Finnair Group interim report 1 January – 31 March 2013

Deputy CEO Ville Iho:
“Finnair’s 90th anniversary year has started well. In January–March, our traffic measured by revenue passenger kilometres grew by over five per cent year-on-year, despite capacity remaining at the level of the comparison period. The demand for passenger traffic developed well, particularly in our key markets of Asia and Europe, and our load factor was nearly 80 per cent. Our strategy works and its implementation is progressing according to plan.

The first quarter of the year is the most challenging for Finnair because of the seasonality of demand. Our operational result improved year-on-year but showed a loss of 17.7 million euros. The business environment in our industry continues to be characterised by intense competition, cost pressures and dramatic structural changes. It is important that we continue our determined effort to improve Finnair’s competitiveness by seeking growth and reducing costs. By the end of March, we had achieved permanent annual savings of 119 million euros, out of the total target of 140 million euros we set in August 2011 for our structural change and cost reduction program. Despite the good progress made in the implementation of the program, achieving the overall target will require a great deal of work and difficult decisions. We are currently carrying out employee consultations concerning the restructuring of Technical Services organisation. As a part of the additional cost reduction program of 60 million euros announced in October 2012, we seek significant savings in personnel costs. Our objective is to achieve the level of Finnish market wages and labour costs in the industry, primarily by implementing changes to wage structures and working hours. The measures required to ensure Finnair’s success are difficult, but we believe we can achieve this goal in cooperation with our personnel through discussion and negotiation. Finnair is committed to improving its productivity and developing its operations. The first quarter has given us a solid foundation for building our future. We face cost challenges, but we also have a clear direction and a growth story: We aim to double our revenue from Asian traffic by 2020 and we are currently preparing to launch two new Asian routes in June. Our outlook for the rest of the year is unchanged. The second quarter will see Pekka Vauramo take the lead at Finnair. His appointment as Finnair’s new CEO as of 3 June 2013 was announced in April. I am pleased to join everyone at Finnair in welcoming Pekka Vauramo to build the Finnair of the future.”

Business environment

There were no significant changes in Finnair’s operating environment in January–March. European network carriers, Finnair included, continued to implement structural change and cost reduction programs to improve their competitiveness in the prevailing tight competitive situation. Despite the uncertain European economic situation, passenger traffic in Europe continued to grow. Combined with the conservative stance airlines have taken toward increasing their capacity, this led to improved load factors. Passenger traffic between Asia and Europe also grew in the period under review. The price of jet fuel – the largest individual cost factor of airlines – decreased in March but remains at a historically high level. During the period under review, the Japanese yen depreciated substantially against the euro as a result of stimulus measures implemented by the Bank of Japan, and at the same time the euro depreciated against the US dollar. The yen is an important income currency in Finnair’s operations, while the dollar is a significant expense currency. The overall industry outlook remains uncertain. The situation on the Korean peninsula and bird flu in China have thus far not had an effect on the demand for passenger traffic.

Progress of the structural change and cost-reduction programs

The implementation of the structural change and cost-reduction programs commenced by Finnair in August 2011 and October 2012 continued in the period under review. Finnair believes that the full target of each program will be reached according to schedule.

The aim of the program that began in 2011 is to cut Finnair’s costs permanently by 140 million euros by the end of 2013. During the review period, the main focus of cost reduction efforts was on the personnel and maintenance cost categories, which lagged behind the original objectives in 2012. With regard to fleet, sales and distribution, and catering costs, the original objectives were already exceeded in 2012. At the end of March, Finnair had achieved total cumulative annual cost savings of 119 million euros in the categories included in the initial cost reduction program.

The aim of the supplementary cost-reduction program commenced in October 2012 is to reduce the cost level permanently by an additional 60 million euros by the end of 2014. We are aiming to achieve significant cost savings in personnel costs and target the level of Finnish market wages and labour costs in the industry, primarily by implementing changes to wage structures and working hours.

The outsourcing decisions implemented as part of the initial structural change and cost-reduction program have allowed Finnair to move a significant share of fixed costs to volume-based variable costs. The cost-reduction measures were also reflected in the decrease of airline unit costs excluding fuel. Nevertheless, it is necessary for Finnair to continue to reduce costs. High fuel prices, intensifying competition and significant fleet investments in the coming years require a substantial improvement in profitability. The long-term return objective set by Finnair’s Board of Directors is an operating profit margin of six per cent.

Financial performance in January–March 2013

Finnair’s turnover in the period under review was largely unchanged from the corresponding period in 2012, totalling 593.2 million euros (591.8). Capacity grew by 0.8 per cent year-on-year. Operational costs excluding fuel costs totalled 446.3 million euros (452.6). Fuel costs, including hedging and costs incurred from emissions trading, were 169.4 million euros (167.6). Personnel costs declined by 9.9 per cent to 102.1 million euros (113.4) due to the personnel reductions implemented after the comparison period, but part of the costs previously included in personnel costs are now seen in the costs for outsourced catering and maintenance services. Due to the structural change and cost-reduction program, euro-denominated operational costs decreased somewhat from the comparison period, totalling 615.8 million euros (620.2). The operational result, which refers to the operating result excluding non-recurring items, capital gains and the change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves, totalled -17.7 million euros (-23.5). Finnair’s income statement includes the change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves that took place during the period under review but will fall due later. This is an unrealised valuation result based on IFRS, where the result has no cash flow effect and which is not included in the operational result. The change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves amounted to 5.3 million euros (9.2). Non-recurring items stood at -1.4 million euros (-4.4). The operating loss decreased, totalling -13.8 million euros (-18.7). The result before taxes for January–March was -18.7 million euros (-24.7) and the result after taxes was -15.8 million euros (-19.3). Unit revenue per available seat kilometre (RASK) increased by 0.2 per cent on the comparison period to 6.06 euro cents (6.04). Unit cost per available seat kilometre (CASK) rose by 0.9 per cent to 6.57 euro cents (6.51). Unit cost excluding fuel (CASK excl. fuel) decreased by 0.6 per cent to 4.45 euro cents (4.48).

No changes in outlook for 2013

The uncertain economic outlook in Europe, weakened consumer demand and slower growth in Asia increase the uncertainty of the future development of air traffic. Fuel costs are expected to remain high in 2013 as well, and the demand for air traffic is estimated to grow moderately.

Finnair estimates that its turnover will grow in 2013. Unit costs excluding fuel (CASK excl. fuel) are expected to decrease compared to 2012. Finnair estimates that its operational result will show a profit in 2013.