Finnair Oyj (FIA1S) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. I'm Erkka Salonen from Finnair, Investor Relations, and it's my pleasure to welcome you all to this Finnair's Second Quarter 2024 Earnings Call. I have here with me our new CEO, Mr. Turkka Kuusisto; and he is joined by our CFO, Mr. Kristian Pullola for the Q&A session. I will now turn this call over to you, Turkka. Please go ahead.

Thank you, Erkka. Good afternoon, and a warm welcome to our second quarter earnings call also on my behalf. So my name is Turkka Kuusisto, as mentioned, and I'm the new CEO of Finnair. I've been in the company now so for three months and maybe it goes without saying that it's very happy to be here today to discuss with you when it comes to our second quarter results. The second quarter was yet another busy and in many ways, good quarter for Finnair. The number of passengers increased by 5%, and we, in total, carried 3 million passengers in our flights during the second quarter. But as the title of our report indicates that the airline industry and market environment is normalizing after a very strong period of demand. And therefore, we faced decreasing unit revenues that consequently led into declining profitability versus the record quarter -- second quarter of 2023. As we communicated earlier, we have added capacity into our own network by calling back four of our narrow-body aircraft that were deployed to a so-called wet lease out arrangements with British Airways and that capacity was deployed to our own network in the end of first quarter. Therefore, the available seat kilometers increased by 6% during this quarter and in total by 8% if we also factor in the [ outdoor ] wet lease arrangements that we have. What we didn't see during the quarter was a -- that the revenue increase was not yet visible in the revenue, and therefore, the revenue increased by 2% in year-on-year comparison. And the vast majority of that growth came from our cargo business and from the successful implementation of our ancillary sales. But at the same time, we faced declining unit revenue and yields by 4%. That then led into decreasing comparable EBIT, which landed at close to EUR 44 million versus the record quarter EUR 66 million a year ago. Our load factors improved somewhat in Asia and Middle Eastern routes. And then on the North Atlantic traffic, we recorded a PLF improvement of close to 7%. At the same time, we especially faced decreasing passenger load factors in our European and domestic traffic into which we deployed the additional capacity in form of those narrow-body airplanes. The on-time performance was below our targeted level and the long-term traditional levels, and that was mainly explained by a runway renovation of our Helsinki hub in which one of the runways were under maintenance and construction work from May until mid-summer. Also, there were some challenging better conditions, especially in the late April when we had some snow blizzards also in the Helsinki area. So therefore, the on-time performance was lower than expected. But all in all, the customer satisfaction moved to the right direction. And in terms of NPS, we improved to 39. During the quarter, the strategy implementation continued and especially now when we see a bit of a changing market environment, our main priority will be in safeguarding our competitiveness and profitability through various continuous improvement actions. The long-term work in terms of improving customer experience continued, and we finalized a EUR 200 million investment scheme or project related to wide-body fleet cabin renewal during the quarter. And now all our wide-bodies are being refurbished. Right after the closing of the period, we opened a New Schengen launch at Helsinki Airport that adds a launch capacity by 100 seats and also is much more modern and comfortable from the passenger journey point of view. And the early experiences and feedback related to both cabin renewal and also the New Schengen lounge are rather promising. In terms of strengthening the balance sheet, which has been one of the strategic priorities for the company. Second quarter was yet another step to the right direction. Not only we got the first ever long-term credit rating BB+ for the company. But with Kristian and his team, we were successfully issuing an unsecured senior bond of close to EUR 500 million. And also with these proceedings, we were capable of down paying -- repaying the pension premium loan in advance and in fully. So that was basically the final instrument -- financing instrument from the pandemic times and now it has been done and dusted. Then when we take a bit more detailed view related to our second quarter P&L, we see that the passenger revenues and travel services revenues were par with the last year even though the volume increased plus 5% and 2%, respectively. That