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CAPA Live June: Finnair -"back to pre-COVID levels in 2023"

Analysis

Talking at the CAPA Live on 9-Jun-2021, Finnair CEO Topi Manner spoke with CAPA’s chief financial analyst, Jonathan Wober. Some of the key highlights can be found verbatim below.

Some quotes:

- It is frustrating that the travel restrictions are so stringent in Finland

- In terms of capacity, ASKs, we will come back to pre-COVID levels in 2023

- We certainly are focused on the upsells, people from economy moving to premium economy

- Freedom of movement is one of the founding pillars of the European Union, and now that is not working

- We deferred delivery of three A350s by a couple of years

- Our long long-term targets related to CO2 emissions are reaching carbon neutrality in 2045

- Until the end of '25, there will be real, tangible reductions (in emissions), but in that time frame offsetting, European emission trading, will be playing a bigger role

- We will turn around the whole land side of operations including reducing 30% of staff headquarter functions

- We have been raising EUR2.6 billion of new debt and equity

- Our hub model...is the very core of our strategy of connecting Europe and Asia

- We are a happy oneworld member...we are in talks with Juneyao Airlines of a joint business

- We are becoming more agile, we are becoming more nimble

JW: I just want to start by asking about the current situation with regard to Finnair, capacity, traffic, etc. You've been operating at very low levels of capacity. The current week, according to data from OAG and CAPA suggests that you're at around about 12% of 2019 seat levels in the first week of May, thereabouts. Europe overall is about 40%, so you're considerably below the European average. Is it frustrating to you because Finland seems to be quite low on infection rates and quite high on vaccination rates, but why can't your government get more connectivity negotiated, and why can't you operate at higher levels?

TM: It is frustrating that the travel restrictions are so stringent in Finland. We currently operate approximately 15% of our capacity, and that includes the Asian long haul flights that we started already last summer. Currently we are flying to Tokyo, Seoul, Shanghai, Bangkok and Hong Kong. That long haul traffic is greatly supported by our cargo demand.

“It is frustrating that the travel restrictions are so stringent in Finland, and that is certainly impacting our operations. As of now, we operate approximately 15% of our capacity, and that includes the Asian long haul flights that we started already last summer.

"I mean, currently we are flying to Tokyo, to Seoul, to Shanghai, and to Bangkok and Hong Kong. And that long haul traffic is greatly supported by our cargo demand. Now for this summer, we have been releasing what I would call the first release of our summer network, and that includes that we plan to fly to something like 60 destinations, and especially European short haul will be on the menu. And we also look forward to increasing flights to North America, so increasing frequencies to New York and also introducing Chicago and Los Angeles.

“Pre-crisis we flew 130 destinations. So about 60 destinations means that we will have relatively wide network, but then clearly less frequency and a clearly smaller gauge than we would usually have. So therefore the capacity for the summer is likely to be a little bit smaller than the 60 destinations actually would indicate.”

JW: And load factor has been very low, the load factor figure for April that I saw was 26%. So even the capacity you've been adding, you're nowhere near filling. Is there an argument for actually making the capacity even less than you have done?

TM: We have been very stringent about flying cash positive, so we are better off flying than not flying. It is clear that especially with the long haul traffic, with the exemption of Shanghai, we have been effectively in low teens in terms of load factors, and that is where the cargo demand steps into play

“We have been very stringent about the flying being cash positive so that we are better off actually flying than not flying. So therefore we have optimised that, but it is clear that especially with the long haul traffic, with the exemption of Shanghai, we have been effectively in low teens in terms of load factors, and that is where the cargo demand steps into play, and that has been supporting the cash positive flying that we have been doing.”

JW: So I come back to cargo as well, but you’re talking about the long haul and you’ve talked about the routes into the Asia region and particularly to China. And obviously Finnair’s core strategy in many ways has been linking Europe with destinations in the Asia region. And I guess before COVID, Europe and Asia where the biggest proportions of your traffic, your revenue, with North America and domestic Finland a smaller contribution. But at the moment, obviously, domestic is the biggest area, followed by short haul Europe, and long haul has been very small. But the prospects of a return to that strategy of linking Europe to Asia, when do you think you might get back to something close to the pre-COVID levels?

