Finnair Group Financial Statements Bulletin 2013

Regulatory News:

Finnair OYJ (HEX:FIA)

Finnair Plc. Financial Statement Release 11 February 2014 at 09:30

This is a summary of Finnair's Financial Statements Bulletin 2013. The Finnair Group Financial Statements Bulletin is attached to this release in pdf format and is also available on the company’s website at www.finnairgroup.com.

Turnover was 2,400.3 million euros and the operational result -4.8 million euros in 2013

* Operational result: Operating result excluding changes in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves, non-recurring items and capital gains.

** Before hybrid bond interest.

*** The number of flights also includes Finnair’s purchased traffic. Numbers for the comparison periods have been changed accordingly.

The comparison figures for 2012 have been adjusted in accordance with the amended standard IAS19 Employee Benefits.

CEO Pekka Vauramo:

"Finnair celebrated its 90th anniversary in November 2013. Thanks to our long history, we have a lot of know-how that has helped make Finnair one of the world’s best airlines in terms of its operations, as well as its punctuality. Over the years the company has also accumulated old structures and practices that we are now forced to renew and eliminate. We made good progress in our 200-million-euro cost reduction program in 2013, and we achieved the original cost reduction target of 140 million euros ahead of schedule midway through the year.

Financially, the final quarter of 2013 did not go according to our plans. We cannot be satisfied with the development of our turnover, our financial result or the progress of our cost reduction program in the fourth quarter.

Our turnover in October–December amounted to 560.6 million euros, a decrease of 8.5 per cent compared to the corresponding period in 2012. The main reason for the decline in turnover was the depreciation of the Japanese yen from the comparison period, which led to a decrease in our euro-denominated revenue from the important Japanese market. The result for the fourth quarter was also affected by a contraction in leisure traffic, as well as lost turnover arising from strike threats. Our operational result was -31.7 million euros in the fourth quarter and -4.8 million euros for the full year 2013.

In the collective labour agreements concluded with cabin crew, pilots and the Finnish Aviation Union (IAU) we agreed on extending the savings negotiations timetable till the first half of 2014. Our cost savings targets remain unchanged.

Many of our structures associated with wages and working hours originate from the era of closed, regulated markets. Renegotiating these structures to match current labour market practices is challenging, but we are determined to move forward with Finnair’s structural changes and cost reductions in cooperation with personnel and their representatives. I hope we reach company-specific agreements on the cost reductions necessary for Finnair and its personnel well ahead of the deadline set for the negotiations.

However, at the same time, we must assess other options to prepare for the contingency that, despite our best efforts, the necessary agreements on cost reductions are not reached through negotiations. We have a strong commitment to achieving the cost reductions that are essential for the company’s future. We intend to make Finnair a sustainably profitable and growing company. However, we will not be able to grow unless we improve our cost structure and competitiveness. This is our key goal for 2014, in addition to the renewal of Finnair’s commercial strategy that began in the last months of 2013. Finnair’s tradition requires us to achieve renewal and build a Finnair that holds a solid position in the consolidating European aviation industry.”

Business Environment

Global air traffic is currently undergoing a structural change, the typical characteristics of which are market liberalisation, increasing competition, overcapacity, consolidation, alliances and specialisation. European network carriers, Finnair included, continued to implement structural change and cost-reduction programs in 2013 to improve their competitiveness in the prevailing tight competitive situation. Capacity growth in the market was conservative. Various partnerships have increased, especially in international long-haul traffic.

The demand for passenger traffic in Europe grew in 2013 despite many European countries still being in recession. Combined with the conservative stance airlines have taken towards increasing their capacity, this led to improved load factors. The weakness of the Finnish economy was reflected in home market demand, especially in the second half of the year. Demand grew in passenger traffic between Asia and Europe but, at the same time, competition in this market increased as competitors launched new routes, particularly to Southeast Asia. Measured in passenger volume, the market for flights between Helsinki and Finnair’s European destinations grew by 4.2 per cent, while the market between Finnair’s Asian and European destinations grew by 1.8 per cent.* Finnair was successful in increasing its market share in both traffic areas.* Unit revenue was under pressure in passenger traffic.

