Good day, ladies and gentlemen. I'm Erkka Salonen from Finnair IR, and it's my pleasure to welcome you all to this conference call regarding the planned rights issue. I have here with me Finnair CEO, Mr. Topi Manner, and he is joined by our CFO, Mr. Kristian Pullola, for the Q&A session. I will now turn this call over to you, Topi. Please go ahead.
Thank you, Erkka, and good day, everybody. Thank you for putting the time aside and joining this call today. What we have announced this morning is that we are raising EUR 600 million of new equity by means of proposed rights issue in an effort to build a sustainable balance sheet for the future and, and then build investment capability for the future. As many of you would remember, it has been a bit more than a year since we introduced a new strategy last September, in September 2022, on the back of the pandemic and on the back of the Russian airspace closure. And ever since, we have been implementing on that strategy in a determined fashion, and we have been proceeding faster than we originally expected.
Therefore, in June this year, we were in a position to send a positive profit warning to the market, outlining that we will be reaching our original strategy target of 5% EBIT 12-18 months ahead of time, supported by, on one hand, the strong demand that we experienced on the market, but as stated, on the other hand, by the successful strategy implementation that has been proceeding faster than expected. Therefore, the restored profitability is a reality, and profitability-wise, we have been reaching what I would call a normal cruising altitude. Due to the profitability and due to the generated positive cash flow, in September, we were able to repay back the hybrid loan, the hybrid bond of EUR 200 million.
This rights issue indeed is a logical next step to continue the implementation of our strategy. It significantly reduces the financing costs that we would otherwise have for year 2024 and onwards. Importantly, it reinstates our ability for shareholder distributions and will enable us to come back to paying dividends in spring 2025 on the back of year 2024 results. The rights issue supports continued strategy implementation and, as stated, supports us making long-term investments that will be needed to stay competitive on one hand, and on the other hand, to be able to reach our sustainability goals.
It is very noteworthy to say that this rights issue is fully supported by our key shareholders, most notably the State of Finland, who has been saying that they will subscribe to the rights issue in accordance with their current ownership on a pro rata basis. The rights issue is also supported by other key shareholders, including Finnish pension funds Varma, Ilmarinen, and Elo. The rights issue, the remaining part, approximately 40%, is fully underwritten, subject to customary terms and conditions, by the lead arranging banks, namely Nordea Bank and Deutsche Bank. When we look at Finnair today, Finnair is a high-performing network airline.
On the back of us redirecting our network after the Russian airspace closure, we today have some 100 destinations across the world, and Finnair is connecting Europe, Asia, North America, and Middle East to Finland. We have optimized our fleet. Our current fleet constitutes of 79 wide-body and narrow-body aircraft, and we are happy with our fleet. The fleet will be serving our purpose well for the next next years and also enable balanced growth in line with the market. Finnair is known of great service quality and operational excellence, as witnessed by our Net Promoter Score. During the first half of the year, the Net Promoter Score was 39 points, and if we measure that to the airlines' p-...
that also are using Net Promoter Score as a method of measuring customer satisfaction, especially in Europe and North America, then Finnair compares well. We are clearly above what would we, we would otherwise or typically see from European or North American airlines. Since the end of the pandemic from spring 2022 onwards, Finnair has been one of the most reliable airlines in Europe, and our current on-time performance score is 83%. Recently, we were, for the thirteenth consecutive time, elected as the best airline in Northern Europe by Skytrax. And we also just recently received a Five-Star Rating from APEX in their global airline category of this year.
When we look at the growth history of Finnair between 2015 and 2019, we had sustainable growth amounting to 8% per annum. Then, of course, the pandemic halted the global aviation, and that reset is very much visible in this chart as well. After the Russian airspace closure, when we have been overhauling our strategy, we have been also growing consistently from month to month. And if we look at the Finnair revenue at the end of second quarter this year and look 12 months back, the revenue amounted to EUR 2.85 billion.
