Finnair - Balancing volumes and prices
Finnair’s Q2 EBIT missed our estimate due to slight negative surprises in revenue and costs. There’s still good travel demand, however supply growth limits earnings potential.
Lower unit yields and higher costs hurt Q2 profitability
Finnair Q2 revenue, at EUR 766m, was close to the EUR 775m/772m Evli/cons. estimates. Passenger revenue was 4% lower than we estimated as RASK in Europe softened at a double-digit rate while we expected a modest decline of 200bps. Unit yields were stable outside Europe, where ticket prices declined by 5% y/y, while prices for North American routes continued to increase by 2%. Ancillary, as well as cargo, revenues were much stronger than expected. There weren’t many cost surprises but they were a bit higher than estimated, which together with the slight top line softness led to the EUR 44m comparable EBIT being lower than the EUR 57m/55m Evli/cons. estimates. There’s uncertainty around which direction ticket prices and fuel costs will trend next as the market has now normalized after the post-pandemic boom, which is reflected in the relatively wide FY ‘24 EBIT guidance range.
Earnings sensitive to load factors, ticket prices and fuel costs
Travel demand grows also this year, albeit not as fast as many carriers’ capacity. Finnair’s H1’24 PLFs trailed the comparison period by a couple of percentage points, which still had rather low ratios compared to the pre-pandemic levels. Finnair’s PLF picked up sharply in June; we believe H2’24 shows stabilization and even some gains. North Atlantic routes have resisted profitability headwinds this year better than other long-hauls, but such traffic doesn’t play nearly as important a role in Finnair’s network as European and Asian connections. H2’24 earnings will thus depend greatly on the optimal balance between volumes and pricing.
Earnings could gain next year, but multiples aren’t very low
We expect Finnair’s FY ‘24 PLF to be around 76%, which with the softer yields would lead to a decline of ca. EUR 25m in comparable EBIT. The still low PLFs leave earnings upside potential for next year, assuming ticket prices and fuel costs remain fairly stable, when EBIT could again top EUR 180m. Finnair is valued about 9x EV/EBIT on our FY ’24 estimates; the multiple could decline below 8x next year, however it would still represent a premium to many peers. Our new TP is EUR 2.5 (3.0) as we retain HOLD rating.