Good day, welcome to the Finnair Q4 and full year results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kasperi Kalske. Please go ahead.
Good day, ladies and gentlemen. I am Kasperi Kalske. I am from the Finnair IR team, It is my pleasure to welcome you to this Finnair Q4 and full year earnings leads conference call. I have here with me Topi Manner, our CEO, Pekka Vähähyyppä, our CFO, and they will be joined by Christine Rovelli, Head of Treasury, for the QA session. Now I'd like to turn the call over to Topi Manner.
Okay. Thank you, Kasperi. This is Topi Manner speaking. Pleased to meet you all virtually, Thank you for joining this call. I have been starting as the new CEO of Finnair, 1st of January, I'm joining from banking. I can just say that, it is as fascinating an industry and even more fascinating as an industry than I originally thought during the recruitment talks. To those of you who are working in banks, I can only say that you are in the wrong industry. At least you get to work with airlines. That must be fascinating as well. This is my first earnings call as such, I think that the good news is that we are presenting a good set of numbers.
If you look at the whole 2018, the main headline is that our operating results comparable EBIT has been stable over the years. Throughout the year, also in Q4, our Asian business remains robust. When you look at the whole year, I think that it would be fair to say that it has been a little bit two-faceted of nature. The first part of the year was characterized by very favorable demand environment. During the latter part of the year, we experienced some mild headwind in terms of tightening competition, especially on some European routes. The oil price and with that, the jet fuel peaked somewhere in October. During the fall, we started to see the signs of softening global economy. In this environment, especially in the environment of Q4, if I go to the next page, we delivered a profitable quarterly result.
If I could just be quick or take a quick browse through of the key numbers. In Q4, we carried 3.2 million passengers. That is an all-time high number for Finnair in Q4. Our capacity in terms of available seat kilometers went up by 9% during the quarter. We allocated quite a bit of capacity to European short-haul traffic as well as to domestic traffic in Finland, most notably to Lapland. During the quarter in November, we welcomed the 12th Airbus A350 to our fleet. The profit on the next page. The profit of the quarter was EUR 9 million. If you compare that to the same quarter the year before, the difference in the profit is explained by the jet fuel price first and foremost, majority of that, then some of it is related to the tightening competition, especially in the European routes.
There would be a number of components that would be coming up and down in the financials. For example, the reversal of the pilot LTI program amounted to something like EUR 11 million, and then the impact of the currency fluctuations during the quarter was EUR 9 million. Basically, more or less offsetting each other. The NPS increased with one point Net Promoter Score, and that is an all-time high figure for Finnair at 46. This next page, you would have seen previously the whole year comparable EBIT landed at 169, and the graph well illustrates the two-faceted nature of 2018. If I move on to the next page. When we look at the revenue, I'd say the Asian traffic has been robust. That is a strength for us. That is something that we can build on also going forward.
The capacity in Asian traffic increased with 2.3% and revenue with almost 6%. In the North Atlantic traffic, the capacity increased with the 5.5% that you see in the slides, and the revenue with a little bit more than 7%. The capacity increase in short-haul Europe as well as in domestic was notable, 19% and 12% respectively. The return as such was a bit more moderate, and that is where the competitive environment is visible. I think that there would be two observations on this one. One is that the traditional sort of sensitivity between load and revenue has potentially changed a bit during the fall, especially on the back of us introducing new revenue management system late Q2 and during the summer. That would be one point to note.
The other one is that the competitive situation in the European short-haul, that is especially related to Norwegian. You know the story, they have been increasing capacity tremendously. During the latter part of the year, they were largely riding for cash as well, and then that has been visible in the Q4 figures. We see a lot happening at Norwegian. They are doing a sizable changes in their operations in their effort to restore profitability. It seems that they will be pulling back a bit of capacity from routes relevant to us when it comes to the traffic on the summer as well as the winter schedule for next winter. This picture is unfolding as we speak, and therefore we are observing it very closely. The year 2018 on the next page seven, included several highlights.
