Finnair - Earnings potential begins to show
A lot of volume potential over the summer and beyond
The summer travel season is once again set to be busy, as indicated by Finnair’s recent positive profit warning and high load factors already in June. Finnair’s positioning has meant its Q2’23 RPK was still some 30% below the Q2’19 comparison figure, however we estimate continued high passenger yields and achieved cost cuts to have helped Q2 EBIT to EUR 44m (close to the EUR 47m Q2’19 figure). We estimate FY ’23 EBIT at EUR 165m, by itself a decent figure and which Finnair could well top if yields and volumes develop favorably also in H2. Volume recovery is set to continue due to Finnair’s positioning; pricing levels don’t seem to be declining any time soon, but neither may they have much further potential to advance from here on.
Finnair’s volumes are still building up after years of crisis
Lately Asia and the Middle East have been most visibly driving Finnair’s volume recovery. Neither region has yet quite reached their potential as the former’s volumes were still only 50% of their Q2’19 levels while the latter is a new focus area. European volumes were a bit above 80% of the Q2’19 levels and so may not have that much further potential as Asian volumes will not recover fully to generate enough transit passengers, whereas North American traffic is another piece of the puzzle for Finnair to build its network large enough to sustain the current fleet.
Valuation demands at least some more earnings gains
Many airlines reached decent figures already last year, and margins are to improve across the board this year. Finnair will see a much steeper improvement than a typical airline due to its positioning. Next year is unlikely to be too bad as a typical peer’s EBIT margin is expected to improve by another two percentage points. We estimate Finnair’s similar improvement at less than half that rate even though it starts from a considerably lower base. Finnair trades roughly 10x EV/EBIT on our FY ’23 estimates, some 20% premium relative to peers. The multiple is 8x on our FY ’24 estimates, still an above 10% premium but which we view acceptable given Finnair’s potential to achieve some more catch-up relative to peers. We retain our EUR 0.53 TP and HOLD rating.