Finnair - Weaker traffic, more expensive fuel

Finnair’s traffic performance in July-September indicate Q3 revenue of EUR 801m. We expected EUR 814m while consensus was at EUR 816/817m. On the cost side fuel moved up further in Q3. We expect earnings to weaken in Q3 after 15 quarters of improvement and have cut FY18- 19E adj. EBIT estimates by ~10%.

Q3 traffic: capacity growth in line, PLF below our estimates

Finnair’s capacity (ASK) continued double-digit growth in Q3 at +14% and was close to our +15% expectation. Sold capacity (RPK), however, grew somewhat less than we expected at +11% vs. +14% our expectation and hence passenger load factor (PLF) came in below our estimate at 84.5% vs. 86.5%. Unit revenue (RASK) declined by 4.6%, ie. at about the same rate as in H1 and what we expected in Q3. Overall, Jul-Sep traffic and revenue came in slightly below our expectations driven by weaker PLF.

Fuel moved up and reached multi-year high at end of Q3

Jet fuel moved up further in Q3. Average price increased by +1% in USD and by +4% in EUR compared to average price of Q2. Average price for Q3 was ~37% higher than last year in USD and ~39% higher in EUR. Fuel reached new multi-year high at the end of Q3. We foresee EUR 60m+ negative earnings impact from higher fuel price in 2018E (incl. FX and hedges but excl. impact of capacity growth), assuming price remains at the average level of Q3 for the remainder of the year.

Estimates cut

Finnair has improved its adj. EBIT for 15 straight quarters, but we expect this trend to turn in Q3, due to higher fuel costs. We foresee Q3 adj. EBIT at EUR 102m vs. EUR 119m last year. Following estimate cuts our FY18-19E adj. EBIT estimates are down by ~10%. With lower estimates and somewhat lower multiples among peers, we cut TP to EUR 6.8 (8.0) and keep “Hold” intact ahead of Q3. We think valuation still does not look too attractive considering the weakening earnings trend.

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