FNNNF - Finnair Oyj (FNNNF) Q2 2023 Earnings Call Transcript
2023-07-21 13:31:02 ET
Finnair Oyj (FNNNF)
Q2 2023 Earnings Conference Call
July 21, 2023 6:00 AM ET
Company Participants
Erkka Salonen - Director, IR
Topi Manner - Pres, CEO & Member of Exec. Board
Kristian Pullola - CFO & Member of Exec. Board
Conference Call Participants
Jaakko Tyrvainen - SEB
Achal Kumar - HSBC
Pia Heinsalmi - Carnegie
Presentation
Erkka Salonen
Good day, ladies and gentlemen. I'm Erkka Salonen from Finnair IR, and it's my pleasure to welcome you all to this Finnair's Second Quarter and Half Year 2023 Earnings Call. I have here with me Finnair's CEO, Mr. Topi Manner, and he is joined by our CFO, Mr. Kristian Pullola for the Q&A session.
I will now turn this call over to you, Topi. Please go ahead.
Topi Manner
Thank you, Erkka. And good day everybody and welcome to this Q2 Earnings Call. This was a strong quarter overall for Finnair driven by strong demand and successful strategy implementation. And on the back of this we are today raising our long-term profitability target to 6% of EBIT by end of 2025. As stated, strong quarter on all accounts, our comparable EBIT landed at EUR 66 million, this was fourth consecutive quarter of comparable, positive comparable operating profit and the third consecutive quarter of positive net results. During the quarter, we carried 2.8 million passengers, we operated 75% of our Q2, 2019 ASKs in terms of our on schedule service and when we calculate in the wet lease operating for our partners, the capacity number was 78%. This was a bit less than we originally planned and reason is basically the global capacity bottlenecks that we are seeing all around the global aviation. There is lack of aircraft, lack of pilots and other staff and lack of spare parts as well. And especially the lack of spare parts has prolonged the maintenance schedule of some of our narrowbody aircraft and that impacted our capacity a bit temporarily during the quarter. The flip side of the capacity bottleneck, however, is that we have experienced good demand for our wet lease services as witnessed by the Qantas deal that we announced during the quarter.
The overall capacity situation, the supply situation versus demand in European aviation and in global aviation is tight at the moment and that is contributing positively to the unit revenue development. So our RASK was 27% above the Q2, 2019 level the load factor in almost all traffic categories improved our overall load factor was 76% during the quarter, customer satisfaction was at 35. So a good number in international comparison. For example, the average of the US airlines seems to be at present time around hovering around 25. On time performance 85% is a good number for the quarter. And during the past month we have been one of the most reliable airlines in Europe.
So as stated our strategy implementation is progressing well. During the quarter, we announced the mentioned deal with Qantas, so we are wet leasing first leasing aircraft and crew for Qantas to Airbus 330s is for two years and then the lease will continue as dry lease so without crew for two and half years. So this is a long term deal and quite a groundbreaking partnership in global aviation as now we are partnering with an airline that operates on southern hemisphere quite far from our Helsinki hub. And this is the testament to Finnair’s operational quality, Qantas of course is renowned and quality airline and the fact that they have been using us as a partner speaks for it speaks for itself. And then also that we are able to operate from Singapore and Bangkok, Bangkok to Sydney is also a noteworthy thing.
During the quarter, we introduced a new Superlight ticket and new baggage allowances. And as part of our product offering updates, the Superlight ticket is part of our strategy, in a sense that as a network carrier as a quality carrier, we offer a wide range of services to different customer needs. At the other end of the spectrum, we have our long-haul business class, which is award winning and really a five star experience. In the other end of the spectrum, we have the Superlight ticket in our European short-haul traffic for the most price sensitive customers. And then we have various gap-ins, business class, premium, economy and various fare types as well as ancillary services for different needs in between the opposite ends of the spectrum.
During the past years, Finnair has been one of the only carriers that has been investing significantly into capping refurbishment, and that we have been doing in the form of our elevated long-haul experience. This has been a significant investment altogether EUR 200 million and it is progressing well as we speak. So currently we have 18 out of 25 widebodies completed and we expect to complete the full rollout by spring next year. Customers like the new gubbins and we are clearly getting positive feedback of that, the premium, economy travel class has been finding its customer base. So we are very happy with that. And the business class offering that we have in the form of [inaudible] is clearly differentiating us from the competition. And we have been reaching the targets of this investment both in terms of customer experience as well as in terms of commercial and financial development.