TM: In terms of capacity we will come back to pre-COVID levels in 2023. We see that there will be probably a bit of delay in terms of Asia really opening up, but we are steadfast in our commitment to our Asia strategy

“I think that our estimate is that, in terms of capacity, ASKs, we will come back to pre-COVID levels in 2023, so in a couple of years from now. And on the overall, if you look at Finnair as an airline, as you stated, as an airline, we are all about connecting Europe and Asia via the short Northern routes, via our Helsinki hub. And we have a small domestic market, and that is certainly impacting our figures as of now.

"We also see that there will be probably a bit of delay in terms of Asia really opening up. The vaccination coverage in Asia is proceeding more slowly than it is in Europe. And this is basically causing the delay. So the demand will start from European short haul, and as stated, North America most likely will be rather important as a long haul destination for us during the next six months.

“Over the medium term, over the long run, we are steadfast in terms of our commitment to our Asia strategy. If you look at how the world is developing after the pandemic, it seems that the big Asian economies are coming out as winners out of the pandemic, driven by China. And the shift of the world economy is more and more moving toward Asia, and the urbanisation as a mega-trend means that there will be new megacities in Asia, most notably in China, for aviation, for Finnair to serve. And I think that these mega trends will be greatly supporting us over the long run. So we are committed to our strategy.”

JW: To what extent is premium traffic important to you and therefore currently a big problem to you, because premium traffic isn't really operating very much?

TM: So we prepared for some of the corporate travel not coming back. But we do think that premium leisure will be increasingly important for us as a segment, going forward

“Yeah, as an airline, we are a little bit less exposed to corporate travel than some of the others, for example, European flight carriers. Back in 2019 corporate travel constituted 20% of our passengers, 30% of our revenue. So we are getting ready for some of that to be not coming back that soon, so effectively corporate travel seeking a new baseline and then starting to grow from that. But we do think that premium leisure will be increasingly important for us as a segment going forward, and we are getting ready to introduce a new premium economy gapping class in our long haul fleet during the next years.”

JW: Okay. Do you see demand for that coming more from economy passengers trading up or business class people trading down?

TM: We are focussed on the upsell, people moving from economy to premium economy. After the pandemic, we can clearly see that there seems to be a willingness among customers to pay a little bit extra.  Customers will be more focused on service and quality and personal space in the aircraft as part of the inflight experience

“I think that we will be seeing a little bit of both, but we certainly are focused on the upsells, so people from economy moving to premium economy, and when we look at now the early indications, after the demand coming back after the pandemic, we can clearly see that there seems to be a willingness among customers to pay a little bit more extra.

"So customers will be more focused on service and quality and personal space in the aircraft as part of the inflight experience. And as stated, these trends are supportive of our hypothesis of premium leisure being very important going forward.”

JW: Do you expect differences in terms of destinations for where the demand for premium leisure will come from?

TM: “We don't have a very firm hypothesis on that one yet. As stated, it's very early days for us, and we need to see the demand come back more before we can be more firm on that one, but we certainly think that premium leisure will very important for our trunk roots in terms of connecting Europe and Asia.”

JW: You mentioned cargo earlier on, and obviously cargo has been doing a lot better than the passenger side of the business for everybody across the industry. So what's the performance of your cargo business been, and do you think there'll be any lasting benefit, a residual positive impact on your cargo business post-pandemic?

TM: Cargo has constituted more than 50% of our revenue during the pandemic. Pre-pandemic cargo was just 7%. Sustainability and CO2 emissions are becoming more and more important for our cargo customers. We have a sustainable competitive advantage between Europe and Asia with the short northern route, that is not only the shortest in terms of travelling time, but also the shortest in terms of kilometres and thereby generating less CO2 emissions

 “Cargo certainly has been a very important part of our business during the pandemic months, constituting more than 50% of our revenue during the pandemic. We have been, for example, flying more than 2,000 cargo-only flights with our A350 equipment. And as stated, cargo has been greatly supportive to our long haul passenger flights. And what we see as a trend in the cargo market is that the sustainability and CO2 emissions are becoming more and more important for our cargo customers.

"And there we think that we have a sustainable competitive advantage between Europe and Asia with the short Northern route, that is not only the shortest in terms of travelling time, but also the shortest in terms of kilometres and thereby generating less CO2 emissions. We think that there's a long term opportunity for us to grow the cargo business.”

JW: So looking forward again, you mentioned that you think a pre-pandemic capacity will come back in, I think you said 2023. What do you think will be the progress of your capacity just for the rest of this current year?

TM: The European digital green certificate that will come into force in July will be a turning point, and after the introduction that will open travel and demand will gradually come back

“Well that remains to be seen. It's, of course greatly depending on the vaccination progress globally. In that one, I think that we have seen now the vaccination speed picking up, effectively 100 million vaccinations being given across the world in three days. Now the threshold of 2 billion vaccinations being passed effectively these days.

