Finnair - Long bumpy runway ahead

Finnair reports Q2 results on Jul 15. Capacity is being scaled up while passenger numbers have bottomed out, but there’s a lot of uncertainty with regards to a meaningful recovery. The rebound will arrive in the years to come, however in our view valuation doesn’t leave much upside. Our TP is now EUR 0.7 (0.75); we retain our HOLD rating.

Recovery may materialize somewhat slower than expected

Finnair’s Q2’21 passenger figures show strong recovery relative to the exceptional halt witnessed in Q2’20, but in the big picture the volumes remained very modest. International volumes increased towards the quarter’s end, however they remained at only around 5% of those seen in e.g. Q2’19 (in terms of RPK). Western passenger flows may pick up further in Q3, but strategically important Asian flights will in our view have to wait at least until Q4’21, if not even beyond that. Slow Asian vaccination rates may not matter that much because the delta variant now seems to act as an additional speed bump on the path to recovery. In our view Finnair’s EBIT is likely to remain in the red until the end of this year. It’s unclear how quick the pent-up passenger flight demand will materialize, but airlines are unlikely to return to normal before next year. We don’t expect Finnair to see pre-pandemic EBIT levels before the year 2023.

We make some downgrades to our long-term estimates

Finnair’s Q2 passenger numbers were somewhat below our expectations as the pandemic situation has proved very resilient. Cargo volumes, nonetheless, were higher than we estimated. We thus make only small revisions to our Q2 estimates. We expect EUR 142m in revenue and EUR 144m in operating losses. We revise our long-term estimates down a bit due to the continued uncertainty that stems from the latest pandemic updates. We also note jet fuel spot prices increased another 13% q/q in Q2.

Valuation recognizes Finnair’s long-term potential

In our opinion Finnair continues to hold a solid long-term strategic position as an airline that connects Europe with Northeast Asia. This seems well recognized as current valuation is not cheap. Finnair trades ca. 15x EV/EBIT on our FY ’22 estimates. We believe Finnair’s EBIT has plenty of room to improve beyond that, however the pandemic is unlikely to alter the inherent competitive nature of the airline industry.

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