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's first quarter 2021 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 go ahead.

Thank you, Erkka, and good day, everybody. Thank you for joining this quarterly earnings call once again. And let's recap the Q1 this year from a Finnair perspective. This was another pandemic month -- quarter for us and the pandemic mitigation actions continued at Finnair. We adjusted costs, both temporary cost as well as permanent costs, and we continued the financing actions and now on the back of the progress in vaccinations, you most likely noticed that during the weekend, the global vaccinations, passed a milestone of 1 billion vaccinations. We see that the vaccinations are accelerating in speed, and that will be enabling a gradual lift of travel restrictions during the course of the summer, and thereby, we expect that a more meaningful travel recovery will gradually take place from late summer onwards. So if we look at the Q1, we flew approximately 75 passenger flights per day, carrying, on average, 3,000 passengers that is something like 10% of the pre-pandemic levels. In terms of destinations, the Finnish Lapland destinations were among the most popular. And that was -- that traffic was effectively a bright spot in our offering. After a year of not flying to North America, we were able to reopen our flights to New York in March, and that is heavily supported by cargo demand. Since the end of January, we have requested from all passengers a preflight negative COVID test in accordance with the recommendation of Finnish health authorities. We also, during the quarter, we introduced One-way fares, and those have been welcomed by our customers. And a meaningful share of our tickets are now sold as One-way fares. Customer satisfaction remained at very high levels, actually record high levels, the Net Promoter Score for the quarter being 54. For cargo, the quarter was very strong, while the passenger revenue remained weak. We flew 547 cargo-only flights during the quarter. And actually, on a monthly basis, the month of March was our all-time best in terms of cargo revenue. The Suez Canal blockage did not have a big impact on cargo revenue during the Q1 but we see that the impact of that blockage to global supply chains and to the cargo market overall will be supportive of airfreight demand during the course of Q2. As we have been mentioning previously, the good cargo demand also enables long-haul passenger flights. That is the case with New York, and that is the case with our long-haul flights to Asia. The cargo development -- price development per ton has been notable during the past months and during the course of the whole pandemic. In comparison to previous quarter, the prices increased by 1/3. And in comparison to pre-pandemic levels, the prices have increased 200%. So a very notable development taking place on that front. What we see increasingly also in cargo business that the short northern route being also the most CO2 efficient is a competitive advantage because our customers, for example, the Norwegian salmon companies and others, are increasingly focused on their sustainability goals and increasingly mindful of the CO2 emissions in their entire value chain. And this is something that we can leverage in the cargo business now and going forward. Altogether, during Q1, cargo was clearly more than 50% of our total revenue as illustrated by the bars on the right-hand side of the picture. When we look at the Q1 numbers, the revenue landed at EUR 114 million. So, much better than during the Q4. And this was clearly driven by the cargo business, as mentioned. In terms of costs, we basically proceeded as expected. And our comparable operating results landed at minus EUR 143 million. When comparing with the previous quarter, we will need to remember that there we had -- there's one very sizable positive one-off related to our pension arrangements. And in comparison to Q1 last year, we will need to remember that, that was the first quarter when the pandemic started to take its toll, especially during the course of March when we needed to ramp down basically the entire network as the lockdown started across the world. We are taking good steps forward in our savings program, cost-saving program that aims for permanent cost savings. And we will be reaching our target of EUR 140 million ahead of time. And with that, we are able to increase the target to EUR 170 million. We have been taking significant steps forward. We have been basically revamping all of our headquarter functions, applying sort of 0 budgeting to -- as a method to these units, and we have been reducing during the course of the fall and winter, approximately 30% of our staff in these units. As late as yesterday, we completed a significant project