"And then of course the travel restrictions will play a big, big role. And there we have been seeing slowness, especially within EU and European countries, and that is holding us back as of now. But we see that European digital green certificate that will come into force in July will be a turning point in this one, and after the introduction of that, after member states within the EU have been adopting that, that will be opening to travel and demand will gradually come back.

“If you look at European Union as a union, freedom of movement is one of the founding pillars of the Union, and now that is not working. So of course we need to restore those freedoms and at the same time take care of the health-related safety with adequate precautions like vaccinations and testing. And then only the traffic can come back.”

JW: Do you fear at all that there will never be a full return to a genuinely single market in Europe, in aviation? Because governments have now seen they can, and need, to take steps sometimes to protect their own borders, the health of their own citizens. Will there be future opportunities or excuses or reasons for them to take similar action, and so the fragmentation of the single market may be permanent in some ways?

TM: I'm an optimist, so I think that eventually things will come around and freedom of travel and freedom of movement within EU will be restored

“Well, I'm an optimist in this one, so I think that eventually things will come around and freedom of travel and freedom of movement within EU will be restored. Of course, I stated that means that the virus needs to be controlled first, and it most likely will be taking a bit of time, and that is why we, as the whole aviation industry, is estimating that the full recovery will take time.”

JW: Moving on to your fleet and fleet plans, looking at data we have in the CAPA fleet database, you currently have 26 of your aircraft in service, including... Or 50 if you include your regional fleet, and 33 still inactive. So excluding the regional fleet, there's a majority of the aircraft still inactive, and you only have three A350-900s on order. As far as I can see, that's your only order. What's the prospect for more of the fleet returning to service, and then what about in the longer term? How has the pandemic changed fleet plans going forward?

TM: We are gradually returning many aircraft from long term parking and getting ready to put them into service. We deferred delivery of three A350s by a couple of years.

“We'll start with the immediate term. I mean, as you said, it stated we have now had many of our aircraft in long-term parking, also in Southern Europe in more warm climate, and now we are gradually returning them back home and getting ready to put them into service.

"We also renegotiated our order of A350s, deferring three A350s by a couple of years, with Airbus, so that is one of the measures that we have been taking related to fleet. Pre-pandemic we were also planning a narrowbody campaign, narrowbody renewal, and that we have now postponed by optimising our narrowbody fleet, extending the life of the aircraft. So these are some of the measures that we have been taking with respect to our fleet.”

JW: On the narrowbody fleet, I don't have the number in my head, but I think your average fleet age there is into double figures in terms of number of years of average age. Is that a problem? I mean, particularly with environmental issues becoming much more important.

TM: We have been going very deep into looking at how can we extend the life of each narrowbody aircraft – there is an implication related to our sustainability agenda so we will need to use carbon offsetting little bit more than we anticipated pre-pandemic.

“It's not a problem for us. We have been going very deep in this one, looking at aircraft by aircraft how can we extend the life of the aircraft? And we have flexibility on that one so we can do it.

"Of course, there is an implication related to our sustainability agenda. We are as committed as ever to our carbon neutrality target of reaching carbon neutrality in 2045. But that means that we will need to emphasise different levers little bit differently. And in the short run, that means that we will need to use carbon offsetting little bit more than we anticipated pre-pandemic.”

JW: Carbon neutrality in 2045, that puts you ahead of most of the rest of the industry. So when did you make that decision, and sustainable aviation fields got to be a key to that, but long haul it's a lot harder than short haul, and you're very much dependent on long haul in the long run. How are you going to achieve that?

TM: We have one of the most modern long haul fleets out there in the form of our Airbus 350 fleet. Our long long-term targets related to CO2 emissions are reaching carbon neutrality in 2045. And also reducing our carbon emissions by 50% by end of 2025, which is very ambitious. Our road map to 2045 is clearly focusing on levers where we can actually reduce real CO2 emissions

“Absolutely. Well, related to long haul, we will need to remember that we have one of the most modern, long haul fleets out there in the form of our Airbus 350 fleet. We were the launch carrier in Europe

"But as stated, our long long-term targets related to CO2 emissions are reaching carbon neutrality in 2045. And also reducing our carbon emissions by 50% by end of 2025, which is very ambitious. And for this purpose, we will need a full range of tools, the whole toolbox. Anything from fuel efficiency by reducing the weight of the aircraft, and obviously sustainable aviation fuels, intermodality in the very short domestic routes, carbon offsetting as stated, European emissions trading, and then – a little bit later in the game – also new technology, more fuel efficient technology in terms of aircraft.”

