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 Fourth Quarter and Full Year 2023 Earnings Call. I have here with me Finnair Interim CEO, Mr. Jaakko Schildt, and he is joined by our CFO, Mr. Kristian Pullola for the Q&A session. I will now turn this call over to you, Jaakko. Please, go ahead.

Thank you, Erkka. Good afternoon, all, from Helsinki, [ New ] Helsinki on my behalf too. And happy Valentine's Day for everybody. It's 14th of February today. Let's start with the quarter 4. In the presentation, traditionally, we touched the quarter 4 and also the full year '23 development, and we have a lot of good news to share with you. And our headline for quarter 4 is it was really a solid end to a strong year. I mean, the market is robust. We see a good development in the market -- we saw good development in the market. And also, our internal efforts with strategy execution, both on the revenue area and the cost area, is really bringing results. Quarter 4, I mean, going back to quarter 4, I mean, we had a good performance despite the fact that we were meeting challenging winter conditions in our operations. We had snow storms, a couple of days of no storms. And also, we had a really cold weather for a couple of days. However, we were able to deal it with (sic) [ with it ] in a very appropriate way, on-time performance landing to 75% than the customer satisfaction NPS at 32. Looking at the revenue for quarter 4, I mean, the revenue increased 5.8% and comparable EBIT landed to EUR 23 million, net results, EUR 60 million. And I think the highlight for the quarter 4 is really that this was a positive fifth consecutive quarter. And I think it would be fair to say that this company, we made it, we survived from the pandemic and the double crisis. And the evidence is actually the fifth consecutive quarter being positive. Revenues stayed on an elevated level, 20%. Passengers increased. And I think it really well describes the excellence of this result when I look at the ASK selling capacity. We did all this with the 17% less capacity compared to 2019. It's a very good result. Load factors we saw improving in Asia and North Atlantic and Middle East in traffic areas, load factor, total load factor, landing to 73%. We will come back to the load factor issue a little later when we talk about the capacities and so on. Looking at the full year then, I mean, there is a number of contributing factors that actually made us to land at the comparable EBIT margin 6.2%. First of all, after the pandemic '22, we still had -- we had a fleet that was not fully utilized. We were really able to make the 330 aircraft, which was not fully utilized to the full use. We have a cooperation with Qatar Airways and Qantas operation started '23. There will be one more aircraft going into Qantas this year, but we were really able to take the fleet into efficient use. For the whole year, we were able actually to purchase 9 leased aircraft, leading to significant cost savings and also operational flexibilities. It is a different story when you own the aircraft versus leasing. You can really define when is your end life and when you exit the aircraft from your fleet. Finance and transactions. It's great to be in the position that we have no remaining debt instrument deemed as an equity. That's really a foundation for the healthy balance sheet. And we successfully executed EUR 570 million rights issue. We're going to have a more detailed picture for the [ number ] downfalls for the balance sheet later on in the presentation. Also the sales channels, we were really able to shift our distribution into the more modern sales channels and also with the cost activities. I mean that was really bringing a lot of bottom line result. And that's great to have because the cost is one of those things that is going to follow us. Whether the cycle in this business is positive or if the cycle would be go down, we always need the cost efficiency. Repeating again the great result, EBIT margin 6.2%. I think the significance of this EBIT margin is that our earlier estimate and our own plan was that we would reach this target within 12, 15 months' time, and we reached it earlier. So this is -- it's a very strong performance for '23. Now we look at the quarters. I mean we are back on the quarter 4, and we are looking at actually under the previous kind of quarter in '22. I mean, repeating, I mean, the success factors, I mean, there are a couple of key success factors, and I'm just repeating them. It is really that we increased the capacity and, by that, made possible to create more earnings. There's a strong demand in the market. Overall, the market capacity is somehow limited, and it's actually keeping the unit revenues up. And then our own activities on the sales, I mean, repeating them from the previous slide, was really giving us a kind of positive result. We did see actually in the quarter that, from the previous quarter from the last year, is that the cargo revenues are declining. But I do consider this overall more as a positive kind of sign because that means that the whole aviation business is normalizing. Cargo revenues has been really, really extremely high during the pandemic and so on and now we can see it normalizing. However, they are still on the elevated level compared to 2019. Expense management and the cost management. I mean, there, the internal efforts -- effort for this one has been, I mean, very efficient. We're actually very proud to be in the situation that we can now state it at the end of the quarter 4. It has been not definitely an easy journey internally, but it's really paying off. Then the last one, I mean, on this slide is that we were actually able to recognize some of the tax assets. We can see there, on the 2023 column, it's EUR 135 million in this [ backdrop ]. And that is something which is -- I mean, when we compare the years and the quarters to a different, there is a big difference, but we'll talk a little bit later. We'll talk