Finnair - Weathering another major blow
Network pivots to West and South Asia
Finnair’s EUR 400m Q1 revenue and EUR -133m adj. EBIT matched the respective EUR 397m/391m and EUR -128m/-141m Evli/cons. estimates. Air travel recovers and Omicron caused only a brief but sharp dip in volume. Finnair sees the ratio of bookings relative to capacity now above the pre-pandemic levels as available capacity has been reduced. Major North Asian hubs such as Tokyo, Seoul and Shanghai will remain on the schedule, but the Russian airspace closure will limit possibilities to smaller North Asian cities. South Asia’s weight will increase as it supports transfer flights to the US and hence Finnair’s network will also pivot to West, where demand is now robust.
Volume outlook prompts us to raise estimates
We raise our estimates as our previous view on volumes seems a bit low in the light of Finnair’s comments on capacity over the summer (we assume some 60-70% load factors for Q2 and Q3). Finnair has already signed leases and the comments on them indicate such deals are now profitable when many Western airlines have need for additional capacity. These can add other operating income some EUR 10-100m annually. Finnair also looks for EUR 60m in further permanent cost savings. The network adjustments, fleet redeployments (including potential aircraft sales) and cost measures didn’t come as a surprise, although these may help Finnair guard profitability better than we initially expected. We upgrade our revenue estimates by more than 10% while we also revise our EBIT estimates up a bit, but there remains a lot of uncertainty around volumes and costs.
Finnair will come through, but upside is still not evident
The EUR 400m hybrid between the State and Finnair will convert to a capital loan and thus supports equity. In our view high demand helps Finnair to successfully maneuver the challenges, but medium to long-term profitability potential remains unclear in the current high inflation environment. Finnair is valued a bit below 14x EV/EBIT on our FY ’24 estimates, still not a low level although our FY ’23 EBIT estimate could prove too conservative. We retain our EUR 0.43 TP; our rating is now HOLD (SELL).