We carried a record number of passengers, 13.3 million of them. Our investment to our cargo hub, COOL Terminal, was finalized and became fully up and running during the year. We would be very competitive at that space right now, we are winning market shares, and we are seeing healthy growth in the cargo business as we speak. We presented the customers with new services like the Wi-Fi connections on our European flights. We were awarded five-star rating in terms of customer service from an organization called APEX. Also at the end of the year, a German-based data evaluation center called JACDEC ranked us as the safest airline in the world. The new destinations included Nanjing, Lisbon, Stuttgart, and Lyon. We did increase frequencies to Tokyo and Osaka during the latter part of the year.
In terms of technologies, multiple steps forward were taken during the past year. If we look at the ticket sales, 25% of the ticket sales is taking place through the digital channels. Our ancillary business grew with some 5%, 6% during last year. More than 50% of that, 56% to be exact, is coming out of the digital channels. We also introduced a number of apps to our personnel, helping with the customer experience and with the people experience, also with productivity. All of our staff have iPhones, and the apps on the iPhones help experience, for example, related to the in-flight sales in terms of convenient payment. Staff and crews would be having their passenger data in the apps. They would be having their duty lists in the apps, and all the manuals would be there.
These are examples of what we're doing in terms of technology development and investment and how we are increasing the productivity of work across the company. To summarize the pluses and minuses of 2018, I already covered competition. In terms of travel services, we saw the year starting on the right foot. The summer in the Nordics was a bit too good and warm, so that impacted the holiday travels negatively. Towards the end of the year, we saw heightened competition in the travel services part of the business, mainly Suntours . Also during the year, cancellations due to weather and shortage of spare narrow-body engines. That would be an industry-wide topic impacted our operations. The currency movements, the currency fluctuations, as I mentioned, did not move to our favor during the last year.
When we look at the whole year, the impact of currency fluctuations was EUR 30 million negative. Growth for the year definitely include the strong Asian traffic as stated, the cargo and the COOL Terminal. Of course, when we look at the fuel price, after the peak in October, the fuel price has stabilized. We are having sort of a predictable, at least short-term environment on that one now for the time being. Just summing up the 2018 figures briefly. The revenue increased double digits, more than 10%. Comparable EBIT was hitting our long-term target, 6% EBIT margin. As stated, the passengers, that number was 13.3, which is the all-time high and close to 12% increase. Looking at our business right now, we see the environment being more challenging during 2019.
If we look at the economic development on our main markets, in Finland, Sweden, the GDP forecast is being revised down a bit. We are talking approximately 1.5%. In U.K., I guess the forecast is zero growth with the Brexit impact. In Germany, 1%. In China, despite of the official records, I guess the consensus is that the GDP growth will be between 3%-4%, or is currently between 3%-4%. In Japan, there has been very subdued, almost zero growth during many years in the past, as you would know. I guess on Japanese standards, the activity in the overall economy is relatively good for the time being. This is also something that we are seeing in our Japanese demands, including the corporate demand from Japan. A bit more challenging.
With that, our capacity is estimated to come down from 14% growth last year to 10% growth, approximately during this year. We estimate that the capacity growth will be especially focused on Asian long-haul traffic as we will welcome a couple of new A350s during the year. We will be opening new routes like Los Angeles at the end of March, Sapporo at the end of March. We will be going to double daily to Hong Kong during the summer of 2019. The capacity growth being approximately 10%, we estimate that the revenue growth will be slightly less than that. In terms of dividends, you have seen the numbers. We are basically proposing a dividend payout according to our dividend policy, that being EUR 0.274 to be exact.
I guess that summarizes the quick browse through of the figures in the presentation for Q4 and 2018. With that, I think that I would be handing over to Pekka Vähähyyppä to go through some of the numbers and elaborate on topics like IFRS. After that, I think we can take the questions.