related to our IT infrastructure, moving all of our data from a physical data center to a cloud-based IT architecture. And that means that as of today, we are an all cloud company when it comes to data. We are reducing the square meters in our office premises quite significantly, up to 40% reduction in these premises. This is partially driven by the decreased headcount in the headquarter functions, but also partially driven by the fact that we estimate that people will be at least partly working more remotely going forward and this kind of a hybrid way of working will be reducing our office space need going forward. On the maintenance and operations side, we have been also able to realize some significant cost savings. On that space as well as across the board, we have been renegotiating basically all of our supplier agreements, and we have been able to materialize significant cost savings in the process. So all of these measures are examples of the kind of measures where we have been exceeding our original targets. And these are enabling us to increase the permanent cost savings target right now. We will turn every stone in order to find these cost savings and then we push forward, we have been setting stretch targets for our entire organization, and we are confident that we will be reaching the new target of EUR 170 million. And if and when we reach that, we are not stopping at that. We will be pushing for more as we do realize that cost competitiveness will be crucially important for us to be competitive on the marketplace post pandemic and us to be able to pay back the debt that we are accumulating by means of increased profitability. So when we look at the headline number of EUR 170 million of permanent cost savings. I think that the good comparison point would be the operating result of 2019, which was EUR 162 million in terms of EBIT. So all other things equal, this would be doubling our profitability in comparison to 2019. When we take a closer look at the composition of the cost saving target, EUR 65 million of the saving target are related to fixed costs and EUR 105 million are related to variable unit costs that are of permanent nature. So that gives you an idea of the dynamics and how that will be reflected in our P&L, depending on how the volumes will be coming back. In terms of cash, the negative cash flow during the quarter amounted to EUR 158 million. What we are seeing now is that the working capital impact on the cash flow is clearly stabilizing in comparison to last fall when we still had quite a bit of the refunds to take care of. At the end of the quarter, we had EUR 665 million of cash at hand and available undrawn credit facilities amounted to EUR 575 million. That includes the EUR 400 million hybrid loan that we have been agreeing with the government of Finland, to which we have an EU Commission approval to EUR 350 million. We will be seeking for the additional approval from EU Commission for the remaining EUR 50 million at a later stage. We also renegotiated our revolving credit facility, the covenant -- the gearing covenant during the quarter and that revolver remains in our disposal. So altogether, putting this liquidity together, it amounts to EUR 1.2 billion roughly. And that would be with the burn rate of Q1, that would be enough for 8 quarters to come. But as stated, we do expect that the demand will be gradually picking up from late summer onwards. Taking a look at the balance sheet, our equity ratio is currently at 22.7%. So still on healthy levels after more than a year of the pandemic situation. The gearing is increasing. But what is worthwhile to note is that the EUR 400 million hybrid loan increases our equity buffers and it's not included in the numbers on this page. As stated, it is all about building the long-term competitiveness now and cost competitiveness will be a big part of this. We have been comparing ourselves vis-à-vis the competitors in the Asian long-haul traffic. And when we look at the CASK numbers, we see that we are comparing well toward our Asian competitors and then even better to what are European competitors. Customer and product is another major headline for us. And here, we will be redefining and refocusing our core product. The basic product, what is included in the basic fare. And we will be creating new revenue streams to ourselves from ancillary business, and we will be focusing strongly, much more strongly than previously to direct distribution. And with the help of retailing capabilities boost the usage of finnair.com, not only in our Nordic home markets, but internationally, gradually in Europe and in our key markets in Asia. So the distribution transformation is a big part of our agenda. We have also continued investments to in-flight customer experience. And premium economy as a new