A network airline specializing in Nordic connections
Finnair’s Q1 further demonstrated solid recovery, however valuation still demands a lot more long-term improvement.
High unit yields due to market and own initiatives
Finnair’s EUR 695m Q1 revenue easily topped the EUR 572m/647m Evli/cons. estimates. Passenger revenue was EUR 130m above our estimate as unit yields were higher than estimated across the network; some q/q decline was expected as Q1 is seasonally soft, however such pricing softness turned out to be negligible. RASK was 30% above Q1’19 due to dynamic pricing and a larger share of direct distribution (doubled to 65%). Finnair reached 80% of Q1’19 ASK (86% incl. wet leases). The EUR 0.9m EBIT was above the EUR -32.4m/-23.1m Evli/cons. estimates and would have been strong for any Q1, let alone one during which Finnair still recovered from major volume losses.
The recovery appears to have found solid footing
The fleet is now optimal for the network, which in our view shows the net volume loss due to lesser Asian exposure to be smaller than feared (Finnair says demand for e.g. Doha routes has been higher than anticipated). The new routes which fill the lost volumes may not be as profitable as the Asian ones were, but Finnair has done major cost cuts since FY ’19 while RASK levels are now way higher. Asian volumes will grow more, driven by e.g. Japanese leisure, and yields can further advance. Yet prices may be exceptionally high, so it’s difficult to say how much yield gains can support results next year. Chinese route recovery may not be really seen before Q3 as the opening surprised many. Chinese carriers can also fly over Russia so the competitive situation is uneven, however Finnair’s guidance doesn’t seem to rely on Chinese recovery to any significant extent.
Valuation still seems quite full, at least in the short-term
Recovery continues and we expect Finnair to reach a decent EUR 127m EBIT this year, while next year should see results above pre-pandemic levels. On our respective estimates Finnair is valued 12x and 8.5x EV/EBIT, which we note are still not cheap levels. We continue to view Finnair pretty much fully valued; results over the summer should demonstrate more clearly how much EBIT potential there exists over the longer term, especially as the market may also take some of the good away. Our new TP is EUR 0.49 (0.47) as we retain our HOLD rating.
Finnair’s Q1 results topped estimates as high unit yields drove passenger revenue. EBIT remained slightly positive, despite the seasonally slow quarter, as the company has managed to revamp its strategy while also benefiting from a favorable market situation.
Finnair reports Q1 results on Apr 27. Finnair has lagged its peers in terms of pandemic recovery due to the legacy Asian strategy, while from now on further volume recovery should be found with the help of a pivoted network.
We make only minor estimate revisions ahead of the report
Finnair’s RPK almost doubled y/y in Q1, as estimated, and thus reached 77% of the Q1’19 comparison figure. Q1 is always seasonally quiet, however yields should have stayed robust as a lot of pent-up demand is yet to be sated. Finnair’s EBIT returned to black in H2’22, but Q1 EBIT is likely to be negative unless pricing tailwinds have proved stronger than estimated. We estimate Q1 revenue at EUR 572m and EBIT at EUR -32m.
The pivoted network to be seen clear over the summer
Asian volumes are now catching up as the key countries have lifted their travel restrictions, yet Finnair’s Asian volumes in Q1 were still only 54% of the Q1’19 comparison figure while Europe reached more than 80% of the corresponding figure. The Asian figures therefore still have some room to improve after the pandemic slump, but the Russian airspace closure limits their recovery potential and consequently Europe too lacks some of its former potential. Further recovery will thus rely on the network updates and increased density to North Atlantic, Middle East and India routes. We estimate Finnair’s FY ’23 RPK to reach 82% of FY ’19 levels, while strong pricing environment could help revenue to almost 94% of the FY ’19 figure this year. We expect FY ’23 EBIT at EUR 104m on this basis, well short of targeted levels.
Valuation closer to neutral from a long-term perspective
Airline valuations haven’t budged much in the past few months; absolute valuations have remained steady while earnings outlook has improved further. Finnair remains valued around 15x EV/EBIT on our FY ’23 estimates, a considerable premium relative to a typical peer. The multiple is about 9x on our FY ’24 estimates, which is still above many peers while we estimate Finnair’s profitability to stay well below those of its peers. We hence view Finnair rather fully valued in the short-term perspective; Finnair’s 5% EBIT margin target, set to be achieved from H2’24 onwards, may not prove too challenging as long as key value drivers like passenger volumes continue to trend favorably. We retain our EUR 0.47 TP; our new rating is HOLD (SELL).
Finnair’s Q4 report was a bit better than expected, however we see current valuation limiting upside potential too much unless more positive surprises are yet to come.
Q4 report a bit better than expected but nothing major
Finnair’s EUR 687m Q4 revenue was near the EUR 679m/681m Evli/cons. estimates as passenger revenues were some EUR 20m higher than we estimated (ancillary and cargo were a bit soft relative to what we expected). Finnair’s Q4’22 saw 79% of ASK relative to Q4’19, including wet leases, as demand stays high. Fuel prices remained high in the historical context, a crucial factor limiting EBIT when Finnair still missed major volumes due to the recent years’ double whammy. Finnair achieved another positive adj. EBIT, at EUR 17.9m vs the EUR 13.5m/2.7m Evli/cons. estimates, as unit yields continued to advance. Prices should hold up also in Q1 and beyond as demand persists despite potential economic headwinds. We didn’t find any big surprises in terms of cost inflation, but the topic remains very much on the agenda as Finnair continues to proceed towards its 5% EBIT margin target.
Volumes and pricing support profitability development
There are still uncertainties around Chinese demand in particular; from Finnair’s point of view the focus now rests much on Shanghai and Beijing, as opposed to any secondary Chinese cities. Finnair has extended its wet leases, and dynamic pricing has helped unit revenues increase by 25%; ancillary revenue per passenger also increased by 13% compared to 2019. Hence Finnair’s revenue will increase significantly this year, but we expect it to remain 10% short of that for FY ’19. We believe Q1’23 EBIT will be negative as the market has recovered enough so that certain seasonal patterns can again be seen, but for FY ’23 we estimate a positive EBIT of EUR 105m.
Coming through, but most good news seem to be priced in
In our view Finnair is set to achieve a positive EBIT this year, and the positive development should continue in FY ’24, but the company’s profitability continues to lag other airlines. Finnair is valued about 16x and 10x EV/EBIT on our FY ’23-24 estimates, which are levels well above peers’. We see Finnair’s recovery already priced in and hence upside would probably require more than one factor to deliver a positive surprise. We update our TP to EUR 0.47 (0.45) but retain our SELL rating.
Finnair’s Q4 revenue hit estimates well, while adjusted EBIT was a bit stronger than expected. At first glance the report doesn’t seem to contain any major surprises. Travel demand continues high after the pandemic for now, while inflation is still a challenge.
Finnair reports Q4 results on Feb 15. Travel demand may remain robust and fuel prices have declined, but high valuation doesn’t seem to leave much upside potential.
Q4 EBIT likely to be a bit subdued after strong Q3
Finnair’s Q3 topped expectations as yields proved higher than estimated. High passenger revenues (some EUR 50m above estimates), helped by the seasonal strength of Q3, as well as income from wet leases translated into an adj. EBIT of EUR 35m (some EUR 40m above estimates). Q4 EBIT should have improved y/y but should be down somewhat q/q; passenger volumes are still recovering from the pandemic slump, but Q4 also includes slower periods and in the case of Finnair there’s the lack of North Atlantic volumes as certain routes have been missing after the summer months. We estimate Q4 revenue at EUR 679m and adj. EBIT at EUR 13m. We believe Finnair will not issue any specific guidance (beyond capacity and load factors) as the company and its main markets are still going through significant changes.
Volumes are still recovering while fuel prices have declined
Finnair now breaks out data for the Middle Eastern routes. The region, based on the initial figures, contributed 25% of the volume in January which Europe and Asia each lately turned out; we look forward to comments on how much these new routes might grow over the year. Finnair’s Asian volumes are now 50% compared to pre-pandemic levels, and even if China is only now opening it’s uncertain how much further the flows may grow as the Russian airspace stays closed. We also look forward to comments regarding ticket pricing as jet fuel prices began to decline in Q4. Jet fuel prices have declined especially in EUR terms (around 20% in the past 3 months) while there should still be significant pent-up travel demand following the pandemic.
Upside appears elusive for now despite lower fuel prices
We estimate 6% EBIT for FY ’24 vs Finnair’s target of at least 5% after H1’24. Lower fuel prices help airlines’ earnings and thus higher valuations are justifiable, however the pace of gains has been rapid in the past few months and sector multiples seem high. Some uplift may be warranted also in the case of Finnair, but the company trades 18x EV/EBIT on our FY ’23 estimates (vs 11x for a typical peer) and ca. 11x for next year (vs 8.4x). Our new TP is EUR 0.45 (0.40); our new rating is SELL (HOLD).
Finnair touched a milestone, but there’s more to go before EBIT reaches adequate levels while valuation remains full.
High passenger yields drove a revenue and EBIT beat
Finnair’s Q3 revenue reached EUR 719m, clearly above the EUR 645m/667m Evli/cons. estimates as passenger revenues were some EUR 50m higher than we estimated. Seasonally strong Q3, including EUR 56m in other operating income mostly attributable to wet leases, coupled with improving unit revenues helped Finnair’s EBIT to EUR 35m vs the EUR -7m/-4m Evli/cons. estimates. In our view the top line and EBIT beats were driven by higher than estimated passenger yields. The positive EBIT was an important milestone for Finnair, but there’s still distance left to go until profitability reaches a firm footing.
Improvement to continue, but not as steep as in Q3
Q3 EBIT was a major improvement q/q as passenger yields increased by some 10% over Q2. Q4 will be a bit softer in terms of volumes; October bookings look good, but November is seasonally soft before December’s seasonal travel volumes. We estimate 5% q/q passenger yield decline for Q4, but high jet fuel prices should still provide some ticket pricing tailwind in addition to a rebound in corporate travel, which has reached around 80% of the pre-pandemic level when adjusted for capacity. Meanwhile Finnair’s strategy includes efforts to secure high unit revenues (e.g. the share of direct distribution has already roughly doubled to 60%). Passenger yields are therefore likely to stay relatively high, but there’s also uncertainty around next year’s passenger volumes as China’s opening may be further delayed.
Valuation well anticipates long-term improvement
There’s a lot of uncertainty around factors such as yields, volumes as well as costs (including fuel prices) going forward. Finnair should achieve a positive FY ’23 EBIT, but it’s likely to be muted due to a certain lag in passenger volumes and wouldn’t in any case be enough to justify current valuation, which still isn’t cheap. Finnair’s valuation seems based on the assumption that it will eventually catch up with peer profitability levels; valued about 12x EV/EBIT on our FY ’24 estimates, clearly above peers while EBIT margin is to lag by many percentage points. The assumption may be fair, but leaves Finnair pretty much fully valued. We update our TP to EUR 0.40 (0.36); retain HOLD rating.
Finnair’s Q3 results came in clearly above estimates as strong development in unit revenues drove top line as well as profitability. Finnair turned in a positive EBIT for the first time since Q4’19.
Finnair reports Q3 results on Oct 28. We make only small adjustments to our estimates ahead of the report.
We make no big estimate revisions before the report
Finnair’s Q3 RPK was as we expected, while the 80% load factor was about 5 percentage points higher than we estimated. North Atlantic RPK was already more than 40% above the Q3’19 comparison figure, which is one of the clearest demonstrations of the recent (necessary) updates to strategy. We estimate the continued recovery in passenger volumes, along with some increases to ticket prices, to have helped Finnair’s revenue to EUR 645m in Q3. Jet fuel prices seem to have stabilized lately but remain still very high in the historical context. We expect Finnair’s EBIT to have continued to improve, however we estimate it to have remained slightly negative in Q3.
Qatar Airways partnership one of the major recent updates
Finnair formally announced the keys of its updated strategy in September. Many of the points had been already discussed over the spring and summer months, including the pivot to North America and India, but Finnair has also signed a partnership with Qatar Airways which is to better connect Nordic capitals with the Middle East. The updated network as well as favorable terms on leased out planes and crew help Finnair’s continued recovery after the pandemic, but the Russian airspace closure still forces the company to make some downsizing choices. We estimate Finnair to reach positive EBIT next year, however our 2.3% EBIT margin estimate remains well shy of the 5% level the company aims to reach in H2’24. Finnair’s liquidity position is adequate, although the recent blows will leave their mark on the balance sheet. Then again, Finnair has no need to make major fleet refurbishments in the short to medium term. We look forward to comments regarding ASK and LFs in the coming quarters.
