It is my pleasure to welcome you to this Finnair third quarter 2018 earnings release conference call. I have here with me Finnair's Interim CEO and CFO, Pekka Vähähyyppä, and he will be joined by CCO Juha Järvinen and Head of Treasury, Christine Rovelli, for the Q&A session. Now I would like to turn the call over to Pekka Vähähyyppä.
Thank you, Kasper. Good afternoon on my behalf. I'm Pekka Vähähyyppä. We had a very active quarter three. We continued to develop our services and network. To highlight a couple of points, we will open next year a route to Los Angeles, and also add our Asian capacity with two daily flights to Hong Kong, to name a couple of those. We are very happy also that right now we have a new high-speed Wi-Fi internet service installation on our 21 narrow-body fleet for European flight, and we have received excellent customer feedback on that. Also, I'm very happy and proud to let you know that customers have given us a five-star rating in APEX Global Airline Ratings. Very happy about that, and that was the first time when Finnair received, and hope that will continue to be so.
One important milestone was also reached during this quarter, or actually in October, when our Norra, a regional airline, majority shareholding of that was sold to a Danish airline called Danish Air Transport. Moving on to next page, looking at some figures. Our growth continued. We had the pleasure to serve more than 3.7 million passengers during the quarter, up 11.5% from the year before. Our revenue grew and was more than EUR 800 million, up nearly 9%. Our NPS was slightly below than last year same quarter, but within this quarter, we saw nice improvement so that the NPS for the month of September was 53. Our comparable operating result went slightly down. It was EUR 108 million for the quarter. Moving on. Next page. Here, we see a long-term rolling four quarters comparable operating result development.
Despite of the small decline during this quarter, our comparable operating result is on a much better level than it has been during previous years. Moving on. Why this slight decline in profit has taken place? I think in the environment which we have, we did face some challenges to begin with. Oil price that has continued to increase in Q3. We can look our oil cost, jet fuel cost in more detail in later slides. Weather conditions were also quite challenging. First of all, to begin with hurricanes in Asia caused us cancellations. Osaka Airport was closed, I think it was more than a week. Also Hong Kong, hurricane there has caused cancellations. When talking about weather, summer was extremely warm here in Finland and also in Europe, and that affected travel service demand and still is affecting travel services demand.
On the other hand, increased capacity in the market has tightened the competition. We are facing competition specifically here in Nordic and European routes. Important point also is that some engine manufacturers have had issues with the new technology engines, and that has caused challenges for us, even though we are using current engine options. That anyhow has caused certain challenges with our spare engine supply and therefore we have had some cancellations in that respect. Quite many various environment-related challenges. Moving on to our revenue. Here in this chart, we see in the middle our capacity in ASK. All in all, our capacity grew 14.2% during the quarter. We saw biggest growth in Europe, nearly 20%. Another important part or territory for us, Asia, grew more than 10%, and domestic and North Atlantic, nice double digit growth as well.
Looking at the revenue growth, we see on the left-hand side that Asian traffic grew, or Asian revenue grew more than Asian capacity, so we're very happy about that. Europe, on the other hand, grew, but less than the capacity. That is also visible in the European load factor, which is on the right-hand side. This picture does not, however, tell the entire content of the development. What we see is that our strategic backbone that is combining Asia via Helsinki to Europe, that had a very healthy growth. We did have some challenges in European and Scandinavian point-to-point traffic. They were causing the Europe revenue and Europe load factor decline. Very happy to say that the, like I said, the backbone of our strategy, combining Asia via Helsinki to Europe is working nicely. Moving on.
Here in this chart, we explain the development of our revenue items in the left-hand side. We can see that the passenger revenue, which grew EUR 54 million, most of that growth is coming from our capacity growth, and we had some decline vs last year in load factor and foreign exchange development that was slightly against us. All in all, nice growth, EUR 54 million. Looking at the middle chart, we can see that Asia is providing a majority of the growth during third quarter. In the right-hand side, I'm also very happy to show that all our other revenue lines, that is ancillary cargo and travel services, grew very nicely. Very solid development in that as well. Moving on to next slide. Here is a bridge between Q3 EBIT last year vs Q3 EBIT this year.