a little bit more about that too at a later stage. Okay. In this picture and illustration, we're showing you our result history from 2014. As we can see that, historically, '23 was a very, very good year for Finnair. And it's very -- it's great to be in this position. And I'm repeating and really stating is that, with this result, I'm very confident and I can say that this company may be through the crisis. On the picture is just on the net result being EUR 255 million. There is a contribution. It's a bit more than half is actually the tax asset treatment, what I talked earlier on the earlier page. Balance sheet. Now we talk about the quarter 4 again. Let's look at, first, the operating cash flow side of it, what is minus EUR 6 million. That's actually quite typical, that the period of the quarter 4, the operating cash flow is a little lower because, basically, the tickets has been bought at earlier during the year and then we are flying those flights during the quarter 4. So I am not concerned about that number at all. On the next slide, we are going to look at the total operating cash flow, and that tells a good story. Back then to the quarter 4, we are looking at the right part of it, right part of this downfall chart. It is that, okay, our rights issue sits there at about EUR 568 million. And because of the rights issue, we were able to repay our debt and also invest the 6 leased aircraft, driving actually a significant cost saving on us. And we are landing at the end of the quarter 4 to a cash level of EUR 922 million, which is actually a very good, appropriate level for this size of a company. Then we are looking actually the whole year kind of cash issue. I mean, first, I would like to you to pay an attention to the operating cash flow on the left side of it. I mean, operating cash flow, EUR 472 million, what is a very, very strong operating cash flow. And on the right part of it, it is actually the repayments of the loans and other activities. And overall, we were able to reduce our debt burden by EUR 1.2 billion, which is a significant number. And that definitely drives our balance sheet to be much, much healthier going forward. Talking more about continuing on the balance sheet, I mean, there are a couple of KPIs and the trends actually on the equity ratio and the gearing. And I think, here, we can see the positive trend on both KPIs. We can see how they kind of -- on the left, we are listing the items that would have been the key contributors on this one. And the trend is definitely here. What is visible, that's the trend what we are determined to kind of stay on and we have to stay, even go further with our balance sheet. Okay. I talked the rights issue a couple of times earlier during the call. And we set some targets to ourselves doing the rights issue. I mean, it was on EBIT margin. It was a net debt divided by comparable EBITDA, and it was cash to sales and it's cash to sales. And from the picture, you can see that actually 2 of the KPIs we have already, I would say, reached. And I am especially very kind of happy to inform and actually proud about the EBIT margin. We reached that one ahead of our initial plan and thinking. That's a very outstanding result. This all sums up that, when we look at then the graph on the right side of the graph, there is the distributable equity. I mean, and we can see the good very, very positive, good trend there. And we are on a track with our aims to reinstate our ability for the shareholder distribution from '25 onwards and so on, so definitely having positive vibes for this development, too. Going forward in '24, I mean, first, I think it is -- we are very determined to continue on our strategy implementation, being it revenue initiative, being a cost initiative, all looking at, okay, all the things what we could do and what we are doing for the customers. The strength that Finnair is having, it's actually the quality and reliability drives the customer satisfaction. And on the top of that one, it is needless to say that all this drives the profitability. We are increasing the capacity for '24. Next page, we're going to look at a bit more detail on our guidance, and let's talk a little bit more about the capacity. But they are now -- all our assets and a full fleet is an efficient and profitable use. Partly, of course, thank you, our oneworld partners with whom we go operate. We are also taking the wet leases out from the British Airways, and we're going to fly those aircraft -- airplanes by ourselves. And then '24, we're going to have a delivery of our next A350 aircraft. I mean, the aircrafts we ordered a long, long time ago, years ago. We postponed actually the delivery twice because of the crisis. And now we are getting it into the traffic late '24. However, the arrival of the aircraft is so late that it's not contributing significantly to the capacity growth of '24. Our outlook and guidance, I mean, I am not reading line-by-line of the guidance, but it's according to our policy. But probably I stop a little bit to the -- our plans to increase total capacity by 10% and probably highlighting that we are saying that the Finnair revenue is expected to grow at a somewhat slower pace than the capacity '24. So key of this capacity growth is really that we use better and more efficient all the assets that we are holding currently. So -- and we are shifting the aircraft from the wet lease to our own production. This is definitely driving us a better financial bottom line result. And we have been really on a very elevated unit revenue environment. I mean, the quarter 4 '22 was extremely high. We saw some change to the quarter 4 '23 and so on. And I think it's very responsible to have a statement that we kind of give the guidance that it's somewhat slower pace, the revenue development and the capacity on '24. Now we are kind of heading towards the end of my presentation. And I guess, Erkka, now it is the time then to have questions and handing over back to you.

