21-09-2020 14:21

Aviation: The extreme of the extremes

How did Finnair come to the early decision to raise EUR 512m of new equity to ensure they stay resilient amid the coronavirus pandemic, and to be able to invest in becoming carbon neutral by 2045? Johan Trocmé, Director at Nordea Thematics, interviews Topi Manner, CEO of listed Finnish airline Finnair, to find out.
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Nordea On Your Mind report: 'Coronavirus: Plan B'

In the latest issue of Nordea On Your Mind, "Coronavirus: Plan B", Johan Trocmé, Director at Nordea Thematics, talks to Topi Manner, CEO of listed Finnish airline Finnair, about the difficult decision to be first in the industry to do a big equity issue. It was about coping with the collapse in air travel as well as securing the ability to invest for the long term in sustainability and differentiation. The dire market situation prompted a sense of urgency among shareholders weighing potential dilution against the possibility for the company to emerge from the pandemic as a healthy, viable premium player.

You completed a EUR 512m rights issue in July. Could you share some of your reasoning behind it, and what were the factors behind your decision to go ahead? Short-term versus long-term considerations, crisis management here and now versus being a step ahead and gaining strategic flexibility in the years ahead?

Topi: For Finnair, the impact of COVID-19 was starting to be felt in January. China is our third most important market and we watched developments there closely after the initial outbreak in Wuhan, and activated our contingency plans in mid-January. The early contingency plans were of an operational nature. We suspended our services to mainland China. We also activated the financial parts of our contingency planning, in anticipation that the virus could spread outside of China. This unfortunately happened in March, resulting in travel restrictions, border closures and most of Europe joining China and Asia in going into lockdown.

We have a good practice of operational and financial scenario planning at Finnair. In January, the scenario we envisaged was that this would resemble the SARS epidemic. By mid-March we realised that this was going to be big and bad. We drew the conclusion that the effect would be protracted, would have a big impact on the propensity to travel, and we added a scenario where there would be no material recovery for air travel until there was at least a partially effective vaccine or effective treatment for the virus. In March or April it was foreseeable that this would likely take at least a year to become available. So this became the new basis of our financial contingency planning.

In our new scenario planning in April, we considered 'V-shaped', prolonged 'U-shaped' and 'L-shaped' recoveries. We rejected the 'V' scenario, not believing it to be realistic at least for the aviation industry. Instead, we adopted the 'prolonged U' as our base-case recovery scenario. So far this has been quite accurate, allowing for some resurgence of the virus after summer. And the recovery we are seeing so far is slow.

In our financial contingency planning we want to be proactive. We want to be out early. And when there is a need, we want to be decisive. To paraphrase the ECB we opted for putting in place our own financial bazooka, raising both debt and equity. We drew our entire revolving credit facility of EUR 175m. We secured a EUR 600m pension premium loan with a 90% state guarantee and a 10% market-based guarantee. We initiated processes to raise long-term debt from sale and leaseback transactions, based on our EUR 1.3bn of unencumbered assets in the form of aircraft. We concluded early that our financial contingency plan would not only be about liquidity, but also about equity and balance sheet strength. We were the first airline in the EMEA region to raise new equity in a rights issue during the pandemic.


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There are different tools for securing financial resilience in an uncertain environment, including short-term debt, long-term debt, hybrid instruments and equity capital. Have there been difficult choices for Finnair? Have you perceived that raising equity has been a ‘hard sell’ owing to concerns about dilution? Has it been challenging to build a consensus among shareholders and other stakeholders to decide the optimal capital choices?

Topi: A rights issue is not something you would take lightly. There are multiple considerations. These include the timing. We initiated our rights issue process in a very uncertain market environment, and I think it could be fair to describe it as a bold move. Then there is the size. We were determined to raise enough equity to cover the needs that we could reasonably anticipate and to make it painfully clear that there would be no subsequent, additional rights issues following the first one. And linked to both timing and size is the issue of dilution for shareholders. This is of course important. Yet it was evident that dilution would be more than compensated for by the benefits in the form of improved long-term competitiveness in a capital-heavy industry and access to reasonably priced debt funding in the short term, which would give us financial firepower relative to other airlines in a challenging operating environment. We are convinced that balance sheet strength will be a key differentiator among airlines, also in the post-COVID-19 environment.

The COVID-19 pandemic has severely affected societies and economies globally, but we should remember that the aviation industry is the extreme of the extremes. Among the management and the board of directors of Finnair there was a great sense of urgency at the time for our rights issue and there still is. And there was similarly a great sense of urgency among our big institutional shareholders including our majority shareholder, the State of Finland. And I would say the same of our key customers and our employees. It would be wrong to describe the process as easy, but once we started describing the rationale for the measures we were proposing we were able to build widespread understanding and support fairly quickly. It was not a hard sell.

The COVID-19 pandemic has caused major uncertainty, and no one knows how it will affect the world economy. What future scenarios have you considered regarding consumer behaviour and travel? Do you expect a permanent change in travel patterns, even if COVID-19 were to be effectively resolved by a vaccine or treatment?

