Finnair Oyj (OTCPK:FNNNF) Q2 2024 Earnings Conference Call July 19, 2024 6:00 AM ET
Company Participants
Erkka Salonen - IR
Turkka Kuusisto - CEO
Kristian Pullola - CFO
Conference Call Participants
Jaakko Tyrväinen - SEB
Mateo Salcedo Lopez - ODDO BHF
Joonas Ilvonen - Evli
Erkka Salonen
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.
Turkka Kuusisto
Thank you, Erkka. Good afternoon and a warm welcome to our Second Quarter's 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 soon for three months and maybe it goes without saying that I'm 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 narrowbody aircrafts that were deployed to a so called wet leases out arrangements with the British Airways and that capacity was deployed to our own network in the end of the first quarter.
Therefore, the available seat kilometres increased by 6% during this quarter and in total by 8% if we also factor in the other wet leases arrangements that we have. What we didn't see during the quarter was 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 EUR44 million versus the record quarter [EUR66 million] (ph) 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 narrowbody 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 midsummer.
Also, there were some challenging weather conditions, especially in late April when we had some snow plies also in the Helsinki area, so therefore, the on-time performance was lower than expected. But all-in-all, with 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 EUR200 million investment scheme or project related to widebody fleet cabin renewal during the quarter and now all our widebodies are being refurbished. Right after the closing of the period, we opened a new Schengen lounge at Helsinki Airport that adds 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 a 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 EUR500 million. And also with these proceedings, we were capable of down-paying or 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 [Karico] (ph) remained strong and favorable throughout the quarter. And as already said, we can be satisfied when it comes to our ancillary revenues that increased by 34% in year-over-year.
And I want to 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 EUR10 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 operating cash flow stayed very strong EUR173 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 older loans and also paying this pension premium loan fully in advance.
The cash position of the company is aligned with our long term targets, close to EUR1 billion in cash at the end of the quarter. And in addition to that, we do have this revolving credit facility amounting to EUR200 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 multi-year 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 outmost 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 the changed route network and the closed Russian airspace.
When 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 risks associated with technology. We can comment that in the Q&A section if needed, but Finnair is 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 EUR3.0 billion to EUR3.2 billion and that again translates into a comparable EBIT range of EUR110 million up to EUR180 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 handing over back to Erkka. Thank you.
Erkka Salonen
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.
Question-and-Answer Session
Operator
[Operator Instructions] The next question comes from Jaakko Tyrväinen from SEB. Please go ahead.
Jaakko Tyrväinen
Good afternoon, gentlemen. It's Jaakko here from SEB. I could start with the question 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?
Kristian Pullola
Yes. Thanks for the question. 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.
Jaakko Tyrväinen
Okay. And could you comment anything on the kind of booking situation you are 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?
Kristian Pullola
No. So 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.
Jaakko Tyrväinen
Okay, very helpful. Thanks. 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?
Kristian Pullola
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 live 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 2023, 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.
Turkka Kuusisto
I would very much echo that. And maybe for an industrial 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% in year-over-year comparison is nothing dramatic, as Kristian already mentioned. So it's all about normalization.
Jaakko Tyrväinen
Okay, good. Then turning to your capacity guidance, which still remains at 10% for the full year, could you remind us how large share of this is capacity that is leased out? How many percentage points?
Kristian Pullola
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 wet leased narrowbody 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 into 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.
Jaakko Tyrväinen
Good. That's helpful. Thanks. The next one, I understand it's a bit of early days for the question, but perhaps looking a bit towards 2025, any comments on your capacity plans for that year? And are you still planning to grow capacity going to 2025? And if so, would you need new aircraft capacity?
Turkka Kuusisto
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 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 assessments and tactical level decisions when it comes to optimizing the capacity for the current demand.
Kristian Pullola
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.
Jaakko Tyrväinen
Thanks. Then a bit of a technical one on costs, especially on the maintenance cost line. Was there some surprising items during second quarter? And should we expect kind of a similar increase on that row in the coming quarters as well? So there was maybe a bit that second quarter last year was maybe 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.
Jaakko Tyrväinen
Okay. Good. Thanks. Then my final one, sorry to have them, so many. On today's news on the global IT issues, impact the growth -- impacting also air traffic. Do you have any first-hand information or estimate how this will impact your operations and flights over the coming few days?
Turkka Kuusisto
Yes, thanks. Great question and a very unfortunate situation. Finnair is not using that technology stack or platform in our own flight operations. So directly, we are not utilizing that technology. But when we are flying towards destinations and airports with which this technology is in use, that obviously then influences our flights as well. So we are continuously monitoring the situation and then potentially delaying some flights and then in the worst case, terminating some flights.
Luckily, our partner in Helsinki Base, Helsinki Airport, is not either using this technology, so we are on the safe side in Helsinki side, but obviously when you have tens of destinations, it remains to be seen what is the final effect.