Yes. Thank you, Topi, and good afternoon on my behalf also. Walk through figures from 2017- 2018, beginning with Q4. Last year, our Q4, 2017, we made EBIT EUR 23 million. During Q4 this year, our revenue grew by 5.8%, all in all EUR 38 million. All other revenue lines except travel services grew. Like Topi said, in travel services, we had, say, EBIT competition and also we have seen something about the extremely warm summer season which we had. People delayed or were not willing to travel to sun because they had already had quite a lot of warm during Finnish summer, which is not usual. When we look all other cost elements on the graph, I think all except the staff are developing pretty much in line with the capacity growth. Staff. As Topi mentioned, we had a positive one-off related to the pilot LTI.
We reversed an accrued cost, which we disclosed separately with a topic change release. That was roughly EUR 11 million positive. Fuel, like Topi also mentioned, had a negative impact on that. We can look at that on the next slide. Before going to next, I want to highlight one KPI on the right-hand side. Average fare during the Q4 grew with EUR 1. That is, of course, combination of all traffic categories which we are flying. Still, I think that increase is showing the impact of the new revenue management tool, which, like Topi said, we have been using since May last year. Moving on to next page. Here, there is a bridge of fuel costs between the years. As you can see, the volume impact of fuel bill was EUR 11 million.
That is pretty much in line with the capacity growth in ASK, which was 9%. Fuel price peaked, like Topi said, during the Q4, and that impacted some EUR 28 million. As mentioned also, USD was against us, currency impact in fuel bill only was roughly $4 million. According to our normal hedging policy, we had positive variances, EUR 21 million. All included, our fuel bill was EUR 145 million, EUR 23 million above year before. On the right-hand picture, you can see our hedges moving on. We have 75% of H1 fuel hedged, and 58% of H2 we have hedged. Moving on. The full year bridge pretty much similar than the Q4. Revenue all in all grew more than 10%.
Staff costs increased versus the year before because we recruited more personnel, mainly more flying personnel, because we had more capacity. Fuel, nearly EUR 110 million more than the year before. Here we have to remember that the growth, which was full year nearly 15%, corresponds part of that growth, fuel bill growth. Also there is this more expensive prices included. All other cost lines are pretty much developing in line with the volume growth. One thing still worth highlighting here is the entity return to here, this cargo development like Topi mentioned also. Finnair invested into a new Cargo Terminal, and it was ramped up during the year. In the end of the year, the capacity was in full use, and we see full year also nice development in volumes and yields. Moving on to next page. A couple of words about our balance sheet.
We have no big surprises. Our equity ratio is nearly 35%, adjusted gearing 67%. In this adjusted gearing, we include as interest-bearing liabilities seven times the annual leases. We have nearly EUR 1.1 billion cash in our balance sheet, so relatively healthy. One minor detail still I would like to highlight here. If you look at the September balance sheet, you can see that we had assets and liabilities held for sale, and those are related to our Norra. That is a regional Nordic airline, which we have disclosed separately earlier. We sold majority of that company, 60% of that company, to a Danish company. That is not anymore in our figures. Moving on to next page. During Q4, we acquired one A350 and paid that with cash, and we made one sale and leaseback transaction. Both of these are visible in the investment cash flow.
On the right-hand side, as I said, we have nearly EUR 1.1 billion cash, and part of that is invested in the commercial paper and deposits maturing more than three months. Moving on to IFRS 16. I think we have shared this picture with you earlier also. Now we have taken IFRS 16 into use in the beginning of the year, and the Q1 figures will be presented according to this format. If we move on in more detail here, what this means to us broadly is that we will recognize as right-of-use asset the, you can say, discounted value of the lease assets. That means that our total asset, which currently is roughly EUR 3 billion, that will go up by EUR 1 billion. On the liability side, the similar discounted value of the interest-bearing debt will be visible in the interest-bearing liabilities.