But another noteworthy happening during the quarter was that we were yet again selected as the best airline in Northern Europe, actually for the 13th consecutive time by Skytrax customer review. And then our home hub in Helsinki-Vantaa selected as the best European Airport in its category during this year. It is a well-functioning airport, very smooth, modern experience for our customers. So first and foremost, we would like to congratulate Finavia, the airport operator. But then again, we are also big part of the Helsinki-Vantaa operations ourselves and the airport is big part of the customer journey of our customers so we are happy that we can offer the airport services also to our customers.
This is a differentiating element in the customer experience or Finnair in comparison to many other airlines. When we look at the specific risks related to our business environment, we conclude that they have normalized and with the specific risks, we especially referred to the pandemic on one hand and the Russian airspace closure in the other hand, the impact of the pandemic has had basically faded away. And then the Russian airspace closure is sort of a new normal and the market has adapted to this reality. And the same applies to Finnair as well. Having said that, we still see that inflation and rising interest rates are causing uncertainty in our operating environment and those risks are on elevated level when it comes to customer purchase power. Yet at this point of time, we see a strong booking curve. And we clearly see customers, consumers, prioritizing travelers spend as part of their overall spend.
we have been starting to pay back the debt that we have accumulated during the quarter and now our net debt has decreased to EUR 850 million. And the strong cash flow stemming from the profitability together with the decreased risks of our operating environment basically enable us to call the EUR 200 million hybrid bond in September that is our intention. And with that, we are avoiding the bond annual coupon of EUR 20 million and being able to decrease our finance expenses, which is important for our net profit development going forward.
So when we look at the Q2 numbers little bit more in detail, the Q2 comparable EBIT margin was 8.8%. And clearly better than the comparable operating profit in Q2, 2019. And this despite the fact that in 2019, we operate it through the Russian airspace, our Asian network. So the Q2 revenue was EUR 749 million, comparable EBITDA at 17% level, roughly speaking, and comparable operating results, I mentioned EUR 66 million. I mean, when we decompose the number a bit, then we see that our sales efforts as well as our revenue management has been successful during the during the quarter. And all the strategic initiatives that we have been taking to increase the share of direct distribution in the past, improve the digital sales and marketing. Taking into usage advanced revenue management tools, they are visible in this number. The same applies to our cost management measures, despite the fact that the fuel in 2019 was on lower level.
Our operating costs are lower than back in 2019. And, as stated, the measures that we have been taking during the past years, as well as during the quarter are visible in the cost numbers improving our operating leverage. The result before taxes was EUR 44 million which is a good number in itself. But then given the fact that our longer-term profitability outlook has improved due to the successful strategy implementation, we also re-recognizing, writing back EUR 99 million of deferred tax assets, those deferred tax assets that we wrote down in Q2 of last year. And on the back of that our results for the period were EUR 139 million.
So as stated this is the fourth consecutive quarter of comparable, positive comparable operating profit. And when we look at the past 12 months, our comparable EBIT has been at the level of EUR 120 million. So with that we can clearly say that we have turned a corner in terms of restoring our profitability and we have turned a corner in terms of coming back to profitability on full year basis. And we expect the good profit development to continue as part of our guidance, we are stating that we expect the EBIT for this calendar year to land within the range of EUR 150 million to EUR 210 million, the midpoint there being EUR 188 million. As you would know, the Q3 is always seasonally the strongest in aviation and when we look at the bookings for Q3, we conclude that we expect that it will be a good summer, it will be a summer of busy travel and that is part of our expectations for the remainder of the year.
Looking into the cash position, we started the quarter with little less than EUR 1.6 billion of cash. There was strong operating cash flow generation of EUR 176 million. And during the quarter, we also started the repayments of our loans, repayment of pension premium loan, there the first down payment was EUR 100 million and the quarter ended with the cash balance of bit more than EUR 1.5 billion. The cash to sales ratio being 54% which is a strong number. The positive net result is visible in the balance sheet ratios. So, clearly the balance sheet ratios still need improvement and we will continue to work on that going forward, but the direction of development is the right one. So, equity ratio at the end of the quarter stood at 13% roughly, and the gearing decrease to roughly 150%. As stated, we intend to pay back the hybrid, the EUR 200 million hybrid in September and that will be having a negative impact to both of these ratios during Q3, but at the same time as stated, Q3 is always to see seasonally strongest and then the bookings for that quarter have been good.