Jaakko Tyrväinen
Okay, good. Thanks. That’s all from my side. I will leave the floor to other questions.
Operator
The next question comes from Mateo Salcedo Lopez from ODDO BHF. Please go ahead.
Mateo Salcedo Lopez
Yes, thanks for taking my questions. Maybe coming back on the yield, could you maybe give us how do they compare right now against 2019 levels? And we have seen also some of your peers saying that yields, especially to Asia are quite weak. Could you maybe give us a breakdown on how yields are behaving from one region to another, please?
Kristian Pullola
Yes. I think clearly so yields are still on a higher level than they were in 2019, but so our costs and so our fuel prices, inflation has been back in the system since 2019. And because of that, I think 2019 is less of a relevant benchmark as we go. Having said that, we do want to highlight that last year was now with the benefit of hindsight kind of really a strong year from a performance and yield point of view. Then when it comes to kind of regional performance on yields for us, North America and the Atlantic business has been strong relative to the past and expectations.
And maybe Asia and Europe has been a bit more on the weaker side. And I think that's true from an underlying demand point of view and it has impact both on volumes as well as on yields.
Mateo Salcedo Lopez
Perfect. Thanks. And then maybe just last question on your EBIT guidance. I know there is a huge range that you have given. Is it maybe because you're waiting something to happen? Or in the fourth quarter, like there is a lot of uncertainty over the winter period? Or is it more mostly regarding the summer period expectations? I'm just trying to get a color on why it's such a range.
Kristian Pullola
So first of all, there are, of course, multiple things that can have an impact on EBIT, both volume yield, as well as then fuel price, even if we are hedging fuel costs to a high degree. So in a way, the large range is a function of what if all of these factors point in the wrong direction. So one shouldn't think about it that the range is an expected value. It's like worst and best case if everything goes with or against us. And in that sense, I think the information value is in the midpoint of the guidance that we have provided.
And I don't think there is any exceptional uncertainty here that we are trying to signal with the broad range. We are in an industry which is volatile from time-to-time. We have some uncertainties on top of that. And then we are also being prudent when it comes to setting the range so that it would include almost all possibilities that we see.
Mateo Salcedo Lopez
That's very clear. Thanks a lot.
Operator
The next question comes from Joonas Ilvonen from Evli. Please go ahead.
Joonas Ilvonen
Hi. It's Joonas from Evli. Just following up on the unit yields question. As you said, the North America routes have been quite hot this summer, and I think that's the case for many other airlines as well. So what various risks in Europe have been relatively soft. So do you think that rather large difference that we now saw in this Q2 figures, because do you think that will like kind of harmonize towards the end of this year? Is it like a kind of -- can you maybe talk about the factors behind that, mainly driven by American tourists arriving to Europe and Europeans staying more in home? Can you talk about that dynamic?
Turkka Kuusisto
Thank you for the question. So we see a rather strong demand on all of our North Atlantic or North America routes for the time being and most likely, that is to continue. And then if we take the other reference point versus Europe, there we need to keep in mind that we especially allocated this new capacity or increased capacity to our domestic and European routes leading to lower load factors. So obviously difficult to predict for the future, but we anticipate that the North Atlantic traffic remains strong during the Q3.
Joonas Ilvonen
All right. So the pricing differences -- ticket prices are not that different when you take into account the load differences in load factors.
Kristian Pullola
And of course, the underlying dynamics here is, of course, that the North Atlantic business is a very competitive one. But as you said, everybody is doing fairly well in that market. So it must mean that the dynamic US Economy is having an impact on travel both to and from the US. And unfortunately, we can't say the same about the dynamic of the European economy. And that is kind of visible here.
Joonas Ilvonen
All right, thanks. And maybe another question. Can you comment on I mean, ancillary revenues, I would say, extraordinarily strong this time despite somewhat toughness in unit yields and load factors. So can you give any color on that?
Turkka Kuusisto
So that is a continuous effort when it comes to pushing for additional ancillary sales, and that has developed rather positively throughout the first half of 2024 in June, in May, we did see additional sales coming from buying of Finnair Plus or Avios points, so that was a seasonality towards the end of the reporting period.
Kristian Pullola
But I think, as Turkka says, it is fair to say that this is of course, a thing that we worked hard on for a longer period of time. We've kind of -- we've made the growth possible by structuring our products in a way where customers have a choice when it comes to what they want to have included on their travels. And now we are systematically training the organization to sell the offering. And it is good to see that this underlying work and the training is actually starting to show results.
Joonas Ilvonen
Okay. Thanks. That's all from me.
Operator
[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers.
Erkka Salonen
As there are no further questions, we shall conclude the session. So many thanks for the excellent questions and joining the call. We wish you a great day.
Turkka Kuusisto
Thank you.
Kristian Pullola
Thank you.