indicates that the yield environment is softening from the very high levels of 2023. Having said this, we are still facing an elevated level if we take a bit longer historical period into consideration. We can be rather satisfied when it comes to our cargo business. The revenue was up by 9%, and the yield environment, especially from the Asian traffic related to cargo remained strong and favorable throughout the quarter. And as already said, we can be satisfied with it when it comes to our ancillary revenues that increased by 34% in year-over-year. And one could conclude that the selections made in the commercial strategy are gradually paying off. In terms of cost control, operating expenses increased somewhat in line with the added capacity around 6%. We did have some additional cost related to the runway closure and also the weather conditions and also the maintenance costs were some EUR 10 million higher than in the comparison period last year. The fuel price decreased somewhat in year-on-year comparison. Moving to the cash flow perspective. This is yet another highlight from the quarter, even though the softening yield environment and other smaller issues that we faced during the quarter, the operative cash flow stayed very strong, EUR 173 million. That gives us confidence that we are doing the right things also in terms of cash flow generation that then further also improves our balance sheet. And as already mentioned, thanks to the successful senior bond launch together with the operating cash flow, we were capable of buying back some of the order loans and also paying the pension premium loan fully in advance. The cash position of the company is aligned with our long-term targets, close to EUR 1 billion in cash at the end of the quarter. And in addition to that, we do have this revolving credit facility amounting to EUR 200 million, also available. So one could conclude that the financing position of the company is relatively strong. That also influenced our gearing ratio that then decreased by some 40%, down to 150%, and that is also a continuation of the multiyear restoring of the profitability and the balance sheet healthiness that then again makes it easier when it comes to looking into future and the implementation of the strategy. Then some remarks after being a couple of months in the office and getting to know the company, business and the industry, I guess that the utmost important topic for us is to continuously improve the competitiveness and profitability as the market normalizes. The Finnair team has made right choices, has done a fantastic job in terms of overcoming the crisis that we have seen over the last couple of years, made right decisions in terms of redeploying the fleet and accommodating to change route network and the closed Russian airspace. Then moving on, we need to continue building our customer satisfaction around safety, reliability and punctuality. However, I also believe that there are a lot of opportunities when it comes to understanding our customers in greater detail, through data and understanding their current needs and future needs and develop our services and customer experience accordingly. And technology, obviously, offers some opportunities and those of you who have been reading the news this morning, there are also some risk associated with technology. We can comment that in the Q&A section, if needed, but Finnair not using that technology stack in its own flight operations that has been today widely published or communicated globally. And then finally, personal experience plays a pivotal role in terms of achieving our long-term goals and targets. This then brings me to the final slide. We are repeating our guidance that we've been discussing throughout the year that the global air traffic is expected to continue growing in 2024. However, there are multiple risks associated with the demand and the cost environment in terms of inflation, prolonged high interest rate environment and also the uncertainty related to various geopolitical and international conflicts remains as an uncertainty for the industry. We will reiterate the previous guidance related to capacity increase measured by available seat kilometers, including the wet lease arrangements, and we say that our capacity will increase by approximately 10% during 2024. Per our disclosure policy, we are today also giving the euro guidance related to our revenue and comparable EBIT. And the range for the revenue as per of today is EUR 3.0 billion to EUR 3.2 billion, and that again translates into a comparable EBIT range of EUR 110 million up to EUR 180 million in 2024. We will update this outlook and guidance in connection with the third quarter interim report that will be published in October. With this, I would be ending my short presentation and then handing over back to Erkka. Thank you.