JW: Well, isn't it the case that we need to have completely different propulsion systems? I mean, burning carbon fuels, fossil fuels, isn't going to work at all in the long run. Even sustainable aviation fuels aren't going to meet the full need.

TM: “What we are seeing currently is that there's massive stimulus packages all around the world to infrastructure, in US, in China, also in Europe. And some of that stimulus money is going to environmental initiatives like scaling up hydrogen-based electric fuels. And this is something that we think that will be eventually, over the long run, making those fuels more affordable to aviation, and that will be having a systemic impact on carbon emissions in aviation. So that is actually an example of something that has been speeded up by the pandemic.

"But of course it's a long journey to carbon neutrality in aviation, and the laws of physics are against us. And yes, you're right that, for example, propulsion engines will need to be considered. So electric flying in short distance flying up to one and a half hours in 10 years or so. Yeah, it could be one tool in the toolbox to use.”

JW: I mean, does it concern you that in the meantime... Carbon neutrality, in theory you could obviously achieve carbon neutrality by continuing to burn fossil fuels and offsetting it all, but perception-wise that doesn't go down very well. So your 2045 target is that net neutrality, but is that primarily really reducing your burning of fossil fuels, or is it still a big offset element in it? Do you have a road map to that 2045 and how it will be achieved?

TM: “We have a road map to both our target of carbon neutrality in 2045, and then to the target of reducing 50% of the emissions in at the end of 2025. And you're absolutely right that the world cannot offset its way out of the climate crisis.

"So real and tangible CO2 reductions will need to take place. But here the timeline is very important. So when we look at our road map to 2045, that road map is clearly focusing on levers where we can actually reduce real CO2 emissions. When we look at the more short run, now in four years up until end of '25, there will be real, tangible reductions, but in that time frame offsetting, European emission trading, will be playing a bigger role.”

JW: And in the meantime, obviously in the pandemic there's been a lot less flying, so in a sense, the pressure has eased a little bit, but the public sentiment in recent years seems to have changed quite rapidly. So this whole flight shame movement which started in some of your neighbouring Nordic countries. Is there a concern that when the recovery really gathers pace, people are just going to say, "No, the only answer is to stop flying." Is that going to act against the recovery?

TM: The pandemic has shown us that aviation has a great economy and social value. There’s a more balanced understanding that sustainability means you need to address all three pillars – environmental, social and economy pillars

“No, I think that... I mean, the pandemic has shown us that aviation has a great economy and social value to people and to societies. And I think that there's a more balanced understanding that sustainability actually means that you will need to address all three pillars. You will need to address the environmental pillar, you will need to address the social pillar, and you will need to address the economy pillar.

"So we think that the environmental consciousness certainly will be there after the pandemic, and that is why we have continued very determinedly our sustainability initiatives throughout the pandemic. But, we think that there will be a more balanced view to aviation benefits after the pandemic among consumers. And there, of course, airlines and the whole aviation industry has a big role to play in terms of cementing that understanding among customers.”

JW: Indeed. And just moving on, because I'm conscious of the time we have left and there are other topics I want to cover. Another aspect of sustainability is financial sustainability. Before the pandemic aviation, as a global industry, didn't consistently meet its cost of capital. And obviously in the pandemic, there've been many airlines that have had to rely on state aid in order to survive. I mean, isn't that a shocking indictment of the industry, that it can't really generate enough return on capital even in the good times? So we bail them out to keep going through the crisis, but then what's the future back to a situation where airlines can't cover the cost of capital sustainably anyway?

TM: We are restructuring the company and resetting the whole of our cost base. We will turn around the whole land side of operations including reducing 30% of staff headquarter functions and moving 100% of data to cloud and changing our IT infrastructure, which is something for a 98 year old company with a lot of legacy systems

“But that's obviously a very big question and something that the aviation industry needs to tackle in the upcoming years. And that is certainly one of the reasons why we are restructuring the company, and we are basically resetting the whole of our cost base.

"I mean, our flight operations, the fact that we fly from A to B, and that very safety-driven part of our business will remain intact. But other than that, our land side of operations, we will basically turn around the whole company.