Valuation has moderated a bit, but still not cheap
Finnair continues to trade at high FY ’23 earnings multiples relative to peers as the pandemic already hurt the (legacy) Asian strategy more than those of other airlines. Finnair is valued around 12x EV/EBIT on our FY ’24 estimates, while other airlines are valued roughly that level on FY ’23 estimates. In our view this puts Finnair’s valuation in the fair to fully valued range. We retain our EUR 0.36 TP; our rating is now HOLD (SELL).
Finnair continues to address its challenges, and EBIT will improve, but a lot of uncertainty lingers around outlook while valuation multiples remain high relative to peers.
We make downward revisions to our estimates
Finnair’s EUR 550m Q2 revenue matched the EUR 549m/542m Evli/cons. estimates. Top line continued to rebound with higher passenger loads while cargo revenue was down q/q. Wet leases amounted to 6% of ASK and the figure continues to increase to above 10% as strong demand will extend over the winter and probably even up to next summer. The EUR -84.2m adj. EBIT missed the EUR -41.3m/-56.5m Evli/cons. estimates as jet fuel prices spiked during Q2. Ticket prices are to catch up with the resulting higher unit costs, but the big gap may not close for a while; yields picked up in June as demand matched capacity sufficiently to help revenue management efforts, but the pricing environment is to remain somewhat volatile. Finnair’s guidance for H2’22 implies further top line recovery, but we make some downward revisions to our ASK estimates. We expect Q3 EBIT to remain negative (EUR -9m vs our previous estimate of EUR 18m).
Roughly 10-15% of ASK could still be rerouted or sold
The EUR 60m in cuts should come in as planned and the new strategy, to be ready during the autumn, is to deliver more savings. Partnerships play an important role in the network strategy and the weight of previously marginal destinations, such as the US and India, will increase. Yet the new strategy also likely implies some aircraft sales. Leases can be included in the strategy, but we believe they are unlikely to amount to more than 10% of ASK. Hence some 10-15% of ASK needs to find new routes or be sold. Finnair has a strong record when it comes to flight and crew performance, and we expect the strategy will be able to secure profitability. FY ’23 is likely to see a meaningful positive EBIT, but there remains much uncertainty around the level. We now estimate the figure at EUR 77m (prev. EUR 116m).
Valuation appears tight relative to peer multiples
The competitive landscape remains stable; we see valuation tight against this backdrop when Finnair’s outlook is still subject to elevated uncertainty. Finnair trades around 26x and 12x EV/EBIT on our FY ’23-24 estimates; we find the levels high relative to peers. Our new TP is EUR 0.36 (0.43); our rating is SELL (HOLD).
Finnair’s Q2 top line was as expected, but EBIT came in below estimates as costs were high especially because of fuel. We also find Finnair’s guidance leaves some downward pressure on H2’22 estimates. Finnair is preparing a new strategy and looks to complete the work on it this autumn.
Finnair reports Q2 results on Jul 19. We revise our estimates up a bit due to busy early summer, but valuation continues to reflect the on-going improvement well.
We believe EBIT could turn positive already in Q3’22
Q2 RPK topped our estimate by 12% thanks to high passenger loads, especially in June, as Europe was in line while Asian and North Atlantic flows were above our estimates. The overall Q2 RPK figure was roughly half of the level seen in 2019; Finnair’s European Q2 flows were already 70% of the corresponding 2019 figures, which reflects the fact that short-haul routes have rebounded faster than long-haul ones. Many airports have been strained under the traffic and Finnair cannot have dodged the challenge although the impact may have been less pronounced in its case. Finnair expected Q2 EBIT to land around the same level seen in Q4’21 (EUR -65m); we previously estimated the figure at EUR -80m but revise our estimate to EUR -41m due to the busier-than-expected early summer season. Finnair appears poised to reach profitability in the coming quarters, despite the Russian airspace closure, as Western routes continue to rebound and high travel demand helps secure good prices for wet leases.
Expect to hear more on shoring up long-term potential
The Russian closure is likely to limit Finnair’s long-term potential to some extent, however Finnair is yet to announce any sales of aircraft in response. It would therefore be interesting to get some further color on where Finnair sees itself standing now with respect to the already announced leases and potential additional capacity reduction measures. Finnair was quick to identify further EUR 60m in permanent cost savings, and there were hints the target could still be upped a bit. The company has also recently expanded its Stockholm Arlanda presence and may be able to pursue more growth from there.
Valuation reflects the improving environment
Jet fuel prices peaked in June and are already down by some 20% from those highs but the current levels remain elevated by historical standards. We have revised our EBIT estimates slightly upwards, but airline valuations have developed soft over the summer weeks and are now trading about 12x FY ’23 EV/EBIT. We don’t thus see upside on the 13-18x EV/EBIT multiples (on our FY ’23-24 estimates). We retain our EUR 0.43 TP and HOLD rating.
The Q1 report didn’t contain many surprises, but we make some upgrades to our estimates as Finnair may be able to maneuver the situation a bit better than we expected.
Network pivots to West and South Asia
Finnair’s EUR 400m Q1 revenue and EUR -133m adj. EBIT matched the respective EUR 397m/391m and EUR -128m/-141m Evli/cons. estimates. Air travel recovers and Omicron caused only a brief but sharp dip in volume. Finnair sees the ratio of bookings relative to capacity now above the pre-pandemic levels as available capacity has been reduced. Major North Asian hubs such as Tokyo, Seoul and Shanghai will remain on the schedule, but the Russian airspace closure will limit possibilities to smaller North Asian cities. South Asia’s weight will increase as it supports transfer flights to the US and hence Finnair’s network will also pivot to West, where demand is now robust.
Volume outlook prompts us to raise estimates
We raise our estimates as our previous view on volumes seems a bit low in the light of Finnair’s comments on capacity over the summer (we assume some 60-70% load factors for Q2 and Q3). Finnair has already signed leases and the comments on them indicate such deals are now profitable when many Western airlines have need for additional capacity. These can add other operating income some EUR 10-100m annually. Finnair also looks for EUR 60m in further permanent cost savings. The network adjustments, fleet redeployments (including potential aircraft sales) and cost measures didn’t come as a surprise, although these may help Finnair guard profitability better than we initially expected. We upgrade our revenue estimates by more than 10% while we also revise our EBIT estimates up a bit, but there remains a lot of uncertainty around volumes and costs.
Finnair will come through, but upside is still not evident
The EUR 400m hybrid between the State and Finnair will convert to a capital loan and thus supports equity. In our view high demand helps Finnair to successfully maneuver the challenges, but medium to long-term profitability potential remains unclear in the current high inflation environment. Finnair is valued a bit below 14x EV/EBIT on our FY ’24 estimates, still not a low level although our FY ’23 EBIT estimate could prove too conservative. We retain our EUR 0.43 TP; our rating is now HOLD (SELL).
Finnair’s Q1 results landed very close to estimates. The report does not appear to contain any major surprises as demand continues to improve while Finnair also works on deploying some of its current capacity through leases and sales.
Finnair reports Q1 results on Apr 27. The focus will be on the responses to the change which alters the strategy’s viability; we view profitability potential hard to gauge.
Finnair’s Asian strategy will now have to be reviewed
Q1 traffic was robust relative to expectations (the RPK metric was only 2% below our estimate) despite the lag due to slow Asian openings. South Korea opened only in the beginning of Q2, while Japan remains basically closed to foreigners and according to our understanding is unlikely to open before H2. China was previously set to open for H2, however even this conservative schedule may now be in question considering the very strict local virus policies. Asian flight volumes would thus remain subdued even without the closure of Russian airspace. The Siberian flightpath is unlikely to open in the foreseeable future and Finnair is revising its network plans in response to the fact that many Asian routes will not be profitable due to the added costs.
We make some further estimate cuts
Finnair is in the process of leasing out some of its resources which it cannot itself deploy under the circumstances. In our opinion some such deals, either leases or sales, seem inevitable given the scale of the problem as the Asian flights made more than 50% of Finnair’s pre-pandemic revenue. We cut our top line estimates by some 10% at this point; in the long-term Finnair may be able to employ some of its current idle capacity on new European and North American routes, but there may still be need for additional revenue estimate cuts. We revise our FY ’22 EBIT estimate to EUR -220m (prev. EUR -82m) and that for FY ’23 down to EUR 47m (prev. EUR 171m). Costs remain yet another issue as jet fuel prices have continued to surge to new records.
Profitability potential remains highly uncertain for now
Finnair had EUR 1.7bn in cash at the end of last year; the financial position and potential additional measures, be they leases or outright sales of aircraft, should help the company manage through the extraordinary period of challenge. Finnair was valued, before the war, in line with other carriers on FY ’23 estimates. It’s now very hard to say how Finnair’s next year will be like. Finnair is valued roughly 15x EV/EBIT on our FY ’24 estimates, but this still doesn’t seem like an attractive level. Our new TP is EUR 0.43 (0.60), and our rating is now SELL (HOLD).
Finnair’s Q4 report didn’t include that significant news. Finnair’s profitability is poised to rebound, yet valuation doesn’t seem to leave much upside given the uncertainties.
The Q4 report didn’t deliver any major surprises
Finnair’s Q4 revenue grew to EUR 414m, compared to the EUR 452m/387m Evli/cons. estimates. Adj. EBIT landed at EUR -65m vs the EUR -95m/-90m Evli/cons. estimates. Q4 cargo revenue was very high, but Q1 losses are likely to be well above EUR 100m due to Omicron and ramp-up costs. Finnair sees some delay to the opening of most of Asia, which was to be expected.
The whole airline industry is staging rebound this year
Omicron doesn’t seem to be a major negative, only a short-term issue, but losses still loom in Q2. Meanwhile Finnair implements a EUR 200m investment in improved long-haul experience with refitted seats, and we also expect Finnair’s fixed costs savings will continue to come through; inflation relating to e.g. Helsinki airport charges is modest compared to those of larger hubs. Finnair’s long-term profitability potential is no worse considering the fleet renewal and cost positioning, but high jet fuel prices continue to limit the whole industry’s profitability potential.
Valuations continue to reflect surging earnings levels
We believe other airlines’ valuations will continue to drive Finnair’s multiples: Finnair’s profitability will materialize later due to the Asian reliance, but it will nevertheless come through at a certain level. In our view the most essential uncertainty, for Finnair as well as other airlines, now lingers around overall operating cost levels, particularly with respect to jet fuel prices. Higher ticket prices could compensate, but we view such increases still to be uncertain. Air traffic will continue to rebound across the globe, including Asia as well, and is set to reach the pre-pandemic levels sooner or later. We estimate Finnair’s FY ’22 EBIT is most likely to remain in the red, while some other airlines should be able to reach high profitability this year. We believe the anticipation and materialization of these profits will determine Finnair’s valuation over the course of this year. In our view Finnair’s current valuation, ca. 12x EV/EBIT on our FY ’23 estimates, is somewhat neutral relative to other airlines, however overall sector valuations may still stand on the optimistic side. We retain our EUR 0.60 TP; our rating is now HOLD (SELL).
Finnair’s Q4’21 losses were a bit lower than estimated, however the company expects the combination of Omicron and certain other operational expenses to lead to somewhat higher losses again in Q1’22. Finnair expects Omicron to postpone the opening of Asia to some extent.
Finnair reports Q4 results Thu, Feb 17. In our view the latest pandemic twists do not stage any significant further operational challenges for Finnair, yet we believe valuation has inched ahead of itself amid cost uncertainty. Our TP is now EUR 0.60 (0.65); our new rating is SELL (HOLD).
Finnair will continue to lag peers especially in H1’22
Q4 RPK was very close to what we had estimated despite the onset of Omicron; the latest variant(s) have indicated how there’s robust pent-up travel demand as traffic figures continued to grow in December despite uncertainty related to restrictions. Meanwhile Finnair’s flows continue to lag those of Western peers as Asian volume recovery is further delayed. We believe China is still set to open in H2’22, but we now expect Japan and South Korea not to contribute much before Q2’22. In our view the Asian lag isn’t a major issue for Finnair considering the measures taken to reinforce balance sheet as well as the fact that cash flow already turned positive in Q3. The short as well as long term effects of Omicron are hard to discern because the infection peak happens to play out over months which are very different in terms of seasonal demand, and it’s still too early to say whether the variant might accelerate the pandemic towards its end.
