Finnair - Room for gains if demand follows
Finnair’s earnings continued to decline y/y in Q3, and although there’s now again potential for gains financial performance remains sensitive to a couple of key factors.
Ticket price softness caused an earnings miss
Finnair’s EUR 818m Q3 revenue was flat y/y, vs the EUR 867m/857m Evli/cons. estimates, as ticket prices declined 9% y/y while we estimated a drop of a couple of percentage points. Especially Asian route prices were lower than we expected as they fell 10% y/y while we estimated them flat, whereas the similar European price decline was some 500bps worse than we expected. Passenger revenue was thus EUR 50m lower than we estimated, and while Finnair achieved good cost discipline it wasn’t enough for EBIT to remain as high as it was a year ago. The EUR 71.5m comparable EBIT thus fell by more than EUR 20m y/y and missed the EUR 84.7m/91.2m Evli/cons. estimates.
Q4 is already likely to see y/y earnings gains
The past year has had challenges after a very favorable period last year, however Q4 bookings now look better than they did a year ago. We also note that the North Atlantic routes remain more resilient as ticket prices there continued to increase by some 2% y/y, where Finnair serves certain relatively niche yet attractive destinations such as Dallas, TX. In our view it shouldn’t be too hard for Finnair to achieve earnings gains again next year, especially since Q4 already has potential to turn, yet there are still key risks such as jet fuel prices as well as potential lack of travel demand. In our opinion the latter alternative still doesn’t seem that significant, but Finnair’s recent capacity increases mean even relatively small sentiment changes could leave load factors quite low while ticket prices may remain under pressure.
Earnings gains are the base case scenario next year
Airline earnings are still expected to grow next year, and the EUR 145m mid-point of Finnair’s EBIT guidance suggests Q4 could already see some EUR 20m y/y gain. We don’t make any large changes to our estimates, but we cut our Q4 EBIT estimate by EUR 7m due to the ticket price softness. We thus estimate EUR 138m FY’24 EBIT and see the FY’25 figure gaining by more than EUR 40m y/y. On this basis Finnair is valued below 8x EV/EBIT on our FY’25 estimates, which isn’t very challenging but remains a bit above peers. We retain our EUR 2.5 TP and HOLD rating.