As stated, we have been growing our passenger numbers as an indicator of revenue growth from month to month in comparison to last year, and that was also the case in the traffic numbers that we published today for September. Going forward, Finnair will be targeting profitable, cash-generative growth. We have six strategic themes: customer-centric commercial and operational excellence being the first one. Balanced growth, supported by optimized fleet, being the second one. Continuous cost efficiency to ensure competitiveness is always important on this industry. We want to be among the industry sustainability leaders, and we want to build a sustainable balance sheet, the rights issue being a logical next step down this lane.
I think that the key differentiator in Finnair, and the main enabler for the recent transformation that we have been doing after the double crisis is the adaptable Finnair culture, driven by engaged people. That is the magic potion of Finnair. When we look a little bit deeper into these themes, in terms of customer-centric commercial and operational excellence, we have been doing a lot. We have been increasing the share of our direct sales from 35% prior to the pandemic, to 65%. In doing so, we have been able to reduce costs by cutting out the middlemen, and we have also been able to increase revenue by getting more direct access to customers, being able to offer them more relevant offers, and thereby being able to increase the ancillary revenue.
In the process of doing this, finnair.com has grown rapidly, and today is the largest online store in Finland, exceeding sales of EUR 1 billion during the course of this calendar year. We have very sophisticated revenue management methods in place, and all of this has been supported by strong operations, strong safety culture, and as stated, operational excellence with clear focus in on-time performance. So the next step in all of this is that we will be using more data to provide our customers with more personalized offers. And in order to be able to deliver those offers to our customers, we will be needing more streamlined, more flexible, end-to-end processes. So this is the essence of the next phase in customer-centric commercial and operational excellence.
We also see growth opportunities in our loyalty business, and that is why we are renewing our Finnair Plus program as we speak. In terms of balanced growth, as stated, we have completed the fleet optimization, reflecting the new strategy, and we believe that going forward, we can grow in line with the market. Still maintaining an option to rebuild Asia-Europe connections if Russian airspace opens once there is peace in Ukraine someday. So maintaining this Russian optionality while minimizing the cost of that optionality has been also embedded in our strategic thinking.
The growth in line with the market is possible by us increasing the aircraft utilization, especially in the narrow-body space, by faster turnarounds, by optimizing our schedules and our network, and also us calling back some of the wet-leased narrow-body capacity from BA once the contract ends at the end of March next year. So going forward, in terms of wet leases, we see that the two wet leases of Airbus A330s to Qantas effectively will be the ones that we will be having over longer term in our fleet.
During the pandemic, during the last couple of years, we have been resetting the cost base in Finnair, and we have been achieving significant structural and permanent cost savings amounting to plus EUR 200 million, and we still have some in the pipeline. Going forward, the focus will shift from intense, program-like focus to reset the cost base to continuous improvement in cost efficiency and also streamlining the end-to-end processes in the company by means of lean methods. In terms of sustainability, we maintain our focus to reaching carbon neutrality by 2045. We are currently in the process of validating our Science Based Targets Initiative related targets, and we estimate that that validation will come to closure Q1 next year.
So that means that carbon offsetting and European emission trading won't be calculated into our carbon footprint. Instead, the carbon footprint reduction will need to come from true science-based measures, most notably newer aircraft and engine technology, sustainable aviation fuels, and any operational measures that will be reducing the carbon footprint. Once we have validated the science-based targets, we are committed to 40% reduction in emission intensity during the next 10 years by 2033. And that in turn will require, as stated, some longer-term investments, for example, related to fleet. And this rights issue indeed is a important measure to position us for those investments that would be in terms of CapEx gradually materializing over the years during this period that we are talking about.
Building a sustainable balance sheet is certainly something where restoring profitability has been a prerogative, and that we have been doing successfully. Following that, in connection to Q2, we re-recognized some of the deferred tax assets that supported our equity, with some. In September, as stated, we paid back the hybrid bond of EUR 200 million, reducing our future financing costs significantly. This planned rights issue is a logical next step down this lane. Finnair—the State of Finland will be participating in the rights issue with their pro rata share by converting their capital loan into the participation in the rights issue. That conversion will amount to EUR 335 million.
