Q400
Aug 9, 07, 2:26 am
Finnair Oyj: Finnair oyj quarterly report finnair group interim report 1 january - 30 june 2007, result improved as expected
FINNAIR OYJ STOCK EXCHANGE RELEASE 9 AUGUST 2007 AT 09:00
FINNAIR GROUP INTERIM REPORT 1 JANUARY - 30 JUNE 2007
RESULT IMPROVED AS EXPECTED
Summary of the second quarter's key figures
Turnover rose 8.8% to 538.1 million euros
Passenger traffic grew 13.9%, passenger load factor fell 0.9 percentage points
to 74.6%
Unit revenues from flight operations fell by 0.5%, unit costs fell by 3.8%
Operating profit i.e. EBIT was 37.1 million euros (5.5 million)
Operational result i.e. EBIT excluding capital gains and changes in the fair
value of derivatives, was 27.2 million euros (18.2 million)
Profit before taxes was 34.4 million euros (3.3 million)
Gearing at the end of the second quarter was 21.7% (-3.8%) and gearing adjusted
for leasing liabilities was 114.6% (92.6%)
Balance sheet cash and cash equivalents at the end of the second quarter
totalled 249.9 million euros (366.1 million)
Equity ratio 36.1% (38.5%)
Equity per share 7.27 euros (7.33)
Earnings per share 0.29 euros (0.01)
Return on capital employed 5.0% (4.1%)
Comparisons made with Q2 in 2006.
President and CEO Jukka Hienonen on the interim result:
The figures published today show that we are heading in the right direction.
Unit costs have clearly decreased due to efficiency measures, and profitability
has in many respects improved. This would not have been possible without
determined work in different parts of the Group. However, the ongoing fleet
renewal program requires us to further improve the current profitability level
and operational performance.
New openings in Asia and Europe have started off well and the changes we have
made to our long-haul network have proved to be successful. Daily connections to
most Asian destinations have enhanced operational efficiency and have improved
the product. They have also facilitated new corporate agreements in Finland and
abroad. Next summer we will open a route to Seoul, flying five times a week.
The fast growth of Asian traffic has put the passenger and baggage handling
capacity of Helsinki-Vantaa Airport to the test. A terminal extension serving
Asian traffic will alleviate the situation when it opens in early 2009.
During the summer, higher passenger volumes as well as security measures have
delayed baggage at large European airports to an unprecedented extent. The
problems have also been reflected in Finnair's opportunities to serve its
customers.
Finnair's organisation and operations have been modified with strong measures.
It is clear that it will take a while for all parties to become accustomed to
the implemented changes. We have what it takes, however, to build a success
story in the coming years with high quality and flexible Finnair expertise.
Focusing more clearly on our core expertise in scheduled passenger and leisure
traffic, as well as continuous development of structures and operations, will
ensure that we have the ingredients for successful growth. New routes put
pressure on pricing in the near future.
Our efficiency programme continues with greater impact towards the end of the
year. The full effect of the programme will be seen next year. We continue to
believe that this year our operational result will exceed 70 million euros.
Market and General Review
Growth in demand among European network airlines has levelled off in the early
part of the year. Finnair's sales, on the other hand, have continued to be
strong in nearly all types of traffic. This has been driven above all by Asian
traffic, but growth in European traffic has also been solid, to a large extent
due to increased demand for European routes brought by Asian connections.
European network airlines' performance improved on average by five per cent,
while Finnair's revenue passenger kilometres in scheduled traffic increased by
over 20 per cent, representing the absolute best performance in the sector.
European airlines have increased their capacity on South American routes, but
flying to Asia has increased on average by less than two per cent. Finnair's
Asian traffic grew by 30 per cent in the early part of the year.
The price of jet fuel has remained at a high level and has even increased
slightly since the beginning of the year. Through operational efficiencies,
Finnair has reduced the unit costs of flight operations by a good three per cent
in January-June. At the same time, unit revenues have remained at the previous
year's level. This has improved profitability in the second quarter compared
with the corresponding period last year.
The improvement of profitability is particularly evident in Scheduled Passenger
Traffic, where a ten per cent growth in turnover brought a nearly 30 per cent
increase in the operational result.
The 80 million euro efficiency programme initiated in 2006 is expected to yield
over 40 million euros in savings in the cost structure during the current year.
The savings will be weighted towards the end of the year. A significant part of
the 670-job reduction of the workforce announced last May will be implemented
during the summer.
Ownership and partnership arrangements for Northport, Finnair's loss-making
ground handling company, have been clarified since the end of last year with the
aim of improving the quality of operations and profitability. Part of the
operations have been sold to the Finnish RTG Group. Otherwise, measures to
improve efficiency will continue under new management.
Strongly growing Asian traffic is creating new challenges for baggage handling
and for service to passengers travelling through Helsinki-Vantaa Airport.
Finavia has initiated terminal expansion work and a renewal of baggage handling
systems. To maintain the punctuality of traffic, staggering of arriving aircraft
has been improved in cooperation with air traffic control and, in terms of
facilities, temporary arrangements have been agreed with Airport management.
The long-haul fleet renewal programme announced in March 2007 advanced in the
second quarter with the arrival of two new Airbus A340 long-haul aircraft as
well as two Embraer 190 aircraft for European traffic. The present Boeing MD-11
fleet will be replaced with Airbus A330/340 wide-bodied aircraft by the end of
2010.
At the end of June, Finnair sold its Swedish subsidiary FlyNordic to Norwegian
Air Shuttle. As a result of the deal, Finnair acquired over five per cent of
Norwegian's shares as well as an option to increase its ownership to
approximately ten per cent. The companies also agreed to wide cooperation in the
Nordic region.
Financial Result, 1 April - 30 June 2007
Turnover rose in the second quarter by 8.8 per cent to 538.1 million euros. The
Group's operational result (EBIT), i.e. operating profit excluding capital gains
and changes in the fair value of derivatives, rose to 27.2 million euros (18.2
million euros, from which arrangement expenses were also eliminated). Adjusted
operating profit margin was 5.1 per cent (3.7). Profit before taxes was 34.4
million euros (3.3 million).
The result includes 5.0 million euros (1.9 million) capital gains, consisting
mainly of the sale of three ATR 72 turbo-prop aircraft. Changes in the fair
value of derivatives improved the second quarter result by 4.9 million euros,
but this has no effect on cash flow.
In April-June, the Finnair Group's passenger traffic capacity (ASK) rose 15.3
per cent and demand grew 13.9 per cent; demand in Asian traffic alone rose 25.8
per cent. Passenger load factor fell by 0.9 percentage points compared with the
previous year to 74.6 per cent. The amount of cargo carried was 23.5 million
kilos, i.e. approximately the same as in April-June last year. The amount of
cargo in Asian traffic has grown, but cargo demand elsewhere has correspondingly
decreased.
In Group passenger traffic, total unit revenues per passenger kilometre remained
nearly at last year's level (-0.3%). Yield per passenger rose by 9.8 per cent.
Unit revenues per tonne kilometre for cargo traffic fell 9.0 per cent due to
price competition caused by overcapacity in the Northern European cargo market.
Weighted unit revenue for passenger and cargo traffic fell by 0.5 per cent.
Euro-denominated operating costs rose during the period by 3.1 per cent. Unit
costs for flight operations, on the other hand, fell by 3.8 per cent. Fuel costs
increased in the second quarter by 14.9 per cent as a whole, but per available
tonne kilometre only by 1.3 per cent. Unit costs excluding fuel costs fell by
5.3 per cent.
Earnings per share for the quarter amounted to 0.29 euros (0.01). The main
factors in the Group's profit improvement were the improved results of the
Scheduled Passenger Traffic business area and Finnair Technical Services.
Any comparison should also take into consideration the fact that 15 million
euros of non-recurring expenses relating to the restructuring programme were
recognised in the second quarter of last year. In the comparison of operational
results, the restructuring provision has been eliminated.
Financial Result, 1 January - 30 June 2007
Turnover rose in January-June by 9.4 per cent to 1,066.6 million euros. The
Group's operational result (EBIT), excluding capital gains and changes in the
fair value of derivatives, rose to 33.0 million euros (13.1 million). Adjusted
operating profit margin was 3.1 per cent (1.3). The result before taxes was 47.8
million euros (-1.9 million).
Changes in the fair value of derivatives improved the result for the first six
months by 10.9 million euros, but this has no effect on cash flow.
In January-June, passenger traffic capacity (ASK) rose 12.3 per cent and demand
grew 12.6 per cent; demand in Asian traffic alone rose 30.5 per cent. The
passenger load factor was at the previous year's level, 75.2 per cent. The
amount of cargo carried was nearly at the previous year's level (+0.6%) and was
45.2 million kilos.