Yes, indeed. Thank you, Jaakko. So if you have any questions, please follow the operator's instructions to present them.

[Operator Instructions] The next question comes from Pasi Väisänen from Nordea.

[indiscernible] Pasi from Nordea. Well, I have a couple of questions. Maybe if I just [indiscernible] those online and we can actually then look at kind of if there's something left after the [indiscernible]. But first of all, to start with guidance, and by, let's say, assuming that capacity growth is some 11% for this year, so are we then going to see some roughly around 7% revenue growth for the year on a year-on-year basis? And if it really happens that RASK is now declining, as you highlighted, will the CASK decline less than RASK on this year? And at this [ deal ] I would actually like to also discuss with you. And then a couple of other questions are related to kind of the investments and the amount of sales. So when you actually are planning to start this renewal process of the short-haul fleet? Is it going to happen on a couple of years of period? And when we are going to see news regarding this investment phase? And we're looking at kind of the amount of sales. So would it make actually sense to make reverse split already on this spin? Or do you have any plans for that?

Okay. Thanks, Pasi. Maybe I'll take a first stab and then Jaakko will add. So on your guidance question, unfortunately, I need to just say that's a very good question. We have deliberately not provided the detail on profitability. As Jaakko said, we are seeing that, in the current environment, it makes sense for us to utilize our assets more efficiently and, through that, grow capacity. And then as Jaakko also said, we do see that, from a yield development, we are comparing ourselves against a very high yield environment. And because of that, it's prudent to assume that things will normalize somewhat even if we believe that the yield environment also this year will continue to be strong. Having said all of that, we will, of course, monitor the situation. And if there is some uncertainties realizing in the demand environment, we can always kind of course correct when it comes to the actual kind of capacity that we end up flying for the year. But the current plan is to utilize the assets that we have and to utilize them more efficiently throughout the year. When it then comes to CASK, as Jaakko also said, cost efficiency continues to be instrumental in our thinking when it comes to long-term competitiveness. We see that being cost efficient is a no-regret move in any scenario and in any kind of strategy outcome that we might have. And because of that, we are kind of taking the good learnings that we've accumulated during the crisis and turning them into a continuous improvement way of working within the company. And through that, we hope to be able to continue to be good at developing CASK going forward. Then how will that relate to RASK development? Time will tell. And once we have a better understanding of how this year's profitability will develop, we'll then provide updates to the guidance during the quarters to come. Then when it comes to the fleet renewal for the short-haul fleet, as we said in conjunction with the rights issue, that is something that we will need to address at some point. Having said that, our widebody fleet is mainly very modern. And their investment requirements above and beyond the 2 aircraft that we have on delivery is going to be very, very limited. When it comes to the short-haul fleet, also there, half of that one is still such that you can fly quite many years with it in the current environment, but then maybe the other half is such that we'll need to start dealing with it during the next years to come. The reality is, of course, that if you want to acquire new aircraft in the current environment, they are not available immediately. You'll get them in years' time. So in that sense, I think this is still something we'll need to address and make decisions at some point of time, but the implementation of it will be over many years to come. And then on your final question on the reverse split, As I've said, after the rights issue, this is something that we have on the table, trying to work it out in terms of how such a thing would be implementable in the current environment where we have a large number of also small retail owners in our shareholder base. So once we get to AGM proposals, you might hear something more on the topic.

The next question comes from Jaakko Tyrvainen from SEB.

It's Jaakko from SEB. I would like to continue on your guidance. You're planning up to 10% capacity increase. How confident you are that you will find kind of a corresponding demand for that increase? I.e., perhaps it's just me, but 10% sounds quite a lot. Could you elaborate how you are ensuring that the capacity increase can be made without sacrificing too much load factors or the yield level?

No, we had some echo in here. Now I'm back online. I mean, I'm very confident actually about this capacity increase because it is coming from the elements what I mentioned earlier, being it's that we really don't take an external aircraft and increase the cost in a major way that they would become a new [ tails-in ]. We are increasing the efficiency and switching their aircraft from the BA production then to our own production and so on. The demand environment has been, I mean, very, very strong for basically starting from '22 through the whole 2023. And when I look at our route network and where we are adding, we have announced that we will start the Nagoya again. We are very strong in Japan. And then there are a number of destinations that we have been implementing, being it -- and -- or actually communicating to the market. Being it the northern Norway or Poland or Tartu, I am actually very confident that this is the right move for Finnair to do. It is also something because we're doing it with our own fleet, and we are adding tails. I mean, we have the levers and flexibilities to move, kind of then to adjust our thinking if, for some reason, the demand is not picking up.

Okay. Perhaps following up still on the same topic, how much more crew members you need to recruit in order to deliver the 10% capacity increase? Or would you be able to do the increase with the current staff?

