Finnair Group interim report 1 January – 30 June 2013

Finnair Plc. Interim report 14 August 2013 at 09:30

 The historical comparative financials presented in the interim report include certain changes to previously reported information. These changes result from retrospective application of an amendment to IFRS accounting standard IAS19 Employee Benefits. The changes are described in detail in notes 2 and 17 to the interim report.

* Operational result: Operating result excluding changes in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves, non-recurring items and capital gains.

** Before hybrid bond interest.

*** The number of flights also includes Finnair’s purchased traffic. Numbers for the comparison periods have been changed accordingly.

CEO Pekka Vauramo:

  “Finnair’s turnover in the second quarter increased by 2.6 per cent. We can be fairly pleased with that, taking into account the depreciation of the Japanese yen and the effect this had on the company’s euro-denominated revenue. The increased demand in Asian and European traffic contributed to the growth in turnover. Our improved load factors partly compensated for the decrease in unit revenue (yield), but despite this our operational result totalled only 6.1 million euros (16.2). 

  I am particularly pleased that we achieved the savings target of 140 million euros of the structural change and cost-reduction program already now. Achieving these savings six months ahead of schedule is the result of an uncompromising and determined effort by everyone at Finnair. For this, I would like to extend my warmest thanks to the entire Finnair team. 

  Nevertheless, the operational result for the period under review is disappointing. It underlines the necessity of the measures we have taken to improve our business operations and customer service over the past few years and the need to continue those measures. At the same time, we will need to utilise the opportunities offered to us by the growing market.

  Last October we set a target of achieving additional cost reductions of 60 million euros. We must now continue to implement a more agile structure and renew the wage structures and earnings models. Part of the supplementary cost-reduction target can be achieved by streamlining operations, but accomplishing the target in full will require an improvement in labour productivity. We must now find, in a dialogue with personnel, solutions and the will to make changes.

  Our future success is, however, built, through increasing revenue and developing our products and services - not but cutting costs only. Satisfied paying customers are the best way to ensure a successful future. The new Asian routes launched during the review period, our increased market share in Asian and European traffic, investments in product development and upcoming fleet renewal are all steps towards profitable growth.

  During just over two months as CEO, I have met a large number of Finnair personnel. They all have a strong commitment to their work and the company. I believe we all have a shared will to build the Finnair of the future.”

Business environment in the second quarter

  Finnair’s business environment remained difficult in the second quarter of the year. European network carriers, Finnair included, continued to implement structural change and cost-reduction programs to improve their competitiveness in the prevailing tight competitive situation.

  Despite the European economy being in a recession, demand for passenger traffic in Europe continued to grow. Combined with the conservative stance airlines have taken toward increasing their capacity, this led to improved load factors. Measured in passenger volume, the market for flights between Helsinki and Finnair’s European destinations grew by 4.6 per cent, while the market between Finnair’s Asian and European destinations contracted by 2.1 per cent.* Finnair was successful in increasing its market share in both markets.* The demand for air cargo in traffic between Asia and Europe was largely unchanged from the corresponding period last year.

The price of the largest individual cost factor of airlines, i.e. jet fuel, remained at a high level. The euro appreciated nearly 26 per cent against the Japanese yen and approximately two per cent against the US dollar compared to the corresponding period in 2012. The yen is an important income currency in Finnair’s operations, while the dollar is a significant expense currency.

Progress of the structural change and cost-reduction programs

By the end of June 2013, Finnair had achieved the cost-reduction target of 140 million euros set for structural change and cost-reduction program commenced in August 2011. The target was reached six months ahead of the original schedule. The outsourcing decisions and other cost-reduction measures implemented as part of the structural change and cost-reduction program have allowed Finnair to move a significant share of fixed costs to volume-based variable costs. This was reflected during the period under review as a decrease in airline unit costs excluding fuel. Some of the cost reductions will not be realised until the second half of the year.

In spite of reaching its cost reduction target, Finnair continues to pursue further savings in all of the first cost reduction program’s cost categories. This is essential for improving the company’s competitiveness, as high fuel prices, cost reduction measures taken by competitors, intensified competition and fleet investments in the coming years require a substantial improvement in profitability. The long-term return objective set for the company by Finnair’s Board of Directors is an operational profit margin of six per cent.

  The emphasis in pursuing further cost savings is on personnel and maintenance costs, in which progress has lagged behind the original targets. The aim of the supplementary cost-reduction program commenced in October 2012 is to reduce the cost level permanently by an additional 60 million euros by the end of 2014. As part of the supplementary program, Finnair is aiming to achieve substantial savings in personnel costs. The objective is to achieve the level of market wages and labour costs in the industry, primarily by implementing changes to wage structures and working hours.

  Finnair has today published a separate bulletin on the detailed targets of the supplementary cost-reduction program.

