Finnair Oyj (FIA1S) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. I'm Erkka Salonen, I'm from Finnair, Investor Relations, and it's my pleasure to welcome you to this Q2 Pre-Silent Call. I'm joined by our CFO, Pia Aaltonen-Forsell, who will first give you an update on the key points of our second quarter. And after that, we're happy to take your questions. But with these words, I hand it over to you, Pia. Please go ahead.

Thank you so much, Erkka. And ladies and gentlemen, good afternoon, good morning, and welcome to what I believe might be the first pre-silent call that Finnair is hosting, and we hope to make this more of a sort of regular activity and obviously on the back of our silent period starting and still in a fairly sort of in a period with a lot of activity right now, it's probably good to take a few minutes for a dialogue with you all. And as Erkka said, we will take questions, but please go ahead if you want to put the questions in the chat. Go ahead already now so that we can start preparing for that as well. But let me first talk a bit on the second quarter. I will focus my comments today mainly on sort of the here and now, but also talk a little bit about what we see happening in the market and sort of what that tells us about the later part of the year. But if we first look at the early part of the second quarter, we have figures out for April and May. Our traffic performance continued to show a very positive momentum. And if we look at passenger volumes, which is the growth metric that we also talked about in our strategy, our volumes increased by 6.3% in April and 7.4% in May year-on-year. And we all know the big picture that's sort of around us right now. I mean, demand has remained strong in an environment where supply has been constrained during this quarter due to the Middle East situation due to the war in Iran. And obviously, it's -- from Finnair's perspective, we had industrial actions in the comparison period. So that's also boosting the figures versus the comparison period a bit. So if we look at the different areas, growth was particularly strong in Asia and Europe. North America maybe remained still a bit on the softer side and we have suspended traffic in the Middle East and then sort of taking all of that into account, we still saw good growth in the early parts of the second quarter. Revenue passenger kilometers increased in both of the months and all factors improved to around 78%. And that's really on the back of solid demand and from our perspective, a supportive market environment. So let's talk a little bit about unit revenue development. I mean that's been clearly positive, let's not forget. There's a significantly increased cost picture, obviously, with the higher fuel cost, and we'll still come back to that. So revenue per available cakilometer increased by 14.7% in April, 17.7% in May. And if we then look at sort of the factors that contributed to that, let's not forget the load factors improved, as I just talked about, and that supported this development. There were also higher yields, particularly in the Asian traffic. And we have actively optimized our network capacity allocation and pricing to capture the demand and take advantage of the reduced market capacity caused by the war in the Middle East. And maybe it's still sort of fair to say that also, if you look at industry development from sort of a total picture perspective, what we have seen is, of course, costs that have raised a lot due to the increased fuel cost. But at the same time, we have also seen improved yields and I think this is testimony to the fact that demand has remained stable, supply has been somewhat constrained during the second quarter and then holistically. This means that the higher fuel costs have been compensated in the prices. Also, Finnair's biggest market, obviously, has always been the Europe, Asia has been really important, and that has been an area where I think we have sort of on relative terms benefited during this interim period or during this period of change and more. Now obviously, the situation in Middle East as far as we can integrate today is normalizing and maybe a little bit more about that later on. I still wanted also to comment on cargo because from Finnair's perspective, that's been also a very positive development during this quarter. It has been driven by yields and that's really benefited from these disruptive situations. And this is continuing also a positive cargo trend that we did see already in the first quarter. So overall, that's a strong part of our business. Then let's talk a little bit about the fuel prices. I mean throughout the second quarter, obviously, they have remained elevated. We have hedging in place and as I already said, strong unit revenue has certainly mitigated part of the impact. So as we told you at the end of the first quarter, when we sort of looked at the remaining part of the year, we had a hedging ratio of 69% for the remaining period of April, December. So that's been something, of course, that has really balanced the picture for us. Then -- as it comes to fuel supply, it has remained stable at our home hub in Helsinki. And we have not seen during this period any sort of material availability issues either as any other stations. So obviously, there's been sort of the odd situation here and there. So there has been, let's say, some very temporary limitations, but those have all been sorted out. Of course, having said that, this -- the situation is still somehow fragile. And the geopolitical development still continue to create uncertainty around fuel availability and pricing for the longer term, should the peace agreement not come into place. But if and when the Strait of Hormuz remains open, this would certainly alleviate the uncertainty around the fuel supplies. And I think as you all have noted, if you follow the news flow from the recent days, the Brent crude has really sort of been falling back to even prewar levels really fast, after these negotiations between Iran and U.S. have fallen -- come to place. And we don't see quite as fast or rapid decrease in the jet fuel. And I think that's on the back of sort of more constraints, whether it's in the refinery capacity or just in the transportation to the specific locations. And I think it's fair to say that sort of clearing that all out should there now be sort of continued opening of the Strait will probably still take some months, but it's, of course, a positive sign that the Brent crude has fallen back to pre-war levels. So when we look ahead, market conditions could gradually normalize during the second half of the year, we also understand, of course, that the capacity that was suspended in Middle East will come back and normalize when this sort of war situation is easing up. And we also know from history and sort of what earlier lessons have told us that it's the balance between demand and supply that will, in the end, then sort of define the price levels. So could also from that perspective, expect something about sort of the ticket prices to be impacted by increased supply as the stocks continue. Overall, when it comes to demand, we do continue to see good demand, encouraging demand momentum still. We are moving into a very busy summer season or we are probably already in the busy summer season as we speak. And we still see customers actively looking and traveling across our network and our operations are delivering a reliable and high-quality connections. And so all in all, there are certainty still uncertainties remaining in the operating environment, but we are confident in our ability to serve our customers. And it still remains safe to plan and book travel also for the autumn season and at least I'm planning to go for a short holiday tomorrow and really looking forward to that as well. But I think with that said, that's really sort of the short overview of the current situation. And I think Erkka, we could hand it now over to questions.