The way how we have adopted IFRS 16 is that we use so-called retrospective method. We start reporting IFRS 16 as if all the leases would have been presented according to IFRS 16 when the lease was signed. That means that we will have in equity one negative booking which will reduce our equity. Over the life cycle of the leases, that will be amortized out. It will have impact on cash flow statement. The separation of lease liabilities between depreciation and interest means that operating cash will now include the interest part of lease component. Quite a bit of changes. About the key figures, due to the fact that the balance sheet will grow and also the equity will have a decrease, our equity ratio will decline by more than 10 percentage points.
Currently, as we discussed in the previous pages, it is 35% roughly here. It will go down by more than 10 percentage points from that. Gearing will be roughly in the same ballpark than previously reported adjusted gearing, which in the end of last year was 67%. Moving on to income statement. In practice, the changes will mean that the comparable EBITDA will grow or increase, lease payment will decrease, the comparable operating result will increase, and reported result for the period will go down due to increase in financial expenses. As I think everyone knows, this will have no impact on the true cash flow which we are having, just reporting change. We wanted to present this in advance to you because it will have a sizable impact on the Q1 figures which we will report.
We will provide the restated 2018 figures in the month of March to you so that you can update your calculations and models and be prepared for the first Q1 results, which will be reported according to IFRS 16. This, I think, is what we wanted to share with you this time.
Thank you, Pekka and Topi. I think now we have time for some questions. As I mentioned, we have also Christine here to answer as well. Yeah.
Ladies and gentlemen, if you wish to ask a question at this time, please press star one on your telephone keypad. The voice prompt on your phone line will indicate when your line is open to ask a question. Please state your name before posing a question. Again, please press star one to ask a question. There are currently no questions in the queue. Pardon? We have a question from Achal Kumar from HSBC. Please go ahead, your line's open.
Hi. Congratulations for the great set of numbers. I just wanted to understand few things. One, on the Asia side. Basically, your Asian capacity was up just 2%, and your load factor was down 3.5%. Are you seeing some demand weakness or was it, your capacity was not up hugely, it was just up 2% and yet the load factor was down. However, having said that, your yield was, Asian RASK was up 5%. Is that a change in the traffic mix? Is it more high-paying passengers? How do you see that? Overall, I just want to understand better on this, if you could please help.
Yeah. Thank you for the question. It is obviously a good question. We don't see that much change in the underlying demand. Our Asian traffic and Asian business is robust, as we have stated. The traffic mix, I think that especially comes also from the revenue management and the way that we have been conducting the revenue management, that optimizing between load and revenue. Therefore, I think that is the sort of main element that is impacting the Asian RASK and the figures.
Right. Okay. On the same thing, as you highlighted, you're adopting the new revenue management system. Could you please elaborate a bit on that side? What sort of changes are there how it is helping you more?
Yeah, there's not that much to elaborate in detail. We took that into use in May. Of course, we have been gathering experiences now during the months of past year. We are optimizing a little bit differently. One of the changes that has taken place is that whereas we previously optimized one route, now we are optimizing the O&Ds. That is a sort of a key underlying change that is now partially visible in the Asian RASK especially.
Okay. Other thing I wanted to understand about your ancillary revenue. Previously you had a target, you wanted to double ancillary revenue to EUR 120 million. Do you still have that target or how your performance is as compared to your target? Where do you stand in terms of ancillary revenue? How do you see ancillary revenue going forward?
Our ancillary revenue during the past year that increased between 5%-6%. Of course it's decent growth, but it's lower than our ambitions would be. Therefore, if we look at the sort of ancillary category going forward, I think that I see opportunities in that space. I see opportunities for us developing new products and services and then increasing the penetration of the existing products and services in the ancillary category and also improving the efficiency of our marketing and sales efforts. As you saw from the numbers as well, more than 50%, 56% of the ancillary sales is now taking place through the digital channels. We expect to increase that percentage going forward.
