Finnair Q1 2022 results and Q&A
Finnair’s two-sided Q1: travel revived strongly, but the Russian airspace closure had a dramatic impact on our operating environment.
Erkka Salonen, Director, Investor Relations
We published our interim report yesterday and had a substantial number of participants at our press conference and in our investor call. Many thanks to all the participants for all their excellent questions.
As I mentioned in my February blog post, the impact of the Omicron variant on travel in the first quarter was significant, albeit short-lived as expected. Omicron softened demand significantly in January and February, whilst complicating operations and increasing staff costs due to a high number of sick leaves. However, demand for travel picked up significantly after the Finnish winter holidays in February, especially in the European, North American and South Asian markets. North Asia continued to be burdened by severe travel restrictions.
Our revenue in Q1 (EUR 400 million) remained at the level of Q4 2021, mainly due to the aforementioned Omicron impacts, but the closure of the Russian airspace also decreased our revenue. For example, we did not fly to certain Asian destinations for about a week and then cut some of our Asian routes and frequencies because of the longer routings. On the other hand, strong cargo demand continued to support our revenue and enabled us to operate many flights with longer routings despite increased costs.
Our current routings to Asia are 10–40% longer following the airspace closure, which increases our fuel, staff and navigation costs. In addition, jet fuel price rose to a record high after the start of the war in Ukraine. Our comparable operating loss was EUR 133 million (-143.2), of which a whopping EUR 51 million was explained by the cost effect of fuel prices from the comparison period.
The war in Ukraine is a horrible human crisis. The ensued closure of Russian airspace also hits us heavily, as the geographical location of our home airport, Helsinki-Vantaa, no longer optimally serves transfer traffic between Europe and North Asia. We are now preparing for the prolongation of the Russian airspace closure. We have, therefore, adapted our network strategy and during the airspace closure, we place more focus on our westbound routes in Europe and North America as well as on our South Asian routes, where the impact of the closed airspace is more moderate.
We also launched a new EUR 60 million programme for permanent cost savings in addition to the old EUR 200 million programme that we already achieved. The new programme is our first response in terms of cost savings to the impacts of the airspace closure. We also announced that we will be leasing aircraft and crews to other airlines for the summer season, to make use of our idle capacity caused by the closed airspace – and to provide work for a total of 600 Finnair employees. We estimate that during the summer season, almost 80% of our capacity will be in use compared to 2019, when these wet leases are also considered.
Demand for travel is now recovering at a rapid pace, as reflected in our bookings, which have in some markets even exceeded the pre-pandemic levels. On the other hand, travel restrictions and closed Russian airspace weaken the demand for our North Asian traffic. We guided that the comparable operating loss for Q2 will decrease compared to Q1 2022, due to robust demand, but will be of a similar magnitude as in Q4 2021 (EUR -65 million) due to high fuel prices. In Q3, we estimate that demand is closer to pre-pandemic levels in Europe, North America and South Asia.
We have collected a few of the most-asked questions from Wednesday, together with our answers below.
You said that demand for travel during the summer is strong. How is this visible in your bookings?
The growth trend in our bookings, which began in the autumn of 2021, suffered from the Omicron impacts, but returned to the growth path after the winter holidays quite quickly after the dip. Growth in bookings continues despite the war in Ukraine as pent-up demand is now materialising fast. Demand is strong in Europe, North America and South Asia, and we have seen even stronger demand in these markets, compared to the pre-pandemic levels, also in absolute terms. On the other hand, as we stated in our guidance, demand in North Asia is dampened by the continued travel restrictions, so the closure of the Russian airspace will not have such a significant impact on revenue in that market, at least in the short-term.
You said that you have updated your network strategy due to the closed Russian airspace. What does that mean in practice? Is the transfer traffic through Helsinki, that is vital for your business, still viable?
As a first step, our updated network places more emphasis on connections to West and to South Asia. We opened a new route to Dallas, as we had already announced earlier, at the end of March, and new routes to Mumbai and Seattle will open in the summer. We will continue to operate our main North Asian routes, but at the same time we will increase the number of frequencies to destinations in South Asia, where the impact of the closed Russian airspace on the length of routings will be significantly smaller. Routes and frequencies to Japan and South Korea have been reciprocally cut.
The globe is proven to be round, and, therefore, a trip from South Asia (e.g., India) via Helsinki to North America is time-efficient and justified. For this very reason, we aim to strengthen our offering in these markets.
You announced that you would launch a new cost savings programme of EUR 60 million of permanent savings, in addition to the EUR 200 million savings programme you have previously achieved. How do you achieve these savings?
This is the first step in our cost-savings work on the impacts of the airspace closure. The programme is more targeted than the previous EUR 200 million programme, and the new programme seeks savings from continuous improvement of operations (e.g., fuel efficiency) and the renegotiation of distribution and lease agreements. Our goal is that the full run-rate impact would be visible starting from 2024.
You announced that a EUR 400 million hybrid loan from the state will be converted to a capital loan. What does this mean?
A capital loan is a slightly stronger equity instrument compared to a hybrid loan, which strengthens the company's equity and, thus, also its balance sheet. We said that we are likely to commence the drawdowns already during Q2.
You stated that you will be leasing aircraft and crew to other airlines. Is this profitable? How is it booked from a P&L perspective?
Due to the closure of Russian airspace, we have overcapacity in our fleet and, on the other hand, there is demand for capacity in the market as many airlines cut staff due to the pandemic. We are known for high quality and safe operations, and there is a demand for this at an economically viable price. As a result, we ended up leasing our aircraft and crew for the summer season to both British Airways and Eurowings Discover, part of Lufthansa Group. In addition to the income, the arrangements provide work for up to 600 Finnair employees, of which we are happy about.
Income from these so-called wet leases is not recognised in revenue but in other operating income. Related costs are instead recognised as operating expenses.
In addition to these initial steps, we have begun reviewing our fleet plan and evaluate in parallel both aircraft leasing and the sale of idle aircraft.