Finnair - Nearing cruising speed
Finnair hits above 5% EBIT margin already this year
Finnair upgraded guidance, according to which it will near or even exceed the FY ‘19 adj. EBIT level of EUR 163m this year. Finnair did EUR 3,098m in FY ’19 revenue, but is still likely to remain a bit shy of that figure this year. We don’t view the upgrade a big surprise (although it arrived early) as Finnair has reached positive EBIT since Q3’22, and Q1’23 results were also strong considering seasonality. The revision was driven by the extension of factors which helped it reach its break-even Q1’23 EBIT, in other words continued high demand, moderating fuel prices and strategy execution. We previously estimated Finnair to reach EUR 127m EBIT this year, whereas our new estimate is EUR 160m. We make minor revisions to our top line estimates but update our FY ’24 EBIT estimate to EUR 199m (prev. EUR 186m).
The market environment is quite favorable right now
Fuel prices have already slid a lot from their peak, yet the levels are still high in the historical context and hence a further decline seems more likely than an increase. In any case the airline industry continues to be in a rather sweet spot for now as higher ticket prices have not so far curtailed demand. The inflationary environment itself causes uncertainty around demand and operating costs going forward, while it’s also unclear to what extent inflation persists. We note our Finnair EBIT margin estimates continue to significantly lag those of its peers.
At least some further improvement to be expected
Finnair’s peers’ EBIT margin estimates for FY ’23-24 have gained by 100bps in less than two months. We update our FY ’23 estimate by 100bps, but our revision is only 40bps for next year. We believe Finnair will issue new long-term targets soon as the ones given only nine months ago have already become outdated. Those targets at no point looked too challenging, but back then Finnair still had a lot to do in terms of strategy implementation. Finnair is now on a sound footing, but it remains to be seen how much more improvement continues to come through now that the market is already very favorable. Finnair is valued 10x and 8x EV/EBIT on our FY ’23-24 estimates, which we view neutral levels. Our new TP is EUR 0.53 (0.49); we retain HOLD rating.