So, that basically covers the quarter, but as stated in our profit warning, couple of weeks back, we are now in a situation where we can say that we will reach our previous profitability target of 5% EBIT from mid-2024 onwards 12 to 18 months ahead of time. And this means that we have been proceeding faster and better in our strategy implementation as we originally anticipated. And therefore, today we are increasing our mid-term target, our long-term profitability target to 6% by end of 2025. And we are also making selected evolutionary updates to our strategy. We have been having pretty much sole focus to improving our profitability during the past year. And now we can say that we have restored the profitability and that enables a bit more balanced approach for us going forward.
So, we will certainly keep our focus on improving profitability as witnessed by the increase of the target to 6%. But at the same time, we will be balancing the approach and we will be in addition to profitability, focusing more on customer satisfaction and employee satisfaction because we believe that they will be crucial in the long-term success of Finnair.
We have six strategic themes, customer centric commercial, and operational excellence being the first one, balanced growth enabled by optimized fleet being the second one, continuous cost efficiency to stay competitive. We maintain our focus to sustainability, we want to be among industry sustainability leaders, we maintain our focus to balance sheet. We want to build a sustainable balance sheet over time. And then as a new theme we are introducing adaptable thinner culture driven by engaged people. So when we take a bit deeper look into the strategy themes. With respect to customer centric, commercial and operational excellence, I think that we have accomplished a lot during the past years. As stated, we have been improving the share of direct distribution, we have been improving our digital sales and marketing, the product offering, taking advanced revenue management tools into use. And the next step, the next chapter of this will be that we will be focusing more on customer need and data driven retailing.
Instead of sales structure transactions, we aim to create more relationships with our customers across products, across customer segments. And with that, we want to drive loyalty. And we want to drive continuous customer engagement, also being able to ultimately monetize the loyalty. In order to do this commercially, we need excellent operations. We will continue our focus to safety and on time performance. And we will be increasing our focus and investing more in data and analytics to deliver smooth journeys and be able to deliver through operations, the more personalized offerings to our customers.
In terms of balanced growth supported by optimized fleet, here, the starting point of our thinking is that we have now optimized our fleet and on the back of the Qantas deal of two Airbus 330s, we are happy with the fleet that we are currently having. So going forward, we want to grow in line with the market. While we want to maintain the flexibility to rebuild the Asia, Europe connections. If one day in the future, there would be a peace in Ukraine and the Russian airspace would be open again. So growing with the markets while maintaining this Russian airspace option is part of our thinking. And the reason why we think that we can grow with the market with the current fleet is that we think that we have an efficiency possibility in terms of faster aircraft turnarounds, and improved aircraft utilization by doing small changes in our network and scheduling. And also, we have an opportunity to pull back some of our wet leased narrow body capacity. And together these three elements enable a cost competitive way for us to increase capacity and as stated to grow in line with the market. This would be also meaning a bit more employment, a bit more recruiting needs in Finnair during the upcoming period.
In terms of continuous cost efficiency to ensure competitiveness. During the past three years, we have been running, a program based cost resetting, basically adapting to the circumstances in our surrounding environment. Going forward, we want to increasingly move to continues yet more incremental improvements in cost efficiency, to stay competitive, versus all of our competitors, the network carriers and low cost carriers alike. And at the same time to make sure that through cost of efficiency over time, we have the possibility to invest in our customer offering and customer experience.
In terms of sustainability, we want to be among industry sustainability leaders as before. We are fully committed to reaching carbon neutrality by 2045, that being our strategic target in terms of environmental sustainability. And in doing so, we are now moving away from the use of offsets in favor of various types of measures that truly reduce our direct emissions. And while we are doing this, as communicated before, we are committed to science based targets initiative, and now what we will be doing is that we will be submitting our sustainability targets to validation by the science based targets initiative during the fall. And we expect that we get the targets validated early next year. So science based targets initiative being a global best practice in terms of carbon reduction, we think that this is a good step forward in our sustainability agenda. And we do acknowledge that over long term over time, this will be meaning increased investments to reduce carbon emissions by means of using for example, sustainable aviation fuels clearly more and investing to new aircraft and engine technology producing less carbon emissions.
As stated, we want to build a sustainable balance sheet over time through profitability, the re-recognition of the deferred tax assets we already covered. And the next step indeed, would be this payback of the EUR 200 million hybrid bond in September.
