Finnair - Recovery widely expected
Finnair’s biggest challenges this year may now be in the past, yet it still needs to achieve significant earnings growth next year to earn its current valuation.
North Atlantic weakness hit Q3 earnings
Finnair’s EUR 835m Q3 revenue missed the EUR 860m/848m Evli/cons. estimates as North American ticket fares were lower than we estimated. Finnair managed in total some EUR 10m lower costs than we estimated, but this wasn’t enough to offset the softness in revenue and so the 50.7m comparable EBIT was almost EUR 15m lower than estimates. Finnair’s Asian and European routes have been lately developing relatively well, but many recent challenges led to a cut in the upper end of the FY’25 EBIT guidance range. We previously expected Finnair to return to y/y earnings growth in Q4’25; we believe Finnair could still achieve this, but it seems more uncertain now that North Atlantic ticket prices turned out to be so much softer than we expected.
EBIT margin should recover to more than 5% next year
European ticket prices have remained flat this year, while Asian prices increased by 3% over the summer; North American prices already declined by 4% y/y in Q2, and now 9% in Q3. This is not yet a huge problem for Finnair as its North Atlantic capacity is quite limited in size compared to the other two, but together with the other recent operational challenges means Finnair’s FY’25 EBIT would have been soft y/y even without the EUR 68m direct impact of industrial action. In our view Finnair should be able to hit 5% EBIT margin again next year; we continue to estimate 5.5% EBIT margin for FY’26, however this level seems a bit more challenging now than before the Q3 report.
A significant EBIT recovery already priced in for next year
The 6% EBIT margin target appears more demanding now, although Finnair is most likely to achieve meaningful earnings recovery next year. Finnair did achieve an EBIT margin of 6.2% two years ago, and a similar above 6% margin should still be possible as ticket prices have largely stabilized after the declines seen last year while jet fuel prices have trended down. Finnair is now valued about 8x EV/EBIT on our estimates for the next two years, which is slightly higher than the median peer multiple. The multiple is thus not very demanding, but Finnair should also achieve significant earnings recovery next year to earn it. Our new TP is EUR 2.5 (2.7) as we retain REDUCE rating.