OPEX cuts help but jet fuel prices have continued to gain
Jet fuel prices have continued to soar, the spot rate up by some 15% in the past three months, meaning the achieved operating expenditure cuts will be valuable in securing profitability during the quarters and years ahead. We expect Q1’22 EBIT to remain in the red similarly as in Q4’21, roughly to the tune of EUR 100m, while we believe some improvement will happen in Q2 but not nearly enough to reach break-even. We make only very minor downward revisions to our volume and revenue estimates, but we revise our FY ’22 EBIT estimate down to EUR -11m (prev. EUR 30m) and that for FY ’23 down to EUR 164m (prev. EUR 232m).
Valuation seems to have turned dear amid cost uncertainty
Many carriers’ valuations have advanced in the past few months, and thus Finnair also arguably deserves some further boost. Finnair’s recovery will however take longer than those of peers; the company close 15x EV/EBIT on our FY ’23 estimates, a slight premium relative to a sector that seems itself fully valued. Our TP is now EUR 0.60 (0.65); our new rating is SELL (HOLD).
Finnair’s Q3 results and updated outlook didn’t provide major surprises considering the persistent uncertainty around long-haul air travel, however the operating loss guidance until the end of H1’22 was a minor negative.
Some initial steps towards profitability
Q3 revenue amounted to EUR 199m, compared to the EUR 264m/247m Evli/cons. estimates. Passenger revenue came in lower than we estimated, but cargo continued to support operations and in our view the freight performance explains a large part of the narrowing in Q3 operating loss. Q3 EBIT was EUR -109m vs the EUR -149m/-144m Evli/cons. estimates. Demand is right now focused on European leisure travel, while business travel has taken some tentative initial steps in Northern Europe. Finnair’s operating cash flow already turned positive in Q3, the first time since Q4’19. The company has built a EUR 1.2bn cash position; the buffer stands high in part to meet loan repayments due next year. Finnair doesn’t expect any major narrowing in Q4 operating loss. Our updated Q4 EBIT estimate is EUR -76m (prev. EUR -65m).
Profitable RPK levels will still have to wait many quarters
Finnair opens routes to Thailand and the US in November, while Japan and South Korea should follow around year-end. China may not open before H2’22; China is an important destination for Finnair and thus decent profitability will probably have to wait until H2’22. Q1’22 at least will remain in the red, but we would expect losses to narrow considerably already in Q2’22 if destinations excluding China are able to support adequate volumes. Q2’22 is still likely to result in an operating loss. Finnair’s updated outlook wasn’t a huge surprise as it was well known Asian passenger volume recovery will lag those of Western routes. We revise our FY ’22 RPK estimate down by 12%. We now estimate FY ’22 EBIT at EUR 30m (prev. EUR 75m), however we make only minor revisions to our FY ’23 estimates.
We consider FY ’23 multiples to be in line with peers’
Finnair is valued high relative to peers on our FY ’22 estimates (6x EV/EBITDA and 70x EV/EBIT) due to slow Asian route recovery, but on our FY ’23 estimates the multiples narrow to 4x EV/EBITDA and 10x EV/EBIT. We find the levels to be, overall, in line with peers. We retain our EUR 0.65 TP and HOLD rating.
Finnair’s Q3 operating loss was smaller than estimated despite certain top line softness. Slow Asian traffic recovery nevertheless continues to limit potential and losses will not subside in Q4. Finnair might not be back to black before H2’22.
• Q3 revenue grew by 105% y/y and was EUR 199.4m vs the EUR 263.7m/246.7m Evli/consensus estimates.
• Adjusted EBIT amounted to EUR -109.1m, compared to the EUR -149.3m/-144.0m Evli/consensus estimates.
• Fuel costs were EUR 48m vs our EUR 77m estimate. Staff costs were EUR 58m vs our EUR 72m estimate. All other OPEX+D&A combined amounted to EUR 212m, compared to our EUR 275m estimate.
• Cost per Available Seat Kilometer was 9.37 eurocents vs our estimate of 12.50 eurocents.
• Finnair expects Q4 operating loss to be of similar magnitude as in Q3. This is not a major surprise compared to the EUR -65.5m/-59.8m Evli/consensus estimate for Q4. Finnair estimates positive operating cash flow for Q4.
• Finnair estimates operating losses will continue during H1’22 due to the slow recovery of Asian traffic. Finnair doesn’t expect return to pre-pandemic traffic levels before 2023, although the H2’22 operational environment could be already closer to that era.
Finnair reports Q3 results on Oct 26. Losses remain large and focus is on narrowing them from Q4 onwards. We expect Finnair to achieve break-even EBIT in H1’22 even if traffic still continues to normalize throughout H2’22.
Q3 losses are going to be steep like before
Q3 traffic figures show revenue passenger kilometers doubled y/y and tripled q/q but were still only 13% of Q3’19 levels. The Q3 passenger volumes were also significantly below our estimates and hence we revise our revenue estimate down to EUR 264m (prev. EUR 332m). We now expect EUR 149m Q3 operating loss (prev. EUR 132m). Jet fuel prices have also advanced by some 25% during the past three months (average prices increased by about 10% q/q in Q3). We still expect losses will begin to narrow in Q4, however we don’t see the recovery quite as fast as before and now estimate Q4 operating loss at EUR 65m (prev. EUR 13m). Somewhat slower-than-anticipated recovery should not be a major issue for Finnair, considering e.g. the recent sale-and-leaseback transaction which untied more than USD 400m.
We expect FY ’23 RPK to be 95% of FY ’19 levels
Important destinations like Japan and South Korea have progressed with vaccinations, but Finnair’s Asian passenger volumes remain low for now. Asian Q3 RPK was only 4% of Q3’19 levels, while European RPK had already reached 21% of similar comparable levels. North American RPK also progressed to 19%, however Finnair does only marginal volumes on those routes. The Asian reliance means Finnair’s volume recovery takes at least a bit longer than that for many other Western airlines. We expect Finnair to reach break-even EBIT in H1’22, and decent profitability should be possible during H2’22. The company could therefore achieve modest profitability next year, but more significant annual EBIT may have to wait until FY ’23. We cut our FY ’22 EBIT estimate from EUR 150m to EUR 75m, while our FY ’23 estimate remains basically unchanged at around EUR 200m.
The inevitable passenger volume recovery is fully valued
Finnair is bound to make a strong operational recovery sooner or later, but in our view this outlook is pretty much fully valued already. Finnair is valued ca. 30x and 11.5x EV/EBIT on our FY ’22-23 estimates, a level we find to be well in line with primary European peers. We retain our EUR 0.65 TP and HOLD rating.
Finnair’s Q2 report didn’t contain major news, considering the big picture. We revise our volume estimates down, however additional cost savings support our EBIT estimates.
No big surprises, but Q3 profitability will not much improve
Finnair’s Q2 revenue amounted to EUR 112m, below the EUR 142m/145m Evli/cons. estimates. Passenger, ancillary and cargo revenues were all soft compared to our estimates, but travel is resuming as passenger revenue topped that for cargo in June. Working capital situation is beginning to improve due to growing bookings and Finnair expects monthly OCF to turn positive by the end of this year. The situation, however, remains challenging from profitability perspective. Finnair’s Q2 adj. EBIT was EUR -151m, compared to the EUR -144m/-144m Evli/cons. estimates. Finnair sees similar losses for Q3 as well. We revise our Q3 adj. EBIT estimate to EUR -132m (prev. EUR -91m).
Cost savings support profitability amid volume challenges
Finnair turned more cautious regarding the following years’ travel rebound, not a big surprise considering the latest developments. Asian vaccination rates have begun to pick up and important Northeast Asian countries are expected to have fully vaccinated 70% of their population during Q4. Finnair’s passenger volume rebound will lag those of Western short-haul focused carriers, but meaningful recovery should begin to materialize during the next few quarters. We now expect Finnair to reach ca. 90% of FY ’19 business levels (in terms of ASK & RPK) in FY ’23. We revise these estimates down a few percentage points and now expect EUR 2.8bn top line for FY ’23 (prev. EUR 3.0bn). Meanwhile Finnair’s upsized permanent cost savings projection supports our EBIT estimates. In our view the company could achieve healthy EBIT margins already next year and we see potential for 7% profitability in FY ’23. We have made only very small revisions to our absolute profitability estimates.
In our view profitability potential has been fully valued
In our opinion Finnair is set to return to good profitability levels, however this potential has been appreciated for a while. Finnair is valued roughly 15x EV/EBIT on our FY ’22 estimates, not an unreasonable level compared to other airlines but nonetheless fully valued given the persistent level of uncertainty. Our TP is now EUR 0.65 (0.7) and we retain our HOLD rating.
Finnair’s Q2 losses were pretty much as expected. The company estimates Q3 operating loss will also be roughly EUR 150m, in other words comparable to recent quarters.
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.
There were no surprises with Finnair’s Q1 result. The company expects Q2 comparable operating loss to be similar compared to the previous quarters and gradual recovery to start from late summer. Finnair also increased its cost savings target to EUR 170m. We keep “HOLD” with TP of EUR 0.75.
Restrictions continued to hamper Q1 figures
Finnair’s Q1 result was relatively similar compared to the previous quarters. Tight travel restrictions remained, and Finnair operated with limited network and frequencies in January-March (approx. 75 daily passenger flights). Revenue decreased by ~80% y/y to EUR 114m vs. EUR 96m/103m Evli/consensus. Once again, revenue was supported by strong cargo demand (cargo revenue represented ~54% of total revenue). ASK was down by ~88% y/y and PLF was 25.5% (-47.1pp). Adj. EBIT amounted EUR -143m and was slightly better than expectations (EUR -155m/-159m Evli/cons.).
Increased cost savings target
Previously, Finnair was targeting permanent costs savings of EUR 140m by 2022 (compared to 2019 levels) but as the savings program is proceeding well the company increased the target to approx. EUR 170m. This is good news as it is extremely important to be well positioned in the post COVID-19 world. Despite the blurry outlook regarding the recovery of air travel, there are positive signs in the market as the vaccination coverage is gradually increasing. Finnair starts to accept vaccination certificates from mid-May onwards and will be adding destinations and frequencies towards the summer. In summer, the company’s plan is to operate over 60 destinations. However, we note that it is important that European countries lift travel restrictions at a same pace but also that traveling from non-EU countries becomes easier.
“HOLD” with TP of EUR 0.75
Due to the week visibility, Finnair did not provide a full year guidance but expects Q2’21E comparable operating loss to be similar compared to the previous four quarters. The company expects gradual recovery to start in late summer. As the company has additional funding available if needed (e.g. hybrid loan from the State of Finland) we expect the company is rather well positioned once the market reopens. We expect 21E revenue of EUR ~1287m and adj. EBIT of EUR -372m. Profitability should quickly improve once the recovery starts due to the cost savings. We keep our rating “HOLD” with TP of EUR 0.75.
Finnair’s Q1 result was similar compared to the previous quarters. Q1’21 adj. EBIT was EUR -143m vs. our expectation of EUR -155m and consensus of EUR -159m. Revenue decreased by ~80% y/y and was EUR 114m vs. our expectation of EUR 96m and consensus of EUR 103m.
Finnair reports its Q1 result on next week’s Tuesday, 27th of April. We expect Q1’21E to be relatively similar compared to the previous quarters. We keep our rating “HOLD” with TP of EUR 0.75 (0.60).
Quiet quarter, as expected
In Q1, Finnair carried 259k passengers which is 90% decline compared to Q1’20. Average Seat Kilometers (ASK) decreased by 87.6% y/y and Revenue Passenger Kilometers (RPK) decreased by 95.6% y/y. Passenger Load Factor (PLF) declined by 47.1%-points y/y and was 25.5%. The pandemic situation worsened during the first quarter of the year and strict travel restrictions remained. We expect Q1E revenue of EUR 96m (-83% y/y) and adj. EBIT of EUR -155m.