Financial performance in April–June 2013

  Finnair’s turnover in April–June grew by 2.6 per cent year-on-year, reaching 609.7 million euros (594.4), while capacity increased by 5.6 per cent year-on-year. The substantial depreciation of yen from the comparison period had a negative effect on Finnair's euro-denominated revenue, which slowed down the growth in turnover. Operational costs excluding fuel costs increased by 2.3 per cent to 436.5 million euros (426.7). Fuel costs, including hedging and costs incurred from emissions trading, were 171.5 million euros (157.9). Personnel costs declined by 10.6 per cent to 100.6 million euros (112.5) due to the personnel reductions implemented after the comparison period, but part of the personnel costs in the comparison period are now seen in the form of higher costs for outsourced catering and maintenance services. Euro-denominated operational costs rose by four per cent year-on-year and amounted to 608.0 million euros (584.6). The operational result, which refers to the operating result excluding non-recurring items, capital gains and the change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves, was weaker than in the comparison period at 6.1 million euros (16.2).

  Finnair’s income statement includes the change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves that took place during the period under review but will fall due later. This is an unrealised valuation result based on IFRS, where the result has no cash flow effect and which is not included in the operational result. The change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves amounted to 1.4 million euros (-20.9). The non-recurring costs associated with the outcome of the employee consultations regarding Technical Services that were concluded during the period under review were recorded in their entirety in the second quarter and constituted the majority of the period’s total non-recurring items of -19.3 million euros (-11.9). The operating loss for the period decreased to -11.8 million euros (-16.6). In April, Finnair sold its entire holding of shares in Norwegian Air Shuttle ASA and recorded a capital gain of 34 million euros as financial income. The company’s result before taxes for April–June increased to 21.2 million euros (-24.0) and the result after taxes was 17.0 million euros (-18.7).

  Unit revenue per available seat kilometre (RASK) declined mainly due to the depreciation of the Japanese yen by 3.1 per cent year-on-year and amounted to 6.39 euro cents (6.60). Excluding the effect of exchange rate fluctuations, RASK declined by 1.7 per cent year-on-year. Unit cost per available seat kilometre (CASK) decreased by 0.7 per cent and amounted to 6.62 euro cents (6.66). Unit cost excluding fuel (CASK excl. fuel) decreased by 2.4 per cent and totalled 4.52 euro cents (4.64) as a result of successful cost-reduction measures.

Outlook for 2013 – change in turnover guidance

  Previous guidance

  The uncertain economic outlook in Europe, weakened consumer demand and slower growth in Asia increase the uncertainty of the future development of air traffic. Fuel costs are expected to remain high in 2013 as well, and the demand for air traffic is estimated to grow moderately.

  Finnair estimates that its turnover will grow in 2013. Unit costs excluding fuel (CASK excl. fuel) are expected to decrease compared to 2012. Finnair estimates that its operational result will show a profit in 2013.

  New guidance

The uncertain economic outlook in Europe, weakened consumer demand and slower growth in Asia increase the uncertainty of the future development of air traffic. Fuel costs are expected to remain high in 2013 as well, and the demand for air traffic is estimated to grow moderately.

  Finnair estimates its 2013 turnover to be approximately at the 2012 level due to the pressure that the weak yen puts on the Japan generated unit revenues. Unit costs excluding fuel (CASK excl. fuel) are expected to decrease compared to 2012. Finnair estimates that its operational result will show a profit in 2013

Disclosure procedure

 Finnair Plc. follows the disclosure procedure enabled by Standard 5.2b published by the Finnish Financial Supervision Authority and hereby publishes its Finnair Group Interim report 1 January – 30 June 2013 enclosed to this stock exchange release. The Finnair Group Interim report 1 January – 30 June 2013 is attached to this release in pdf format and is also available on the company’s website at www.finnairgroup.com.

Finnair’s interim report for 1 January – 30 September 2013 will be published on Friday 25 October 2013.

FINNAIR PLC Board of Directors

Briefings

  Finnair will hold a press conference on 14 August 2013 at 11:00 a.m. and an analyst briefing at 12:30 p.m. at its new office at Tietotie 9. An English-language telephone conference will begin at 1:45 p.m. Finnish time. The conference may be attended by dialling your local access number +358 800 770 306 and using the PIN code 255856#

Finnair Plc. Communications 14 August 2013

For further information, please contact:

Chief Financial Officer Erno Hilden Tel. +358 9 818 8550 erno.hilden@finnair.com

Financial Communications and Investor Relations Director Mari Reponen Tel. +358 9 818 4054 mari.reponen@finnair.com

 Kati Kaksonen, IRO Financial Communications and Investor Relations Tel. +358 9 818 2780 kati.kaksonen@finnair.com 

Distribution: NASDAQ OMX Helsinki Principal media