In Group passenger traffic, total unit revenues per passenger kilometre rose 0.9
per cent. Yield per passenger rose 9.7 per cent. In cargo traffic, unit revenues
per tonne kilometre fell 7.2 per cent due to strong price competition and a
change of traffic structure. Weighted unit revenue for passenger and cargo
traffic rose by 0.6 per cent.
Euro-denominated operating costs rose during the period by 4.6 per cent. Unit
costs for flight operations fell by 2.9 per cent. Fuel costs increased in
January-June by 15.2 per cent as a whole, but per available tonne kilometre only
by 2.5 per cent. Unit costs excluding fuel costs fell by 4.5 per cent.
Earnings per share for January-June amounted to 0.40 euros (-0.04).
Investment, financing and risk management
Investments in January-June totalled 244.6 million euros (119.0 million) and
included, among other things, two Airbus A340 wide-bodied aircraft as well as
three Embraer 190 aircraft for European traffic. Including advance payments, the
cash flow impact of investments was -195.7 million euros. Total investments in
the years 2007-2009 exceed 300 million euros per year.
At the end of June, the Group had balance sheet cash and cash equivalents
amounting to 249.9 million euros, in addition to which there was a total of 250
million euros in unused committed credit facilities.
Operational net cash flow in January-June was 114.0 million euros, compared with
23.6 million euros a year earlier. Gearing increased from 7.1 per cent at the
beginning of the year to 21.7 per cent at the end of June, and gearing adjusted
for leasing liabilities increased from 112.8 per cent to 114.6 per cent. Equity
ratio decreased 1.1 percentage points from the beginning of the year to stand at
36.1 per cent. Various options for funding investments and strengthening the
capital structure are being studied.
The leasing agreements of the seven Boeing 757 aircraft used by Leisure Flights
have been renewed on more favourable financial terms, which is evident as lower
aircraft leasing costs.
During the second quarter, one sale and leaseback agreement was concluded for an
Embraer 190 aircraft. The lease agreement is a Japanese Operating Lease, which
includes the right to repurchase when the leasing term of approximately ten
years expires.
According to the financial risk management policy approved by Finnair's Board of
Directors, the company has hedged around 66 per cent of scheduled traffic's jet
fuel purchases during the next six months and thereafter for the following 24
months with a decreasing level of hedging.
At the end of 2006 Finnair adjusted its hedging policy so that the hedging
horizon for jet fuel was extended from two to three years. Finnair Leisure
Flights has price hedged over 60 per cent of the fuel consumption of its agreed
traffic programme for the current summer season and the coming winter season.
Derivatives linked to the jet fuel price are mainly used as the fuel price
hedging instrument. Due to the extension of the hedging horizon and derivatives
market efficiency differences, Finnair also uses other oil derivatives.
Under IFRS rules, a change during the financial period in the fair value of
derivatives that mature in future is recognised in the Finnair income statement
item ‘Other expenses'. The change in the fair value of derivatives is not a
realised hedging gain nor does it have an effect on cash flow; it is a valuation
gain in accordance with IFRS reporting practice. During the second quarter, the
change in the fair value of derivatives was 4.9 million euros, and in
January-June 10.9 million euros.
During the early part of the year, a weakening of the US dollar against the euro
has had a positive impact on Finnair's operational result of more than four
million euros, taking foreign currency hedging into account. At the end of June,
the degree of hedging for a dollar basket over the next 12 months was 66 per
cent.
Shares and Share Capital
The company's market value on 30 June 2007 was 1,167.1 million euros (1,071.8
million) and the closing share price 13.15 euros. During the period
January-June, the highest price for the Finnair Plc share on the Helsinki Stock
Exchange was 14.35 (15.00) euros, while the lowest price was 12.02 (10.01) euros
and the average price 13.09 (12.61) euros. During the early part of the year,
some 10.1 million (23.0 million) of the company's shares, with a value of 131.8
million euros (290.3 million), were traded on the Helsinki Stock Exchange. At
the end of the period under review, the Finnish State owned 55.78 per cent
(56.13) of the company's shares, while 31.16 per cent (34.07) were held by
foreign investors or in the name of a nominee.
At the beginning of the financial period, the company held 151,903 of its own
shares, which it had purchased in previous years. On 22 March 2007 the Annual
General Meeting authorised the Board of Directors to purchase the company's own
shares up to a maximum of 3,500,000 shares and dispose of the company's own
shares up to a maximum of 3,651,903 shares. The authorisation applies to shares
amounting to less than five per cent of the company's share capital. The company
has not acquired nor disposed of its own shares in the period 1 January-30 June
2007, and on 30 June 2007 the company held a total of 151,903 own shares, i.e.
0.17 per cent of all shares.
Changes in Senior Management
Kristina Inkiläinen began as Managing Director of Finnair Catering Oy and SVP,
Catering on 30 April 2007, succeeding Anssi Komulainen, who became SVP, Human
Resources. Inkiläinen was formerly Managing Director of Select Service Partner
Finland Oy.
Kristiina Asplund began as Managing Director of Finnair Catering Oy's subsidiary
Finncatering Oy on 1 April 2007.
Tero Vauraste, Managing Director of the Group's ground handling company
Northport Oy, resigned from his post on 31 May 2007. He will be succeeded by
Jukka Hämäläinen, who previously served as Managing Director of Servisair Oy.
Hämäläinen starts working in his new post on 13 August 2007.
Taru Keronen has been appointed Managing Director of Matkatoimisto Oy Area as of
1 October 2007, who previously served as Managing Director of Eckerö Line.
Area's present Managing Director, Juhani Suomela, will remain a senior adviser
until the end of the year, when he will retire.
Personnel
During the first six months of the year, the Finnair Group had an average number
of 9,531 employees, which was 1.8 per cent fewer than a year earlier. Scheduled
Passenger Traffic had 4,180 employees and Leisure Traffic 373 employees. The
total number of personnel in technical, catering and ground handling services
was 3,696 and in travel services 1,134. A total of 148 people were employed in
other functions.
Personnel expenses rose by 3.1 per cent in January-June. Nominal salaries rose
by 2.4 per cent and pension contributions by 7.8 per cent. Personnel expenses
fell in April-June by 2.8 per cent compared with the second quarter of the
previous year, when personnel expenses included approximately ten million euros
in reorganisation expenses. Comparable personnel expenses per available tonne
kilometre fell 3.4 per cent in the second quarter.
The criteria for the 2007 incentive bonuses has been decided. The size of the
profit bonus payable to the Personnel Fund will be determined on the basis of a
combination of the operating profit margin (3-7%) and return on capital employed
(8-14%). The determination criteria of the share bonus scheme for key
individuals are earnings per share (0.70-1.20 euros per share) and return on
capital employed (8-14%). In addition, there is also an incentive scheme for all
personnel based on operational performance.
Finnair has collective employment agreements valid until 30 September 2007 with
six labour unions and with pilots until the end of April 2008. In March, an
efficiency agreement was signed with the Finnish Airline Pilots Association
(SLL). The agreement will help improve work productivity and achieve significant
cost savings. A corresponding agreement had been concluded earlier with cabin
staff.
Fleet changes
Finnair Group's fleet is managed by Finnair Aircraft Finance Oy, which belongs
to the Scheduled Passenger Traffic business area. On 30 June 2007, the Finnair
Group's fleet had a total of 72 aircraft in service. The average age of the
entire fleet was 7.6 years. In European traffic, the average age of the fleet is
about four years. Finnair has at its disposal the most modern fleet in European
air traffic, which brings both cost savings and eco-efficiency.
The present Boeing MD-11 long-haul traffic fleet will be replaced by Airbus A330
and A340 wide-bodied aircraft by the end of 2010. In May and June, Finnair
received the first two of four new Airbus A340 aircraft it has ordered. The
remaining two A340 will arrive next year. The fleet already has one A340
aircraft, acquired last year.
Finnair has also placed orders for six Airbus A330/A340 wide-bodied aircraft to
be delivered in 2009-10 and has options for four more. The final selection of
the types of aircraft will be decided later. The programme means that the
Finnair long-haul fleet can be increased from the present ten aircraft to 11-15
aircraft by the end of 2010.
In 2014-16, new technology A350XWB aircraft will also be acquired. Finnair has
placed firm orders for 11 of this type of aircraft and has options for four
more.
The present seven Boeing MD-11 aircraft will be withdrawn from Finnair's ranks
in 2008-10 as their lease agreements expire. Two aircraft which were owned by
Finnair were agreed to sell to Aeroflot Cargo in June. The aircraft will be
transferred to their new owner in autumn 2008 and summer 2009.
Because the selling price of the MD-11 aircraft exceeds the book value, the
depreciation program for the aircraft´s time of use has been lowered, and thus
significant capital gains will not arise at the end of the period. Due to the
change, monthly depreciation up to the time of the withdrawal of the MD-11
aircraft will be around 0.7 million lower compared with the previous
depreciation programme. During the second quarter, depreciation on the MD-11
aircraft decreased by around 1.4 million euros.
