Finnair - Still waiting for Asian passengers

Finnair reports Q3 results on Oct 26. Losses remain large and focus is on narrowing them from Q4 onwards. We expect Finnair to achieve break-even EBIT in H1’22 even if traffic still continues to normalize throughout H2’22.

Q3 losses are going to be steep like before

Q3 traffic figures show revenue passenger kilometers doubled y/y and tripled q/q but were still only 13% of Q3’19 levels. The Q3 passenger volumes were also significantly below our estimates and hence we revise our revenue estimate down to EUR 264m (prev. EUR 332m). We now expect EUR 149m Q3 operating loss (prev. EUR 132m). Jet fuel prices have also advanced by some 25% during the past three months (average prices increased by about 10% q/q in Q3). We still expect losses will begin to narrow in Q4, however we don’t see the recovery quite as fast as before and now estimate Q4 operating loss at EUR 65m (prev. EUR 13m). Somewhat slower-than-anticipated recovery should not be a major issue for Finnair, considering e.g. the recent sale-and-leaseback transaction which untied more than USD 400m.

We expect FY ’23 RPK to be 95% of FY ’19 levels

Important destinations like Japan and South Korea have progressed with vaccinations, but Finnair’s Asian passenger volumes remain low for now. Asian Q3 RPK was only 4% of Q3’19 levels, while European RPK had already reached 21% of similar comparable levels. North American RPK also progressed to 19%, however Finnair does only marginal volumes on those routes. The Asian reliance means Finnair’s volume recovery takes at least a bit longer than that for many other Western airlines. We expect Finnair to reach break-even EBIT in H1’22, and decent profitability should be possible during H2’22. The company could therefore achieve modest profitability next year, but more significant annual EBIT may have to wait until FY ’23. We cut our FY ’22 EBIT estimate from EUR 150m to EUR 75m, while our FY ’23 estimate remains basically unchanged at around EUR 200m.

The inevitable passenger volume recovery is fully valued

Finnair is bound to make a strong operational recovery sooner or later, but in our view this outlook is pretty much fully valued already. Finnair is valued ca. 30x and 11.5x EV/EBIT on our FY ’22-23 estimates, a level we find to be well in line with primary European peers. We retain our EUR 0.65 TP and HOLD rating.

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