Thank you, Turkka. Now would be a convenient time for any questions you may have. So please follow the operator's instructions to present them.

[Operator Instructions] The next question comes from Jaakko Tyrvainen from SEB.

It's Jaakko here from SEB. I would start with the questions on the ticket liabilities, which were up 8% year-over-year. How much of this, so to say, relates to normalizing booking curve? And how much of this is kind of a growing demand for Q3?

So I think we are seeing a normalization of the booking curve as we speak. And then we are also seeing demand for the increased capacity that we put in place. So I think the answer is a bit of both. And let's see how this then pans out for the remainder of the year.

And could you comment anything on the kind of booking situation you're seeing right now on the balance between load factors and yields for Q3 or the second half? Are you seeing the growth coming in from volumes? Or should we expect some change in the yield trend we've seen over the past few quarters?

No. I think we'll, of course, see how things pan out. We have seen, as we say in the report, the normalization of the demand and also a normalization of the capacity situation in the industry, which has then led to yields coming down from elevated levels. What will happen from here onwards is partly going to be a function of what is the underlying demand? Is the economic worries that consumers and corporates are dealing with? Are they going to be easing or are we going to go into a longer period of the type of uncertainty that we have now. But having said that, I think you're on to the right topic that the unflown ticket liability is up. It is showing that we've continued to sell on a healthy level. There is some normalization of how consumers behave from buying in advance. And then we'll have to work hard on the measures that are within our control, which is keeping up the competitiveness from a product point of view and then focusing on driving costs down as much as possible.

If I may, I would still continue on the yield topic. If you think about the outcome of the yield for the quarter, was it kind of in line with your own expectations early in the quarter or did it turn out to be a kind of a disappointment?

Maybe we can try -- maybe I'll answer and then Turkka will answer, and we'll see if our expectations were the same. Clearly, it's fair to say that when you leave in an elevated yield environment, it's kind of -- it's difficult to expect that things would normalize. You always think that the current will continue. Even if -- as we've discussed last quarter and maybe also kind of after the full year results in '23, we were talking about the fact that the yield environment has been really good and strong and so on. But clearly, it has come down, and we've responded to that by also ensuring that we make the right decisions when it comes to balancing our capacity and so on. So I don't think this is -- it's nothing dramatic. And trend-wise, this is really what was expected after a period of elevated yields.

I would very much echo that. And maybe for an industry newcomer, it's maybe easier to objectively analyze the previous year that was extremely high from the yield development point of view. So therefore, coming down by 4% year-over-year comparison is nothing dramatic as Kristian already mentioned. So it's all about normalization.

Then turning to your capacity guidance, which remains at 10% for the full year. Could you remind us how much share of this capacity that is leased out? How many percent is [ fine ]?

So again, we are talking about maybe -- so maybe I'll answer this way that roughly half of the growth is coming from the new wet lease agreement that we have with Qantas. Then, of course, we are, as we've said in the report, we are taking earlier at least narrow-body capacity into our own use. That's the other driver here. But clearly, there is an element here where the new Qantas deal, which also was a deal which enabled us to take in to use our full fleet of wide-bodies that is driving approximately half of the growth, and then the rest is coming from growing our own flying on the balance.

The next one, I understand it's a bit of early days for the question, but perhaps looking a bit towards '25. Any comments on your capacity plans for that year? And are you still planning to grow capacity going to '25% and if so, would you need new aircraft capacity?

If I start and then Kristian may complement. Obviously, when we see that there is some changes in the routes and the demands in those routes that we are flying. We are adjusting our capacity on a continuous basis, and we've already communicated to our customers that we will be, for instance, canceling some European flights for the forthcoming winter season, Trondheim and Venice to mention a few examples. And at the same time, we are adding some capacity to our London route. So we are continuously monitoring the demand and then doing minor adjustments and tactical level decisions when it comes to optimizing the capacity for the current demand.

And maybe to the latter part of your question. So we are now growing our capacity by utilizing our existing fleet more efficiently. In the current market environment, I do not see that we would be growing capacity through investments. We haven't been invested into this 10% growth. And in this environment, there are no investment plans on our end.

Then a bit of a technical one on costs, especially on the maintenance cost line. Was there some surprising items during Q2? And should we expect kind of a similar increase on that role in the coming quarters as well?

There was -- so there was maybe a bit that Q2 last year was a bit on the low side. Now in this quarter, we had some pressure on maintenance, partly coming from the discount rate changes that have an impact on the maintenance reserve and through that on maintenance costs. We also had some engine-related maintenance, which was maybe one-off in nature regarding some of the wide-bodies, which have had some engine incidents. So in that sense, we were a bit on the high side in the quarter, this is a cost line item, which is volatile from quarter-to-quarter. But I think trend-wise, there is some pressure still on maintenance cost because of the supply chain and availability of spare parts and so on. We are also trying to structurally kind of lower the maintenance cost by the actions that we have taken when it comes to particularly owning a larger portion of the aging fleet, which gives us flexibility from an operational point of view and also kind of cost efficiencies from a maintenance point of view. But -- so again, a bit volatility here, but no drama.