After the withdrawal of the MD-11 aircraft, the company's scheduled passenger
traffic fleet will consist solely of modern Airbus A320, A330 and A340 aircraft
as well as Embraer 170 and 190 aircraft.
The orders made will accelerate the fleet renewal. The commonality of the fleet
will boost the efficiency of crew utilisation and maintenance work. The lower
fuel consumption of the new aircraft will bring savings and cut emissions. The
fleet renewal will create a good framework for lowering operating costs and
improving profitability. The total value of confirmed aircraft orders is around
two billion euros.
The Embraer aircraft acquisition programme, which began in autumn 2005,
continues. The number of Embraer aircraft ordered to date is 20, of which ten
are the 76-seat 170 model and ten the 100-seat 190 model. All ten Embraer 170
aircraft and four Embraer 190s have already been delivered to Finnair. During
the current year, two more Embraer 190s will arrive, and the remaining four will
be delivered in 2008-09, two each year.
Some technical problems relating to departure reliability have been connected
with the introduction of the Embraer aircraft, and this has led to delays and
flight cancellations. Embraer and Finnair have been cooperating to rectify the
problems. Some of the problems caused by faults have already been eliminated and
a solution to the rest will be found in the near future. The technical departure
reliability of the Embraer aircraft is at the same level as other new types of
aircraft.
Winglets have been fitted to six of the seven Boeing 757 aircraft used by
Finnair Leisure Flights. The remaining aircraft will be fitted with them this
autumn. Winglets improve an aircraft's aerodynamics and thus reduce fuel
consumption and emissions. Fuel consumption falls by an estimated four per cent.
Of the seven ATR 72 turboprop aircraft used by the Estonian subsidiary Aero
Airlines AS, four were sold in June and July. A 4.5 million euro capital gain
from the sale of three aircraft was recognised in the second quarter, and a good
one million euro capital gain from the sale of one aircraft will be recognised
in the third quarter.
Aero continues to operate with three ATR 72 aircraft primarily from Helsinki to
Tallinn, Tampere, Turku.
Performance of business areas
The primary segment reporting of the Finnair Group's financial statements is
based on business areas. The reporting business areas are Scheduled Passenger
Traffic, Leisure Traffic, Aviation Services and Travel Services.
Scheduled Passenger Traffic
This business area is responsible for sales of scheduled passenger traffic and
cargo, service concepts, flight operations, and procurement and financing of
aircraft. Scheduled Passenger Traffic leases to Leisure Traffic the crews and
aircraft it requires. The business area consists of the following units and
companies: Finnair Scheduled Passenger Traffic, Aero Airlines, Finnair Cargo Oy,
Finnair Aircraft Finance Oy, and FlyNordic up to end of the second quarter.
In April-June the business area's turnover grew 10.6 per cent to 434.0 million
euros. The operational result, i.e. adjusted EBIT, improved 27.6 per cent to
27.7 million euros (21.7 million).
In the second quarter, Scheduled Passenger Traffic's capacity and demand,
measured in passenger kilometres, both grew by 19.9 per cent, so passenger load
factor remained on the previous year's level, 73.3 per cent. Alongside additions
to Asian traffic, a capacity swap between the Boeing 757 and the Airbus A320
fleet agreed with Leisure Flights contributed to the strong growth in capacity.
Scheduled Passenger Traffic carried 2.1 million passengers in April-June. During
the first six months of the year, four million passengers were carried on
scheduled flights.
Unit revenue for scheduled passenger traffic declined by 3.1 per cent in
April-June. The fall in unit revenue resulted from weaker unit revenue in
European traffic as well as from growth in the relative share of long-haul
traffic. On long flights, passenger kilometre-based unit revenue and cost are
lower than on shorter European and domestic flights.
In international scheduled traffic, Finnair has increased its market share by
several percentage points. Finnair has a market share of more than 57 per cent
in travel departing from Finland.
During January-June, the arrival punctuality of scheduled passenger flights fell
by 4.7 per cent to 80.8 per cent (85.5%). Delays are particularly caused by the
Helsinki-Vantaa Airport terminal's capability of handling the increased
passenger and baggage streams of Europe-Asia traffic during extension work,
which will be completed in 2009.
Finnair sold its Swedish subsidiary FlyNordic to Norwegian Air Shuttle. The deal
was implemented as a share swap through which Finnair gained a more than five
per cent ownership of Norwegian Air Shuttle. In addition, Finnair acquired share
options which, if exercised, would increase its ownership to around ten per cent
by the end of 2008. FlyNordic clearly improved its profitability from the
previous year, and it reported a profit in the second quarter.
Finnair and Norwegian Air Shuttle have also agreed to deepen cooperation between
the companies. Norwegian Air Shuttle's Scandinavian route network will be linked
to Finnair's increasing Asian connections, which will mean, for example, that
growing demand in Asia for tours of the Nordic countries and Central Europe can
be satisfied better.
The total amount of cargo carried in scheduled traffic grew by 3.5 per cent.
Leased cargo capacity has been reduced in North American traffic. The amount of
cargo carried in Asian traffic increased 19.0 per cent from the previous year.
In June it was decided to divide Cargo's sales and terminal operations into two
distinct subsidiaries of Finnair Oyj. Around 300 employees will be transferred
to a newly formed company, Finnair Cargo Terminal Operations Oy, with around 100
employees remaining in Finnair Cargo Oy. Antero Lahtinen will continue as the
managing director of both companies. The objective is also to expand Finnair's
cargo terminal capacity in the area of Helsinki-Vantaa Airport in next few
years.
Unit revenues of cargo in scheduled traffic declined 9.1 per cent in the second
quarter as a result of a fall in prices due to overcapacity in the Nordic
market. A positive factor is strong cargo demand in the Indian market, where
Finnair has quadrupled its capacity from three to 12 flights per week.
Leisure Traffic
This business area consists of Finnair Leisure Flights as well as the
Aurinkomatkat-Suntours package tour group, which is the biggest in its field in
Finland with a market share of more than 37 per cent. Finnair Leisure Flights
also enjoys a strong market leadership in leisure travel flights. The business
area's clientele consists of Finland's leading tour operators and private
customers.
In April-June, Finnair Leisure Flights carried nearly 283,500 passengers.
Performance calculated in passenger kilometres was 7.4 per cent lower than a
year earlier and capacity was reduced by 4.0 per cent, so the passenger load
factor of Leisure Flights declined 3.0 percentage points from the previous
year's level to 81.2 per cent. The capacity reduction resulted mainly from the
fitting of winglets to the Boeing 757 fleet being scheduled for April-June.
Winglets enable significant savings in fuel consumption to be achieved.
Second quarter capacity of Aurinkomatkat-Suntours was seven per cent lower than
the previous year, but passenger load factor rose 1.3 percentage points to 98.2
per cent. The opening of the sales for the winter season at the end of April was
the most successful ever. Tourism to Thailand continues to grow strongly.
At the end of 2006, Aurinkomatkat-Suntours agreed to buy Estonia's second
biggest tour operator, Oü Horizon Travel. The deal was finalised at the
beginning of April. The company, however, will be reported for the whole year as
part of Aurinkomatkat's result. The company increases Aurinkomatkat's tour
capacity by more than five per cent.
The business area's turnover in the second quarter was 83.1 million euros (82.4
million). The operational result was similar to the previous year, a profit of
1.1 million euros.
Finnair has agreed fixed flight prices with tour operators and provided for the
fuel risk with price hedging in accordance with the Group's financial policy.
Aviation Services
This business area comprises aircraft maintenance services, ground handling and
the Group's catering operations. In addition, the Group's property holdings, the
procurement of office services, and the management and maintenance of properties
related to the Group's operational activities also belong to the Aviation
Services business area.
In April-June, turnover for Aviation Services rose by 2.4 per cent to 99.8
million euros (97.5 million). The operational result improved by 2.6 million
euros and was a profit of 1.3 million euros (1.3 million loss).
At the beginning of 2006, Finnair Technical Services initiated a competitiveness
project in which the entire organisation's revenue and cost structure was
examined. The goal is to achieve profitable business operations through
specialisation and by developing processes and operating models. Operations for
which there is no commercial justification will be discontinued. As a result of
operational efficiencies, Finnair Technical Services' operational result in
January-June was in profit, even though the second quarter was slightly
loss-making.
Finnair Technical Services has received new clients outside the Group, which
will increase external turnover towards the end of the year. Utilisation of the
Aircraft Heavy Maintenance unit has increased and profitability improved, but
the unit is still loss-making.
