Despite analysts’ negative responses to Finnair’s second quarter results, the national airline of one of Europe’s smaller airlines should be giving its 55.8% government shareholder a fairly comfortable feeling at present. With a young short haul fleet and a potentially bullet-proof Asian-focussed network, Finnair shares some of the positive attributes of the Gulf airlines, including a very strategically positioned home base. Its low cost profile also offers a good platform for profitable growth.

Pushing a high level of new capacity into the long haul market seemed like a very good idea just a year ago. But a softening in demand, much higher fuel prices (with a not so fuel-friendly long haul fleet) and increased competition have distorted that picture into a much less welcoming one. Nonetheless, Finnair is setting itself up well in a Europe-Asia network role which will almost certainly continue to grow through difficult conditions. And, in a more forgiving fuel price environment, it could be well poised to return the Finnish taxpayer solid dividends.

Finnair long haul route network, with frequencies. Summer 2008



Source: Finnair

Finnair’s hub advantage also leaves it open to competition along each spoke and, although the airline is expanding aggressively on long haul, it is suffering heavily from the growing savvy of short haul European travellers who are increasingly able to self-connect simply by going online.

Finnair CEO, Jukka Hienonen, last week offered an O’Leary-like view of the low cost airline industry in Europe:  "If we say there are roughly 40 low-cost carriers in Europe, roughly five of them saw profits last year while 35 saw losses. And 10 of them have never seen the light of profit in their whole lives."

He also had a serve for airlines “like Alitalia” whose bad health is infecting the industry. But Finnair’s own scheduled capacity growth will reduce to around 5% in the second half of the year, following a 10% expansion in the first. Arrival of A330s next year to replace the MD-11s will provide a much needed 20% reduction in fuel burn – and cost.

Aggressive introduction of new capacity has caused Finnair’s load factors to slip, along with yields, but July’s 6% traffic growth saw passenger load factor increase back to a more respectable 79%, as Asian demand grew 12%, with 80% load factors on those routes. Cargo too performed well.

Finnair passenger numbers growth by region



Source: Centre for Asia Pacific Aviation & Finnair

But basically, like many other airlines, Finnair is absorbing fuel costs for the time being, hoping for better times, while preparing for worse. Citing its “Finnishness” as a key attribute, its frugal nature makes it now well positioned to take advantage of a lower cost fuel environment. It is still returning a positive margin and, assuming oil prices do continue to hold at or below USD115 per barrel, from what Mr Hienonen was saying last week, the second half also ought to be profitable.

Finnair Group operating profit margin (EBIT margin): 1Q06 to 2Q08


Source: Centre for Asia Pacific Aviation & Finnair

A nearly 13% reduction in non-fuel unit costs over the first half of last year helps keep the airline at benchmark cost levels for a network carrier and its 29 young A320s help with its cost containment measures. Again, like the Middle East sixth freedom model, Finnair is able to punch well above its weight in long haul markets. But the finnishness feature may well be strained to the limit if fuel prices move higher again.