Finnair Q2 2022 results and Q&A
Finnair's Q2 was overshadowed by an uncertain operating environment and historically expensive fuel; however, demand began to normalise in several markets.
Erkka Salonen, Director, Investor Relations
We published our Half-year report yesterday. Despite the release in mid-July, our press conference and analyst call gathered quite a few participants, so our warm thanks to all those who participated.
Q2 was characterised by the same themes as Q1, but they were more pronounced. Overall demand for air travel continued to strengthen, and Finnair’s passenger numbers increased, especially in Europe and the United States. On the other hand, the fuel price was at a historically high level, and Russian airspace remained closed throughout the quarter. The strong demand was reflected in the operating cash flow of 182 million euros, which was even better than in the corresponding period of 2019, but the result remained strongly negative as the comparable operating result was -84 million euros. During the quarter, the negative cost effect of the fuel price was a whopping 126 million euros year-on-year. In addition to the increased price, the impact of a strengthened US dollar was reflected in our fuel bill.
Our revenue increased to 550 million euros, because all product groups, i.e., passenger traffic, ancillary, cargo and travel services, grew significantly year-on-year, and with the exception of cargo, the growth continued compared to Q1 2022. Thanks to the strong demand, Finnair was able to raise its ticket prices to cover the increased costs, though with record high fuel prices, it was impossible to pass through 100% of the increase in costs.
Travel, especially to North Asia, remained limited due to restrictions implemented to address the COVID-19 pandemic. Compared to the corresponding period of 2019, the capacity of our Asian traffic was only about 30% of measured in ASKs (the Great-Circle distance-based ASKs do not take into consideration longer routings caused by the closed Russian airspace). Although ticket prices in Asia developed positively due to limited market capacity, longer routings due to closed Russian airspace increased fuel and staff costs. This had a significant impact on the profitability of Asian routes, although strong cargo demand continues to support them.
During the quarter, we withdrew 290 million euros of the 400-million-euro capital loan granted by the Finnish government, which is recognised as equity. With the drawdown, our gearing decreased, because our cash funds strengthened to almost 1.6 billion euros. However, our equity ratio remained unchanged quarter-on-quarter because the result of the period burdened the equity almost as much as the raised capital loan. In addition to the above-mentioned factors, the result was affected by financial expenses that increased due to the strengthened US dollar and the write-down of deferred tax assets, as there is increased uncertainty regarding the utilisation of tax losses accumulated during the pandemic.
The confluence of the COVID-19 pandemic, the war in Ukraine, volatility in energy prices, foreign exchange rates and inflation expectations – together with the development of the global economy – make forecasting Finnair’s operating environment and competitive landscape challenging. We estimate that this uncertainty will continue, and we are therefore preparing a new strategy to improve our profitability and strengthen our financial position, as we indicated that our comparable result for 2022 will be significantly negative for a third consecutive year. Our goal is to announce the new strategy in the autumn of this year.
We have collected a few of the most-asked questions from Tuesday, together with our answers below.
Why did the comparable operating result fall short of analysts' forecasts?
Travel demand was strong as expected. Cargo also continued its strong performance, although cargo revenue fell short of Q1. However, historically expensive fuel, combined with the strong US dollar, burdened the result. The result was also negatively affected by exceptional items of c. EUR 10 million euros, which were mainly related to staff.
What kind of impact has inflation had on demand and, on the other hand, on ticket prices?
The pent-up demand has materialised since the beginning of summer, so demand is currently strong in several markets. People want to travel after the long break due to COVID-19, and they are also ready to pay. This was visible in the higher ticket prices towards the end of the quarter, which slightly eased the cost pressure.
However, it may well be that demand will soften at least to some extent by autumn because high inflation affects customers' spending habits. As stated, the effect of inflation on both demand and costs creates uncertainty in Finnair's operating environment.
Why is the company's fuel hedging ratio at such a low level, even though the price is historically expensive?
The hedges must be done in advance and they create costs, too. In other words, hedging for this summer should have been done at the beginning of the year, when the omicron variant was booming. As the development of demand was uncertain back then, there was a risk of excess hedging. Many airlines, including Finnair, suffered from the expensive excess hedging at the beginning of the pandemic, because capacity and fuel consumption suddenly dropped to almost zero.
On the other hand, the development of fuel prices has been very volatile during the pandemic. Obviously, we monitor the price development non-stop and strive to optimise related costs.
You are preparing a new strategy. What kind of changes can we expect?
Renewing the strategy starts from the network because it creates the basis for an airline's operations. It is followed by an update of the fleet plan. When the base created by both the network and fleet is in good condition, new revenue and income streams, as well as cost structures and balance sheet, will be examined. It is already clear at this stage that we need further cost savings and this requires constructive cooperation with various stakeholders.
Our thorough strategy work started in the spring will be completed during the autumn. We will publish the results once the work is completed.