After the successful completion of the rights issue, we intend to pay the remaining part of the capital loan, EUR 65 million plus interest, back to the State of Finland. This remaining part, plus interest, in total, will amount to some EUR 110 million. It is worthwhile to note that paying back the capital loan in full will significantly reduce our financing cost during 2024. That reduction in financing cost will amount to EUR 54 million to this loan alone. Reduction of financing cost, optimizing financing cost, certainly is a key element in the rationale of this transaction, and in turn will support us coming back to paying dividends in the future.
The adaptable Finnair culture, as stated, is a key differentiator for Finnair in many ways, and we want to nurture and strengthen that culture going forward, also by investing to development of our people, to well-being of our people, and the general people experience in Finnair. This we do with the belief that this will in turn support customer experience and deliver better business results. These days, the attractiveness as-- of aviation sector is being discussed a lot across the world with different airlines. It's a hot topic. We are in a fortunate position in Finland in the sense that, among business students, we are the most attractive player on this market.
Number one in the Universum studies, and in a little bit broader population of business professionals, we are the third most attractive employer in Finland. So in the local labor market, we are attractive, and when we have been recently recruiting new pilots, new cabin crew members or coders, data experts to our digital services, we are certainly getting a great number of qualified applications. And this position as an attractive employer and the employee branding is well visible in our daily operations. The culture, the current people, combined with the employee brand, the strong employee brand, means that Finnair has capable hands and strong teams in place, going forward. And that, to me, is a clear sign of strength and reassurance that we will be reaching our profitability targets also going forward.
With that, I will be handing over to Kristian Pullola, our CFO, who will be going through the profitability targets in more detail.
Thank you, Topi. So, let me maybe start by, by trying to answer the question: Why do we feel that, we, we are entitled to ask shareholders to put more money into, into Finnair? As Topi said, after the double crisis, we have, through successful execution of our, our strategy, as well as with some help from a, from a solid market, been able to, turn the company around from a profitability point of view. During the first half, our level of profitability was higher than, you know, prior to the crisis, and, I think on, on all operational as well as financial metrics, we are making strong, improvements year on year. We are flying more, our planes are fuller, our yields are up, and our, our costs are down.
As we've said now over the last year, you know, the focus of management was first to put the company in a better shape so that we then have more optionality when it comes to making the balance sheet also stronger. That's why we feel that today is a logical step to announce the rights issue and to shore up the balance sheet and get the financing costs down. When it comes to what are we committing to, what can you and what can shareholders who put money in, what can they expect from us? We will be targeting, I said, profitable cash generative growth over the medium term.
We are sticking to our 6% Comparable EBIT margin target that we increased slightly in conjunction with the Q2 results. We are setting also two new higher-level targets. On the leverage side, we will be targeting one to two times Net Debt to Comparable EBITDA. We feel that we can do this because the profitability that we expect to generate will come at a strong cash flow profile. You know, that will enable us to reduce the Net Debt level from the level it will be after the rights issue will be completed, which I'll describe in a second.
Then the third point is really, we understand that when you ask owners for money, owners will have an expectation of future returns, and thus, the rights issue will put us in a position to consider dividends going forward. The current thinking is that we would be putting ourselves in that position in 2025, based on 2024 earnings. What are then the assumptions for these targets? You know, one assumption is that we grow with the market. A second assumption is that, you know, our level of maintenance CapEx will be in the order of EUR 80-100 million annually. On top of this, you know that we have two or three A350s coming end of 2025 and during 2026.
So that's what you can expect from a broad-brush CapEx point of view. We also see that post the completion of the rights issue, the right level of liquidity to operate with is, you know, somewhere in the region of 30% of cash- to- sales ratio. Which would mean that we would have, you know, some liquidity to use to repaying, you know, some of the debt that we currently have outstanding. Because as a reminder, our liquidity position at the end of Q2 was EUR 1.5 billion, which is, you know, north of that 30% ratio.