travel class will be part of our plans going forward. And we do think that premium leisure as a segment will be increasingly important for an airline like us post pandemic. In terms of agility and flexibility, I think that during the pandemic, we have been really learning new ways of working. As an organization, we are less hierarchical, more entrepreneurial now. And then I'm sure that, that will be serving our purpose going forward. Committed personnel is really key to our plans. And on that front, we have been taking steps forward during the past days. We just yesterday announced that we have come to an agreement with our pilots, with our Pilot Union of a new collective agreement for 3.5 years to come. So the CLA is a groundbreaking agreement in many ways. It brings predictability to our business. It increases the flexibility of our business. We already have a quite seasonal demand structure and we estimate that, that seasonality will be further increasing both pandemic if there will be a degree of hit in the corporate travel. And then this CLA enables us to address that seasonality better going forward. We are also moving from a purely seniority based salary model into a vacancy based salary model. And therefore, we are simplifying many of the old structures in our CLA and optimizing the usage of our pilot resources. So a very, very important deal and a very important building block in the rebuild efforts of Finnair. Looking forward, we are now preparing for a gradual increase in the traffic during the course of the summer. The first eligibility trainings for our flying crews have begun. The pilots will go through simulator training, the cabin crews go through their sort of travel and service-related training for several days. But when the trainings are done, they will go back to furloughs. And once we start flying more, then they will be called back on a relatively short notice. And this enables us to flexibly manage the cost and manage the resourcing. We yesterday announced our summer network, the network that we are starting with, and that includes over 60 destinations. So the summer destinations include countries like Spain, Italy and Greece. And on the back of a rapidly increasing vaccine penetration in the U.S. we estimate that the travel restrictions will be lifted towards the end of June. And thereby, we are introducing and reopening Chicago and Los Angeles as new destinations, and we will be also adding frequencies to New York. We will be keeping a close eye on the demand development, and we stand ready to add frequencies and flights, hand-in-hand with demand as travel restrictions are loosened. We are continuing our comprehensive flight health-related -- health and safety-related measures. And last week, we also announced that we are from 11th of May onwards, accepting vaccination certificate as an alternative to negative COVID test as the vaccine coverage increases rapidly in the markets that are relevant to us. We also able the customers to book with confidence so that they can transfer their bookings without any fees flexibly if the bookings are made before 1st of September. Also, the Corona Cover is extended for bookings made by end of June at the latest. And with this, we hope that customers are able to move from travel-related trimming to travel booking and then onwards to actual travel experience during the course of the summer. There has been a lot of talk of government exit plans, I guess, in many countries, the Finnish government also announced its own exit plan. And while that plan is a very high level plan, but a good part of it is that Finnish government is committed to EU Digital Green Certificate as the basis for reopening travel. And EU Digital Green Certificate which, by definition, restores free movement in EU, indeed, is a big part of our plans, and we expect that to promote travel across Europe from late June onwards when it is supposed to be decided. Getting travel arrangements and travel agreements with countries outside of EU will be very important, and we will be working very closely with our government to get those arrangements in place both in Asia as well as in North America. And we do understand that especially related to U.S., EU is also taking steps forward. We have been having a joint task force with a number of local parties that are relevant to health and safety measures. And then we will be separately publishing a report on those recommendations later today. So when we look at the outlook and guidance for Q2, we are reiterating the essence of our guidance for previous quarters. And as stated, we expect that the gradual recovery of demand will take place from late summer onwards and thereby from Q3 onwards. I stop at this. So thank you for listening, and then I think that it is time to go for questions.