As said earlier, we are showing some decline, EUR 10.5 million decline. We also see that all in all, revenue grew EUR 66 million, but that growth was, shall we say, eaten up by big increase in fuel cost. The increase was nearly EUR 40 million. All other cost lines were developing pretty much in line with the volume growth, which, like I said, during the quarter was in ASK more than 14%. Moving on to next page. Fuel. Some more analysis on the fuel. Our fuel cost last year was EUR 124 million, and this year EUR 163 million. When we split that into components, volume-related growth or increase in the fuel bill was EUR 19 million. If we would have bought all our fuel in spot prices, that fuel bill would have been EUR 49 million more.
While we are consistently following our hedging policy, we had positive hedging deviation worth EUR 30 million or so. All those included, our fuel bill grew EUR 39 million. On the right-hand side in this slide, you can see the fuel hedges which we have currently. We are following the hedging policy constantly over the following 24 months. Moving on to next slide. We are of course not happy that we were not able to improve our profit quarter vs quarter. We have taken actions to safeguard the continuation of our profitable growth. We will focus more thoroughly on improvements that will increase our efficiency, increase revenue, and also improve our customer experience. We are taking and will take or deploy new ways of working and tools.
For example, in technical operations, we have taken applications which increase efficiency and reduce paperwork of mechanics and engineers who are providing service. In admin, we are taking some, shall we say, baby steps at this point of time in improving our admin efficiency, some accounting-related issues. We are increasingly being active in deploying new ways of working and simplifying our processes in order to be able to improve efficiency. Moving on to the next page. We have a strong and solid balance sheet. We have nearly EUR 3.1 billion capital tied in our business. We had in the end of the quarter, equity ratio, which was 37.5%, nearly 3 percentage points up vs previous year. Our cash is EUR 1.1 billion. Adjusted gearing, which is also calculated and showed here, is 55%. Moving on. Next page. We have a very solid cash flow.
Our operating cash flow grew with the growing EBITDA, and that was EUR +64 million. Investing cash flow, including investments in fixed assets, was EUR -57 million. Financing was also negative due to the fact that we paid back tail ends of our bond which we mostly were able to refinance or buy back from the market last year already. On the right-hand side of the slide, we see the components of our total cash. We have cash and bank deposits. We have commercial papers with maturity less than three months and commercial paper and deposits with maturity of more than three months. Moving on to the next page. Just to let you know that we, like any other company, are starting to deploy and present our figures according to IFRS 16 beginning of next year, and that will have impact on our reporting.
However, the adjusted net gearing which we have been reporting earlier for a long time, that gives you certain indication of the balance sheet development which we will have first quarter next year. Moving on to outlook. We have specified our outlook. We see that our global airline traffic continues to grow strongly. We are facing increased competition in our main markets. Also, as discussed earlier, the price of jet fuel is increasing our and other airlines' costs as well. We also specify that our capacity increase is unchanged than what it was in the beginning of the year, but specify that passenger volume is expected to grow between 12%-13% and revenue is expected to grow by 10%-11%. Comparable operating profit will be somewhat below the previous year level. Last year, it was EUR 170 million.
We also have disclosed with a separate stock exchange release earlier today that we are discontinuing an old pilot long-term incentive plan because together with the pilots, we were not able to reach the certain improvement objectives there. Therefore, we are discontinuing that. That discontinuation means that we are, say reversing the accrued costs which we would have been paying to the pilots if the targets would have been met, and that positive impact, approximately EUR 11 million, will materialize, or we will report that in our Q4 results. That is also included in the guidance, which I said earlier. With these words, I think we are open for questions and like Kasper said, we have Chief Commercial Officer Juha Järvinen and Treasurer Christine Rovelli here also answering any questions.
To ask a question over the phone that's star one on your telephone keypad. As a reminder, that's star one for questions. We'll go first to Andrew Lobbenberg with HSBC.
Oh, hi.
Andrew?