Indeed. Thank you, Pia. So now would be a convenient time to present any questions you may have. Please follow the operator's instructions or use the chat function to present them.

[Operator Instructions]. The next question comes from [ KaisaVanhaPartila ] from [indiscernible].

This is [ Kaisa ] from [indiscernible]. Nice to hear you, and I have a few questions. So I would like to start with the first one. So the Q2 traffic data looks strong from a unit revenue perspective, so I would like to still ask about the pricing. So how should we think about the pricing for the rest of the summer and also into [indiscernible] it is the strength mainly driven and supported by the capacity constraints in the market? Or is there also like demand driven growth?

Thank you. I think it's an excellent question, and I think the answer is there's elements of both in it because I do we have seen across -- also, if we look at market data, sort of broader in the market, it seems that demand has remained on sort of a strong footing. And with that said, it's clear that people are willing to travel and people want to travel. And we see that sort of in the booking momentum as well as, of course, sort of in the traffic data, which has already been published. So I think with that said, it's fair to say that there is an element of sort of good market momentum. But certainly, there have also been supply constraints that we can follow from the data that they will also now probably ease up or have probably already eased up to some extent. And so there's elements of both.

Yes, that makes sense. On to the next question, [indiscernible] revenue is a very important part of the -- your new updated strategy as well. I would like to ask, has the reason development being mostly volume-driven? Or are you also seeing progress in this revenue part also per passenger?

Thanks, [ Kaisa ]. Yes, it's driven again by both. So I think based on our strategy, offering more choice to customer is -- that's really a key part of the strategy. And that's why we have developed a lot also the offering around the ancillaries, whether it's kind of new combo, which may be sort of what seat and WiFi has been a [indiscernible] whether that you want to have more baggage with you during the summer or whatever that could be. So both metrics are improving, of course, as our volumes are growing, that helps. But we have certainly seen also upper tax improvement and I think already in Q1, we could see this for tax improvement as well, which I think was a double-digit figure. So it's a good development.

Yes, yes, definitely. Yes. So lastly, I have one question. So given the strong start of the year, how are you thinking about the current revenue guidance and a quite wide adjusted EBIT guidance range, what would be maybe the key factors behind any potential revision or any changes on those ranges? I totally understand you you're maybe not possible to comment widely about it, but still keen to know.

It's a very relevant question. And I can I can give a few sort of thoughts around why is the range so wide as it is right now. And we were asking earlier this morning in a meeting that, hey, sorry, I made the slides a week ago and already now this and that thing has changed. And I think that's the environment that we are living in right now. I think what I tried to describe in my earlier presentation is that some of the concerns have, of course, been alleviated a bit. So with the stocks now ongoing with some traffic in the trade of rules, some of those concerns seem a little bit more distant, but I don't think anyone could feel sort of -- they have to say that they are certain about a development such as peace agreement, et cetera. So there are things that we know and those we try to share and they relate to the fact that demand is still on a good footing. We have seen some of the additional cost burden also kind of the positive development in our RASK has been supported by load factors increased by some higher yields in the early part of Q2. So we try to kind of put the puzzle of all of these different pieces. What we can really foresee and where we still foresee an uncertainty. And that's why in the end, we still, at the moment, have this guidance with the wide range. And I think that what will sort of what we will need to all the time follow is really this development of these, like both external and internal factors. And that should then always sort of give the answer to you what should the guidance be. But at the moment, that is our guidance, and the wide range still is there for a reason.

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Yes. Then we can proceed with the questions sent by the chat function. So the first question is coming from [ Benjamin Levin ]. Is there a plan to return to the number of agent destinations from before COVID once the Russian aerospace is opened again or has [indiscernible] completely put up strategy aside?