Towards better times
Even though the coronavirus situation has continued severe in the beginning of the year, there is light at the end of the tunnel as the vaccination pace has slowly improved. However, it is still unclear when traveling can start to normalize and how to make it safe. Possible vaccination certificates could be a crucial solution to this as it is important that European countries, including Finland lift travel restrictions at the same pace. Currently, it is estimated that majority of Finnish people have been received the first vaccine dose by the late summer thus air travel is expected to remain in a low level also during April-June. Therefore, we have cut our Q2’21E estimates. Our H2’21E and 22E-23E estimates are largely unchanged at this point.
“HOLD” with TP of EUR 0.75 (0.60)
The hybrid loan by the State of Finland to Finnair (max. of EUR 400m) was approved by the EU Commission in March. Approx. EUR 350m of the loan can be used by Finnair if its cash or equity position drop below specific limits. The remaining approx. EUR 50m share needs the Commission’s approval at a later stage. The interest rate of the hybrid loan has not been specified. We expect the recovery of air travel to begin in H2’21 but highlight that there are still significant uncertainties due to the changing pandemic situation. We expect 21E revenue to increase by 72% y/y and adj. EBIT of EUR -336m. We keep our rating “HOLD” with TP of EUR 0.75 (0.60) ahead the Q1 result.
Finnair - Waiting for better times Equity Research Read full report here → Finnair’s Q4 figures were ugly, as expected. As the pandemic situation prolongs, we expect slow recovery to start during the summer but better improvement is expected to start in late 2021. We keep our rating “HOLD” with TP of EUR 0.60.
Revenue declined by 87% y/y
Once again, Finnair reported ugly quarterly figures, as the coronavirus situation is not showing any signs of abating. Strict travel restrictions remained, and there was an overall lack of demand during Oct-Dec. Finnair’s Q4 revenue decreased by 87% y/y to EUR 102m (94m/101m Evli/cons.). Adj EBIT was EUR -163m (-172m/-167m Evli/cons.). Q4 ASK decreased by 89% and PLF was 29.2% (-49.8pp). No dividend is distributed for 2020.
Recovery expected to start during the summer
According to the company, the comparable operating loss in Q1 will be of a similar magnitude as in Q2-Q4’20. The company continues to fly with limited network during Q1 and estimates that the travel begins to recover from summer 2021 onwards as the vaccination coverage increases and countries start lifting travel restrictions. However, the visibility remains weak and therefore the company is not giving revenue guidance for 2021. The company expects that traffic will recover to 2019 levels in 2023 (measured in ASKs). We expect Finnair is well positioned once the recovery starts and the profitability should improve notably due to the permanent cost savings target of EUR 140m from the beginning of 2022 (compared to 2019).
“HOLD” with TP of EUR 0.60
The State of Finland and Finnair are preparing an unsecured hybrid loan of up to EUR 400m which is expected to be finalized during the first quarter of 2021. As the company still has available funding, we are not concerned even if the pandemic situation continues throughout the summer. We expect H1’21E to remain extremely weak but slightly better recovery is expected to start in Q3E. We expect 2021E revenue of EUR 1545m and adj. EBIT of EUR -312m. We highlight that there are still significant uncertainties with our estimates. We keep our rating “HOLD” with TP of EUR 0.60.
The pandemic continued to hamper Finnair operations during Q4. Finnair’s Q4’20 adj. EBIT was EUR -163m vs. our expectation of EUR -172m and consensus of EUR -167m. Revenue decreased by ~87% y/y and was EUR 102m vs. our expectation of EUR 94m and consensus of EUR 101m.
Finnair reports its Q4 result on next week’s Thursday, 18th of February. We expect Q4E revenue to decline by 88% y/y to EUR 94m and adj. EBIT of EUR -172m. We retain “HOLD” and TP of EUR 0.60 ahead the result.
Expecting Q4E revenue to decline by 88% y/y
In Oct-Dec, Finnair carried 278k passengers which is 92% decline compared to Q4’19. Average Seat Kilometers (ASK) decreased by 89% y/y and Revenue Passenger Kilometers (RPK) decreased by 96% y/y. Passenger Load Factor (PLF) declined by 49.8%-points y/y and was 29.2%. The pandemic situation worsened towards the end of the year and strict travel restrictions remained. We expect Q4E revenue of EUR 94m (-88% y/y) and adj. EBIT of EUR -172m.
New virus variants increasing fears
During Q4, Finnair finalized a sale and leaseback arrangement for one of its A350 aircrafts. The immediate positive cash effect is in excess of EUR 100m. The total positive net impact of the amendments to the terms of Finnair pension fund as well as pilots’ early retirement is EUR 133m on Q4 operating result (not affecting comparable operating result). According to the company, the comparable operating loss in Q4 will be similar to Q2-Q3’20. Despite the vaccine optimism the catastrophic situation threatens to continue at least throughout H1’2021 and deepen distress in the aviation sector as new virus variants are increasing fears and there are delays in the vaccine supply for Europe. Therefore, we have cut our H1’21E estimates and expect better improvement to start in the latter half of the year.
“HOLD” with TP of EUR 0.60
We expect FY20E revenue of EUR 821m (-74% y/y) and adj. EBIT of EUR -604m. We expect the situation to improve during 21E, but better improvement is seen later in 22E. However, there are still significant uncertainties with our estimates as visibility remains extremely weak. We keep our rating “HOLD” with TP of EUR 0.60 intact ahead the Q4 result.
Aviation industry has faced the worse ever crisis in 2020 due to the COVID-19. Finnair has been forced to scale down its traffic and the ramp-up is expected to start next summer. We expect heavy losses in 20E but also in H1/21E. We keep our rating “HOLD” with TP of EUR 0.60 (0.38).
Strategy focuses on the traffic between Asia and Europe
Finnair’s strategy focuses on the growing traffic between Asia and Europe. The strategy is based on the geographic location of the Helsinki hub: the shortest route from (North-East) Asia to Europe goes over Helsinki. Additionally, the distance between Helsinki and most Asian destinations is such that Finnair is able serve most routes in 24h rotations, which enables high utilization rate of planes and reduces the need for additional crew. The most direct route to Asia is enabled by having Russian overflight rights. Flights through the Siberian corridor from Asia to Europe via Helsinki save ca. 2h on flight time compared to one-stop flights via European hubs and ca. 4h compared to routes via the Middle East.
COVID-19 caused the worst ever crisis
The aviation industry faced the worst ever crisis in 2020 as the COVID-19 pandemic spread from China across the world in early 2020. Global lockdowns and travel restrictions forced also Finnair to scale down its traffic. Finnair estimates that the passenger numbers will recover in 2-3 years. The company continues to operate with a significantly limited network also in Q1/21E and the ramp-up is expected to start in the summer 2021. However, the visibility is extremely weak not only due to the pandemic situation itself but due to different travel restrictions. The company expects 20E revenue and capacity (ASK) to decrease more than 70%.
“HOLD” with TP of EUR 0.60 (0.38)
We expect Finnair’s 20E ASK to decline by 72% y/y and revenue to decrease by 73% y/y while comparable operating loss is expected to be EUR 602m. We expect significant losses also during H1/21E. We expect air travel to recover relatively well in 2022E but passenger numbers are still expected to remain below 2019 levels. Due to Finnair’s targeted annual cost savings of EUR 140m from 2022 onwards, we expect good profitability development after the crisis. Finnair’s share price recently took off due to the optimistic vaccine news. The news are promising but we note that there are no effective vaccines in the global distribution yet. We retain “HOLD” with TP of EUR 0.60 (0.38).
The third quarter wasn’t any better for Finnair and was heavily impacted by strict travel restrictions. Revenue declined by 89% y/y and was EUR 97m while adj. EBIT was EUR -167m. We have further cut our estimates and keep our rating “HOLD” and TP of EUR 0.38 intact.
Strict travel restrictions hampered Finnair’s operations
As expected, Finnair’s Q3 result was heavily weighed down by the coronavirus pandemic and the strict travel restrictions especially in Finland. Therefore, the company had to deviate from the previous plans and to continue to operate with a limited network. Capacity (ASK) was down by 87% compared to last year and PLF was 38.7% (-47.5pp). Revenue decreased by ~89% y/y, amounting to EUR 97m vs. EUR 157m/145m Evli/cons. Adj. EBIT was EUR -167m vs. EUR -191m/-179m Evli/cons. By the end of the quarter, Finnair had paid out over EUR 400m of COVID-19 related refunds (some EUR 40m left).
Winter season is expected to remain dark
Due to the prolonged pandemic situation and strict travel restrictions it is likely that the better recovery of air travel isn’t starting anytime soon. Finnair continues to fly with a limited network during the winter season. The company informed earlier that it is aiming to fly approx. 75 daily flights to ~50 destinations during the winter season (~350 flights per day in ‘19). The ramp-up is estimated to start from summer’21. According to the company, comparable operating loss in Q4 will be of a similar magnitude than in Q2 and Q3. The company also expects both, revenue and capacity (ASK) to decrease more than 70% in 2020 compared to 2019. Further, the company raised its savings target to EUR 140m (prev. EUR 100m) starting from the beginning of 2022 (compared to 2019).
“HOLD” with TP of EUR 0.38
Finnair has a fully undrawn EUR 175m revolving credit facility and a EUR 200m short-term commercial paper program, which was unused at the end of September. In addition, the remaining part of the statutory pension premium loan (EUR 200m) can be drawn if needed. We have cut our 20E-21E estimates and expect revenue in 20E to decline by 73% y/y to EUR 850m and adj. EBIT of EUR -606m. We keep our rating “HOLD” with TP of EUR 0.38.
The coronavirus pandemic and strict travel restrictions especially in Finland continued to hamper Finnair’s result in Q3. Finnair’s Q3’20 adj. EBIT was EUR -167m vs. our expectation of EUR -191m and consensus of EUR -179m. Revenue decreased by 88.7% y/y and was EUR 97m vs. our expectation of EUR 157m and consensus of EUR 145m.
Finnair will report its Q3 result on next week’s Wednesday, 28th of October. We have cut our 20E-21E estimates. We keep our rating “HOLD” with TP of EUR 0.38 (EUR 0.50) ahead of Q3 result.
Q3’20 ASK decreased by 87% y/y
In Jul-Sep, Finnair carried 454k passengers which is 89% decline compared to Q3’19. Finnair’s Q3 Available Seat Kilometers (ASK) decreased by 87% y/y but compared to Q2’20, ASK increased by ~380%. Revenue Passenger Kilometers (RPK) decreased by 94% y/y. Passenger load factor in Q3, was 38.7% (-47.5pp compared to Q3’19). Due to the strict travel restrictions and new infection waves, the company was not able to operate as many flights as it first anticipated. We expect Q3E revenue of EUR 157m and adj. EBIT of EUR -191m.
Aiming to fly ~75 daily flights during the winter season
The coronavirus has not shown signs of abating during the autumn and the travel restrictions have remained relatively tight, impacting negatively on demand. The company has been forced to adjust its traffic plans for several times and due to the current situation, the company now expects to operate approx. 75 flights per day from Nov’20 to Mar’21 (in 2019, ~350 daily flights) and will increase its destinations for summer 2021. During Q3, the company finalized a sale and leaseback arrangement for its A350 aircraft delivered in February this year. This had an immediate EUR ~100m positive cash effect. The company also issued a new EUR 200m hybrid bond (fixed interest rate of 10.250% p.a.).
“HOLD” with TP of EUR 0.38 (0.50)
We have further cut our 20E-21E estimates. We expect 20E revenue of EUR 1062m and comparable operating loss of EUR 609m. We expect the better recovery to start during ’21 spring but we highlight that the outlook is still very blurry. We keep our rating “HOLD” with TP of EUR 0.38 (0.50).
Finnair’s April-June revenue decreased by 91% y/y (EUR 69m) while adj. EBIT totaled EUR -174m. Flights are slowly recovering in Europe and Asia but the costs related to the ramp-up will increase H2E comparable operating loss. We keep our rating “HOLD” with TP of EUR 0.50 (0.60).
Heavy losses during Q2
Finnair’s Q2 result was weak as expected. April-June passenger numbers were down by ~98% y/y. Revenue declined by ~91% y/y and was EUR 69m vs. EUR 54m/49m Evli/consensus. Adj. EBIT was EUR -174m vs. EUR -177m/-179m Evli/consensus. ASK decreased by ~97% y/y and PLF was 33.1% (-49.4pp). Finnair’s revenue in the second quarter was greatly supported by the cargo business, which generated more than 70% of the revenue. The company reiterated its previous guidance (20E revenue will decline significantly compared to the previous year and the comparable operating loss will be significant). Revenue guidance for Q3E was not given. However, the comparable operating loss in Q3E will be of a similar magnitude than in Q2, due to clearly reduced capacity and costs related to the ramp-up.