[Operator Instructions] And we have a question from the line of Jaakko Tyrvainen from SEB.

Couple of questions from my side, if I may. I would like to repeat the same question I had last time? And by asking you, what is your current take on the long-haul traffic recovery, i.e., will it lag the intra-European traffic with some 2 to 3 months which I recall was the kind of the answer last time. And a follow-up on this. Could you elaborate a bit more around Chinese restrictions currently? And what is your take when they will accept a kind of European COVID passport or certificate in order to passengers enter the country? Or will there be additional country-specific requirements in China, specifically, but also to other Asian countries?

Between European travel and the Asian travel. Then we can repeat what we commented in the last call. So we see the situation in similar fashion currently. When we look at the vaccination speed in Asia, it differs quite a bit between countries. Now lately, we have been hearing cautiously encouraging news from China in terms of vaccination, it seems that the total volume of people vaccinated in China has exceeded 200 million now. And when we talk to our local sources, our local people, local research firms and, for example, the Finnish Embassy in Beijing, they are stating that the vaccination coverage in bigger cities is actually quite high as of now. For example, in Beijing, the vaccination coverage seems to be above 40% as of now. Now we don't know how that will translate into lifting of the travel restrictions. So that is an open question and that remains to be seen. Of course, from an aviation perspective, from a global trade perspective, if you will, it would be well advised if the bigger cities in China would be vaccinated fast. And then that would be enabling the lifting of some of the travel restrictions during the course of the fall. China has communicated a target of vaccinating approximately 40% of its population by July. And then that is something that we estimate that they can stick to. Vaccination speed in Japan has been notably slower. So that is something that we are observing closely as we speak. We also see something similar in South Korea, although very lately, the vaccination speed in South Korea has been accelerating quite a bit. And then there are individual countries like Singapore, where the start was slower, but which have been gaining a lot of speed in terms of vaccinations. So this would be probably how we would be seeing -- seeing the Asian situation on the overall. India, obviously, it is a case of its own. And then that is something that we will need to consider as a separate. India's role in our entire network before the pandemic was not significant. We basically only flew to Delhi.

Then on the -- also on the kind of short-term demand, what is your current understanding on the level of pent-up demand for leisure traveling, i.e., will the current customers access higher fares and just want to go abroad regardless the price level. Could you elaborate a little bit on the yield expectation in the short term?

This is, of course, an important, important question. And we do see a lot of pent-up demand at this point of time. I mean, based on customer research, we have seen the global example. I mean, the domestic traffic in the U.S., recovering very, very fast during the past month or 2. And on a smaller scale, we see the pent-up demand also materializing in the bookings for our Suntours part of the business. There, the bookings have been increasing clearly during the past weeks. Some of the bookings are for summer, but predominantly, the bookings are for next fall and next winter. What is happening in that part of the business is that we are currently selling with higher-than-average prices. So that would be -- that would be a small indication of customers' willingness to pay post pandemic. But at the same time, we do think that the competition will be tough once the travel restrictions are lifted. And therefore, we will be -- we estimate that many competitors will be deploying capacity, and that will be impacting the yield environment as well. So when it comes to a little bit more long-term picture, we are not calculating on increased unit revenue, rather we want to be more cost competitive and we will be pushing forward with our permanent cost savings program.

Excellent. A follow-up on the competition. Have you evidenced any new rivals entering the Helsinki market as we know that the Norwegian, at least according to their current plan, will basically serve just a couple of Nordic routes from Helsinki, but have you evidenced any new arrivals entering the market? Or their plans?

Not at this stage. So, of course, remains to be seen. And we are, of course, observant about the customers that Norwegian is leaving behind, so to speak, and we want to grab our fair share of those customers.

Right. Then one technical question on the costs. I noticed your maintenance costs were on a relatively lower level. What was the impact of weaker dollar and higher discount rate you have there for the reserves on this cost line? And also what will be the impact of the ramp-up cost in maintenance cost line when you start to take more freight into use?

Discount rate impact in Q3 was EUR 3 million positive. And the maintenance cost we will -- we are really cash conscious during the ramp-up. So we will optimize the maintenance cost very carefully. So that's what I can say about the maintenance cost.

And the next question comes from the line of Achal Kumar from HSBC.

First of all, so basically, what I wanted to understand, just to follow-up on the -- on the trading question. So now you mentioned that you're opening the bookings in May and you opening the flights in May and June. And I believe you must have opened the flights in the system. So how the forward bookings are looking like at this point of time for Asia, for North Atlantic and then for America for Europe, please, if you could discuss that?