Around 300 jobs will be cut in Finnair Technical Services by the end of the
year. The reduction in jobs will be implemented through various early retirement
solutions, outsourcing of functions as well as redundancies, in a manner agreed
earlier. A significant proportion of the employment relationships will end
during summer 2007.
All of the units of ground handling company Northport Oy operated at a loss in
April-June. Northport Oy expanded its operations to Oslo's Gardemoen Airport in
October 2006. Operational profitability has not developed in line with
objectives.
As part of the Finnair Group's restructuring and profitability improvement,
opportunities for the reorganisation of Northport Oy and its subsidiaries have
been investigated. Various ownership and partnership options for the whole
company or parts thereof have been explored. Improvements in efficiency will
continue under Northport's new management.
In respect of Finnish airports, excluding Helsinki-Vantaa, the transfer of
ground handling services to the responsibility of the RTG Group was agreed in
June. At the same time, a single unit was formed from Northport's and SAS Ground
Handling's arrival service functions at Helsinki-Vantaa Airport and sold to the
RTG Group.
Catering operations are profitable. The efficiency of production processes has
been improved and traffic growth has also increased demand for catering
products. In addition to basic operations, additional revenue has been generated
from expanded advance sales in connection with long-haul flights and increased
sales on European flights. Moreover, the product range has been widened to
special meals ordered by passengers in advance.
Finnair Catering will receive new premises at Helsinki-Vantaa Airport at the
beginning of next year. The subsidiary Finncatering moved to new premises a year
ago.
Travel Services
This business area consists of the Group's domestic and foreign travel agencies,
including Finland Travel Bureau (FTB), its subsidiary Estravel which operates in
the Baltic countries, and Matkatoimisto Area, as well as the operations of the
travel reservations systems supplier Amadeus Finland Oy.
In the second quarter, the business area's turnover fell 3.0 per cent to 22.4
million euros (23.1 million). The decline was due to a down-sizing of FTB's own
package tour production. Sales via the internet doubled from the previous year.
Customers have given a good reception to the opportunity to tailor their leisure
trips themselves on the internet. The internal restructuring of Area and FTB
implemented last year and the merger of operating locations situated in various
localities into an FTB distribution network are beginning to be evident in
improved financial performance. Travel Services' operating profit improved in
the second quarter over 30% to 1.2 million euros (0.9 million).
Flight Traffic Services and Products
Finnair has focused on traffic between Europe and Asia, offering efficient and
diverse connections from Finland to the world. Nearly half of scheduled traffic
revenue is linked to Asian traffic. Finnair has a total of 59 direct flight
connections per week to ten Asian destinations.
In spring 2007 Finnair's Asian route network was revised so that all
destinations are now served by direct flights, with no intermediate stops. From
summer 2007 the daily destinations are Bangkok, Delhi, Hong Kong, Osaka, Beijing
and Shanghai. In addition, Finnair flies to Guangzhou in China and to Tokyo and
Nagoya in Japan.
A new destination, Mumbai in India, was opened in June 2007 with five flights
per week. In June 2008 Finnair will begin direct flights to Seoul, the capital
of South Korea. The route will be operated with five flights a week.
Daily, or almost daily, connections to Asian destinations offer business
passengers a competitive product. Product improvement is also expected to
increase average revenues.
Finnair's long-haul strategy exploits Helsinki's ideal location on flight routes
between Asia and Europe. Flights covering 50 European and 15 domestic
destinations connect into Finnair's Asia network. At the same time, a wide
selection of direct connections are offered from Finland to the rest of Europe.
Growing passenger streams between Europe and Asia have enabled the opening of
new routes in Europe. The expansion of the European network also provides an
excellent service to Finnish customers, who can utilise Finnair's
morning-evening concept in their European connections.
This year, five new destinations, serving local demand as well as the needs of
Asian traffic, have been added to the European route network. The new
destinations are Bucharest, Gdansk, Lisbon, Ljubljana and Nuremberg. In
addition, the Madrid and Manchester flights now fly direct, without an
intermediate stop in Stockholm. The changes mean that all European routes will
be served by non-stop flights.
The shorter flight connections also improve the eco-efficiency of travelling;
when flying with Finnair from Europe to Asia, passengers travel the most direct
route, and connections via Central Europe that increase travel time and fuel
consumption are not needed.
Finavia is currently extending Helsinki-Vantaa Airport to serve the needs of the
growing Asian traffic. The increasing bottlenecks in luggage handling underline
the urgent need for modernization and completion of the new terminal extension.
Until then the problems facing passengers are alleviated through cooperation of
the parties involved.
At the beginning of April, the oneworld-alliance completed the biggest expansion
in its history, when Japan Airlines, Malév Hungarian Airlines and Royal
Jordanian Airlines became members of the alliance.
In July American Airlines, Finnair and three other European oneworld airlines -
Iberia, Malév and Royal Jordanian - applied for antitrust immunity (ATI) from
the United States' Department of Transport (DOT) regarding Trans-Atlantic
traffic.
The oneworld partners wish to expand their cooperation in, among other things,
traffic and route planning, marketing, pricing, frequent-flyer schemes, cargo
transportation, and information and distribution systems.
In their bilateral cooperation, Finnair and American Airlines have had a valid
antitrust immunity in United States since 2002. It has reflected, for example,
in common pricing, increased onward connections between Finland and the USA, and
improved airport services.
Finnair Leisure Flights carries the customers of ten tour operators to 66
holiday destinations in 33 countries. In addition, there are flights which only
can be purchased on the internet to dozens of Leisure Flights' destinations.
Growth in Asian travel reflects also in Leisure Flights. Next winter season,
Leisure Flights will operate 12 weekly flights to Asia, including daily flights
to Thailand. A new winter destination is Krabi in Thailand.
Leisure Flights' fleet consists of seven Boeing 757 aircraft and Airbus capacity
leased from Scheduled Passenger Traffic. At the beginning of 2007, Leisure
Flights launched additional services that customers can pay for. Before their
trip, customers can, for example, order via the internet various meal options or
make arrangements for special baggage. The range of additional services will be
expanded during the latter part of the year.
New seats with a slimmer structure have been fitted in the Airbus A320 and A321
aircraft mainly used in European traffic. The new seats have been designed so
that leg room is not reduced, even though the seat spacing has been shortened.
The seat renewal increases by 15 the number of seats in each of the 18 aircraft,
while the weight of each aircraft is reduced by 1,200 kilos, thus enhancing fuel
efficiency.
Short-term risks and uncertainty factors
Fuel costs constitute approximately one fifth of the Group's total costs and are
one of the most significant uncertainty factors where costs are concerned. For
the rest of the year, the degree of hedging of more than 60 per cent will dampen
any short-term fluctuation in the result.
Six out of seven of the Finnair Group's agreements with labour unions are due to
expire on 30 September 2007. The agreement with pilots expires on 30 April 2008.
Finnair has opened new routes to Asia and has increased capacity on existing
routes. The new route openings and increases may weaken load factors and average
prices in the short term.
In traffic between Europe and Asia, cargo pricing is under pressure due to
sharply increased competition in Northern Europe.
Outlook
Finnair's Europe-Asia strategy exploits the company's strengths as a network
airline as well as Helsinki's geographical location. The chosen strategy
diversifies operational risk, because Finnair's European flights serve both
local and transit travel. In addition, with passenger and cargo traffic Finnair
operates in Asia in a number of different types of markets.
Growth in demand for Finnair's Scheduled Passenger Traffic is expected to
continue strongly. This growth will be seen in both Asian and European traffic.
Asian traffic is forecast to grow by over 30 per cent this year and European
traffic by 15-20 per cent.
Despite increased capacity, passenger load factors have remained at good levels,
based not only on growing demand but also on flexible fleet utilisation. A
suitable aircraft can be used on each route according to demand.
Tight price competition is expected to continue. The relentless growth in fuel
prices and security costs, however, will impose pressure on the whole sector to
raise prices. In the short term Finnair yields per revenue passenger kilometre
are expected to slightly decrease due to new route openings and change in
traffic structure.
Of Finnair's seven collective labour agreements, six are due to expire at the
end of September 2007. Terms of employment have been and will be adjusted
further to the needs of long-haul traffic in collaboration with personnel
groups. Significant cost savings have also been achieved with flight personnel
as a whole by developments in work shift arrangements.
Operational efficiencies will continue to be sought throughout the Finnair Group
in accordance with the 80 million euro programme initiated last year. More than
half of the savings will be delivered this year and the full impact will be
evident next year. The estimate for the 2007 operational result remains
unchanged, i.e. to exceed 70 million euros.
