Finnair Q1 2023 results and Q&A

Yesterday, we published our Q1 interim report. Big thanks to all the participants in our events for the active discussion and excellent questions.

Our comparable operating result was positive for the third quarter in a row. This time only a million euros. However, it is an excellent result in the seasonally weakest, normally loss-making quarter. Our net result was also in the black for the second time in a row, this time 3 million euros.

The strong result was a sum of three factors: demand was exceptionally strong, supply was more limited due to capacity constraints in the market, and our work to implement the strategy progressed well. By comparison, our comparable operating result in Q1 during the last ten years has only once before been profitable, and that year, 2018, was also the best year in our history. However, comparability is affected by the IFRS 16 standard adopted at the beginning of 2019. In general, it improved the operating result and weakened the net result. The focused implementation of our strategy progressed on many fronts. We signed a savings agreement with our Finnish cabin crew, which means that almost all our personnel groups have agreed to savings. Among the measures aimed at reducing unit costs, it is also worth mentioning that we discontinued our in-flight product sales (e.g., cosmetics, accessories and gift items) also on our long-haul routes. This will reduce the weight onboard and, thus, also fuel consumption and emissions. We are also making changes to our service concept, which reduces our unit costs. 

We had tailwinds also in our unit revenue related strategy implementation. Although strong demand and limited supply played a role, our efforts to improve the efficiency of our distribution and enhance dynamic pricing bore fruit. Our unit revenue increased by as much as 30 per cent from Q1 2019 and by 40 per cent from Q1 2022, which was burdened by the Omicron variant and also the closed Russian airspace. 

During the period, we operated a more geographically balanced network in line with our strategy. The closure of Russian airspace has reduced traffic to Asia and travel to China is only increasing. Despite it, Finnair's position in traffic between Europe and Asia has remained strong. In long-haul traffic, we have found new passenger flows, e.g., in traffic between the United States and Europe, India and the United States, and the Middle East and Northern Europe. We also made changes to our domestic network by discontinuing our shortest domestic flights from Helsinki to Tampere and Turku. Replacing these flights with bus services reduces both emissions and unit costs, as load factors on these routes have been very low. We will continue to invest in intramodality, where our flights are connected to road and rail transportation. 

As part of our sustainability work, we purchased the largest single batch of sustainable aviation fuel (SAF) to date, 750 tonnes. It is clear that this batch represents only a small part of our total fuel consumption, but it is nevertheless a notable step in our long journey to increasing the use of SAF.

As for our fleet, we made a few changes, as we bought three narrow-body aircraft at the end of their lease period and returned one at the end of the lease period. Another change worth mentioning is the deferral of the last A350 wide-body aircraft delivery with more than a year until Q2 2026, which took place after the period. This also means that the negative cash flow impact of more than EUR 100 million will be postponed to 2026.  The wide-body aircraft wet lease operations for Eurowings Discover ended at the end of the winter season, but at the same time, our one-year wet lease operations of four A320 aircraft for British Airways began. So far, we have not agreed on other wet lease operations, as our entire fleet is currently fairly well deployed.

We still expect to operate at 80–85 per cent capacity in 2023 compared to 2019 (ASKs). The capacity is impacted by the development of demand, e.g., increase in travel on Chinese routes, and how the mentioned wet lease operations are developing. We believe that the strong demand for travel will continue, at least beyond the summer season, supporting our unit revenue. On the other hand, visibility after the summer season is lower due to economic uncertainty. Despite strong demand, it should be noted that significant uncertainty in our operating environment persists, reflecting the high cost of fuel and the uncertainty surrounding the length of the Russian airspace lockdown and the impact of inflation on demand and costs.

We changed our guidance slightly, as according to our new estimate, in addition to the significant growth in revenue, we also estimate that the full-year comparable operating result will improve significantly from 2022. However, we do not believe that we will yet reach the levels of 2019 for either figure.  

Q&A

We have collected a few of the most-asked questions from Thursday, together with our answers below.

What explained the clearly better Q1 comparable operating profit than the consensus?

Our revenue was boosted by continued strong demand in all our markets and limited capacity in the industry due to labour shortages. In addition, our revenue optimisation was clearly visible. However, the impacts of the closed Russian airspace were reflected in higher costs.

The impact of our cost reduction programme was visible, as our unit costs excluding fuel decreased by 3 per cent year-on-year. On the other hand, the high fuel price (cost impact EUR 40 million vs. Q1/2022) had an adverse impact on our result.

Your net profit also continued to be profitable. What is the explanation behind this?

The result before taxes was negative, but the recognised income taxes, which were mainly related to changes in deferred tax assets, raised the result back to black. These deferred tax assets are explained by some temporary differences that had not been recognised in the financial year 2022.

You are quite sure of a strong summer, but more cautious about the development of demand after the summer. Why?

Based on our booking data, we can already see that the summer will be very busy and strong in terms of sales. However, the outlook for the rest of the year is typically weaker at this time of year. Further, given the prevailing economic uncertainty and the fact that inflation has still not subsided, we cannot truly say how demand will develop after summer.

Is there any new news regarding the opening of China?

Domestic travel in China has already increased, but international traffic is only just opening. On the other hand, the good news during the last few days about abandoning PCR tests and allowing group travel are positive.

We are closely monitoring the development of demand with the aim of increasing flights to Shanghai and Beijing when the time is right. China differs from our other markets in that there is no level playing field because Chinese operators fly over Russia. At the same time, we are seeing good demand in many other markets.