Finnair - Balancing volumes and yields

We now estimate FY ’23 EBIT at EUR 178m

Finnair’s Q3 RPK gained 13% y/y, which augurs strong profitability as the comparison period’s EUR 35m adj. EBIT wasn’t too bad either, however the volume fell some 8% short of our previous estimate as PLF was more than 200bps softer than we anticipated. Unit yields have improved further, and a key question is just how much further they can do so in the short and medium term without sacrificing too much demand. Fuel prices bottomed out over the summer and are now 25% up from their lows; we revise our EBIT estimates down to reflect the change. We now estimate Q3 EBIT at EUR 74m (prev. EUR 85m). In our view Finnair’s long-term 6% EBIT target still looks very reasonable, but an extended fuel price elevation would limit potential above that level as unit yields should stabilize soon.

Equity issue gives the flexibility for narrow-body renewal

Finnair’s EUR 600m equity issue will heal its balance sheet: Finnair has no urgent investment needs as current fleet is now pretty much optimal for the circumstances, however financial flexibility will be useful for the purposes of narrow-body fleet renewal. This will be a long-term development project and can be expected to materialize in steps towards the end of the decade as this portion of the fleet has a broad range in terms of age.

Lower earnings and multiples have hit airline valuations

Airline valuations have recently been hit hard as EV/EBIT multiples have declined by roughly 10% while earnings estimates have softened due to e.g. higher fuel prices. Expectations were high amid a boom in travel; earnings should remain high (and even improve a bit further) also next year, but expectations have moderated. Airline earnings remain cyclical, but so far there have been no major signs of weakening demand after a sharp post-pandemic recovery. Cost control is still important, but in our view focus now rests more on the revenue side (balancing between volumes and yields). Finnair is valued a bit above 7x EV/EBIT on our FY ’23 estimates, in line with peers. We find the level neutral assuming roughly 6% EBIT margins going forward. Our TP is now EUR 0.35 (0.54); we retain our HOLD rating.