FINNAIR PLC
Board of Directors
For further information, please contact:
SVP and CFO Lasse Heinonen
tel. +358 9 818 4950
lasse.heinonen@finnair.fi
SVP Communications, Christer Haglund
tel. +358 9 818 4007
christer.haglund@finnair.fi
Director, Investor Relations, Taneli Hassinen
tel. +358 9 818 4976
taneli.hassinen@finnair.fi
FINNAIR OYJ STOCK EXCHANGE RELEASE 9 AUGUST 2007 AT 09:00
FINNAIR GROUP INTERIM REPORT 1 JANUARY - 30 JUNE 2007
RESULT IMPROVED AS EXPECTED
Summary of the second quarter's key figures
Turnover rose 8.8% to 538.1 million euros
Passenger traffic grew 13.9%, passenger load factor fell 0.9 percentage points
to 74.6%
Unit revenues from flight operations fell by 0.5%, unit costs fell by 3.8%
Operating profit i.e. EBIT was 37.1 million euros (5.5 million)
Operational result i.e. EBIT excluding capital gains and changes in the fair
value of derivatives, was 27.2 million euros (18.2 million)
Profit before taxes was 34.4 million euros (3.3 million)
Gearing at the end of the second quarter was 21.7% (-3.8%) and gearing adjusted
for leasing liabilities was 114.6% (92.6%)
Balance sheet cash and cash equivalents at the end of the second quarter
totalled 249.9 million euros (366.1 million)
Equity ratio 36.1% (38.5%)
Equity per share 7.27 euros (7.33)
Earnings per share 0.29 euros (0.01)
Return on capital employed 5.0% (4.1%)
Comparisons made with Q2 in 2006.
President and CEO Jukka Hienonen on the interim result:
The figures published today show that we are heading in the right direction.
Unit costs have clearly decreased due to efficiency measures, and profitability
has in many respects improved. This would not have been possible without
determined work in different parts of the Group. However, the ongoing fleet
renewal program requires us to further improve the current profitability level
and operational performance.
New openings in Asia and Europe have started off well and the changes we have
made to our long-haul network have proved to be successful. Daily connections to
most Asian destinations have enhanced operational efficiency and have improved
the product. They have also facilitated new corporate agreements in Finland and
abroad. Next summer we will open a route to Seoul, flying five times a week.
The fast growth of Asian traffic has put the passenger and baggage handling
capacity of Helsinki-Vantaa Airport to the test. A terminal extension serving
Asian traffic will alleviate the situation when it opens in early 2009.
During the summer, higher passenger volumes as well as security measures have
delayed baggage at large European airports to an unprecedented extent. The
problems have also been reflected in Finnair's opportunities to serve its
customers.
Finnair's organisation and operations have been modified with strong measures.
It is clear that it will take a while for all parties to become accustomed to
the implemented changes. We have what it takes, however, to build a success
story in the coming years with high quality and flexible Finnair expertise.
Focusing more clearly on our core expertise in scheduled passenger and leisure
traffic, as well as continuous development of structures and operations, will
ensure that we have the ingredients for successful growth. New routes put
pressure on pricing in the near future.
Our efficiency programme continues with greater impact towards the end of the
year. The full effect of the programme will be seen next year. We continue to
believe that this year our operational result will exceed 70 million euros.
Market and General Review
Growth in demand among European network airlines has levelled off in the early
part of the year. Finnair's sales, on the other hand, have continued to be
strong in nearly all types of traffic. This has been driven above all by Asian
traffic, but growth in European traffic has also been solid, to a large extent
due to increased demand for European routes brought by Asian connections.
European network airlines' performance improved on average by five per cent,
while Finnair's revenue passenger kilometres in scheduled traffic increased by
over 20 per cent, representing the absolute best performance in the sector.
European airlines have increased their capacity on South American routes, but
flying to Asia has increased on average by less than two per cent. Finnair's
Asian traffic grew by 30 per cent in the early part of the year.
The price of jet fuel has remained at a high level and has even increased
slightly since the beginning of the year. Through operational efficiencies,
Finnair has reduced the unit costs of flight operations by a good three per cent
in January-June. At the same time, unit revenues have remained at the previous
year's level. This has improved profitability in the second quarter compared
with the corresponding period last year.
The improvement of profitability is particularly evident in Scheduled Passenger
Traffic, where a ten per cent growth in turnover brought a nearly 30 per cent
increase in the operational result.
The 80 million euro efficiency programme initiated in 2006 is expected to yield
over 40 million euros in savings in the cost structure during the current year.
The savings will be weighted towards the end of the year. A significant part of
the 670-job reduction of the workforce announced last May will be implemented
during the summer.
Ownership and partnership arrangements for Northport, Finnair's loss-making
ground handling company, have been clarified since the end of last year with the
aim of improving the quality of operations and profitability. Part of the
operations have been sold to the Finnish RTG Group. Otherwise, measures to
improve efficiency will continue under new management.
Strongly growing Asian traffic is creating new challenges for baggage handling
and for service to passengers travelling through Helsinki-Vantaa Airport.
Finavia has initiated terminal expansion work and a renewal of baggage handling
systems. To maintain the punctuality of traffic, staggering of arriving aircraft
has been improved in cooperation with air traffic control and, in terms of
facilities, temporary arrangements have been agreed with Airport management.
The long-haul fleet renewal programme announced in March 2007 advanced in the
second quarter with the arrival of two new Airbus A340 long-haul aircraft as
well as two Embraer 190 aircraft for European traffic. The present Boeing MD-11
fleet will be replaced with Airbus A330/340 wide-bodied aircraft by the end of
2010.
At the end of June, Finnair sold its Swedish subsidiary FlyNordic to Norwegian
Air Shuttle. As a result of the deal, Finnair acquired over five per cent of
Norwegian's shares as well as an option to increase its ownership to
approximately ten per cent. The companies also agreed to wide cooperation in the
Nordic region.
Financial Result, 1 April - 30 June 2007
Turnover rose in the second quarter by 8.8 per cent to 538.1 million euros. The
Group's operational result (EBIT), i.e. operating profit excluding capital gains
and changes in the fair value of derivatives, rose to 27.2 million euros (18.2
million euros, from which arrangement expenses were also eliminated). Adjusted
operating profit margin was 5.1 per cent (3.7). Profit before taxes was 34.4
million euros (3.3 million).
The result includes 5.0 million euros (1.9 million) capital gains, consisting
mainly of the sale of three ATR 72 turbo-prop aircraft. Changes in the fair
value of derivatives improved the second quarter result by 4.9 million euros,
but this has no effect on cash flow.
In April-June, the Finnair Group's passenger traffic capacity (ASK) rose 15.3
per cent and demand grew 13.9 per cent; demand in Asian traffic alone rose 25.8
per cent. Passenger load factor fell by 0.9 percentage points compared with the
previous year to 74.6 per cent. The amount of cargo carried was 23.5 million
kilos, i.e. approximately the same as in April-June last year. The amount of
cargo in Asian traffic has grown, but cargo demand elsewhere has correspondingly
decreased.
In Group passenger traffic, total unit revenues per passenger kilometre remained
nearly at last year's level (-0.3%). Yield per passenger rose by 9.8 per cent.
Unit revenues per tonne kilometre for cargo traffic fell 9.0 per cent due to
price competition caused by overcapacity in the Northern European cargo market.
Weighted unit revenue for passenger and cargo traffic fell by 0.5 per cent.
Euro-denominated operating costs rose during the period by 3.1 per cent. Unit
costs for flight operations, on the other hand, fell by 3.8 per cent. Fuel costs
increased in the second quarter by 14.9 per cent as a whole, but per available
tonne kilometre only by 1.3 per cent. Unit costs excluding fuel costs fell by
5.3 per cent.
Earnings per share for the quarter amounted to 0.29 euros (0.01). The main
factors in the Group's profit improvement were the improved results of the
Scheduled Passenger Traffic business area and Finnair Technical Services.
Any comparison should also take into consideration the fact that 15 million
euros of non-recurring expenses relating to the restructuring programme were
recognised in the second quarter of last year. In the comparison of operational
results, the restructuring provision has been eliminated.
Financial Result, 1 January - 30 June 2007
Turnover rose in January-June by 9.4 per cent to 1,066.6 million euros. The
Group's operational result (EBIT), excluding capital gains and changes in the
fair value of derivatives, rose to 33.0 million euros (13.1 million). Adjusted
operating profit margin was 3.1 per cent (1.3). The result before taxes was 47.8
million euros (-1.9 million).
Changes in the fair value of derivatives improved the result for the first six
months by 10.9 million euros, but this has no effect on cash flow.
In January-June, passenger traffic capacity (ASK) rose 12.3 per cent and demand
grew 12.6 per cent; demand in Asian traffic alone rose 30.5 per cent. The
passenger load factor was at the previous year's level, 75.2 per cent. The
amount of cargo carried was nearly at the previous year's level (+0.6%) and was
45.2 million kilos.