Thank you, Benjamin. There's a strong assumption in your question, which obviously sort of underpins it, which is once there is an opening of the airspace. And I'd still like to comment that first. I'm happy to also give a few comments directly to your question. But I first want to remind that Finnair's strategy is built on sort of the current reality and the assumption that the Russian air space remains closed. Now we may all have hopes that peace talks would progress also with Ukraine situation. And we are, of course, as a company, really putting a lot of attention to follow-up and sort of planning for or various sorts of situations. But nonetheless, our strategy is still built on the fact that airspace remains closed. And we could talk more about sort of what it would then take if it opens kind of it probably isn't just a theme of a week or 2 to then just make everything come back to normal. Probably it would take longer to have a lot of agreements in place, et cetera. But if we then jump to sort of a situation which is now that the Russian air space would have opened, then I for sure see that it would follow the same logic as any route planning is following right now, which really is based on case flows. Where is it possible to get slots, airport availability, a number of factors that would be also a normal business logic would, of course, then be applied to such a situation. So I think with that being said, there would probably be quite a lot of things to consider. And many things have changed since pre-COVID. I mean some of those include maybe a different China, different competitive situation, et cetera. So I don't think there's a kind of a return and just copy paste what was there before COVID, but I don't think you assume that either. So I think it's just fair to say that if that situation would occur, we would just need to apply sort of a normal business logic. And of course, we have a team that is every day investigating sort of the best network for us.

Yes. The following question comes from Telo. How does Finnair plan to strengthen its long-term shareholder value, considering expected changes in global travel demand fleet modernization needs and competitive pressures in the European aviation market.

Thank you, Tero. A question straight to the heart of our strategy. And I think the core elements there obviously revolve around our unique position with the hub in Helsinki and the attractiveness of the hub that we have here today, with the sort of Finnair's network offering and giving an ability for people to travel via [ health], it basically to anywhere in the world through our network, which is really something unique I mean just as a traveler, go and have a look at all of the destinations that you can reach only Finnair from Helsinki, it's really amazing. So I think that's still at the core an attractive hub and network based on our strategy, a focus on our core customers and obviously, a renewal of the feed that we have been talking about the first steps that we are taking right now. But it's also clear that a fleet renewal and the growth of around 4% CAGR that we are foreseeing in the market will support Finnair's value creation today and also in the future.

And the next question is coming from [indiscernible], a higher [indiscernible] details about scheduled aircraft deliveries or leasing?

Well, thanks for the question. And I think there's no major change to things we have described earlier. First, I still want to say that we still have, of course, flagship Airbus 350 sort of the last and final one in the previous campaign coming in, I think, scheduled more towards the end of the year for the delivery. Then we have the new [ Embraer ] campaign that we announced earlier this year, where the first deliveries are scheduled 3 aircraft at the end of 2027. And then we have other additions through our programs such as the midterm capacity, et cetera, where, obviously, this is a bit more sort of a flexible arrangements because some of these aircraft, we are considering sort of the best and most flexible options for us used aircraft leases and even with [indiscernible] if need be, so that we get sort of a total fleet that keeps supporting the network that we have announced and want to fly. So there could be some additions also through these more flexible measures even throughout this year. And then last time when we gave a bigger announcement, we also talked about acquiring up to 12 used CEO, Airbus 32. So here, we are also making progress working on those, but we do not -- we have not announced any sort of more details around those yet.

Thank you. Next question is coming from [indiscernible] from Nordea. Could it be possible that strong RASK growth has more than compensated increased cost burden? What could be the implicit RASK growth in Q2 if RASK growth is in line with cost increases?

[indiscernible], thanks a lot. That's a sort of very to the point question. And I still need to answer you today in a little bit more broad strokes. So I think it's fair to say that with the combination of a good market demand, some constraints in supply and also in combination still with the good load factors, that gives us a position where kind of the RASK growth is at least sort of a strong counterbalance with the cash growth that we have seen. And more importantly so, I think that looking forward, at this point in time, we start to see the pressure easing off on the cost side, and we see a demand picture that continues to be on a strong level. So maybe possibly, we need to discuss this more in detail at our Q2 release.

Then I believe this is the final question coming from [indiscernible]. What is hedging level in 2027 and at what average price? Has hedging now resumed and if so, at what price is?

Yes. Thank you. When I'm looking at the figures. So in our quarterly report, we publish a table that is fairly detailed, but it's on a quarterly level. So I know sort of looking at this where the hedging ratio still early 2027, it's 40% in the first quarter. It's 29% in the second quarter, and then it's just above 10% in the third and fourth quarter. So there's still a fairly sort of good support in the early parts of 2027. And hedging has resumed, but on a slower pace than what we would do sort of in a stable market environment. So I think the liquidity in the market has not been stellar. And I think what we would expect now if the markets are normalizing, then that sort of -- that will over time give back kind of the opportunity to hedge with the [ simple ] and with the pace that we have seen historically.

Yes. Thank you. So as mentioned, there are no further questions and we can end the call. Many times for the excellent questions and joining the call. We wish you a very nice day.

Thank you.