And then, you know, the strong cash flow that we expect is also partly gonna be helped by the fact that we do have EUR 190 million of deferred tax assets that we can use against the future taxes accrued. And in that sense, not have or have a very limited amount of taxes payable over the medium term. So that's the targets that we set out: 6% margin, 1-2x Net Debt to Comparable EBITDA, as well as then restating dividends from 2025 onwards. So then, you know, what does the rights issue do to key balance sheet metrics?
So on the leverage side, if you, if you look at where are we from an adjusted debt point of view today, i.e., assuming, you know, debt treatment for both the hybrid and the capital loan, we are somewhere in the region of 3.3 times Net Debt to Comparable EBITDA. That will come down to 2x as a result of the proceeds from the rights issue, because those proceeds, as Topi said, will be used to repay the capital loan, and we have already repaid the hybrid bond.
Then from a balance sheet equity point of view, if you adjust the balance sheet position with the hybrid and the capital loan, and the related accrued interest, after tax on those instruments, we would be slightly negative from an adjusted equity point of view. So the proceeds from the rights issue takes us to a good starting position, I would say, of EUR 500 million of solid equity, from where we then, over time, through retained earnings, can further improve the situation as we move forward, and in that sense, further strengthen the financial position of Finnair. So just as a summary, we'll...
We are proposing a rights issue that enables us to strengthen our financial position so that we can continue executing on the strategy. We'll repay the capital loan from the proceeds. The capital raised will also put us in a position to make the necessary investments going forward. The rights issue is fully supported, you know, by main owners, State of Finland, as well as then Varma, Elo, and Ilmarinen. We have a standby underwriting from Nordea and Deutsche Bank, and in that sense, feel good about moving ahead here. The key dates here will be that we are planning to hold an AGM on the twenty-seventh of October.
As a result of that, we have pulled forward our Q3 results with one week, so we'll be talking to you again on the twenty-fourth, when we can talk about the Q3 results in more detail. And I think with that, we are ready to take your questions.
Thank you, Kristian. Now would be a convenient time to present any questions you may have. Please follow the operator's instructions to present them.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Joonas Ilvonen from Evli. Please go ahead.
Hi, it's Joonas from Evli. You mentioned this possibility of rebuilding the Asia-Europe connections should the geopolitical situation change for the better. But, of course, the prospects for that don't look all that promising, even in the very long term. So my question to you is that, what other kinds of long-term investment possibilities do you see besides? Like, for example, could you consider expanding within some other geographic regions, or do you just want to maintain financial flexibility in order to renew your existing fleet at some future point in time? Thanks.
Thank you. Thank you, Joonas. A good question. So, in order to be very clear about that one, the current strategy that we have been putting in place and that we have been implementing for a bit more than a year, takes the starting point that Russian airspace is closed, period. We will be changing our strategy, redirecting our network, and optimizing our fleet so that we will be profitable, in this environment. The wet leases to Qantas are an example of us maintaining the option of Russian airspace at some point of time in next years, be that five years or 10 years or something more, opening, and then we would be having the possibility to call back those aircraft and start flying with those to Asia again.
The key thing in this one is that the deals with Qantas are profitable, and therefore, there's no cost of us maintaining that option.
... Another thing is that, now when we, with our current fleet, with the Airbus A350s, when we go around the Russian airspace, the flight times are clearly longer. They are 30%-40% longer than they would otherwise be to markets like Japan, Korea, and China. So if the airspace opens and is available again someday, then just with the current fleet, we can produce more available seat kilometers. So the current fleet enables significant growth beyond the overall market growth. And then that is worthwhile to remember in this context.
So coming back to the present circumstances that are the starting point for our strategy, we believe that with the fleet that we currently have, we are able to grow in line with the market, both in terms of wide bodies, both in terms of narrow bodies. And that is now volume growth, volume growth in terms of flying.
Then, if we would be talking about revenue growth, then we certainly see possibilities for us to grow the revenue faster than we would be growing the volume due to the fact that there, there's plenty of opportunity in further penetrating the ancillary revenue space and also further leveraging, for example, our loyalty business in the form of us now currently renewing our Finnair Plus program, introducing new benefits to our customers, and especially enabling them to both earn and use their points better than previously.