I stated it is early days because we have been having, of course, some flights published during the past months, and we have basically have -- we have not had any active marketing on that one. We published our summer network yesterday. And now we will be gradually ramping up our marketing efforts. So the bookings, the forward bookings are still subdued going forward. But as stated, we estimate that we will be seeing gradually increasing bookings toward summer as the vaccination coverage increases. In our Suntours part of the business, the booking window is notably longer. And as stated there, we have been seeing a notable pickup of bookings during the past weeks.

Right. Okay. Understood. The other thing I also wanted to understand in terms of the slots. So previously, of course, most of the airports have allowed airlines not to not lose the slots even if they're not flying. But now, of course, how long you enjoyed that exemption? I mean -- so I mean, is this still the case? Or now I mean if you don't fly, you will lose the slot. How is the situation, especially in Hong Kong and China?

Yes. I mean, if we start from the European end, the European slot regulator has been updating the slot rules. And with the updated rules, we can safeguard the important slots for summer '22. So -- and with important slots, I referred to those slots on key European airports are the most congested airports that would be critical for our Europe-Asia connectivity. So that's where we are. This coming summer, summer '22, I mean the slot rules have been postponed until end of June. So the slot waiver is in place. And then we foresee that the pandemic still will be impacting the demand picture during this summer. And therefore, it is possible to find the slots on ad hoc basis during this summer. When it comes to key slots in Asia, the travel restrictions are more stringent in Asia currently in the key countries. And therefore, there's no danger of losing key slots at this point of time in Asia.

Right. Right. Okay. Understood. Fair enough. The other thing also, I just wanted a bit more detail about this -- about the deal with the pilots. So you mentioned that you have this agreement, and that will help you to be more flexible. But could you please elaborate a bit more in terms of what kind of deal, I mean how much salaries need to increase? So if you could please explain a bit more on that, that will be helpful.

One part of the agreement is the so-called scope that will be enabling us to use for example, wet lease capacity, clearly more than previously to address of the seasonality in the traffic. So that's improving the operational flexibility of the company. And then the other key part of the new agreement is the new salary structure that I mentioned.

Okay. Right. Okay. Other thing I also wanted to understand about the details regarding this hybrid loan. So according to your statement, of course, you can use the EUR 350 million provided, your equity falls below certain level. So just want to understand, if you could please elaborate that a bit more on the hybrid loan.

Sorry, we can't disclose anything more what we have disclosed. So we need to follow our policy on guidance -- sorry, on disclosure.

Okay. Okay. No worries. On the -- finally, on the cargo, I mean, so you -- of course, the cargo was -- this quarter was very strong in terms of cargo business. But how do you see cargo business going ahead? And especially once you resume your passenger business, how would that have an impact on the cargo business definitely in terms of cargo capacity, but otherwise also, I mean how do you see the cargo business going ahead?

Yes. We see the -- on the short term, we see the cargo business enjoying of a good demand environment and good price environment. And I stated, the Suez Canal blockage and the unwinding of that in terms of cargo will most likely be supportive to the cargo business during the next couple of months. We see this cargo momentum to continue until a more meaningful amount of passenger flights, long-haul passenger flights are restored. And then when that happens, then, of course, there will be more belly cargo capacity out there. And then that will be impacting the air freight demand environment as well as the price environment. What is the big outstanding in this one is that what obviously happens on the shipping side. And then what will be the impact of that to global value chains. But on that one, we really cannot speculate at this point of time.

And we have one more question from the line of Giovanni Caforio from Lexcor Capital.

This is actually Nicolas from Giovanni's line on here today. I have a couple of questions. The first one is on -- I mean, you had this EBIT margin target pre-COVID, pre all this mess of sort of aiming to get to 7.5%. Now obviously, as you said, the cost savings are a big plus. I guess, against that, you have sort of CO2 prices, et cetera, fuel prices moving back up. And obviously, the other airlines also cutting costs, right? So ultimately, what's the yield? I mean, you addressed that, I guess, earlier. But I think my question is really, do you sort of think the 7.5% target, if you sort of think 2, 3, 4 years out. Is that sort of where you think the business can be in a few years' time? Or is it sort of more difficult or maybe actually easier in a sort of post-COVID world?