The historically gloomy quarter is now behind and Finnair is slowly recovering its flights as travel restrictions in many European and Asian countries are gradually being lifted. In July, the company operates approx. 25% of its normal amount of flights. The estimated level in September is approx. 50%. The current traffic plan might change based on the pandemic situation and changes in the country specific restrictions. Finnair’s cargo business has increased its importance during this time and especially on Asian long-haul routes, the profitability is supported by the cargo business thus the good development of freight supports the launch of passenger flights. The company has been able to improve its cash position due to the rights offering proceeds of approx. EUR 500m (wasn’t fully booked by the end of June) and EUR 200m instalment of the EUR 600m statutory pension premium loan which was drawn in June.
“HOLD” with TP of EUR 0.50 (0.60)
Based on the new information we have further cut our estimates. We expect 20E revenue of EUR 1497m and adj. EBIT of EUR -503m. We highlight that the visibility remains very weak and there are significant uncertainties also with our 21E-22E estimates. We keep our rating “HOLD” with TP of EUR 0.50 (0.60).
Finnair’s Q2’20 adj. EBIT was EUR -174m vs. our expectation of EUR -177m and consensus of EUR -179m. Revenue decreased by 91% and was EUR 69m vs. our expectation of EUR 54m and consensus of EUR 49m.
Finnair reports its Q2 result on next week’s Friday, 24th of July. As well known, April-June figures will not be pretty. We expect Q2E revenue of EUR 54m and adj. EBIT of EUR -177m. We upgrade to “HOLD” (“SELL”) with TP of EUR 0.60.
Historically gloomy traffic
Finnair’s April-June traffic figures were extremely weak, as expected. Passenger numbers decreased by 97% y/y as Finnair carried only ~100k passengers during this time. ASK decreased by 97% y/y and RPK decreased by 99% y/y. The were no flights to North Atlantic nor to Asia during most of the quarter and the remaining operations have been mainly related to cargo. Finnair has estimated that its daily comparable operating loss will be approx. EUR 2m throughout Q2. We expect Q2’20E revenue of EUR 54m and adj. EBIT of EUR -177m.
Jet fuel prices dropped during Q2
Jet fuel prices have dropped significantly during Q2. The average price in both, USD and in EUR dropped by 49% on a q/q basis compared to Q1’20. On a y/y basis, the average price in USD fell by 62% and in EUR by 61%.
Flights starting gradually to recover
Finnair has gradually started to add frequencies and routes to its network as many travel restrictions have now been removed and the pandemic situation has improved, at least in Europe and Asia. The company estimated earlier that it aims to fly some 30% of its normal amount of flights in July. Some 70% of the normal capacity is expected to be operated by the end of the year. The company should be able to expand its offering relatively quickly depending on the country specific restrictions and demand.
“HOLD” (“SELL”) with TP of EUR 0.60
As a result of Finnair’s rights offering issued during the summer, Finnair receives net proceeds of approx. EUR 501m. The total number of Finnair’s shares increased to 1.4b. There are no major changes in our 20E-22E estimates. We expect 20E revenue of EUR 1595m and adj. EBIT of EUR -304m. We expect the traffic slowly to recover during 21E-22E but we don’t expect to see levels reached prior the pandemic any time soon. We keep our TP of EUR 0.60 and upgrade to “HOLD” (“SELL”).
Finnair will strengthen its balance sheet with a rights offering of approx. EUR 500m, which have been fully underwritten. We have also cut our 20E estimates to be in line with the latest traffic plan. We keep our rating “SELL” with TP of EUR 0.6 (3.3).
Aiming to raise gross proceeds of approx. EUR 500m
Finnair has announced the terms and conditions of its rights offering of approx. EUR 500m, which have been fully underwritten. The proceeds from the offering are intended for strengthening the company’s balance sheet and to support the company’s long-term strategy. The company offers up to ~1279m new shares for subscription for the existing shareholders. The existing shareholders receive one subscription right for each share held on the record date and each subscription right carries the right to subscribe for ten offer shares. The subscription price is EUR 0.40 per offer share. The state of Finland, which is the largest shareholder of Finnair, has committed to subscribe in full for offer shares on the basis of subscription rights allocated to it (a total of 55.9% of the offer shares). The subscription period commences on 17 June 2020 and ends on 1 July 2020.
Further estimates cut for 20E
We have also adjusted our H2’20E estimates downward based on the traffic plan introduced earlier in May. Finnair will start gradually to add frequencies and routes back starting from July. For instance, the company will fly to several European destinations, concentrating first on the key cities. Also, long-haul flights to Asia will start in phases. The company aims to operate approx. 30% of its normal amount of flights in July. Finnair estimated that it will fly approx. 70% of its normal capacity at the end of this year.
“SELL” with TP of EUR 0.6 (3.3)
We now expect 20E revenue to decline by ~48% y/y, amounting to EUR 1605m (prev. EUR 1752m). We expect 20E adj. EBIT of EUR -305m (prev. EUR -265m). We keep our rating “SELL” with TP of EUR 0.6 (3.3).
Finnair’s Q1 result was weak as expected due to the coronavirus pandemic. Revenue declined by 16% y/y to EUR 561m while adj. EBIT was EUR -91m. We have decreased our 20E-22E estimates and downgrade our rating to “SELL” (“HOLD”) with TP of EUR 3.3 (4.0).
Weak Q1 result due to COVID-19
Finnair’s Q1 result was heavily impacted by COVID-19. Revenue declined by 16% y/y to EUR 561m vs. EUR 585m/555m Evli/cons. Adj. EBIT was below estimates at EUR -91m vs. EUR -73m/-59m Evli/cons. ASK decreased by 9.4% y/y while RASK decreased by 7.3% y/y. The company expects a significant comparable operating loss in 20E. Earlier Finnair cut its capacity by over 90% due to the coronavirus and the company will operate the current minimum network throughout Q2. Finnair estimates that its comparable operating result will be a daily loss of approx. EUR 2m throughout Q2.
Ugly Q2 ahead – H2 remains blurry
Due to the coronavirus pandemic, Q2E result will be even uglier than in Q1. We expect Finnair’s Q2E ASK to decrease by 95% y/y, resulting in a significant decline in revenue. We expect comparable operating loss of EUR ~170m in Q2E. The situation should start slowly to recover after Q2 but we still expect significant capacity cuts during the late summer and autumn. H2’20E remains blurry as it still is unknown how the coronavirus situation will evolve in different markets. Finnair also gave insights of how the mid-term outlook of air travel might look like and indicated that the passenger numbers are not expected to recover to the levels prior the crisis at least not during the next couple of years. It is likely that the air travel will face permanent structural changes and will never return as it was before the crisis.
“SELL” (“HOLD”) with TP of EUR 3.3 (4.0)
We have decreased our 20E revenue estimate by ~20% and adj EBIT estimate by ~80%. We have also cut our 21E-22E revenue estimates by ~14% and adj EBIT estimates by ~30-50%. We now expect Finnair’s 20E revenue to decline by 43% y/y to EUR 1752m and comparable operating loss of EUR 265m. We note that there are significant uncertainties with our estimates. Prior the crisis, Finnair had a strong cash position and a healthy balance sheet. The company is also implementing a substantial funding plan, including sale and leasebacks of unencumbered aircraft, a revolving credit facility of EUR 175m, which has already been raised and a statutory pension premium loan totaling to EUR 600m. Therefore, we see that Finnair is well placed to continue its operations after the crisis, even if the situation is prolonged. Finnair is also planning for an approx. EUR 500m share issue to strengthen its equity. We downgrade our rating to “SELL” (“HOLD”) with TP of EUR 3.3 (4.0).
Finnair’s Q1’20 adj. EBIT was EUR -91m vs. our expectation of EUR -73m and consensus of EUR -59m. Revenue decreased by 16% and was EUR 561m vs. our expectation of EUR 585m and consensus of EUR 555m.
Finnair will report its Q1 result on next week’s Wednesday, 29th of April. The company’s Q1’20 traffic data was below our expectations thus we have cut our estimates. We expect Q1’20E revenue of EUR 585m and adj. EBIT of EUR -73m. We keep our rating “HOLD” with TP of EUR 4.0 (3.5) ahead of Q1.
Q1 traffic hampered by the coronavirus
Finnair’s traffic figures were substantially below our expectations in Q1, due to March traffic figures, which slumped more than we expected. In Jan-Mar, capacity (ASK) decreased by 9% vs. our +2% expectation, while sold capacity (RPK) declined as much as by 16% vs. our -1% expectation. Thus, passenger load factor (PLF) declined by 5.7 percentage points to 72.6%. Traffic figures and cargo were heavily impacted by the coronavirus in all Finnair’s market areas. Total passenger number declined by 16% y/y. We expect Q1’20E revenue of EUR 585m (Q1’19: EUR 668m) and adj. EBIT of EUR -73m (Q1’19: EUR -16m).
Drop in fuel prices
Oil prices have dropped significantly since the beginning of the year amid the coronavirus pandemic and the price war between Saudi Arabia and Russia. The average fuel price in both USD and EUR dropped by 20% on a q/q basis compared to Q4’19. The average price in Q1’20 was 19% lower y/y in USD and 17% lower y/y in EUR.
“HOLD” with TP of EUR 4.0 (3.5)
We have cut our 20E estimates as the ongoing movement restrictions are likely to continue for several weeks or even months and the air travel is not expected to return to normal, not at least during this summer. Finnair has cut some 90% of its capacity due to COVID-19. We now expect 20E revenue of EUR 2213m (-29% y/y) and adj. EBIT of EUR -144m (-190% y/y). We note that there are significant uncertainties with our short-term estimates due to the situation. We have also decreased our 21E-22E revenue estimates by ~6% and adj. EBIT estimates by ~9%. Despite of the weak short-term outlook we still see Finnair’s mid-term outlook rather positive. Prior the crisis Finnair had a strong cash position and a healthy balance sheet. The company is also implementing a substantial funding plan, including sale and leasebacks of unencumbered aircraft, a revolving credit facility of EUR 175m, which has already been raised and a statutory pension premium loan totaling to EUR 600m. It has been proposed that the State of Finland would guarantee the loan. Therefore, we see that Finnair is well placed to continue its operations relatively normally after the crisis. We keep our rating “HOLD” with TP of EUR 4.0 (3.5) ahead of Q1.
The continuing crisis around COVID-19 forces Finnair to cut its capacity by some 90% in April. We have cut our 20E estimates substantially and expect EUR -52m comparable operating loss in 20E. We keep our rating “HOLD” with TP of EUR 3.5 (5.0).
Second profit warning due to COVID-19
Finnair issued its second profit warning within a month as the COVID-19 continues to hammer the global airline industry. Earlier the company withdrew its capacity estimate for 20E and expected 20E comparable operating profit to be significantly lower than on the previous year. Due to the flight restrictions and low demand, Finnair now cuts its capacity by ~90% starting from April and indicates that the comparable operating loss will be significant in 20E. Also, the company decided to withdraw the ’19 dividend proposal of EUR 0.2 per share.
Strong financial position securing Finnair’s operations
In order to secure its financing, Finnair has started to implement a substantial financing plan. This includes funding instruments such as available credit lines (Finnair has an available non-used credit line of EUR 175m), sale and leasebacks of unencumbered aircraft (Finnair currently has 42 unencumbered aircraft, which represents about half of the balance sheet value of the total fleet) and a substantial, market-based pension premium loan. Also, the Finnish government will actively support the company. Prior the COVID-19 situation, the company had a healthy balance sheet and a strong cash position, which should support Finnair’s finance and operations even if the situation around COVID-19 is prolonged. The company will also make further cost adjustments (prev. aiming cost savings of some EUR 40-50m). We expect relatively quick savings from personnel expenses but many of the other cost savings are expected to be realized later in H1’20E.
