1 to 3 months. I would be somewhat surprised if we wouldn't see robust figures in Q4 in Asia. But it naturally -- there's a deviation of 1 to 2 months, 1 to 3 months, what we see in Asian recovery. So we hear from our sales force in Asia that they are really, really confident that there is demand whenever the travel restrictions are lifted. So that's -- and that came from several of the general managers in Asia, so head of sales there. So that's really confident. So the key question is that when the restrictions are lifted there. And what this also means is that we anticipate that the Asian countries like Japan, China, South Korea, they will be proceeding with vaccinations during the course of this year.

Our next question comes from Ashok Kumar from HSBC.

Thank you for taking my questions. First of all, basically, I wanted to understand more about cargo. So your cargo revenue has been very strong. So if you could please talk a bit more about the cargo business in terms of what kind of cargo you're taking in and which region is it going? Is it like more towards Asia Or is it more within Europe? What kind of cargo it is? And secondly, what happened to your plan in terms of vaccine transporting? Previously, you mentioned that you are ready for vaccine transportation. So is that happening really? So what kind of your expectation on that side, please?

Well, yes, as stated, cargo plays a very important role, and the demand has been strong now. And the demand is especially being driven by Asia. So Asia, Europe, is the sort of direction of travel in this one. And that is also where the volumes are and the Asia demand is also basically defining the market prices. So that's really something to bear in mind in terms of cargo demand. In terms of what we are transporting, I mean we are seeing a couple of fundamentals on the market. Fish, especially sort of Norwegian salmon, is traditionally a very big item for us, moving from Nordics toward Asia. So that has continued during the pandemic. We have been also seeing, for example, spare parts, machinery related spare parts increasing in terms of demand because there's simply a lack of shipping capacity on the market and some of the producers have been having a risk of liquidated damages, and therefore, even though air freight -- air cargo is clearly more expensive, they have been turning into air cargo to avoid those kinds of penalty payments for their customers. So that's one. And then in terms of vaccines, the short answer would be that, yes, we have vaccine deliveries. We have strong capabilities on that side. But given the safety and security issues related to vaccines, we are not disclosing any further details or disclosing any specifications. So further details would need to be asked from the vaccine producers.

Right. Fair enough. The other thing, what I wanted to understand is about this hybrid loan for EUR 400 million hybrid loan. So what are the kind of terms and conditions for this loan? I mean you mentioned that hybrid loan requires EU Commission approval and so this is still pending. So what -- could you please give us a bit more detail about what kind of terms and conditions are attached to this hybrid loan? And similarly -- and additionally, so this will further increase your gearing level. So do you see any risk to your covenants or anything like that? I mean, is there any risk that's actually arising gearing levels?

So if I take the hybrid loan and then you, Mika, can take the gearing. But if I start from the hybrid loan. So yes, we are preparing that hybrid loan with the State of Finland. We are well advanced in that process. It is pending EU approval, and we will be communicating around that separately. So in terms of specific terms and conditions, it's too early to come back to that or to discuss that. But what needs to be acknowledged that this is a hybrid loan from the State of Finland. And therefore, it is not a market-based loan with the strictest meaning of the word.

In regards to covenant, and we have only one debt facility with a covenant and that is the revolving credit facility. And we stated rather clearly in the Q4 and annual report that we anticipate the gearing scenario materializes. However, one needs to acknowledge that the revolving credit facility's undrawn. And we have started, in order to change the metric, [indiscernible] negotiations during or by the end of the quarter.

So basically, if I -- and unless the scenarios turned out to be worst, you...

One is to understand that it's undrawn. And in a theoretical circumstances where we couldn't change the covenants, we would cancel the facility. So as such, we have a very strong liquidity. We had EUR 824 million cash balance at the year-end. We are in the final stages of the -- with the hybrid loan with the government, so up to EUR 400 million from there. So hence, hence, the revolving credit facility is not crucial for us and for our cash balance.

Right. Right. No, that's clear. The other thing also I wanted to understand, if you could please help, where are we in terms of employees furlough? I mean, previously, we've been using that. And so now where are we? And secondly, if you could also please talk a bit more about this permanent savings of EUR 140 million? As you know, which cost heads are you expecting at? I mean, are you expecting significant part of it from employees costs or where the savings are coming from, if you could please help us on that?

Absolutely. So in terms of furloughs, we still have the majority of our employees being furloughed, which, in our case, means that we get rid of their salary cost altogether, so 100%. And then that has been helpful during the course of the pandemic. Then related to the savings program, as stated, we are proceeding well in terms of implementing those EUR 140 million of permanent savings. And then we are basically going through each and every line item in our cost base. We have a very strict governance model on this one in the company. Every single unit has a pipeline of cost initiatives. We have a program office and finance people who are tracking and validating each of the cost savings items. We have incentivized our organization with clear targets to realize the savings. And then the sort of elements where the savings are coming from, there would be plenty. In terms of IT, one example would be that we are clearly changing our IT infrastructure. We are moving from data centers to cloud-based -- 100% cloud-based. And that is a significant change in terms of IT infrastructure and architecture, but also something that will result into significant cost savings. We are simplifying our application landscape and architecture. We are renewing all of our contracts in terms of IT. In terms of real estate, we have renegotiated our lease contracts. We are materializing savings from there. For example, in our headquarters, we are reducing 40% of space, because we think that going forward, people will be working in hybrid model. So there will be more remote type of working, and therefore, we don't need the space. So this would be one example related to real estate. In terms of sales marketing and distribution, we are reviewing all of our contracts. We are changing our practices in terms of marketing portfolio, redirecting our marketing portfolio, renegotiating our distribution agreements and materializing savings out of that. In terms of people-related costs, we have reduced the number of personnel in the support functions with almost 30%. So during the course of last year, our headcount reduced with more than 1,100 altogether. So that is, of course, a significant element in the cost program. We are renegotiating our CLAs and then scrutinizing our sort of people-related benefits and all of those things. So it is a real complete overhaul of the cost base. And as stated, every stone is turned in terms of finding those cost savings. And these were just examples. I mean, I could go on with the list.

If I could complement that. So if you look at subunit level. So you can find that it's -- we have actions in technical operations, flight operations, in-flight team, digital services, as Topi stated, market management, that's under commercial, kitchen, ground operations, network management. And that was the top list of our top 8 list. So in every sub-unit and in every cost category. So it's a very comprehensive program.

Sure. Going back to the employees -- yes, yes. Sure. Good luck there. Going back to the employee furlough, and you said, you're still enjoying majority from wising furlough. How long you can take it forward? I mean, is there any limit or until when you can have the employees on furlough?