The demand for leisure traffic developed positively in the first half of 2013 as industry operators adjusted their package tour supply to better match demand. However, the market took a turn in the summer as consumers’ uncertainty regarding their own economic situation began to slow down sales and decrease market prices. All industry operators cancelled their winter season tours to Egypt due to unrest in the country, which was reflected in the volumes and revenues for the fourth quarter.

Cargo traffic continued to suffer from overcapacity and weak demand in 2013, which put average yields in traffic between Europe, the Nordic region and Asia under substantial pressure. High fuel prices also had a negative effect on the result for cargo traffic. However, there were early signs of a slight recovery in demand late in the year, especially in Asia.

The price of the largest individual cost factor of airlines, i.e. jet fuel, has stabilised at a high level, and the increase in fuel costs levelled out in 2013. The US dollar is a significant expense currency in Finnair’s operations, while the Japanese yen is a significant income currency. The dollar-euro exchange rate remained fairly stable in 2013, but the yen depreciated substantially against the euro as a result of stimulus measures implemented by the Bank of Japan.

Progress of the structural change and cost-reduction program

Finnair continued the implementation of its structural change and cost-reduction programs in 2013. During the first half of the year, the focus was on seeking cost reductions under the first program commenced in August 2011. The cost-reduction target of 140 million euros set for that program was achieved by the end of June 2013, six months ahead of schedule.

The second cost-reduction program, with a target of 60 million euros, was announced in October 2012. In August 2013, Finnair stated that, as part of this cost-reduction program, it aims to reduce crew costs by approximately 35 million euros and technical services and customer service personnel costs by approximately 8 million euros. In the autumn, Finnair continued negotiations with personnel and their trade union representatives regarding the solutions and schedules for achieving these cost reduction targets. During the negotiations on new collective labour agreements, the trade unions representing Finnair’s cabin crew, technical staff and ground handling personnel issued strike warnings. To prepare for the potential strikes and look after customers, Finnair had to significantly restrict its traffic in mid-November. Even if the strikes were avoided in the final stages of negotiations, the strike threat and later the support strike threats issued by labour unions caused uncertainty and harm to our passengers, and resulted in a considerable loss of turnover as well as additional costs from, for example, the rerouting of passengers.

The strikes were cancelled on 15 November, as Finnair’s employer union the Association of Support Service Industries (PALTA) reached an agreement with the Finnish Cabin Crew Union (SLSY) and IAU on a new collective labour agreement in line with the national framework agreement, known as the Finnish Employment and Growth Pact, and also agreed on the schedule and processes of separate, company-specific negotiations related to Finnair’s cost reductions. According to the agreement, Finnair and SLSY will negotiate on reaching the cost reductions necessary for Finnair by 28 April 2014. If cost reduction targets are met, cabin personnel will be protected from layoffs for two years. Corresponding negotiations with the IAU to reach a company-specific labour agreement for technical staff have progressed quite far, and these negotiations will continue. In addition, Finnair and the IAU will continue company-specific negotiations on labour agreements for ground handling personnel.

Finnair’s objective in the negotiations is primarily to achieve a level of costs and wages that corresponds with market wages and costs in the industry, primarily by implementing changes to wage structures and working hours. Achieving the targets of the cost-reduction program is essential for improving the company’s competitiveness, as high fuel prices, cost reduction measures taken by competitors, intensified competition and fleet investments in the coming years require a substantial improvement in profitability. The long-term return objective set for the company by Finnair’s Board of Directors is an operating profit margin of six per cent.