“HOLD” with TP of EUR 3.5 (5.0)
We have significantly cut our 20E estimates. We now expect 20E revenue to decline by ~13% y/y (EUR 2707m) while we expect comparable operating profit to decline by ~132% y/y (EUR -52m). This is mainly due estimates cut in Q2’20E. With our updated estimates, Finnair’s 20E gearing would be some 137% (64% in 2019), while the company’s target is to keep the ratio below 175%. Our net debt/EBITDA estimate is 3.9 (1.3 in 2019). On our estimates, Finnair trades at 20E EV/EBITDA multiple of 5.4x, which translates into 105% premium compared to the peers. Despite of the severe situation, we expect Finnair has good possibilities to quickly continue its operations after the situation. As Finnair’s financial position is strong we continue to see Finnair’s mid-term outlook rather positive. Due to the exceptional situation, there are significant uncertainties with our short-term estimates. We keep our rating “HOLD” with TP of EUR 3.5 (5.0).
Finnair came out with revised 20E outlook and issued a profit warning as the impacts of the coronavirus are more severe and far reaching than first estimated. We have cut our 20E revenue estimate by ~1% and comparable EBIT estimate by ~23%. We keep our rating “HOLD” with TP of EUR 5.0 (EUR 6.3).
Revised outlook for 2020E
Finnair revised its 20E outlook due to the larger than first estimated impacts of the coronavirus. During Q4’19 result, the company indicated that the impacts on Q1’20E result will be limited and expected 20E capacity growth of ~4% y/y. According to the new guidance, Finnair expects Q1’20E comparable EBIT to be lower than in the previous year. The company foresees decreasing demand also in Q2’20E, resulting in a negative impact on revenue. Q2’20E comparable EBIT is expected to be significantly lower compared to Q2’19. Therefore, comparable EBIT for 20E is also expected to be significantly lower than in FY19. In addition, the company withdrew its capacity (ASK) growth estimate (~4%) for 20E and aims to adjust its capacity to the current situation. Finnair has also commenced to seek how to adjust its costs by EUR 40-50m to mitigate the negative financial impact resulting from the virus.
20E estimates cut
We have made small adjustments to our Q1’20E revenue expectation and cut our already rather conservative Q1’20E comparable EBIT estimate by ~15%. We also cut our Q2’20E revenue estimate by ~4% and our comparable EBIT estimate by ~48%. Thereby, our FY20E revenue estimate is reduced by ~1% and comparable EBIT estimate by ~23%. We now expect 20E revenue growth of 1.8% y/y (EUR 3154m) while we expect comparable EBIT to decline by ~19% y/y (EUR 133m). We foresee 20E capacity (ASK) growth of 2.4% y/y (prev. estimate of 3.5% y/y). We expect negative impacts especially on Asian routes (Finnair suspended all the flights to mainland China, which might continue until the end of March) but also on European routes and on global cargo during H1’20E. We also expect weaker demand in travel services.
“HOLD” with TP of EUR 5.0 (prev. EUR 6.3)
We have kept our 21E-22E estimates intact as we don’t expect long-term financial impacts resulting from the coronavirus. However, as the visibility around the coronavirus and its development remain weak, there are uncertainties especially with our short-term estimates. We keep our rating “HOLD” with TP of EUR 5.0 (6.3).
Finnair delivered strong Q4 result. Q4 revenue was EUR 774.9m vs. our 740m (cons. 744m) while adj. EBIT amounted to EUR 31.2m vs. our 8.2m (cons. 9.0m). Finnair expects ‘20E capacity growth of ~4% but didn’t provide more detailed ‘20E guidance due to the coronavirus. We keep our rating “HOLD” with TP of EUR 6.3 (6.5).
Q4 better than expected
Finnair’s Q4 result beat the expectations in terms of both revenue and profitability. Revenue grew by 13.4% y/y and amounted to EUR 774.9m vs. our EUR 740m (cons. 744m). The difference is mainly due to Finnair’s better than anticipated revenue management (i.e. ticket fares). Revenue development was good especially in North America (38.5% y/y) and in Europe (17.3% y/y). Q4 costs were as expected with fuel cost of EUR 171m (Evli 171m) and other OPEX (incl. D&A) of EUR 588m (Evli 580m). Q4 adj. EBIT was EUR 31.2m vs. our EUR 8.2m (cons. EUR 9.0m). Proposed dividend for ’19 is EUR 0.20 vs. our EUR 0.11 (cons 0.10).
Expecting ASK growth of ~4% y/y
Finnair’s capacity (ASK) growth was strong in ’19 (11.3% y/y), driven by two new A350s, received last year and one A350, received in Dec’18. The added capacity was mainly put to Asian routes. Two more A350s are expected to be delivered during H1’20E. For 20E, Finnair guides capacity growth of ~4% y/y while our expectation is at 3.6% y/y. We expect the good performance to continue especially in Europe where many airlines have cut capacity but also in North America. We expect cargo to remain relatively soft in ’20E due to continuing uncertainties around global trade.
Weak visibility due to the coronavirus
Finnair did not provide a revenue estimate for 20E, as the total impacts of the coronavirus are still unknown. Finnair has suspended all the flights to mainland China, which might continue until the end of March. Finnair estimates that the Q1’20E financial impacts remain limited as the post Chinese New Year time is usually relatively quiet in terms of traveling. Due to the coronavirus, one delivery of A350 will be delayed from April to June. We have slightly decreased our Q1’20E revenue expectation (approx. -1%) but expect the impacts for the full year to remain limited.
“HOLD” with TP of EUR 6.3 (6.5)
We expect 20E revenue of EUR 3191m (3% y/y) and adj. EBIT of EUR 171m (5% y/y), resulting in adj. EBIT margin of 5.4%. However, as the visibility of the coronavirus is weak, there are uncertainties especially with our short-term estimates. On our estimates, Finnair trades at ‘20E-'21E EV/EBIT multiple 9.2x and 8.4x, which translates into ~10-20% premium compared to the peers. We keep our rating “HOLD” with TP of EUR 6.3 (6.5).
Finnair’s Q4’19 adj. EBIT was EUR 31.2m vs. our expectation of EUR 8.2m and consensus of EUR 9.0m. Revenue was EUR 775m vs. our expectation of EUR 740m and consensus of EUR 744m.
• Q4 revenue was EUR 774.9m vs. EUR 740m/744m Evli/cons.
• ASK increased by 10.6% in Q4. RASK increased by 2.5% y/y.
• Q4 adj. EBIT was EUR 31.2m vs. EUR 8.2m/9.0m Evli/cons. Q4 comparable EBITDA was EUR 120.7m vs. EUR 89.7m our view.
• Absolute costs in Q4: Fuel costs were EUR 171m vs. EUR 171m our view. Staff costs were EUR 136m vs. EUR 133m our view. All other OPEX+D&A combined were EUR 451m vs. EUR 447m our view.
• Unit costs: CASK was 6.42 eurocents vs. 6.31 eurocents our view.
• Q4 EPS was EUR 0.17 vs. -0.14/-0.12 Evli/cons.
• 2019 dividend: EUR 0.20 vs. 0.11/0.10 Evli/cons.
• Finnair expects capacity increase of ~4% in 2020 but due to the coronavirus the company does not provide a full year revenue estimate.
Finnair will report its Q4 result on next week’s Friday, 7th of February. The company’s Q4’19 traffic was in line with our expectations thus we have made only minor adjustments to our estimates. We expect Q4 revenue of EUR 740m and EBIT of EUR 8.2m. We keep our rating “HOLD” with TP of EUR 6.5 ahead of Q4.
Good Q4 traffic data
Finnair’s traffic met the expectations in Q4. Capacity (ASK) grew by 10.6% vs. our 9.4% expectation, while sold capacity (RPK) grew as much as 13.6% vs. our 9.4% expectation. Thus, passenger load factor (PLF) increased by 2.1 percentage points to 79.0% in Q4. PLFs grew in all the market areas but especially in Europe (+3.4pp) and in Finland (+3.4pp). Total passenger number rose by 11 % y/y. Cargo development continued soft as the global uncertainty in world trade continued to press the global air freight market, especially in Asia. We expect Q4 revenue of EUR 740m (Q4’18: 684m) and EBIT of EUR 8.2m (Q4’18: 26.5m).
Slight increase in jet fuel prices
Jet fuel prices slightly increased towards the end of the year. The average price in USD moved up by 1% and in EUR by 2% on a q/q basis compared to Q3’19. Yet the average price in Q4’19 was still -7% lower y/y in USD and -4% lower in EUR.
Coronavirus hampers share price
Finnair’s share price has slumped after the fears around Coronavirus rose. In order to control the situation, China has restricted traveling and day-to-day business in some areas, which affects Finnair’s operations in Asia. The impacts for Finnair’s financial outlook are still unknown thus we have not made changes to our estimates. We expect to get more color on this with the Q4 result.
“HOLD” with TP of EUR 6.5 intact
We have kept our estimates largely intact ahead of Q4 result. For FY19E we expect revenue of EUR 3077m (FY18: EUR 2850m) and adj. EBIT of 140m (FY18: EUR 218m), resulting in EBIT margin of 4.6% which is at the lower end of the guided adj. EBIT margin level of 4.5-6.0%. We expect Finnair to propose a dividend of EUR 0.11 per share for ’19. We keep our rating “HOLD” with TP of EUR 6.5 intact ahead of Q4.
Finnair held its CMD yesterday where the company presented its road map for sustainable and profitable growth after a phase of accelerated growth. The company aims to grow in line with market growth, focusing on improving its market position in Asia. The company provided a mix of efficiency improvement actions in order to improve profitability. We don’t expect any short-term impacts hence we retain our rating “HOLD” with TP of EUR 6.5.
Focusing on Asian mega cities
Finnair continues to focus on improving its market position in Asia. The company’s geographical position provides Finnair a competitive advantage of transfer traffic between Europe and Asia. Transfer traffic between the two continents is essential as transfer traffic represents 62% of Finnair’s flown ticket revenue of which transfer traffic from Asia represents 73%. The company will concentrate on Asian mega cities which are providing higher yields. Japan and China are the two main markets but Finnair increases its presence also in other Asian countries, South Korea being an example as the company opens a new route to Busan in March 2020. The market growth is estimated to be some 4% between Europe and Asia. The company aims to be a modern premium airline and has renewed its website and mobile app to better serve its customers globally. The company is also renewing its ticket types and will offer a new option, premium economy class alongside with the normal economy and premium classes.
Heavy investments on fleet renewal
During the past few years, Finnair has focused on accelerated growth. The company has increased its capacity in 2015-2019 by 14 new A350 aircrafts and five more has been ordered (for 2020-2022). During the strategy period, the company aims to increase its wide-body fleet from 22 to ~30 and the total fleet from 83 to ~100. The company has estimated that the fleet investments during 2020-2025 will be some EUR 3.5b-4.0b (including the five new A350s) depending on the final fleet renewal plan. According to the company, one-third of the investments will be invested into growth and the remaining two-thirds into fleet renewal/replacement. The company aims to increase the share of its owned aircrafts. The investments will predominantly be funded by the company’s cashflow.
Updated financial targets for 2020-2025
Finnair updated its financial targets for 2020-2025 as the company is moving towards a new phase where the company seeks sustainable and profitable growth. The company’s opex (ex fuel) has increased by 6.1% (CAGR) since 2014, which exceeds the revenue growth of 5.5% (CAGR). Based on the strategy update, the company aims to moderate its growth and expects it to be in line with the market growth. Finnair guides ASK growth (CAGR) of 3-5% which is in line with our expectations (3-4% in 20E-21E). The company’s new target is to reach comparable EBIT margin of over 7.5% (prev. over 6%) over the cycle (at constant fuel and currency), after a 12-18 month build-up period. Profitability improvement will be driven by operational efficiency. Key drivers for lower unit costs are fuel efficiency, digitalization and automatization as well as improved on-time performance. Finnair targets to improve its OTP rate to 85% (2018: 78%). Also, fleet renewal should boost efficiency and updated ticket types to support margins. We see Finnair’s profitability target achievable, although we don’t expect any short-term impacts as the improvement of OTP is gradual and implementation of new processes takes time. Finnair also updated its ROCE target and expects ROCE of over 10% (prev. over 7%) over the cycle (at constant fuel and currency), after a 12-18 month build-up period. The company will provide more information of its sustainability targets in Q1’20.
HOLD with TP of EUR 6.5
We have made small adjustment mainly to our 21E estimates after the CMD. We expect revenue to grow 3-4% in 20E-21E while we expect comparable EBIT margin of 5.2% and 6.6%. The updated strategy does not impact our short-term estimates but we see the new targets to create positive outlook for Finnair’s earnings development in the future. We keep our rating “HOLD” with TP of EUR 6.5.