In Group passenger traffic, total unit revenues per passenger kilometre rose 0.9
per cent. Yield per passenger rose 9.7 per cent. In cargo traffic, unit revenues
per tonne kilometre fell 7.2 per cent due to strong price competition and a
change of traffic structure. Weighted unit revenue for passenger and cargo
traffic rose by 0.6 per cent.
Euro-denominated operating costs rose during the period by 4.6 per cent. Unit
costs for flight operations fell by 2.9 per cent. Fuel costs increased in
January-June by 15.2 per cent as a whole, but per available tonne kilometre only
by 2.5 per cent. Unit costs excluding fuel costs fell by 4.5 per cent.
Earnings per share for January-June amounted to 0.40 euros (-0.04).
Investment, financing and risk management
Investments in January-June totalled 244.6 million euros (119.0 million) and
included, among other things, two Airbus A340 wide-bodied aircraft as well as
three Embraer 190 aircraft for European traffic. Including advance payments, the
cash flow impact of investments was -195.7 million euros. Total investments in
the years 2007-2009 exceed 300 million euros per year.
At the end of June, the Group had balance sheet cash and cash equivalents
amounting to 249.9 million euros, in addition to which there was a total of 250
million euros in unused committed credit facilities.
Operational net cash flow in January-June was 114.0 million euros, compared with
23.6 million euros a year earlier. Gearing increased from 7.1 per cent at the
beginning of the year to 21.7 per cent at the end of June, and gearing adjusted
for leasing liabilities increased from 112.8 per cent to 114.6 per cent. Equity
ratio decreased 1.1 percentage points from the beginning of the year to stand at
36.1 per cent. Various options for funding investments and strengthening the
capital structure are being studied.
The leasing agreements of the seven Boeing 757 aircraft used by Leisure Flights
have been renewed on more favourable financial terms, which is evident as lower
aircraft leasing costs.
During the second quarter, one sale and leaseback agreement was concluded for an
Embraer 190 aircraft. The lease agreement is a Japanese Operating Lease, which
includes the right to repurchase when the leasing term of approximately ten
years expires.
According to the financial risk management policy approved by Finnair's Board of
Directors, the company has hedged around 66 per cent of scheduled traffic's jet
fuel purchases during the next six months and thereafter for the following 24
months with a decreasing level of hedging.
At the end of 2006 Finnair adjusted its hedging policy so that the hedging
horizon for jet fuel was extended from two to three years. Finnair Leisure
Flights has price hedged over 60 per cent of the fuel consumption of its agreed
traffic programme for the current summer season and the coming winter season.
Derivatives linked to the jet fuel price are mainly used as the fuel price
hedging instrument. Due to the extension of the hedging horizon and derivatives
market efficiency differences, Finnair also uses other oil derivatives.
Under IFRS rules, a change during the financial period in the fair value of
derivatives that mature in future is recognised in the Finnair income statement
item ‘Other expenses'. The change in the fair value of derivatives is not a
realised hedging gain nor does it have an effect on cash flow; it is a valuation
gain in accordance with IFRS reporting practice. During the second quarter, the
change in the fair value of derivatives was 4.9 million euros, and in
January-June 10.9 million euros.
During the early part of the year, a weakening of the US dollar against the euro
has had a positive impact on Finnair's operational result of more than four
million euros, taking foreign currency hedging into account. At the end of June,
the degree of hedging for a dollar basket over the next 12 months was 66 per
cent.
Shares and Share Capital
The company's market value on 30 June 2007 was 1,167.1 million euros (1,071.8
million) and the closing share price 13.15 euros. During the period
January-June, the highest price for the Finnair Plc share on the Helsinki Stock
Exchange was 14.35 (15.00) euros, while the lowest price was 12.02 (10.01) euros
and the average price 13.09 (12.61) euros. During the early part of the year,
some 10.1 million (23.0 million) of the company's shares, with a value of 131.8
million euros (290.3 million), were traded on the Helsinki Stock Exchange. At
the end of the period under review, the Finnish State owned 55.78 per cent
(56.13) of the company's shares, while 31.16 per cent (34.07) were held by
foreign investors or in the name of a nominee.
At the beginning of the financial period, the company held 151,903 of its own
shares, which it had purchased in previous years. On 22 March 2007 the Annual
General Meeting authorised the Board of Directors to purchase the company's own
shares up to a maximum of 3,500,000 shares and dispose of the company's own
shares up to a maximum of 3,651,903 shares. The authorisation applies to shares
amounting to less than five per cent of the company's share capital. The company
has not acquired nor disposed of its own shares in the period 1 January-30 June
2007, and on 30 June 2007 the company held a total of 151,903 own shares, i.e.
0.17 per cent of all shares.
Changes in Senior Management
Kristina Inkiläinen began as Managing Director of Finnair Catering Oy and SVP,
Catering on 30 April 2007, succeeding Anssi Komulainen, who became SVP, Human
Resources. Inkiläinen was formerly Managing Director of Select Service Partner
Finland Oy.
Kristiina Asplund began as Managing Director of Finnair Catering Oy's subsidiary
Finncatering Oy on 1 April 2007.
Tero Vauraste, Managing Director of the Group's ground handling company
Northport Oy, resigned from his post on 31 May 2007. He will be succeeded by
Jukka Hämäläinen, who previously served as Managing Director of Servisair Oy.
Hämäläinen starts working in his new post on 13 August 2007.
Taru Keronen has been appointed Managing Director of Matkatoimisto Oy Area as of
1 October 2007, who previously served as Managing Director of Eckerö Line.
Area's present Managing Director, Juhani Suomela, will remain a senior adviser
until the end of the year, when he will retire.
Personnel
During the first six months of the year, the Finnair Group had an average number
of 9,531 employees, which was 1.8 per cent fewer than a year earlier. Scheduled
Passenger Traffic had 4,180 employees and Leisure Traffic 373 employees. The
total number of personnel in technical, catering and ground handling services
was 3,696 and in travel services 1,134. A total of 148 people were employed in
other functions.
Personnel expenses rose by 3.1 per cent in January-June. Nominal salaries rose
by 2.4 per cent and pension contributions by 7.8 per cent. Personnel expenses
fell in April-June by 2.8 per cent compared with the second quarter of the
previous year, when personnel expenses included approximately ten million euros
in reorganisation expenses. Comparable personnel expenses per available tonne
kilometre fell 3.4 per cent in the second quarter.
The criteria for the 2007 incentive bonuses has been decided. The size of the
profit bonus payable to the Personnel Fund will be determined on the basis of a
combination of the operating profit margin (3-7%) and return on capital employed
(8-14%). The determination criteria of the share bonus scheme for key
individuals are earnings per share (0.70-1.20 euros per share) and return on
capital employed (8-14%). In addition, there is also an incentive scheme for all
personnel based on operational performance.
Finnair has collective employment agreements valid until 30 September 2007 with
six labour unions and with pilots until the end of April 2008. In March, an
efficiency agreement was signed with the Finnish Airline Pilots Association
(SLL). The agreement will help improve work productivity and achieve significant
cost savings. A corresponding agreement had been concluded earlier with cabin
staff.
Fleet changes
Finnair Group's fleet is managed by Finnair Aircraft Finance Oy, which belongs
to the Scheduled Passenger Traffic business area. On 30 June 2007, the Finnair
Group's fleet had a total of 72 aircraft in service. The average age of the
entire fleet was 7.6 years. In European traffic, the average age of the fleet is
about four years. Finnair has at its disposal the most modern fleet in European
air traffic, which brings both cost savings and eco-efficiency.
The present Boeing MD-11 long-haul traffic fleet will be replaced by Airbus A330
and A340 wide-bodied aircraft by the end of 2010. In May and June, Finnair
received the first two of four new Airbus A340 aircraft it has ordered. The
remaining two A340 will arrive next year. The fleet already has one A340
aircraft, acquired last year.
Finnair has also placed orders for six Airbus A330/A340 wide-bodied aircraft to
be delivered in 2009-10 and has options for four more. The final selection of
the types of aircraft will be decided later. The programme means that the
Finnair long-haul fleet can be increased from the present ten aircraft to 11-15
aircraft by the end of 2010.
In 2014-16, new technology A350XWB aircraft will also be acquired. Finnair has
placed firm orders for 11 of this type of aircraft and has options for four
more.
The present seven Boeing MD-11 aircraft will be withdrawn from Finnair's ranks
in 2008-10 as their lease agreements expire. Two aircraft which were owned by
Finnair were agreed to sell to Aeroflot Cargo in June. The aircraft will be
transferred to their new owner in autumn 2008 and summer 2009.
Because the selling price of the MD-11 aircraft exceeds the book value, the
depreciation program for the aircraft´s time of use has been lowered, and thus
significant capital gains will not arise at the end of the period. Due to the
change, monthly depreciation up to the time of the withdrawal of the MD-11
aircraft will be around 0.7 million lower compared with the previous
depreciation programme. During the second quarter, depreciation on the MD-11
aircraft decreased by around 1.4 million euros.