Hi. Can you just put in context the pilot situation? The failure to reach the savings, is this threatening industrial action coming forward or problems with industrial relations? Where are we with pay settlements going forward with that group?
Are you now referring to the pilot LTI or in general the CLA situation?
I'm referring specifically to the pilots and the fact that we're withdrawing this incentive structure. What does that tell us about the industrial relations with pilots?
Well, currently there is a CLA negotiation with Norra pilots and nothing special to report about that. With Finnair pilots, we have, I think this year negotiations will take place, is it next year or year thereafter? We don't have current negotiations ongoing with them. This LTI which we are disclosing or need to disclose today, that dates back to 2014 when Finnair and the pilots agreed certain savings targets, which we were planning to meet together with all the pilots were planning to meet. Unfortunately, we were only able to meet roughly 2/3 of the target. Therefore, as the plan was close to its end, we agreed with the pilots that we need to terminate that LTI. That has been ongoing discussion with the pilots throughout the LTI. That's no surprise to them either.
It's not necessarily a sign that there are imminent challenges with labor relations there?
No, I wouldn't say so. No. That is, like I said, originating long back.
Okay.
We are not happy that we were not able to meet these objectives. I wouldn't consider that as a negative sign for the future negotiations.
Okay. On Europe and the weak unit revenues, who is bringing the capacity pressure on point to point? In terms of the revenue environment going forward, Q3 looked very good on Asia. Obviously, there's a whole host of concern in the financial markets about the outlook for China, and I think that sits in the broader trade mess with the U.S. How do you characterize demand looking forwards on the Asia trips? Two questions. In Europe, competition point to point and outlook Asia.
Yes. Juha Järvinen here, Chief Commercial Officer. On the European level, the increased competition has been really focusing largely on Scandinavian and Spanish routes. In combination with the great summer that we all had in Europe, which of course, it had an impact on the short-term demand for leisure trips within Europe for this summer, but also it has a bit of a spin-on effect for the autumn as well. We do see this tight competition in intra-Europe airlines continue. When it comes to our next year's operations, we are getting incremental long-haul aircraft to our fleet
Without expanding the European network, we get improved balance between long-haul and short-haul. When it comes to long-haul outlook, the demand environment is still positive, especially to Japan. This summer performance to and from Japan has improved and continues to improve, and also the outlook for next year looks promising, including the major cities in China. The launch of Nanjing route this year also performed very well in China. We don't see any major concerns on the Asian demand environment, more the overcapacity in Europe, which is the bigger concern.
Okay. The last thing I was curious about is you're talking about spare engine problems. Is that on the narrow bodies and just because they're all so distracted with the new engines that they're not delivering old engines or what? That's hard to understand.
Yeah. Christine, if you want to-
Hi, Andrew. It's Christine.
Hi, Christine.
As you probably know. Hello. The engine issues for Rolls-Royce are mostly on the wide body side, and the engine issues for Pratt & Whitney are on the narrow body side. What we've seen on both of those, narrow bodies are the ones that affected us the most. What we've seen on the narrow body side is that folks who had classic engine option aircraft with neo orders are still operating those classic engine option aircraft. As you might know, a lot of times when an aircraft is coming to the end of its service life with an airline, they try to time the maintenance so that it is not due until after the aircraft service life has ended, or they've returned the aircraft, or both.
What we've seen is that all of a sudden they're holding onto these aircraft longer, and they are starting to have to go through heavy maintenance on the engines. That has put pressure on the spare engine supply in the market, and that has affected us because we would have needed those spare engines as well. We were planning on, and we still are, operating our narrow bodies for a good while longer. It was the supply in the market that we had counted on that didn't quite turn out the way we'd hoped. There's no issues from the engine side on our wide bodies, no issues on spare engines. It's only on the A320s.
Our current situation has improved. During Q3, the situation was challenging. Right now, the situation has improved.
Okay, thanks. That makes sense.
Yeah, because they've gone back. On Pratt & Whitney, the answer was to go back to the previous design. They have fewer problems than Rolls-Royce.
Yeah.
