China demand slowdown feeds Finnairs gruesome traffic downturn

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Finnair is today embarking on talks with its staff with a view to personnel reductions and probable cutbacks of European capacity by 7-10%. About 500 jobs are due to go. The move follows this week’s publication of May-08 traffic figures, which CEO, Jukka Hienonen, described as “gruesome”.

Perhaps of most concern is the carrier’s description of the key reasons for this. Inevitably, fuel prices are a major concern, with estimated 2008 costs rising by EUR160-180 million over 2007. But it is the slowdown in headline demand that sounds warning bells: “demand has decreased and this decrease has accelerated at such a rate in the past weeks that together with the price development of fuel, Finnair's result-making capability has significantly weakened”, the airline announced yesterday.

Finnair last week commenced non-stop service to Seoul and had already greatly increased capacity on both Asian (ASKs up 38.3%) and North Atlantic (up 19.2%) routes over May-07. Although passenger load factors remained nearly stable on the North Atlantic, at 78.2%, the Asian markets’ load factor slumped by 10.5%.

Within Europe, despite more modest year on year capacity increases (5.5%), passenger load factors fell 6.7%, to an ugly 61.7%.

Network operations have their good and bad sides. When demand on long haul feeders is strong, the system feeds through nicely to Finnair’s 40+ European routes, but the other side of the coin is that a slowdown in one route group can pollute the remainder of the airline’s system – as Finnair reported: “demand has dropped especially on Chinese routes and it is also reflected on European and domestic traffic.”

The causes of the quiet Chinese market may hopefully be temporary, with European outbound affected by the “ambiguity” concerning the massive earthquake in China’s south and Chinese outbound limited by government restrictions on travel. But demand is also slowing in the Indian market.

The new Korean market is expected to generate strong inbound flows to Europe, with a good business content and the coming summer season should help. But that is unlikely to compensate for the bigger and established markets and European feed will suffer.

Finnair has been a highly successful proponent of the northern European gateway operation, distributing into short haul routes and vice versa. As a relatively low cost sixth freedom operation, it should be reasonably well placed to weather a downturn. This will depend on how effectively it can reduce costs, without disturbing the network dynamics.

But, with its recent high levels of added new capacity, the carrier would probably have preferred that the good times lasted another few months at least.

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