Finnair continues to pursue savings in all of the first cost-reduction program’s categories. As of the third quarter of 2013, Finnair has monitored the progress of its two cost-reduction programs combined. The combined total target is to reduce annual costs permanently by 200 million euros by the end of 2014. The point of reference for the cost reduction target is the company’s unit cost level in 2010. By the end of 2013, Finnair had achieved a total cost reduction of 155 million euros, which was reflected in decreased air traffic unit costs in 2013. At the same time, the company has been able to move a substantial share of fixed costs to volume-based variable costs.

Financial performance in October–December 2013

Finnair’s turnover in the fourth quarter fell by 8.5 per cent year-on-year to 560.6 million euros (612.9). Capacity decreased by 1.8 per cent. The factors contributing to the decline in turnover were lower euro-denominated revenue due to the depreciation of the Japanese yen, a contraction in leisure traffic and lost turnover arising from the strike threat. Operational costs excluding fuel decreased by nearly five per cent from the comparison period, amounting to 435.0 million euros (456.7). Fuel costs, including hedging and costs incurred from emissions trading, were largely unchanged from the corresponding period in the previous year at 163.9 million euros (165.2). Personnel costs declined by 11.7 per cent to 94.6 million euros (107.1) due to the personnel reductions implemented after the comparison period, but part of the costs are now seen in the form of higher costs for outsourced catering and maintenance services. Euro-denominated operational costs decreased to 598.9 million euros (621.9). The company’s operational result, which refers to the operating result excluding non-recurring items, capital gains and changes in the fair value of derivatives and in the value of foreign currency-denominated fleet maintenance reserves, was -31.7 million euros (0.1).

Finnair’s income statement includes the change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves that took place during the period under review but will fall due later. This is an unrealised valuation result based on IFRS, where the result has no cash flow effect and which is not included in the operational result. The change in the fair value of derivatives and in the value of foreign currency denominated fleet maintenance reserves amounted to 15.7 million euros (0.0). Non-recurring costs in October–December totalled -2.5 million euros (-4.5) and the operational result was -18.5 million euros (-3.5). The result before taxes for October–December was -23.8 million euros (-5.3) and the result after taxes was -13.7 million euros (-3.5).

Unit revenue per available seat kilometre (RASK) declined, primarily due to the depreciation of the Japanese yen, by 5.1 per cent compared to the corresponding period in 2012 and amounted to 6.05 euro cents (6.37). Excluding the effect of exchange rate fluctuations, passenger unit revenue declined by 1.9 per cent from the comparison period. Unit cost per available seat kilometre (CASK) rose by 4.5 per cent to 6.84 euro cents (6.54). Unit cost excluding fuel (CASK excl. fuel) increased by 5.7 per cent and totalled 4.73 euro cents (4.47).

Outlook for 2014

The ongoing uncertain economic outlook in Europe and Asia is contributing to weak consumer demand in some of our main markets. Air traffic is expected to grow moderately in 2014. Finnair, however, will not be able to benefit from that growth without progress in its cost savings program and its target cost structure in place.

Finnair estimates its turnover to be close to previous year’s level in 2014. Fuel costs are expected to remain high. The outcome of Finnair's ongoing cost-saving negotiations will have a significant impact on financial performance in 2014, and therefore the company will reconsider giving guidance for its full-year 2014 financial performance after the savings negotiations have been concluded.

Finnair’s interim report for 1 January – 31 March 2014 will be published on Wednesday 7 May 2014.

FINNAIR PLC

Board of Directors

Briefings

Finnair will hold a press conference on 11 February 2014 at 11:00 a.m. and an analyst briefing at 12:30 p.m. at its office at Tietotie 9. An English-language telephone conference for analysts will begin at 3:00 p.m. Finnish time. The conference may be attended by dialling your local access number +358 800 770 306 and using the PIN code 255856#

Finnair Plc.

Communications

11 February 2014

* Finnair’s estimate. The estimate is based on travel agencies’ MIDT data and Finnair’s estimates of airlines’ own sales through their own sales channels, such as websites.

Distribution:

NASDAQ OMX Helsinki

Principal media

This information was brought to you by Cision http://news.cision.com