We'll go to our next caller from Achal Kumar with HSBC.
Yeah, hi. Just two questions I had. One, I wanted to understand in terms of do you see any impact from this IAG's North Atlantic Alliance coming under scrutiny? Do you see any impact on you guys from that? Secondly, I wanted to understand a bit in terms of cost. I can see the staff costs has declined sharply on per unit basis. What's going on there? Just wonder if you could please help me understand that. Thank you.
Yeah. First of all, we don't see any concerns in the STI] audit or how you want to call it. Our understanding it as a part of their normal routine work, which they're doing from time to time. We are not at all concerned about that. Costs. Last year when we had a very good financial year, we paid a so-called turnaround bonus to all Finnair employees, and that total cost was EUR 13 million. We did accrue some EUR 9 million out of that already in Q3. We had last year a certain one of type of salary cost, which we are not having this year.
Right. Okay. Thank you.
We'll go next to Victoria Moores with ATW.
Hi there. Good afternoon. My question is regarding the fleets. How are you fixed for aircraft at the moment? Are you looking at acquiring or replacing any right now? What would be next up on the fleet planning for you? Thank you.
We have one more A350 delivery coming this year in December. We have two A350s coming next year. After that, we're one [C2Z] on the final order of eight options that we have until 2022. That's us on the wide body side. On the narrow body side, as you will see from our press release, they're quite middle-aged at this point, so we're starting to think about what to do with those aircraft as they reach the end of their service life. We haven't made any decisions on timing yet, but it's under consideration.
In terms of those options, when will you take a decision on those?
You're talking about the A350 options, we exercised those already in 2015. Those are the eight aircrafts that we're taking delivery of now.
Okay, excellent. The timeline on the narrow-body replacements?
Well, I don't know when we will make the decision, but our fleet is kind of mid-life at the moment, so we would not anticipate taking any new deliveries until the beginning of the next decade.
Okay, thank you.
We'll go next to Achal Kumar with HSBC.
Yeah. Hi, sorry. I just want to understand two things. One, basically, given that the fuel price is rising and the yield pressure is there, do you see any impact on your dividend? That is first question. Secondly, I want to understand about your CapEx, if you could please help us in understanding that.
Yeah. Our dividend policy is that we pay 1/3 of our profit as a dividend. At this point of time, it's too early to say about dividends. It's the AGM who, in due course, decides that. The policy is 1/3 of the ordinary profit, including, or taking into the consideration the future investments. Christine, do you about the investments?
Yeah, I do. What specifically are you looking for with respect to information on CapEx?
I just want to understand what's your CapEx plan? If you could please tell us about how should we model it?
I guess the best place to start is with the delivery schedule on the A350s. As I said, we have one coming in December. We have two coming in 2019. Then again, until 2022, we're taking, I think one or two per year. Two per year until then. That's all the new aircraft orders that we have at the moment. Then in parallel, you probably have seen that we are retrofitting our wide-body fleet, our older ones, with a new cabin. There's going to be some spend associated with that. I think we've disclosed that in June in the investment profile. There's the Wi-Fi that I think we're pretty much done with at the moment.
Pretty much done, yes.
I can't think of any other big CapEx plans that we have other than the retrofit.
Okay, perfect. Thank you.
We'll go next to Victoria Moores with ATW.
Yeah, thank you. Just one further question on that sort of ultimate narrow-body replacement. How many aircraft would that be covering? And also a second question, which is, just checking based on the Norra transaction, has that all gone through now and completed?
What's Norra?
The Norra transaction, that is fully completed. The normal approval of the competitor officers, we have received them early October. That is fully completed. Will Christine comment on the narrow body?
Sure. The best place to start is because the narrow bodies that we have, we will operate them until the end of the service life, and there are something like 37 of those. We're going to start with replacing those, and then I think we'll look at how the network looks and how we feel about the growth prospects before we think about whether or not we should add to that or not.
At this time, there are no further questions.
If there are no further questions, I would like to thank you very much for taking the time to join us today. Thank you, and have a wonderful day.
This does conclude today's conference. We thank you for your participation.