Finnair Q3 2022 results and Q&A
Positives: Q3 comparable operating result in the black for the first time in almost three years and the strategy work proceeds; negatives: net result still in the red, long journey ahead.
We published our interim report on Friday. The positive operating result after a long break was pleasant news, and it was great to see that there was so much interest in our results, as our events on Friday had good attendances. Thanks to everyone who was present at our headquarters or dialed in.
The trends of H1 2022 continued in Q3. Summer is seasonally the busiest time in the aviation industry, which was reflected in strengthened demand as well as increased ticket prices and passenger numbers, especially in Europe and the United States. Consequently, the total revenue increased clearly both year-on-year and quarter-on-quarter. On the other hand, the quarter was characterised by accelerated inflation, and the fuel price remained at an exceptionally high level. The negative cost effect of the fuel price was c. 125 million euros year-on-year.
Due to the COVID-19 restrictions and longer routings caused by the closed Russian airspace, travel to North Asia remained low, although at the end of Q3, e.g., Japan was opened. However, China's strict restrictions continue. Compared to Q3 2019, the capacity of our Asian traffic was only about 35% measured in Available Seat Kilometres (ASKs are based on the Great Circle distance and do not take into account the longer routings caused by the closed Russian airspace), so the challenges in our Asian traffic continue.
Strong demand and the actions we took to cut costs, improve sales and optimise profits were reflected in our comparable operating result (35.2 million euros), which was positive for the first time since Q4 2019. However, our net result remained negative (-37.2 million euros). This was mainly due to high financial expenses caused by heavy indebtedness and exchange losses caused by the strong US dollar.
During Q3, our cash funds increased slightly, however, still rounding down to 1.6 billion euros. We drew down the remaining 110 million euros of the 400-million-euro capital loan granted by the Finnish government. This decreased our gearing and improved our equity ratio. Operating cash flow was merely 12 million euros positive. It was impacted by, among other things, seasonal factors, timing difference of wet lease receivables and certain changes in our payment terms.
In September, we announced our new strategy to restore profitability. There is a long journey ahead of us before we are profitable on an annual level. The key actions to achieve this goal are a geographically more balanced network, fleet optimisation, strengthening of unit revenues, utilisation of partnerships, reduction of unit costs, building a sustainable balance sheet and sustainability. Our goal is to reach the pre-pandemic comparable operating profit of at least 5 per cent from mid-2024.
As guided, we predict that in the short-term, the strong demand for travel will continue, which will support our unit revenues in a similar fashion as in Q3. However, significant uncertainty in our operating environment continues as the fuel price is exceptionally high and the length of the Russian airspace closure, the impact of inflation on demand and costs, and the development of the pandemic and related measures are unclear. We reiterated our guidance that the comparable operating result for 2022 will be significantly negative for a third consecutive year.
During Q4, the implementation of our new strategy will progress in every area and we need contribution from all stakeholders. We will tell more about the progress of the implementation and the outlook for 2023 in connection with our 2022 financial statements release.
We have collected few of the most-asked questions from Friday, together with our answers below.
Why did the comparable operating result exceed analysts' forecasts?
In this seasonally strongest quarter, revenue growth was boosted by the pent-up demand that continued to materialise, especially in Europe and North America, and the limited capacity of the aviation industry caused by labour shortages. In addition, our sales improvement measures and the optimisation of our revenues generated results. Driven by these factors, the average ticket yields were at an exceptionally high level. Although cargo revenue decreased quarter-on-quarter due to the drop in cargo yields, it was still at a good level, clearly exceeding Q3 2019 figures. Further, Travel Services revenue reached almost the level of 2019.
On the other hand, the COVID-19 restrictions and closed Russian airspace adversely affected both our revenues and costs, especially in our Asian traffic. In addition, the exceptionally high fuel price and the strong US dollar weighed on the result.
How have you implemented the new strategy in Q3?
Examples of a more geographically balanced network are the Mumbai route opened in August and the cooperation with Qatar Airways to open flights from three Nordic capitals to Doha during Q4. Negotiations with our personnel on changes to working conditions are progressing as part of our unit cost target, and we have achieved conditional negotiation results with our two unions. After Q3, we also started change negotiations to streamline the company's global organisational structure.
We strive to increase the share of digital sales and direct channels and to make our distribution even more efficient. These actions primarily improve our unit revenues, but lead to more cost-effective sales, too, as distribution costs decrease.
We also seek savings from all other cost items, such as fleet costs, supplier contracts and premises and aim for 15 per cent lower unit costs compared to the 2019 level. This goal includes the permanent cost savings of c. 200 million euros implemented during the pandemic. Measured by the 2019 volumes, reaching the goal still requires additional savings of similar size.
What does building a sustainable balance sheet mean?
The key to building a sustainable balance sheet is to restore our profitability. This strengthens equity and improves cash flow, which enables repayment of debts and, thereby, achieving a sustainable balance sheet over time. This part of our strategy is built into the four main themes of our strategy, which are more balanced network and fleet optimisation, strengthening unit revenues, reducing unit costs and sustainability.
What is your estimate of China opening for travel?
The Party Congress was organised in China in October, where no changes were made to the prevailing dynamic zero covid policy. Therefore, we are prepared for the possibility that strict travel restrictions would remain in place short term, i.e., at least until the end H1 2023.
We currently operate a weekly flight to Shanghai, but will add another frequency during November.