Topi: Our current base-case, 'prolonged U-shaped recovery', scenario assumes a slow autumn and winter. We are currently operating around 30% of our flights in comparison to 2019. This translates into using perhaps 15% of our capacity in terms of available seat kilometres. We do not expect this to change materially until there is an at least partially working vaccine or effective therapy against COVID-19. It could improve somewhat depending on changes in travel restrictions and rapid testing, including departure and arrival testing at airports. But in the short run, the unfolding of the pandemic and the travel restrictions related to it will ultimately determine the size and scope of our business.



Hopefully, by next summer there will be at least a partially effective vaccine and/or medication. We believe this would allow a return of demand for air travel, but not to anywhere near 2019 levels. There will likely be major economic woes, for corporates and consumers. Some types of leisure travel may continue to suffer, like Asian group travel. This is an important category for us which we expect to eventually come back but which has an effective 12-month lead time, since Chinese groups typically book their travel 12 months ahead. As for corporate travel, we think part of it will not return. Corporate travel related to deal-making, to active and prudent governance, to active relationship building, will continue to play a role. The maintenance of existing relationships and ongoing ordinary business interactions may be partially replaced by videoconferencing and online meetings.

Against this backdrop, we expect that it could take three years until the volume of air travel for Finnair returns to 2019 levels. For the global aviation industry, we believe it could take closer to four years. We will resize the airline to match this environment, and to be competitive in the post-COVID-19 market landscape.

Sometimes a crisis is needed to shake up, consolidate or restructure an industry. Would you expect an increased polarisation among airlines after COVID-19? What do you think will distinguish winners from losers? Could pro-active and early capital strengthening be one such differentiator?

Topi: We expect the competitive landscape to become increasingly polarised during the pandemic, where balance sheet strength should be a key differentiator. The current dire market environment means that effectively all airlines are trying to hoard cash and are accumulating debt. Some have wafer thin balance sheets. Any such airlines that survive the pandemic will need a very long time to rise and recover from the immense financial strain. The need to repay all their debt means they will find it difficult to invest. Balance sheet strength and the ability to invest in modern, fuel-efficient aircraft with lower CO2 emissions and improved passenger and employee experiences is critical for us. We want to be able to invest in the customer experience and sustainability.

I believe tomorrow's more polarised aviation industry will have the low-cost airlines, which will be running point-to-point traffic, short haul, and will likely see some consolidation in their segment, with the big players getting bigger. The traditional network airlines, where Finnair is competing, have a significant share of their business in long haul. Here I think customers will be increasingly focused on quality and service, and the mitigation of health risks could be a critical part of this. How much personal space do you get in the aircraft? How can you personalise your trip? How clean is the aircraft? How is hygiene maintained? How is it disinfected? We think these will be differentiating factors and believe Finnair is well positioned, as a modern premium airline with one of the world's most modern long-haul fleets in the form of our Airbus A350 fleet.

To protect our cash, we are limiting our capital expenditure in the short term. But we continue to execute on projects which are critical for building long-term competitiveness.

Do you expect the COVID-19 pandemic to be an additional catalyst for focus on sustainability? Could it prompt changed consumer behaviour which is needed to achieve better sustainability? If so, do you think airlines will be able to adapt, for example to lower emissions and a different mix of travel destinations?

Topi: At Finnair, we look at sustainability through the lens of three pillars: environmental, economic and social. In the short term the environmental pillar is not as central as it used to be, as actual traffic volumes have declined so much that CO2 emissions are much less of an issue. Economic sustainability, on the other hand, including the ability of airlines to withstand a shock, continue to fly passengers, and refund passengers for flight cancellations, has become a big topic. And so has social sustainability, as airlines are in this dire market environment forced to adapt and restructure. This usually includes reducing staff, which you need to do very responsibly. And during the pandemic there are other social sustainability and responsibility items which become important, such as Finnair operating cargo flights to deliver face masks, COVID-19 test kits and other personal protective equipment. These social sustainability issues have taken centre stage but we expect that environmental sustainability will become top of mind again, once the pandemic is behind us.

In anticipation of that, we introduced our long-term sustainability strategy even in the midst of the COVID-19 outbreak, before it became a pandemic. We aim to be carbon-neutral by 2045. Perhaps an even bigger milestone for us is that we want to reduce our CO2 emissions by 50% by the end of 2025. We need to invest in more modern aircraft, especially in our short-haul fleet. We need to use more sustainable aviation fuels, biofuels and synthetic fuels. We need carbon offsetting. We need European emissions trading. We need a range of operational measures to reduce the weight of our aircraft. When you calculate backwards, you realise that both the 2025 goal and the 2045 goal require the ability to invest. This brings us back to the issue of balance sheet strength, and this was part of the long-term considerations when deciding on the capital strengthening measures we implemented.


Finnair's air travel volumes could take three years to return to 2019 levels

Finnair aims to halve CO2 emissions by the end of 2025 and cut them to zero by 2045, which requires the ability to invest

If you want access to the full Nordea On Your Mind report “Coronavirus: Plan B“, please contact viktor.soneback [at] nordea.com (Viktor Sonebäck).

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