Digital Strategy Will Contribute to Future Finnair Cost Efficiencies

Finnair has published its Q2 and H1 financials, showing improvements on year-to-tear operating results, while detailing plans to make operations more efficient including an improved digital strategy to reduce costs.

• Comparable operating result for Q2 showed a year-on-year improvement for the seventh consecutive quarter and was positive at 3.2 million euros

Based on financial reporting released today, it would also seem that the airline’s digital ancillary strategy to date, including the bidding sales of upgrades and digital onboard retail rare paying off.

The airline reports an improvement of over 17% in ancillary and retail sales to passengers in both the quarter and the half-year.

April–June 2016

• Revenue grew by 4.7% year-on-year to 569.6 million euros (543.9)*.
• Comparable operating result was 3.2 million euros (-12.9).
• Operating result was 0.2 million euros (-5.7)
• Comparable EBITDAR was 56.3 million euros (37.4).
• Net cash flow from operating activities totalled 119.6 million euros (88.4), and net cash flow from investing activities amounted to -149.0 million euros (-53.7).
• Unit revenue (RASK) decreased by 3.8% year-on-year.
• Unit cost (CASK) decreased by 6.5% and unit cost at constant currency excluding fuel increased by 0.1% year-on-year.
• Ancillary and retail revenue per passenger grew by 17.3% year-on-year to 10.89 euros.
• Earnings per share were -0.04 euros (-0.06).

January–June 2016

• Revenue grew by 3.8% year-on-year to 1,106.0 million euros (1,065.2).
• Comparable operating result was -12.2 million euros (-41.3).
• Operating result was -17.4 million euros (-13.9).
• Comparable EBITDAR was 92.7 million euros (56.5).
• Net cash flow from operating activities stood at 130.0 million euros (101.4), and net cash flow from investing activities totalled -396.3 million euros (89.2).
• Unit revenue (RASK) decreased by 3.0% year-on-year.
• Unit cost (CASK) decreased by 5.6% and unit cost excluding fuel at constant currency increased by 1.0% year-on-year.
• Ancillary and retail revenue per passenger grew by 17.3% year-on-year to 11.35 euros.
• Earnings per share were -0.19 euros (-0.16).

Caution Ahead

The airline warned of “renewed uncertainty” for passenger and cargo traffic in its main markets. Finnair reports planned capacity growth of 8% and slower revenue growth in 2016, but that the lower cost of jet fuel will support its financial performance for the year.

“Finnair’s new estimate of capacity growth is approximately 7 per cent, while the previous estimate was a growth of 8 per cent compared to 2015. The revision is due to delays in the deliveries of A350 aircraft. The rate of revenue growth is estimated to be slower than the rate of capacity growth. Uncertainty regarding the demand and yield prospects of the airline industry has increased during recent months. Finnair estimates that its comparable operating result for 2016 will increase from the previous year (2015: 23.7 million euros),” the airline reports.

“Our comparable result for the second quarter was a good three million euros in the black, representing an improvement of some 16 million euros compared to the previous year, roughly equal to the year-on-year increase of our result in the first quarter. The past quarter was already the seventh consecutive quarter in which we achieved a year-on-year improvement,” say’s Finnair’s CEO Pekka Vauramo.

“Due to reasons such as lower fuel costs, higher capacity and growing ancillary and retail revenue, our updated outlook is that our full-year result for 2016 will show an improvement on the previous year. Nevertheless, it should be noted that last year’s third quarter saw several factors contribute to a strong result that was an all-time record for Finnair, so the comparison period sets the bar high. With that in mind – and provided that the market situation remains unchanged – we expect that our performance developments will moderate somewhat in the second half of 2016.”

A350 Delays

A350 aircraft delays also had a negative impact on the airline.

“In the second quarter, our organisation continued to prepare for accelerated growth in the longer term in accordance with our strategy. The training and supplementary recruitment of flight personnel progressed as planned. After taking delivery of two new A350 aircraft during the second quarter, we now have six of the new aircraft in our fleet. However, the deliveries of the new aircraft took place a little later than planned, which forced us to adjust our flight program. This meant that our capacity growth fell slightly short of our previous estimate,” Vauramo said.

Capacity Management

• Capacity measured in Available Seat Kilometres (ASKs) grew in Q2 by approximately 9% year-on-year
• Traffic growth measured in Revenue Passenger Kilometres (RPKs) was slightly below 7%

“We achieved growth particularly in long-haul traffic, where we launched two new routes for the summer season, to Fukuoka and Guangzhou, and we also added more flights to Miami and Chicago. Filling aircraft on new routes and frequencies typically requires a breaking-in period, and the review period on these routes was largely in line with our expectations. In the second quarter of this year, long-haul traffic accounted for about 56 per cent of our capacity, while the corresponding figure for the comparison period was about 53 per cent. Since unit revenues are typically lower in long-haul traffic than in short haul, this change in our traffic structure was also reflected in our unit revenue,” Vauramo said.

Cost Cutting Through Digitalisation

“Our unit costs excluding fuel increased slightly in the first half of the year, which is something we cannot be satisfied with. On the other hand, it is important to keep in mind that we are currently preparing for accelerated growth, which has a front-loaded impact on our cost structure. During the first half, we recruited over 500 employees. The training of our new crew, the roll-out of the new aircraft, launch of new routes and other preparations for growth burdened our results by some 6–8 million euros in each quarter. We must maintain tight control over costs even as we prepare for growth. We are also looking for new ways to improve efficiency; for example, through digitalisation.”

Finnair’s performance has been improving over the past two years which Vauramo attributes cost savings programs implemented between 2011-2014, fuels savings, and higher ancillary and retail sales. The airline has set a target to achieve permanent savings through “various efficiency-improvement measures” of EUR 20 million a year by the end of June 2017.

“In order to be able to invest in growth and continue on our chosen path, we must ensure that our unit costs continue to decline. With that in mind, we are now proactively taking steps to deliberate together with our personnel about the measures we could utilise to improve our result and sustain the preconditions for the implementation of our growth strategy,” says Vauramo.

“Finnair expects to finalise the plans on the main areas of the cost-efficiency programme during the next few months,” the airline states.