We are currently updating our strategy and that strategy will be building on the key cornerstones of our strategy before. So we will be all about connecting Europe and Asia. We want to be a modern premium airline, sustainability will be important for us and so forth. In connection to the strategy update, we will be also updating our long-term financial targets. And we will be making that strategy public probably toward the latter part of the year, end of the year. The exact timing is not decided at this point of time. But what we do want to see is that the traffic is coming back. First, and we do want to see -- or we do want to have a better understanding of the competitive environment and the impact of that to yields. And then I think that we will be better positioned to address this particular question. What remains clear, however, is that with the savings package of permanent cost savings, we are improving our underlying profitability parameters quite significantly. And we will be better equipped to tackle the competition in the -- in the post pandemic world. As stated, we are comparing well to our key competitors, both Asian and European in the Asian traffic part of the business. And then based on what we have seen, our target of a permanent cost savings is also more ambitious than some of the competitors are having.

And I guess, sort of second question would be so I understand that from a sort of accounting perspective, the hybrid is sort of seen largely as sort of debt -- sort of as of equity, but I guess I'm minded to look at it a bit also as being sort of debt here as opposed to straight equity. And I guess, you have a market cap of sort of way above EUR 1 billion. Again, the market is wide open. Isn't there sort of a temptation? Or isn't there sort of a -- ultimately, wouldn't it could sort of fit in a much stronger position to -- to actually go for some sort of proper equity here, considering that it might be a year until next summer, maybe where you have sort of proper cash flows again?

That is not part of our plans. So as stated, when we look at our balance sheet and when we look at the current scenarios of the -- of the demand coming back, no matter whether we are talking about the base case or whether we are talking about the base pessimistic case, we feel that the needs of the balance sheet are addressed by this hybrid arrangement. And the key reason for us liking the hybrid instrument and now I refer to the EUR 400 million hybrid loan with the State of Finland is that we can draw on that one flexibly based on needs. So in this uncertain environment, that aspect of the hybrid loan comes in handy.

Right. But if you think about the free cash flow is -- do you think that -- I mean, it looks to us that we probably -- we might have to wait until next summer, meaning summer '22 to get a sort of properly positive cash flow. Does that sort of makes sense? Or do you think we could be sort of positively surprised here?

It's -- that's not true. So you need to remember that operating cash flow turns positive around 2 months before the EBITDA turns positive. And when EBITDA -- EBITDA is, let's say, well in black. So operating cash flow is also well in black. And our upcoming investment cash flows are quite small going forward because we won't -- it's basically some investments to our current fleet and some cabin retrofits, and that's it. We have only 3 wide-body orders in place. The next one is already financed. And hence, the investment cash flow part of the equation is quite small actually. And as stated, the working capital impact, when we grow from this current level, and we have already repaid all of the refunds unlike some of our peers. So you need to remember that we had a very negative working capital dynamics last year. But when the growth starts, it's vice versa.

Right. And when it comes to the investment cash flows, what we have been stating previously is that whereas before the pandemic, there was a discussion about narrow-body investment at Finnair. We have stated that this narrow-body investment is still part of our long-term plans, but it is not actual for next couple of years. So instead, in terms of the fleet management, we will be working with life extensions and optimization of our fleet.

And just the last question then because obviously, there's sort of [indiscernible] investing cash flow. There's also sort of financial expenses that you -- although, I mean they're part of the operating -- operating cash flow, I guess. But just can you [indiscernible] is the sort of Q1 financial expenses something that one should annualize at this point? Or would you -- sort of how do we think of what would sort of unrealized 2021 financial expenses eventually be?

Financial expenses paid net, i.e., that part what's in the operating cash flow is slightly less during the rest of the year than during Q1. So it's not foreseen to be as high as now, but attach that's smaller than currently. There are some...