After the withdrawal of the MD-11 aircraft, the company's scheduled passenger
traffic fleet will consist solely of modern Airbus A320, A330 and A340 aircraft
as well as Embraer 170 and 190 aircraft.
The orders made will accelerate the fleet renewal. The commonality of the fleet
will boost the efficiency of crew utilisation and maintenance work. The lower
fuel consumption of the new aircraft will bring savings and cut emissions. The
fleet renewal will create a good framework for lowering operating costs and
improving profitability. The total value of confirmed aircraft orders is around
two billion euros.
The Embraer aircraft acquisition programme, which began in autumn 2005,
continues. The number of Embraer aircraft ordered to date is 20, of which ten
are the 76-seat 170 model and ten the 100-seat 190 model. All ten Embraer 170
aircraft and four Embraer 190s have already been delivered to Finnair. During
the current year, two more Embraer 190s will arrive, and the remaining four will
be delivered in 2008-09, two each year.
Some technical problems relating to departure reliability have been connected
with the introduction of the Embraer aircraft, and this has led to delays and
flight cancellations. Embraer and Finnair have been cooperating to rectify the
problems. Some of the problems caused by faults have already been eliminated and
a solution to the rest will be found in the near future. The technical departure
reliability of the Embraer aircraft is at the same level as other new types of
aircraft.
Winglets have been fitted to six of the seven Boeing 757 aircraft used by
Finnair Leisure Flights. The remaining aircraft will be fitted with them this
autumn. Winglets improve an aircraft's aerodynamics and thus reduce fuel
consumption and emissions. Fuel consumption falls by an estimated four per cent.
Of the seven ATR 72 turboprop aircraft used by the Estonian subsidiary Aero
Airlines AS, four were sold in June and July. A 4.5 million euro capital gain
from the sale of three aircraft was recognised in the second quarter, and a good
one million euro capital gain from the sale of one aircraft will be recognised
in the third quarter.
Aero continues to operate with three ATR 72 aircraft primarily from Helsinki to
Tallinn, Tampere, Turku.
Performance of business areas
The primary segment reporting of the Finnair Group's financial statements is
based on business areas. The reporting business areas are Scheduled Passenger
Traffic, Leisure Traffic, Aviation Services and Travel Services.
Scheduled Passenger Traffic
This business area is responsible for sales of scheduled passenger traffic and
cargo, service concepts, flight operations, and procurement and financing of
aircraft. Scheduled Passenger Traffic leases to Leisure Traffic the crews and
aircraft it requires. The business area consists of the following units and
companies: Finnair Scheduled Passenger Traffic, Aero Airlines, Finnair Cargo Oy,
Finnair Aircraft Finance Oy, and FlyNordic up to end of the second quarter.
In April-June the business area's turnover grew 10.6 per cent to 434.0 million
euros. The operational result, i.e. adjusted EBIT, improved 27.6 per cent to
27.7 million euros (21.7 million).
In the second quarter, Scheduled Passenger Traffic's capacity and demand,
measured in passenger kilometres, both grew by 19.9 per cent, so passenger load
factor remained on the previous year's level, 73.3 per cent. Alongside additions
to Asian traffic, a capacity swap between the Boeing 757 and the Airbus A320
fleet agreed with Leisure Flights contributed to the strong growth in capacity.
Scheduled Passenger Traffic carried 2.1 million passengers in April-June. During
the first six months of the year, four million passengers were carried on
scheduled flights.
Unit revenue for scheduled passenger traffic declined by 3.1 per cent in
April-June. The fall in unit revenue resulted from weaker unit revenue in
European traffic as well as from growth in the relative share of long-haul
traffic. On long flights, passenger kilometre-based unit revenue and cost are
lower than on shorter European and domestic flights.
In international scheduled traffic, Finnair has increased its market share by
several percentage points. Finnair has a market share of more than 57 per cent
in travel departing from Finland.
During January-June, the arrival punctuality of scheduled passenger flights fell
by 4.7 per cent to 80.8 per cent (85.5%). Delays are particularly caused by the
Helsinki-Vantaa Airport terminal's capability of handling the increased
passenger and baggage streams of Europe-Asia traffic during extension work,
which will be completed in 2009.
Finnair sold its Swedish subsidiary FlyNordic to Norwegian Air Shuttle. The deal
was implemented as a share swap through which Finnair gained a more than five
per cent ownership of Norwegian Air Shuttle. In addition, Finnair acquired share
options which, if exercised, would increase its ownership to around ten per cent
by the end of 2008. FlyNordic clearly improved its profitability from the
previous year, and it reported a profit in the second quarter.
Finnair and Norwegian Air Shuttle have also agreed to deepen cooperation between
the companies. Norwegian Air Shuttle's Scandinavian route network will be linked
to Finnair's increasing Asian connections, which will mean, for example, that
growing demand in Asia for tours of the Nordic countries and Central Europe can
be satisfied better.
The total amount of cargo carried in scheduled traffic grew by 3.5 per cent.
Leased cargo capacity has been reduced in North American traffic. The amount of
cargo carried in Asian traffic increased 19.0 per cent from the previous year.
In June it was decided to divide Cargo's sales and terminal operations into two
distinct subsidiaries of Finnair Oyj. Around 300 employees will be transferred
to a newly formed company, Finnair Cargo Terminal Operations Oy, with around 100
employees remaining in Finnair Cargo Oy. Antero Lahtinen will continue as the
managing director of both companies. The objective is also to expand Finnair's
cargo terminal capacity in the area of Helsinki-Vantaa Airport in next few
years.
Unit revenues of cargo in scheduled traffic declined 9.1 per cent in the second
quarter as a result of a fall in prices due to overcapacity in the Nordic
market. A positive factor is strong cargo demand in the Indian market, where
Finnair has quadrupled its capacity from three to 12 flights per week.
Leisure Traffic
This business area consists of Finnair Leisure Flights as well as the
Aurinkomatkat-Suntours package tour group, which is the biggest in its field in
Finland with a market share of more than 37 per cent. Finnair Leisure Flights
also enjoys a strong market leadership in leisure travel flights. The business
area's clientele consists of Finland's leading tour operators and private
customers.
In April-June, Finnair Leisure Flights carried nearly 283,500 passengers.
Performance calculated in passenger kilometres was 7.4 per cent lower than a
year earlier and capacity was reduced by 4.0 per cent, so the passenger load
factor of Leisure Flights declined 3.0 percentage points from the previous
year's level to 81.2 per cent. The capacity reduction resulted mainly from the
fitting of winglets to the Boeing 757 fleet being scheduled for April-June.
Winglets enable significant savings in fuel consumption to be achieved.
Second quarter capacity of Aurinkomatkat-Suntours was seven per cent lower than
the previous year, but passenger load factor rose 1.3 percentage points to 98.2
per cent. The opening of the sales for the winter season at the end of April was
the most successful ever. Tourism to Thailand continues to grow strongly.
At the end of 2006, Aurinkomatkat-Suntours agreed to buy Estonia's second
biggest tour operator, Oü Horizon Travel. The deal was finalised at the
beginning of April. The company, however, will be reported for the whole year as
part of Aurinkomatkat's result. The company increases Aurinkomatkat's tour
capacity by more than five per cent.
The business area's turnover in the second quarter was 83.1 million euros (82.4
million). The operational result was similar to the previous year, a profit of
1.1 million euros.
Finnair has agreed fixed flight prices with tour operators and provided for the
fuel risk with price hedging in accordance with the Group's financial policy.
Aviation Services
This business area comprises aircraft maintenance services, ground handling and
the Group's catering operations. In addition, the Group's property holdings, the
procurement of office services, and the management and maintenance of properties
related to the Group's operational activities also belong to the Aviation
Services business area.
In April-June, turnover for Aviation Services rose by 2.4 per cent to 99.8
million euros (97.5 million). The operational result improved by 2.6 million
euros and was a profit of 1.3 million euros (1.3 million loss).
At the beginning of 2006, Finnair Technical Services initiated a competitiveness
project in which the entire organisation's revenue and cost structure was
examined. The goal is to achieve profitable business operations through
specialisation and by developing processes and operating models. Operations for
which there is no commercial justification will be discontinued. As a result of
operational efficiencies, Finnair Technical Services' operational result in
January-June was in profit, even though the second quarter was slightly
loss-making.
Finnair Technical Services has received new clients outside the Group, which
will increase external turnover towards the end of the year. Utilisation of the
Aircraft Heavy Maintenance unit has increased and profitability improved, but
the unit is still loss-making.
Around 300 jobs will be cut in Finnair Technical Services by the end of the
year. The reduction in jobs will be implemented through various early retirement
solutions, outsourcing of functions as well as redundancies, in a manner agreed
earlier. A significant proportion of the employment relationships will end
during summer 2007.