Finally, last but not least, adaptable Finnair culture, driven by engaged people is the last theme of our culture. And when we now look back, I think that we can conclude that Finnair has a huge strength in the adaptable culture of working together, I'm really proud of the way the whole Finnair team has been taking the company through the pandemic, adapting to Russian airspace closure, defining a new strategy and then implementing that strategy successfully to the extent that now we can announce the best Q2 result ever in the history of Finnair. So this adaptable culture of working together is something that we want to nurture going forward. And we want to strengthen even more going forward. And we acknowledge that stems from our people. So we will be increasing our investments to training, competence and capability development generally to wellbeing of our customers. And we believe that while doing so, that will be improving our customer experience and our profitability, hence the more balanced approach to strategy. As stated on the overall, an evolution of the strategy that we communicated in September last year, and selected updates to the strategy.
This brings me to the last page of the presentation, the outlook and guidance. In terms of outlook, we are reiterating our capacity guidance for the year, we estimate that we will be flying 80% to 85% of ASKs compared to 2019 level, we also reiterating our previous guidance in terms of revenue. So, we estimate that the revenue will be increasing significantly year-on-year, but will not yet reach the 2019 level and the range related to operating result. We are specifying that guidance and indicate a range of from EUR 150 million to EUR 210 million as I stated previously. And then we are reiterating the comments that I made early in the presentation in terms of the specific risks of our operating environment normalizing yet interest rate risk and inflation is still being on elevated levels. And as per usual, we will be updating our outlook and guidance in connection to Q3 during the fall.
So as stated a strong quarter from us. Best in Finnair history if we look at Q2, isolated and on the back of the successful strategy implementation, our longer-term outlook has improved. And therefore we are now in a position to make the selected updates to our strategy and increase our long-term profitability target to 6% of EBIT. I'll stop at this. Thank you.
Erkka Salonen
Thank you, Topi. Now would be a convenient time for any questions you may have. Please follow the operator's instructions to present them.
Question-and-Answer Session
Operator
[Operator Instructions]
The next question comes from Jaakko Tyrvainen from SEB.
Jaakko Tyrvainen
Good afternoon, gentlemen. And congrats on the strong numbers in Q2. Regarding the second half outlook, did not have a pretty good understanding how Q3 will turn out. However, have you, do you have any kind of early indications on the booking curve you see towards Q4? How does that compare to 2019? And do you have kind of a confidence that demand momentum will sustain in Q4? What are the key risks for that?
Topi Manner
Yes. Thank you for the question, Jaakko. I stated I mean, we have sort of statistically significant forecasting models, especially now for Q3, and that indeed looks to be good as you alluded to, then, the bookings further out in the curve for Q4 are still a bit more thin. Just the way the normal booking curve looks like. And therefore they are not statistically as representative as the sort of three month outlook. But certainly, I mean, if we look at the current bookings that we have currently, and if we compare that to second half of 2019. The booking curve looks pretty much similar. So, therefore, there are no sort of signs of weakness in the booking curve but we just acknowledge that the Q4 part of the booking curve is little bit less statistically representative. Kristian, I don't know whether you want --
Kristian Pullola
Yes, no, nothing to add. So, no indication that there would be any change. However, the normal booking curve is such that we only have a small number of bookings at this stage for Q4 and because of that, we need to be kind of holding our eyes open for how consumers in the end will respond to inflation and higher interest rates and in that sense choose to travel going forward.
Jaakko Tyrvainen
Thanks. That’s very helpful. Perhaps a follow up on that one, if the demand starts to kind of deteriorate from current strong levels towards Q4, do you have kind of room to adapt your capacity in order to keep the profits on a healthy level?
Topi Manner
I mean, when we look at the situation as it is, I stated there are these capacity bottlenecks in the overall aviation globally in Europe, and that also applies to our traffic. So, if we would have had the possibility to fly more during Q2, then we would have actually done that. Then again, the flip side of this is that the tight capacity sort of demand supply situation on the market, of course, is a good environment for revenue management. And that certainly is visible in the RASK development. So for the time being, I think that we can still maintain discipline, in terms of capacity allocation, even if the demand environment would turn into be a bit softer than it is today.
Jaakko Tyrvainen
Okay, good, thanks. Then my second one, regarding the strategic plan and the optimized fleet. We're going to be further down the road, do I ready you correctly that there are no near-term plans for fleet investments, excluding those agreed 350 that are coming in. And could you remind us about the oldest aircraft you have on your fleet, when it will be designed to kind of a replace those.