This is the case. That big part as you pointed out, of our growth is coming from Asian customers and majority of our Asian customers buy their tickets through travel agents and our possibility to sell ancillary is much more efficient in direct channel as stated here. That may explain also why the ancillary revenue per passenger did not grow in line with the passenger number growth.
Do you have any sort of target? How should we expect ancillary revenue, say in 2019 and 2020?
We have been disclosing the previous set of numbers and the previous ambitions related to ancillary, and for the time being, we haven't changed them. At the same time, the disclaimer that I would be leaving is that now, I have started, I have been here for 1.5 months. During the course of spring, we will be updating our strategy a bit, and we will be looking into the ancillary category as part of that work, and then we will be defining new ambitions for ourselves for that category.
Okay, perfect. I have few more questions. I'll come back to you. I don't want to take other's time if there's anybody else. Thanks.
We will now move to our next questioner, Andrew Lobbenberg from HSBC. Please go ahead, your line's open.
Oh, I see other people in the queue. It's only me. Hi, Topi. Welcome to the family.
Thank you, Andrew.
I'll just start by following up on the ancillary stuff and what Pekka was saying. Is there an opportunity that sort of the deployment of IATA's NDC program, can that help you get control of ancillary in Asia? Is it that it all goes through tour operators, so you don't have a chance?
I think we are pretty much, y es. The short answer is yes, it will help us. We'll come back to that in due course.
Okay, fair enough. I was keen to ask on Europe, because obviously we've got a weak RASK on the European trading, and we're all keen to blame Norwegian because they're obviously crazy and growing so fast. We look at your capacity, and it's growing rather fast, isn't it? I know you'll say that a lot of it is down to densification of aircraft and upgauging, which is helpful for unit costs, it also looks like you're growing too fast on Europe, aren't you? Shouldn't you be cutting capacity on Europe to optimize profitability? Are you going to tell me that profitability is improving on Europe because costs are so good?
Yeah. I think that is of course a good question. I think that if we look at the balance between short-haul and long-haul narrow bodies and wide bodies, that will be changing now during the course of this year when we are sort of welcoming new wide bodies to our fleet. That is one consideration on this. We are of course reviewing our network. We are reviewing our frequencies on a continuous basis as any given airline would be doing, and we are doing the fine-tuning. We have been doing a bit of fine-tuning for this year, and therefore, we are more comfortable with the balance of narrow and wide-body air traffic for 2019.
Okay. Got one other sort of simple one. Should we expect that you will be building some cooperation with China Southern? It appears to be moving fairly rapidly into the Oneworld sphere of influence away from SkyTeam.
I mean, China, of course, is a key consideration for us and the overall as a market. We want to grow sustainably and profitably over the long run, and we want to do that in China as well. We will be looking into various types of partnership opportunities with different players. You know that we have the current joint businesses, Siberian Joint Business and the Atlantic Joint Business, and similar structures would be something that we would be considering also going forward. When it comes to China Southern specifically, we will live and learn. We are talking with them, we have a memorandum of understanding, and we are doing some codeshares. These kinds of early steps of collaboration are in place.
A general one really targeted for you because you joined a company which I think you guys, I don't know, you or Pekka said that your company achieved its profitability targets. It is at record revenue and record passenger numbers, yet here you are, you arrive. How do you hope to steer it? What do you hope to change, to improve? Where do you want to take this company?
Generically, I think that our sort of path forward will be about sustainable profitable growth. Sustainability, especially on our home market in the Nordics, sustainability in general and climate change in specific, is being discussed quite a bit. We want to position ourselves as the sort of best choice for the responsible airline passenger. That, of course, includes a number of measures. That would be one area. When it comes to sustainable profitability, we have been reaching our targets. As stated, in terms of EBIT margin, we are at our sort of long-term target. As I mentioned, we will be updating our strategy during the course of spring here, that will be including the consideration around new long-term financial targets as well.