"To give you a couple of examples, we are reducing 30% of our staff headquarter functions, completely chang[ing] our ways of working. We are renegotiating every supplier deal in the company. We are changing our IT infrastructure. We, for example, moved 100% of our data to cloud. So the cloudification rate of Finnair is 100%, and this is quite something for a 98 year old company with a lot of legacy systems. So while the airlines will need to do a lot in order to restore profitability in order to pay back the accumulated debt during the pandemic and eventually to come above cost of capital levels in terms of profitability.”

JW: You've raised significant amounts of additional capital, both debt and equity, from the government, as well as from the capital markets. Will you need more before the recovery is completed, or do you have enough to keep going?

TM: We think we have a way through the pandemic. We have been raising EUR2.6 billion of new debt and equity - EUR500 million in terms of new equity as part of our rights issue, EUR600 million as hybrid capital, and the rest of it in terms of debt

“We certainly think that we have now a way through the pandemic for ourselves. As you stated, we have been doing extensive recapitalisation. We have been raising EUR2.6 billion of new debt and equity. 500 million in terms of new equity as part of our rights issue, 600 million as hybrid capital, and the rest of it in terms of debt.

"And this debt, as stated, it needs to be paid back, and for that one, we need a better profitability going forward. We have benefited from the fact that we have the state of Finland as a majority shareholder. So during times like this, having a strong majority shareholder is a benefit. They have been participating on pro rata basis to our rights issue, and they have been also granting us a 400 million hybrid law.”

JW: Moving on then, do you have any concerns that the effect of the pandemic on the hub model and the connecting model is going to be a negative one, in that people don't necessarily want to take more than one flight, they want reduced amount of contact, they want reduced time in airports, all of that kind of thing? Is that a problem for you?

TM: Finavia is doing a major investment to extend and renew Helsinki Airport. It will be a brand new airport with great customer experience, with connecting times as low as 40 minutes. Helsinki is not a congested hub, which customers want to avoid crowded connections

“We certainly believe in our hub model, and that is the very core of our strategy of connecting Europe and Asia. And our airport operator Finavia is currently doing a major in investment, more than EUR1 billion investment to extend and renew the Helsinki Airport.

"It will be a brand new airport and with great customer experience, and connecting times as low as 40 minutes. So we think that this will be greatly supportive of our strategy. And also Helsinki is not one of the most congested hubs in Europe, and I think that that will be playing to the favour of the likes of Helsinki, because customers most likely also want to avoid the most crowded hops in terms of connecting, going forward.”

JW: That was certainly part of what I was getting at. And then again moving on, because we are running out of time, but the importance of partnerships and alliances, whether it's oneworld or whether it's bilateral alliances you have with individual airlines, are they becoming more important or less so, do you think?

TM: We are a happy oneworld member and participate in two important joint businesses – one in the traffic between Europe and Japan, where we were the biggest before the pandemic, and on the Atlantic. We are currently in talks with Juneyao Airlines for a joint business arrangement

“For us, they will be become more important. So we are a happy oneworld member, and as part of oneworld we are participating in two important joint businesses, Siberian joint business together with Japan airlines and BA and Iberia in the traffic between Europe and Japan, and there we are big.

"We were actually the biggest European airline in that traffic category before the pandemic. We're also participating in the Atlantic joint business, but there we are smaller. As of now, we are in talks with Juneyao Airlines of a joint business. We have a letter of intent and we hope to be moving forward with those talks and thereby improving our presence in China. Juneyao is a Shanghai based airline roughly the size of Finnair.”

JW: You do look to be well positioned with joint business arrangements, once the markets open up again. Okay, we're coming to the close. I'm just going to finish off with one last question, which is: what new opportunities has the crisis presented to Finnair?

TM: “One is the one that I already covered, so we are restructuring the company, we are resetting our cost base. And that is certainly very important. Another is that we want to position ourselves as a modern premium airline, also very much focusing on the premium leisure segment. And then again, I mean, in the midst of the pandemic, in the midst of this radical uncertainty, the environment has basically forced us to be very agile and collaborating seamlessly across units, across teams in the organisation.

And therefore we are becoming more agile, we are becoming more nimble, and I would say that culturally, after the pandemic, we are stronger, and we are stronger in spirit.”

JW: Okay. Thank you very much. I wish we had more time. There's so many things to talk about, and Finnair is certainly an airline that projects a global footprint that's much bigger than the population of the country in which it's based, and that speaks to a successful management in the past and ongoing in the future, I hope.

Thank you very much, Topi, for joining us, and thank you everybody for watching. Bye-bye. 

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