Finnair’s Q3 earnings fell short of expectations. We have cut our estimates for 2019E-2021E after Q3 earnings. Considering the weakening profitability trend and market outlook uncertainties we do not see valuation being particularly attractive. We downgrade to “HOLD” with TP of EUR 6.5 (prev. EUR 7.4).
Profitability weighed down by fuel costs and currencies
Finnair’s Q3 revenue increased by 7.9% and was EUR 870.3m vs. our expectation of EUR 889.2m and consensus of EUR 871.4m. The revenue was boosted by increased passenger numbers (11.9% y/y). Especially the European traffic development was good as well as traffic in North America due to the new Los Angeles route which was opened last March. Finnair’s traffic from Asia to Europe remained at good level, whereas demand from Europe to Asia was softer. Capacity (ASK) increased by 9.5% y/y while RASK decreased by 1.5% y/y. Finnair’s Q3 profitability fell short of expectations as comparable EBIT decreased by ~14% from last year and was EUR 100.7m vs. our expectation of EUR 135.4m and consensus of EUR 121.9m. Profitability was weighed down by fuel costs (incl. hedging), a decline in the dollar-based discount rate on maintenance reserves and negative exchange rate effects. Also, softening demand in cargo impacted Finnair’s Q3 earnings.
Global uncertainties increasing risks
We expect the market outlook to remain volatile in the latter half of the year as the global economies of Finnair’s key markets are slowing down and the uncertainties surrounding global trade, such as Brexit and US-China trade talks continue which could have an impact on air travel and cargo demand. We have already seen some softening in cargo demand especially in Asia and we expect the market environment to remain challenging. Finnair experienced some lower air travel demand in Hong Kong in Q3 and we expect this to continue as long as the disorder continue. We expect Finnair to gain some competitive advantage in short term, especially in the European routes as Norwegian has cut down its capacity growth expectations for 2019 (Norwegian expects capacity growth of 0-5% in 2019). Considering the tight competition, we expect the advantages to last only for a short time.
Guidance for 2019E unchanged
Finnair reiterated its guidance and expects capacity growth of 11%-12% which is mainly due to the new route to Beijing’s Daxing International Airport which will be opened in early November. The company expects revenue to grow at a slightly slower pace than capacity in 2019E. Finnair expects adj. EBIT margin to be between 4.5-6.0% in 2019, assuming no material changes in fuel prices and exchange rates. We expect capacity to grow by 11% in 2019E while we expect RPK growth of 10% and total revenue growth of 8%. Our expectation for 2019E adj. EBIT margin is at the lower end of the guidance at 4.6%.
Estimates cut – downgrade to “HOLD”
After Q3’19 earnings we have cut our 2019E-2021E estimates. We have lowered our 2019E-2021E revenue expectations by ~1% and cut our EBIT estimate for 2019E by 23% and for 2020E-2021E by 12-17%. We now expect 2019E revenue of EUR 3074m (prev. EUR 3104m) while our 2019E adj. EBIT expectation is at EUR 140m (prev. EUR 181m) resulting in EBIT margin of 4.6%. Considering the weakening profitability trend and market outlook uncertainties we do not see valuation being particularly attractive. With our new TP of EUR 6.5 (prev. EUR 7.4) Finnair trades on our estimates at its historical average of NTM EV/EBITDA of 3.5x. After estimates cut we downgrade our rating to “HOLD” (prev. “BUY”).
Finnair’s Q3’19 adj. EBIT was EUR 100.7m vs. our expectation of EUR 135.4m and consensus of EUR 121.9m. Revenue was EUR 870.3 vs. our expectation of EUR 889.2 and consensus of EUR 871.4m. Finnair reiterated its guidance. The company expects capacity growth of 11-12% and revenue to grow at a somewhat slower pace than capacity in 2019. Finnair expects its EBIT% to be between 4.5%-6.0% in 2019.
Finnair will report its Q3 result on next week’s Tuesday. The company’s traffic data in Q3 was slightly above our estimates but did not provide any major surprises. Q3 ASK growth was 10% while RPK growth was 12% (Finnair’s 2019E guidance for capacity growth is 11-12% while revenue is expected to be slightly below capacity growth). With the share price correction, our rating is now “BUY” (prev. HOLD) while our target price remains unchanged at EUR 7.4 ahead of Q3.
No surprises with Q3 traffic data
Finnair’s Q3’19 ASK grew by 10% while we expected ASK growth of 9%. ASK increased especially in North America as a result of the new Los Angeles route which was opened in March 2019 and additional flights to San Francisco. ASK growth in Asia was mainly due to additional frequencies to Hong Kong and Osaka. Finnair’s RPK growth was 12% in July-September vs. our expectation of 10%. Revenue increased especially in the European and North American routes where RPK growth beat ASK growth. Passenger Load Factor increased in all the other market areas expect in Asia where PLF declined by 2.3%. Global uncertainty in world trade and the softening of demand and price pressures have lowered expectations for cargo especially in the Asian market. The Q3 traffic data did not provide any major surprises thus we have kept our estimates intact.
Ease in jet fuel prices during Q3
Jet fuel prices have eased during Q3’19. In Q3, the average spot price of jet fuel in USD declined by 4% from Q2. On a y/y basis, the average Q3 USD price was down by 13%. Similarly, the average spot price in EUR moved down by 3 % q/q and by 9% on a y/y basis.
“BUY” (prev. HOLD) with TP of EUR 7.4
We have kept our Q3’2019E estimates intact after Q3 traffic information. We expect Finnair’s Q3’19E revenue to be EUR 889m while we expect Q3’19E EBIT of EUR 135m resulting in EBIT margin of 15.2%. We expect Finnair’s 2019E total sales to be EUR 3104m (8.9% y/y) while we expect EBIT of EUR 181m. With the share price correction, our rating is now “BUY” (prev. “HOLD”) while our target price remains unchanged at EUR 7.4.
Finnair’s Q2 profitability fell short of expectations. The company issued new FY19E guidance for profitability. Global market uncertainties and weaker outlook for cargo business are likely to impact H2’19. We have cut our 19E-20E adj. EBIT estimates after Q2 result. Despite of the sizeable drop in share price we do not see valuation being particularly attractive considering the weakening profitability trend. Hence, we retain “HOLD” with TP of EUR 7.4 (prev. 8.0).
FY19E outlook remains volatile
Finnair expects EBIT% of 4.5%-6.0% for 2019E, which is clearly weaker than 2018 EBIT% of 7.7%. Increased fuel costs and high irregular maintenance costs in Q2 as well as weak profitability Q1 are burdening profitability expectations for FY19E. The operating environment is expected to remain volatile and continued uncertainties in global trade, such as Brexit and US-China trade talks could have an impact on air travel and cargo.
Good capacity growth in 2019E
Finnair’s capacity growth in Q2 (+14.8%) was good and the company strengthened its market share in both Asia and Europe. Finnair updated its guidance for 19E capacity growth as the new route to Beijing’s Daxing International Airport will be opened in early November. The company expects capacity growth to be 11%-12% (previously 10%) and revenue growth slightly below that in 2019E. Our capacity growth estimate is 11%, while we expect revenue to grow 9% in 2019E.
“HOLD” with TP of EUR 7.4 (prev. 8.0)
As a result of updated FY19E guidance and weak H1 profitability we have decreased our 2019E EBIT expectation from EUR 203m to EUR 181m resulting EBIT% of 5.8% (prev. 6.5%). We see revenue of EUR 3104m for 2019E. Considering the weakening profitability trend and market outlook uncertainties we do not see valuation being particularly attractive for 2019E-2020E. With our new TP of EUR 7.4 (prev. 8.0) Finnair trades on our estimates at its 3yr historical average NTM EV/EBITDA of 3.4x. We retain our rating “HOLD”.
Finnair’s Q2’19 adj. EBIT was EUR 47m vs. our expectation of EUR 65m and consensus of EUR 62m. Sales was EUR 793m. Finnair’s Q2 number of passengers rose to a new Q2 record and the company’s market share strengthened in both Asian and European markets. The growth development of cargo and travel services was not as favorable in Q2. Finnair issued its guidance for 2019E. The company expects capacity growth of 11-12% and revenue to grow at a somewhat slower pace than capacity in 2019. Finnair expects its EBIT% to be between 4.5%-6.0% in 2019.
Finnair’s traffic data in April-June indicates Q2’19 revenue of EUR 806m. We expected Q2 revenue of EUR 785m while consensus was at EUR 778m. Capacity growth in Q2 was above the company’s 2019E guidance (14.8% vs. 10% 2019E guidance) and our Q2 expectation of 12%. Fuel price continued to move up in Q2. We maintain our rating “HOLD” with to TP of EUR 8 ahead of Q2.
Strong passenger number growth and improved load factor
Finnair’s passenger numbers in Q2 grew by 13% y/y and hit the monthly all-time company record in June with 1.4m passengers in total. Overall capacity (ASK) grew by 14.8% y/y which was above our expectation of 12%. Capacity increase was mainly supported by three new A350-aircrafts that entered the service in December 2018, February 2019 and April 2019 and by one new A321-aircraft that was added to European routes. In North America, capacity increased following the new Los Angeles route and frequency additions to San Francisco. Sold capacity (RPK) growth was in line with the capacity growth at 14.7% y/y and clearly beat our growth expectation of 10%. Q2 passenger load factor (PLF) improved from Q1 and was 82.5% (-0.1% y/y growth vs. our expectation of -1.4% y/y).
Fuel price continued to move up in Q2
Jet fuel price development has continued in line with Q1. In Q2, the average spot price of jet fuel in USD moved up by 4% from Q1. On a y/y basis, the average Q2 USD price was down by 8%. Similarly, the average sport price of jet fuel in EUR moved up by 5% q/q and was down by 3% on a y/y basis.
“HOLD” with TP of EUR 8
As a result of Finnair’s strong April-June traffic data we have increased our Q2 revenue expectation from EUR 785m to EUR 806m (12% y/y) while keeping other estimates intact. We foresee Q2 adj. EBIT of EUR 65m (8.0% margin). We maintain our rating “HOLD” and TP of EUR 8 intact ahead of Q2.
Finnair’s Q1’19 results fell short of expectations. Comparable EBIT was EUR -16.2m vs. -6m our view. Especially passenger growth in China was low. The company expects increased competition due to increased capacity especially on routes between Europe and Asia. Finnair reiterates its guidance: 10 % capacity growth in 2019 and revenue growth of slightly slower. We keep our “HOLD” rating with TP of EUR 8.0.
Q1: costs and fuel weighed down the result
Finnair’s revenue was in line with our expectation (EUR 673m vs. 679m our view). The company’s Q1 adj. EBIT was clearly below expectations at EUR -16.2m vs. EUR -6m Evli and EUR -6m cons. Compared to our estimates the loss was driven by increased costs. Operating costs (excl. fuel and staff costs) were EUR 353m vs EUR 339 our view. Increase in OPEX was driven by higher passenger and handling costs as well as increased aircraft materials and overhaul costs. Fuel costs increased from the year end but was below our expectations (EUR 145m vs. 155m our view).
Competition expected to increase in 2019
Finnair guides 10 % ASK growth in 2019 with passenger revenue slightly behind. This will be driven by Feb-2019 delivered A350 and a second A350 which will be delivered in Q2’19. Added capacity will be mostly put to Asian routes. Finnair expects increased competition due to added capacity especially on routes between Europe and Asia. Based on Q1 results, we have made small adjustments to our cost estimates but revenue remains intact. We expect EBIT 2019E to be EUR 195m (previous estimate EUR 203m).
Retaining “Hold” with TP of EUR 8
It is notable that the peer multiples might not reflect the changes of IFRS 16 yet which makes the comparison challenging. On our estimates Finnair trades at an EV/EBITDA of 3.4x and P/B of 1.1x in FY19E-20E, while generating ROCE of ~7% with a WACC of 8.9. We see valuation as fair and hence retain “Hold” with TP of EUR 8.0.