Maybe on the investment that you asked, we are, you know, happy with the current fleet. We operate both, you know, number of aircrafts as well as then type of aircraft. But we also recognize that at some point of time, we will have a need to start renewing the narrow body fleet that we have. That will be a long-term project. It will not result in immediate kind of investment needs, and because again, you know, if you look at our narrow body fleet, it is quite broad when it comes to age.
There are newer planes, and there are older planes, and there is kind of 20 years between those. So in that sense, it's gonna be a long-term investment, which happens gradually over many years.
All right. That's helpful. That's all for me. Thank you.
The next question comes from Jaakko Tyrväinen from SEB. Please go ahead.
Yes, good afternoon, gentlemen. I would like to touch on the topic of the fleet renewal. You already touched that on in your previous answer, but perhaps to follow up there, could you give some kind of a ballpark, how many narrow bodies you need to renew, let's say, before 2020, 2030? So just to understand the magnitude of the rest of the decade, the investment pipeline there.
Yeah. Thank you. Thank you, Jaakko, for the question. As stated, I think that we need to look at this in sequence, and clearly for the next couple of years, I think that we are happy with our fleet, and we have been doing a significant undertaking during the pandemic, where we have been optimizing the life cycle and the lifetime of individual narrowbody aircraft. Our technical operations is of a very high quality in global comparison, and therefore, there is lifetime still clearly in our narrowbody fleet.
If we take the other end of the discussion and would consider a narrow body renewal, purchasing directly from OEMs, be that Airbus, Boeing or Embraer, then what we currently see and experience is a couple of things. First of all, the delivery pipeline for all of these OEMs is long, and if you would be ordering narrow-body aircraft, you would be needing to wait the delivery until, you know, even 2030. So, clearly, that is a consideration. At the same time, many of the sort of new technology aircraft experience engine issues. I mean, the most notable example is the Pratt & Whitney engine recalls that have been experienced.
During the short term with the new technology, there clearly has been some issues, and also the maintenance cost of these aircraft has been offsetting the fuel savings from the new engine technology. Therefore, just right now and for some time still, I think that we are better off with the CEO Technology. You know, how it will be moving from there onward, and what will be the pace of the narrowbody renewal? I think that we simply need to come back to that later. There, of course, we would need to keep in mind that if we would want to get newer aircraft faster than, for example, in 2030, then the lessor market would be available for individual aircraft deals.
And then certainly we are observing that market, currently. The prerequisite for all of these considerations over the long term is that we have a healthy, sustainable balance sheet, and this rights issue certainly is supportive of that.
Okay, great. That's, that's very helpful. Thanks. Maybe continuing on the, on the, on that topic, you must have better touch on the, on the, aircraft market and the pricing of the aircraft, let's say, versus the pre-pandemic levels and also the lease prices. How has the aircraft prices and leasing prices developed lately? And then what are the most important kind of KPIs, balance sheet KPIs and leverage KPIs the aircraft financers are looking in an airline when you are considering this kind of investments?
Well, I mean, when we look at the current aircraft market, I think that it's worthwhile to note that what we see on the market is various types of capacity bottlenecks. There's a shortage of aircraft, there's shortage of spare parts, there's shortage of pilots, there's shortage of simulator training capacity for pilots, you name it. So of course, in this environment, there is demand for aircraft, and that has been reflected in the lease rates in a way that those lease rates have been increasing a bit.
And then related to the NEO Technology or new engine technology on the overall, as stated, these engine issues that have been there and now are most notable with Pratt & Whitney, they certainly increase the demand for CEO Technology. And then that has been somewhat reflected already on the CEO lease rates, and we estimate that that most likely will have an increasing impact also going forward. At the same time, we have a lot of CEO Technology in terms of owned aircraft in our balance sheet. And then that certainly helps with the balance sheet values of those aircraft, which already have been very solid.
In a way, what does lessors kind of pay attention to? You know, they pay attention to the metrics that we hopefully improve with the proposed rights issue, in addition to, of course, looking at, you know, both the longer-term strategies as well as the operational capabilities of airlines. And we feel good about, you know, both our strategy as well as our operational capabilities. So I think, you know, all in all, with the rights issue, we will be a more attractive customer for lessors in general. You know, given how we've acted in the past, as well as given the balance sheet metrics that we'll be able to present going forward.