Sustainable growth is all about sort of adjusting our growth rate to the surrounding economic circumstances on our main markets. As stated for 2019, it is all about a capacity increase of approximately 10% coming down from 14% last year. We also want to make sure that our growth is profitable, do what is needed to achieve that. I also think that in this line of business, in airline business, cost consciousness and productivity is a way of being. We need to do continuous development on that space. Fundamentally, putting all of this together, it is all about maintaining the focus on customer experience and acknowledging the big correlation with people experience and customer experience, building on that foundation.
Probably not a full answer to your question, but at least some entries in terms of how I'm looking at it. We will be updating the strategy and coming back to this more specifically during the course of this year.
That's fair enough. Thank you. I'll pass to Pekka . I suspect that you'll have some more detailed questions as we try to work through the model.
Thank you. We have follow-up questions from Achal Kumar from HSBC. Please go ahead.
Hi. Thank you so much again for your time. I want to understand a few more things, so take up lots of time. One thing I want to understand about the capacity groups, supply and capacity group, you're saying 10%. If you can please help us understand where this group will be going. How will you model? Do we model more Of course, you said that more towards Asia, but you mentioned about new definition in U.S. Just if you could please help us on that.
Yeah. We are not sort of disclosing a breakdown of the capacity as such, but of course, the routes that we will be opening give you some idea of that. As stated during the course of this year, for example, during the summer, we will be going to double daily to Hong Kong. We have, during the latter part of last year, we have increased frequencies to Tokyo and Osaka, also to Hong Kong. That will be having sort of an annual impact also during 2019. Of course, Los Angeles will be there and the European destinations. As stated, on the overall, the balance will be that more of the capacity will be allocated to the wide-body traffic, and therefore the balance will be improved during 2019.
Sure. Perfect. Thank you so much. Do you have any guidance for the CapEx for 2019?
Yes. We have disclosed our CapEx forecast in the release. Like I said, we will have two new A350s. One of those arrived last this week and that is paid by cash. Next one we will have on April, and that most likely will be financed with cash. I just don't remember on which page we have that in the finance release, the figures. I'll find that page out and figure, but if you have further questions, I'll comment to that in more detail when I find the precise page and number for you.
Yeah, he's probing through the pages here. If there are any other questions, I can talk while he's finding out the number.
Sure. No, thanks. I have just last question. You've got the recent hedging for first half, and you have some for second half. Assuming the fuel price stay where it is and the Forex, how do you see a fuel bill turning out to be for 2019?
Okay. Fuel bill and the hedgings. Now Pekka has found the CapEx number, I guess.
Yeah. Let's see. It's described what we have said in page 10 and page 11. For the following three years, the financing will be roughly EUR 975 million. I think in the annual report which we disclosed today, there is a more detailed split by the year. I don't have that unfortunately in here. This is only the three years figures which we have here.
Okay. This is something that we can come back to. We can do the breakdown, and we can send the numbers to you. T he hedging and the fuel.
Yeah. Of course because our capacity is growing this year, the roughly 10%, like we looked in Q4, the capacity growth corresponds pretty much the fuel volume growth. We have not disclosed the prices of the fuel hedges which we have used. I'm afraid you need to do your own math even when you need to estimate the total amount of fuel bill. It's good to remember that we do hedges constantly at the same, say, structure. I think that can provide you some information that if you consider that in the last quarter, we had pretty much 75% hedge. I think using the market prices or historical market prices, you can make quite good, say, guess of the fuel prices. We don't know how the unhedged price will develop.
That is, you know as well as your guess is as good as ours on this.
Sure. Thank you so much for time, and good luck.
Thank you.
Thank you.
Thank you. There are currently no further questions in the queue.
Okay. In that case, I would like to thank you all for putting the time aside to participate. We look forward to meeting all of you in the next earnings call. Okay. Thank you. Bye-bye.
Thank you. Bye.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.