All of the units of ground handling company Northport Oy operated at a loss in
April-June. Northport Oy expanded its operations to Oslo's Gardemoen Airport in
October 2006. Operational profitability has not developed in line with
objectives.
As part of the Finnair Group's restructuring and profitability improvement,
opportunities for the reorganisation of Northport Oy and its subsidiaries have
been investigated. Various ownership and partnership options for the whole
company or parts thereof have been explored. Improvements in efficiency will
continue under Northport's new management.
In respect of Finnish airports, excluding Helsinki-Vantaa, the transfer of
ground handling services to the responsibility of the RTG Group was agreed in
June. At the same time, a single unit was formed from Northport's and SAS Ground
Handling's arrival service functions at Helsinki-Vantaa Airport and sold to the
RTG Group.
Catering operations are profitable. The efficiency of production processes has
been improved and traffic growth has also increased demand for catering
products. In addition to basic operations, additional revenue has been generated
from expanded advance sales in connection with long-haul flights and increased
sales on European flights. Moreover, the product range has been widened to
special meals ordered by passengers in advance.
Finnair Catering will receive new premises at Helsinki-Vantaa Airport at the
beginning of next year. The subsidiary Finncatering moved to new premises a year
ago.
Travel Services
This business area consists of the Group's domestic and foreign travel agencies,
including Finland Travel Bureau (FTB), its subsidiary Estravel which operates in
the Baltic countries, and Matkatoimisto Area, as well as the operations of the
travel reservations systems supplier Amadeus Finland Oy.
In the second quarter, the business area's turnover fell 3.0 per cent to 22.4
million euros (23.1 million). The decline was due to a down-sizing of FTB's own
package tour production. Sales via the internet doubled from the previous year.
Customers have given a good reception to the opportunity to tailor their leisure
trips themselves on the internet. The internal restructuring of Area and FTB
implemented last year and the merger of operating locations situated in various
localities into an FTB distribution network are beginning to be evident in
improved financial performance. Travel Services' operating profit improved in
the second quarter over 30% to 1.2 million euros (0.9 million).
Flight Traffic Services and Products
Finnair has focused on traffic between Europe and Asia, offering efficient and
diverse connections from Finland to the world. Nearly half of scheduled traffic
revenue is linked to Asian traffic. Finnair has a total of 59 direct flight
connections per week to ten Asian destinations.
In spring 2007 Finnair's Asian route network was revised so that all
destinations are now served by direct flights, with no intermediate stops. From
summer 2007 the daily destinations are Bangkok, Delhi, Hong Kong, Osaka, Beijing
and Shanghai. In addition, Finnair flies to Guangzhou in China and to Tokyo and
Nagoya in Japan.
A new destination, Mumbai in India, was opened in June 2007 with five flights
per week. In June 2008 Finnair will begin direct flights to Seoul, the capital
of South Korea. The route will be operated with five flights a week.
Daily, or almost daily, connections to Asian destinations offer business
passengers a competitive product. Product improvement is also expected to
increase average revenues.
Finnair's long-haul strategy exploits Helsinki's ideal location on flight routes
between Asia and Europe. Flights covering 50 European and 15 domestic
destinations connect into Finnair's Asia network. At the same time, a wide
selection of direct connections are offered from Finland to the rest of Europe.
Growing passenger streams between Europe and Asia have enabled the opening of
new routes in Europe. The expansion of the European network also provides an
excellent service to Finnish customers, who can utilise Finnair's
morning-evening concept in their European connections.
This year, five new destinations, serving local demand as well as the needs of
Asian traffic, have been added to the European route network. The new
destinations are Bucharest, Gdansk, Lisbon, Ljubljana and Nuremberg. In
addition, the Madrid and Manchester flights now fly direct, without an
intermediate stop in Stockholm. The changes mean that all European routes will
be served by non-stop flights.
The shorter flight connections also improve the eco-efficiency of travelling;
when flying with Finnair from Europe to Asia, passengers travel the most direct
route, and connections via Central Europe that increase travel time and fuel
consumption are not needed.
Finavia is currently extending Helsinki-Vantaa Airport to serve the needs of the
growing Asian traffic. The increasing bottlenecks in luggage handling underline
the urgent need for modernization and completion of the new terminal extension.
Until then the problems facing passengers are alleviated through cooperation of
the parties involved.
At the beginning of April, the oneworld-alliance completed the biggest expansion
in its history, when Japan Airlines, Malév Hungarian Airlines and Royal
Jordanian Airlines became members of the alliance.
In July American Airlines, Finnair and three other European oneworld airlines -
Iberia, Malév and Royal Jordanian - applied for antitrust immunity (ATI) from
the United States' Department of Transport (DOT) regarding Trans-Atlantic
traffic.
The oneworld partners wish to expand their cooperation in, among other things,
traffic and route planning, marketing, pricing, frequent-flyer schemes, cargo
transportation, and information and distribution systems.
In their bilateral cooperation, Finnair and American Airlines have had a valid
antitrust immunity in United States since 2002. It has reflected, for example,
in common pricing, increased onward connections between Finland and the USA, and
improved airport services.
Finnair Leisure Flights carries the customers of ten tour operators to 66
holiday destinations in 33 countries. In addition, there are flights which only
can be purchased on the internet to dozens of Leisure Flights' destinations.
Growth in Asian travel reflects also in Leisure Flights. Next winter season,
Leisure Flights will operate 12 weekly flights to Asia, including daily flights
to Thailand. A new winter destination is Krabi in Thailand.
Leisure Flights' fleet consists of seven Boeing 757 aircraft and Airbus capacity
leased from Scheduled Passenger Traffic. At the beginning of 2007, Leisure
Flights launched additional services that customers can pay for. Before their
trip, customers can, for example, order via the internet various meal options or
make arrangements for special baggage. The range of additional services will be
expanded during the latter part of the year.
New seats with a slimmer structure have been fitted in the Airbus A320 and A321
aircraft mainly used in European traffic. The new seats have been designed so
that leg room is not reduced, even though the seat spacing has been shortened.
The seat renewal increases by 15 the number of seats in each of the 18 aircraft,
while the weight of each aircraft is reduced by 1,200 kilos, thus enhancing fuel
efficiency.
Short-term risks and uncertainty factors
Fuel costs constitute approximately one fifth of the Group's total costs and are
one of the most significant uncertainty factors where costs are concerned. For
the rest of the year, the degree of hedging of more than 60 per cent will dampen
any short-term fluctuation in the result.
Six out of seven of the Finnair Group's agreements with labour unions are due to
expire on 30 September 2007. The agreement with pilots expires on 30 April 2008.
Finnair has opened new routes to Asia and has increased capacity on existing
routes. The new route openings and increases may weaken load factors and average
prices in the short term.
In traffic between Europe and Asia, cargo pricing is under pressure due to
sharply increased competition in Northern Europe.
Outlook
Finnair's Europe-Asia strategy exploits the company's strengths as a network
airline as well as Helsinki's geographical location. The chosen strategy
diversifies operational risk, because Finnair's European flights serve both
local and transit travel. In addition, with passenger and cargo traffic Finnair
operates in Asia in a number of different types of markets.
Growth in demand for Finnair's Scheduled Passenger Traffic is expected to
continue strongly. This growth will be seen in both Asian and European traffic.
Asian traffic is forecast to grow by over 30 per cent this year and European
traffic by 15-20 per cent.
Despite increased capacity, passenger load factors have remained at good levels,
based not only on growing demand but also on flexible fleet utilisation. A
suitable aircraft can be used on each route according to demand.
Tight price competition is expected to continue. The relentless growth in fuel
prices and security costs, however, will impose pressure on the whole sector to
raise prices. In the short term Finnair yields per revenue passenger kilometre
are expected to slightly decrease due to new route openings and change in
traffic structure.
Of Finnair's seven collective labour agreements, six are due to expire at the
end of September 2007. Terms of employment have been and will be adjusted
further to the needs of long-haul traffic in collaboration with personnel
groups. Significant cost savings have also been achieved with flight personnel
as a whole by developments in work shift arrangements.
Operational efficiencies will continue to be sought throughout the Finnair Group
in accordance with the 80 million euro programme initiated last year. More than
half of the savings will be delivered this year and the full impact will be
evident next year. The estimate for the 2007 operational result remains
unchanged, i.e. to exceed 70 million euros.
FINNAIR PLC
Board of Directors
For further information, please contact:
SVP and CFO Lasse Heinonen
tel. +358 9 818 4950
lasse.heinonen@finnair.fi
SVP Communications, Christer Haglund
tel. +358 9 818 4007
christer.haglund@finnair.fi
Director, Investor Relations, Taneli Hassinen
tel. +358 9 818 4976
taneli.hassinen@finnair.fi