Clearly, our balance sheet metrics will stand to comparison to basically any given airline in Europe going forward, and therefore, we feel that we will be a good credit for the lessors also going forward.
Okay, that's very insightful. Thank you, gentlemen, all from my side. Bye-bye.
The next question comes from Pia Rosqvist, from Carnegie Investment Bank. Please go ahead.
Hi, gentlemen, it's Pia Rosqvist calling from Carnegie. A few questions continuing on your aircraft and the need for renewal. So, I think you earlier, prior to the pandemic, had a preference for owning rather than leasing your aircraft. Can you comment on any changes in your thinking around this theme?
Yeah, I think that if we look at our sort of current balance sheet values in terms of aircraft, we have approximately 1/3 of owned aircraft in terms of balance sheet values unencumbered. And you know, going forward, I think that this is not only a sort of financial optimization decision and not only a balance sheet structure decision. The decision between leasing or owning aircraft in this environment will also be impacted greatly by availability of aircraft. As stated, the delivery times from OEMs are currently relatively long, whereas the lessors have order books with the OEMs with earlier slots.
Therefore, you know, the timing of the fleet renewal will be a consideration and that will be impacted by the availability of delivery slots, both from OEMs and from lessor portfolios. Therefore, to come back to what Kristian stated a little bit earlier, you know, the shape of the fleet renewal at this point of time looks to be something that materializes over the long term, and the CapEx materializes gradually over the years.
And maybe to add, I think it is fair that, again, with a stronger balance sheet, we also have more choice going forward. During, you know, parts of the pandemic, we had to use some of our aircraft to get liquidity. And in that sense, maybe that was not choice, it was necessity that drove us to the current situation. And, you know, we clearly understand that, but it, the owning aircraft comes with some benefits from a cost optimization point of view, but then as Topi said, you know, there is also a reason for leasing aircraft. One of the reasons now is that it's also one way of getting availability.
So, I think we'll take all of that into account when, you know, managing the situation dynamically as we move forward.
Okay, thanks. Can you please comment on your leasing costs today? You talked about some price pressure, so what should we expect here?
So, again, I think, you know, the fleet that we currently have is priced. And in that sense, it doesn't come with price pressure or anything. And then, you know, going forward, as Topi said, and as I said earlier, you know, the narrow body renewal is a long-term exercise. And we are not in the market at the current state. So in that sense, let's see what the market then at that time how it prices both the leases as well as the aircraft that we decide to purchase outright. So I think it's difficult to answer it any other way.
What I would probably add to that is that our fleet team is very much on top of its game in this. And also on the short run, they are optimizing our portfolio of leases. And we are, of course, doing tactical optimization of individual lease deals. For example, individual aircraft where the lease deals would be extended in an effort to negotiate the lease rates down. So this would be in the category of normal running of the business of any given airline.
Understood. Thank you. If I still may ask, even though I think you made it clear that this is a long-term play now, with the future investment needs in your fleet, and then if we exclude the leases, how do you plan to invest or finance your narrow body renewal?
I think as said, it's a long-term exercise. We've now put ourselves in a stronger financial position. For that, we will continue to strengthen our position by incurring profitability and shoring up the balance sheet through retained earnings. Yes, by also then distributing, if we put ourselves in that position, dividends to shareholders, and also kind of renewing, at some point of time, the financial liabilities that we have on our books. I think it's gonna be an active exercise where we continue to drive for a balance sheet that is the right one for the company at the right time during that investment cycle. Very difficult to say anything other than that.
Yeah. And I would really-
All right. Thank you.
Thank you, Pia. I would really echo your own words in this one, so that the CapEx related to the fleet renewal is a long-term, long-term game.
Thank you.
Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers.
Yes, so it seems that there are no further questions, so we can conclude the call. Many thanks for joining. We wish you a nice day.
Thank you for joining.
Thank you.
Bye-bye.