Finnair: Figuring out the new normal of air travel – Evli research

Weak Q1 result due to COVID-19

Finnair’s Q1 result was heavily impacted by COVID-19. Revenue declined by 16% y/y to EUR 561m vs. EUR 585m/555m Evli/cons. Adj. EBIT was below estimates at EUR -91m vs. EUR -73m/-59m Evli/cons. ASK decreased by 9.4% y/y while RASK decreased by 7.3% y/y. The company expects a significant comparable operating loss in 20E. Earlier Finnair cut its capacity by over 90% due to the coronavirus and the company will operate the current minimum network throughout Q2. Finnair estimates that its comparable operating result will be a daily loss of approx. EUR 2m throughout Q2.

Ugly Q2 ahead – H2 remains blurry

Due to the coronavirus pandemic, Q2E result will be even uglier than in Q1. We expect Finnair’s Q2E ASK to decrease by 95% y/y, resulting in a significant decline in revenue. We expect comparable operating loss of EUR ~170m in Q2E. The situation should start slowly to recover after Q2 but we still expect significant capacity cuts during the late summer and autumn. H2’20E remains blurry as it still is unknown how the coronavirus situation will evolve in different markets. Finnair also gave insights of how the mid-term outlook of air travel might look like and indicated that the passenger numbers are not expected to recover to the levels prior the crisis at least not during the next couple of years. It is likely that the air travel will face permanent structural changes and will never return as it was before the crisis.

“SELL” (“HOLD”) with TP of EUR 3.3 (4.0)

We have decreased our 20E revenue estimate by ~20% and adj EBIT estimate by ~80%. We have also cut our 21E-22E revenue estimates by ~14% and adj EBIT estimates by ~30-50%. We now expect Finnair’s 20E revenue to decline by 43% y/y to EUR 1752m and comparable operating loss of EUR 265m. We note that there are significant uncertainties with our estimates. Prior the crisis, Finnair had a strong cash position and a healthy balance sheet. The company is also implementing a substantial funding plan, including sale and leasebacks of unencumbered aircraft, a revolving credit facility of EUR 175m, which has already been raised and a statutory pension premium loan totaling to EUR 600m. Therefore, we see that Finnair is well placed to continue its operations after the crisis, even if the situation is prolonged. Finnair is also planning for an approx. EUR 500m share issue to strengthen its equity. We downgrade our rating to “SELL” (“HOLD”) with TP of EUR 3.3 (4.0).