It is not a significant number. So we can see also the utilization efficiency that, when we increase the -- when we put more capacity out and we increase the utilization, we can -- the major part of it we can increase the crew utilization too. And I know that the industry kind of is struggling on some other parts of the world and in Europe actually to attract people and get the people. So we have a very good, I mean, situation on that one when it comes to availability of the pilots, good, qualified pilots and also the carrying crew. The recruitment efforts have been very popular, and we have been really able to choose the best people out from there. And we are, I mean, very good on our targets with the plans actually to increase the people.

Okay. My next one on the competition environment, what is your visibility, current visibility, regarding competing capacity in Helsinki-Vantaa for 2024? Are you seeing rivals [ cutting ] capacity as well?

Of course, the competition, that is nothing new to us, including the low-cost guys. I mean, we have always faced to competition in Helsinki, in our home base, and in other places. We have an excellent network and actually schedules. We also do -- we do fly to the primary airports of Europe and so on. And we look after the customers, first, during the journey, outside of the journey and also at the time of the disruptions. And I think these are very strong assets against the competition. It is also the fact that, if I just look at Helsinki's location and put that one into the operational parameters, what the low-cost guys are doing, it's probably very difficult to make -- for them to make the aircraft into efficient use because Finland is 1.5. hours away from the big, big concentrated cities from Europe.

And then when you add some of the challenges that you have during winter times here, that's most likely also one thing that competition takes into account when they think about how attractive Helsinki vis-a-vis the other alternatives that they have for their flying.

Cargo and the current yield levels, are you seeing the yields picking up following the situation on Red Sea?

No, we haven't seen -- we cannot -- we haven't been able to make a correlation with the situation at Red Sea, the cargo market, cargo deals. No, we haven't seen a correlation there.

So air cargo is -- or sea cargo is not a direct competitor of air cargo. We are talking about slightly different kind of markets here. And now the sea cargo time lines getting extended by 6 to 10 days doesn't change the big picture relative to air cargo. So the drivers for our cargo business are others. It is about the normalized level of capacity now of flying to Asia, and then it's the overall kind of economic activity, which is going to be the main drivers for our cargo business.

That's clear. Then moving to ancillary, where we saw a quite nice pickup in ancillary [ per packs ]. What was driving this, especially in Q4? And should we expect this level to be the new normal going forward?

It was really driven our kind of approach, what we did to our kind of ticket classes and activities to drive the revenues up. So we are actually very happy to see that our efforts on this area is paying -- I mean, giving the results. And we definitely, I mean, see that this area is going to stay on this level or even improve further.

Good. My final one, sorry to have for many, but historically, you have been, if we think of the era prior to COVID, you've been loss-making in Q1. What is your visibility for this year Q1?

Yes, so we are not providing any guidance for Q1. And you're right. Q1 has been a challenge. I think the only thing I can say, that both guys on this call will do their utmost to ensure that the streak that we now have when it comes to 6 consecutive quarters of profitability would be something we could continue. But it will be a challenge during the seasonally low first quarter.

The next question comes from Joonas Ilvonen from Evli.

It's Joonas from Evli. Coming back to the capacity growth question, would it be possible to provide some color on these route areas? Like, let's say, do you expect maybe double-digit growth in Asia, mid-single-digit growth in Europe and maybe flat elsewhere? Some color on those?

It's really -- the answer is no. I mean, it is really distributed, the network. I mean, I mentioned a couple of new destinations that we are having there. Then we are adding the frequencies to some destinations and so on. We have no such detail available.

Another question, the recent political strikes and the possible impact on Q1 results, will you get back to those possible impacts later on before the Q1 release?

So again, I think we all know that the current situation is fluid, to say the least. We had 2 days of strikes impacting our operations. There is always some headwind from a profitability point of view coming from this type of actions. If that cumulative impact would become material, then, of course, we would consider if that would be something we would come out with. But as we now look at it, my earlier statement when it comes to us being focused on trying to keep the streak alive is still the valid one.

The next question comes from Achal Kumar from HSBC.

This is Achal from HSBC. So my first question is on Asia. So basically, you mentioned that your focus would be on Asia. While I can see that your yield has come down on Asia -- I mean, your capacity was up 24%, and your passenger revenue was up 19% in Q4 versus Q4 last year. So just want to understand, if you could please break up in terms of Asia. So what makes you confident or rather what encourages you to grow more on Asia? I mean, what kind of growth is there? Is it more corporate? Is it like more -- previously, I understand that you mentioned -- your predecessor mentioned that the group travels -- I mean, Asia was known for the group travels, which had discounted travel, and you were discouraging that. But now what is it that encourages you to grow on Asia while the yield seems to be going down? And then, of course, the cargo is also going down. So if you could please break up on that and help us understand that.