Finnair’ Q1 adj. EBIT was clearly below what we expected at EUR -16.2 vs. our expectation of EUR -6m. Consensus was at -6m. Finnair 2019E guidance reiterated; 10% capacity growth and revenue growth somewhat behind capacity. Especially transfer traffic between Asia and Europe grew well as well as cargo. Finnair expects the competition to increase especially between Europe and Asia and in Asian traffic as the capacity increases. Finnair’s figures were largely impacted by IFRS 16 changes.
Finnair’s capacity growth in Q1 was in line with the guidance for 2019E (10.4% vs. guidance 10%) and with our Q1 expectation of 11 %. Passenger growth on the other hand was weaker than expected. We have implemented the IFRS 16 changes to our estimates and kept Q1 expectations mainly intact. We keep our rating “HOLD” and target price of EUR 8.0 ahead the Q1.
Soft start in Q1 traffic information
Finnair’s traffic continued soft in Q1. Overall capacity (ASK) grew by 10.4 %, which is somewhat in line with our 11 % expectation. Sold capacity (RPK) growth was only 4.2 % which stayed clearly below our estimation of 7 %. As a result of that, passenger load factor (PLF) continued decline by 4.6 % percentage points in Q1 to 78,3 %. Largest drop was in Asia (-6.2pp) but also in Europe (-3.2pp) and domestic (-3.2pp).
Fuel prices rising from its lowest point
Jet fuel prices reached its lowest point during the turn of the year but has increased since then. Average price moved on q/q basis by -7% in EUR and by -8% in USD compared to the average prices of 4Q18. Also, on a y/y basis the prices moved by -3% in USD when compared to the average price of 1Q18. However, the average price in EUR was 5% higher.
IFRS 16 changes implemented to our estimates
The effects of IFRS 16 to Finnair’s financials are noteworthy. Lia-bilities in 2018 increased by 1,1b euros and assets by 992 million euros. 2018 EBIT improved from EUR 169m (margin 6,0 %) to EUR 218m (margin 7.7%). We have kept Q1 estimates largely un-changed apart from the changes caused by IFRS16 and the changes in the accounting principle of aircraft frame components. We expect Finnair’s Q1 revenue to be EUR 679m (6 % growth) while foreseeing adj. EBIT of -6m (margin -0.9 %). We keep our rating “HOLD” and TP (EUR 8.0).
Finnair’s Asian strategy has proven successful and the remaining seven A350s deliveries in 2019-2022E support strategy execution and growth further. Evolution of competition in short-to-mid-term remains a key risk, in our view. We expect earnings to weaken slightly in 2019E and consider valuation as largely fair. We retain “Hold” rating.
A350 fleet carries from Asia to Europe via shortest route
Finnair’s strategy is based on the geographic location of Helsinki hub, as the shortest route from (North-East) Asia to Europe goes over Helsinki. Finnair is able to serve most Asian routes in 24h rotations, which enables high utilization rate of planes and reduces the need for additional crew. New A350s, 12/19 of which were delivered by the end of 2018, are an essential part of the Asian strategy and form the cornerstone of cost management as they have higher seat capacity, lower maintenance cost and better fuel efficiency vs. the replaced A340s. The remaining seven A350s will be delivered in 2019-2022E, enabling further growth.
New A350s enable growth and balance capacity in 2019E
For 2019E Finnair guides 10% capacity growth (largely based on new A350s) and revenue growth slightly behind capacity. New capacity will be mostly put to Asian routes. This should enable further growth and improve weakened PLFs in European traffic, as a good part of capacity adds in 2018 was short-haul. Key risks for 2019E are demand and competition: demand could soften with economic growth, while competition is expected to increase in traffic between Europe and Asia and in intra-European traffic. Fuel is no longer at record levels, although hedged price should continue to edge up. At present we see adj. EBIT, excl. impact of IFRS 16, to weaken slightly in 2019E, assuming steady fuel.
Valuation appears fair - “Hold” reiterated
On our estimates Finnair’s current P/E multiples are 10.8x for 2019E and 9.7x for 2020E, vs. the 3yr historical NTM average of 10.1x. On P/B Finnair trades 1.2-1.1x when the EUR 200m hybrid removed from equity, while generating ROCE of 8.8% in FY19E vs. our WACC of 8.9%. Overall, Finnair’s current valuation appears largely fair to us. We hence retain “Hold” rating with an ex-div TP of EUR 8.0 (7.3). Our TP values Finnair close to par with Finnair’s 3yr historical NTM P/E (10.1x) on our FY19E estimates.
Finnair’s Q4 was surprisingly strong, but guidance for 2019E indicates the operating environment will remain at least as tough as in H2. Valuation appears largely fair to us – we hence retain “Hold” rating.
Q4: fuel and yield behind the earnings beat
Finnair’s Q4 adj. EBIT came in well above estimates at EUR +9m vs. EUR -9m Evli and EUR -6m cons. Compared to our estimates the beat was driven by somewhat stronger revenue (EUR 683m vs. EUR 671m) and fuel costs, which were EUR 10m less than what we expected. On the revenue side the beat was driven by unit revenues –RASK declined less than we expected, and yield surprisingly grew by 3.5% while we expected yield decline to continue as increased competition had been flagged during H2.
Increasing competition and potentially softer demand
For 2019E Finnair guides ASK growth of 10% and revenue growth slightly behind ASK. We expected only 5% ASK growth for 2019E. Finnair will receive both of its 2019-delivered new A350s during H1, on top of which the Dec 2018 -delivered A350 will contribute to ASK growth. Added capacity will be mostly put to Asian routes. However, at the same time competition is expected to increase further with capacity increases, especially on routes between Europe and Asia and in intra-European traffic, even though Norwegian’s planned capacity cuts may impact Finnair positively on some routes. At the same time, demand is seen to be at risk of softening with slowdown in economic growth. Increasing competition and potentially softer demand keep visibility short even though fuel appears to have stabilized.
On our estimates Finnair trades at an EV/EBITDA discount, but at a P/E premium to its primary peers. On P/B Finnair trades 0.9x in FY19E, or 1.1x when the EUR 200m hybrid removed from equity, while generating ROCE of ~8.5% in FY19E, close to our WACC (8.9%). We continue to think valuation does not look too attractive and hence we retain “Hold” rating with TP of EUR 7.3 (6.8). Our TP values the shares at par with Finnair’s 3yr historical P/E on our FY19E estimates.
Finnair’ Q4 adj. EBIT was clearly better than we expected at EUR +9m vs. our expectation of EUR -9m. Consensus was at -6m. Compared to our estimates the beat looks to be driven by EUR 10m lower fuel costs, and by better revenue. For 2019E Finnair guides 10% capacity growth and revenue growth somewhat behind capacity. We have expected 5% growth for both and hence there is upside to our estimates. Finnair also expects competition to tighten, especially in EU-Asia routes and in short-haul traffic. Dividend is close to estimates. Overall, a good report.
Finnair’s traffic came in below our (and consensus) expectations in Q4 and the company appears to have slightly missed its FY2018 guidance ranges for capacity growth (14.8% vs. guidance “above 15%”) and passenger growth (11.6% vs. guidance 12-13%). We have cut Q4 estimates with weaker than expected traffic, whereas our 2019E estimates remain largely unchanged.
Q4 traffic softer than we expected
Finnair’s traffic continued soft in Q4. Overall Q4 capacity (ASK) grew by 9% vs. our 12% expectation, while sold capacity (RPK) grew by only 4% vs. our 10% expectation. Thus passenger load factor (PLF) declined quite notably by 3.4 percentage points in Q4 to 76.9%. This was driven by weakening PLFs in European (- 3.6pp), Asian (-3.5pp) and domestic (-3.0pp) traffic. Finnair flagged in Q3 that competition had tightened especially in the Nordics, which is a likely contributor to soft traffic performance. Finnair stopped reporting unit revenue (RASK) with end-quarter monthly traffic, but we expect it to have continued to decline in Q4.
Fuel price eased somewhat q/q in Q4
As a positive the price of jet fuel eased in November and December, after climbing to a multi-year high in October. On a q/q basis average price moved by -5% in USD and by -3% in EUR compared to average price of Q3. Yet average price for Q4 was still 15% higher y/y in USD and 18% higher in EUR.
Q4 estimates cut
We have cut Q4 estimates and expect Finnair’s Q4 revenue to be EUR 671m (4% growth), while foreseeing adj. EBIT at EUR -9m (margin -1.4%). We foresee FY2018 revenue growth at the low-end of the guided “about 10-11%” range. Our rating (“Hold”) and TP (EUR 6.8) remain intact, with 2019E estimates largely unchanged.
Finnair’s Q3 earnings were somewhat better than expected, but guidance for FY18E adj. EBIT was cut to reflect increased competition and fuel. Combination of increased competition and higher fuel price keeps the outlook tough. We retain “Hold” rating with TP of EUR 6.8 intact.
Guidance cut due to increased competition and fuel
Finnair cut its guidance for adj. EBIT. Company now expects adj. EBIT to somewhat weaken vs. be flat previously. Guidance was cut to reflect increased competition, especially in the Nordics, and the fuel price increase. Increased capacity by competitors was visible in Q3 traffic and suggests yield compression is likely to continue at least in European traffic in the short-term, despite fuel price has been increasing for almost two years now.
Fuel price looks to be moving up further in Q4
Fuel price looks to be moving up further in Q4, with USD spot prices in October averaging 8% higher compared to the average spot of Q3. Current spot price is 4% higher than the Q3 average.
Challenging outlook – “Hold” intact
On our estimates Finnair trades at an EV/EBITDA discount, but at a P/E premium to its primary peers. On P/B Finnair trades 0.8x in FY18-19E, or 1.0-0.9x when the EUR 200m hybrid removed from equity, while generating ROCE of ~7-8% in FY18-19E, slightly below our WACC. We think valuation does not look too attractive, considering increasing competition and fuel. We retain “Hold” rating with TP of EUR 6.8. Our TP values the shares at a discount to Finnair’s 3yr historical average NTM EV/EBITDA, but close to par with P/E on our FY19E estimates.
Finnair’ Q3 adj. EBIT came in at EUR 108m, above our estimate (EUR 102m) and consensus (EUR 105m). However, Finnair cut its FY18E guidance and now expects adj. EBIT to be somewhat below last year’s level of EUR 170m, vs. flat previously. Finnair states it is experiencing increased competition in its main markets. We have expected EUR 159m adj. EBIT in 2018E, ie below last year’s EUR 170m. Consensus has been EUR 160m. However, separately released discontinuation of incentive plan for pilots will have a positive EUR 11m adj. EBIT impact in Q4, which with new guidance seems to imply underlying estimates for Q4 adj. EBIT may be too optimistic.
Finnair’s traffic performance in July-September indicate Q3 revenue of EUR 801m. We expected EUR 814m while consensus was at EUR 816/817m. On the cost side fuel moved up further in Q3. We expect earnings to weaken in Q3 after 15 quarters of improvement and have cut FY18- 19E adj. EBIT estimates by ~10%.
Q3 traffic: capacity growth in line, PLF below our estimates
Finnair’s capacity (ASK) continued double-digit growth in Q3 at +14% and was close to our +15% expectation. Sold capacity (RPK), however, grew somewhat less than we expected at +11% vs. +14% our expectation and hence passenger load factor (PLF) came in below our estimate at 84.5% vs. 86.5%. Unit revenue (RASK) declined by 4.6%, ie. at about the same rate as in H1 and what we expected in Q3. Overall, Jul-Sep traffic and revenue came in slightly below our expectations driven by weaker PLF.
Fuel moved up and reached multi-year high at end of Q3
Jet fuel moved up further in Q3. Average price increased by +1% in USD and by +4% in EUR compared to average price of Q2. Average price for Q3 was ~37% higher than last year in USD and ~39% higher in EUR. Fuel reached new multi-year high at the end of Q3. We foresee EUR 60m+ negative earnings impact from higher fuel price in 2018E (incl. FX and hedges but excl. impact of capacity growth), assuming price remains at the average level of Q3 for the remainder of the year.
Finnair has improved its adj. EBIT for 15 straight quarters, but we expect this trend to turn in Q3, due to higher fuel costs. We foresee Q3 adj. EBIT at EUR 102m vs. EUR 119m last year. Following estimate cuts our FY18-19E adj. EBIT estimates are down by ~10%. With lower estimates and somewhat lower multiples among peers, we cut TP to EUR 6.8 (8.0) and keep “Hold” intact ahead of Q3. We think valuation still does not look too attractive considering the weakening earnings trend.
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