Topi Manner
So, I mean, the overall if we look at the growth prospects as stated in terms of our strategy update, we have now optimized our fleet and we are happy with our fleet and that includes to your point, the order book that we are having. So we still have two Airbus 350s coming up, one in late ‘24 and another one in Q2, ‘26. And we see a use case for these aircraft. So we are planning to take them to be part of our scheduled service going forward. So then we expect that we can grow in line with the market going forward by increasing the utilization especially of our narrowbody aircraft, with faster turnaround times, generally increased utilization, doing network and scheduling adjustments and then taking back some of the wet lease capacity into usage. So this is the sort of short to medium term agenda in terms of us being able to grow cost efficiently with our current fleet. Then looking a little bit further ahead, the narrowbody replacement with new technology is on our agenda. It's not actual right now, but when you consider for example, the age of our fleet on one hand and then the science-based targets for sustainability on the other hand, then they point to the direction that narrowbody replacement will be needed at some point of time. As stated, this is not the agenda right now. But eventually we will be coming back to this.
Jaakko Tyrvainen
Okay, good. Then on costs and maintenance costs, you mentioned that the lack of spare parts has prolonged the maintenance schedule there, probably explaining the decline costs in maintenance line, when should we expect the maintenance schedule to kind of be catch up? And will we see them elevated maintenance costs?
Kristian Pullola
I don't think it's that visible actually on the cost side, it's more visible on the amount of flying. So the fact that we were a bit soft on ASKs compared to ‘19 is maybe where you see the impact from slightly longer maintenance times. On the cost side, the fleet optimization is also optimizing to some extent the maintenance cost. We've bought back some leased aircraft, which allows us to optimize for maintenance cost also. So, I don't see this as something where we would somehow have higher maintenance cost, when there is a possibility to catch up and the tightness in the market doesn't seem to be going away anytime soon. So, I think this is a thing that we need to learn to work with over the quarters to come and maybe a bit back to the previous question, also the narrowbody fleet is working well, for us currently, it is getting older. The average age is a bit north of 20 years, but still these are aircrafts, where the operating lifecycle is 30 to 35 years. So, in that sense, there is still life in them. But as Topi said at some point of time, from a fuel efficiency point of view moving to new technology will be required, but we have time to plan for that. And in that sense, we also have time to see that the new technology matures, and from a maintenance point of view becomes cost effective.
Jaakko Tyrvainen
Okay, good. Then perhaps a final one, regarding the tax assets that you're kind of exploited in the P&L this quarter? Do you have still those assets in kind of a in your reserves? Meaning that I understand that you don't have to, from cash flow perspective, you don't have to pay taxes for some time, but can you still show positive taxes on the P&L going forward?
Kristian Pullola
Yes, so we booked now the approximately EUR 100 million of the deferred tax assets and in total, we had some EUR 160 million of them. So, there is still some EUR 60 million or so to be recognized if the current kind of profitability trend continues. And then when it comes to cash taxes, we now have a buffer for years to come. And in that sense the law says that the company has made over the past years will now then be used to do offset cash taxes for years to come.
Operator
The next question comes from Achal Kumar from HSBC.
Achal Kumar
Yes. Hi. Thank you, gentlemen, for taking my question. First of all, well done on this -- on for the strong results. So I, so first of all, going back to the yield, so your Q2 yields were up almost 35%, 36% versus the pre-COVID level. You mentioned that Q3 looks pretty strong, but I mean, how should we look at Q3 yields versus Q3, 2019. And how do they look like look like versus pre-COVID levels for Q3. And then in this, the performance in the second quarter yield, which you reported, could you please give us a bit of a color as to what was the underlying yield growth? If you need to compare apple-to-apple versus pre-COVID? How much of it was driven by Qatar operations? Or so if you could give us a bit of color on that, that'd be very helpful, please.
Kristian Pullola
Yes, I think first of all, so we are not guiding specifically yield development going into the Q3, I think we've given you quite many tools to assess our future performance on both in terms of how we see overall revenue development, as well as then giving a guidance range for profitability. So, again, as we said, we have better visibility into Q3, from a demand point of view, there are still tickets to be sold, we haven't seen any change in the demand for travel. And then, of course, going into Q4, as we said earlier there is less proof points, because we have sold less of the of Q4, which is normal at the time, it's really kind of when people come back from this vacation period when they start booking the following one. So say mid-August, we'll have a better view on how Q4 starts to pile up. But I don't know, Topi, on the drivers for yield.
Topi Manner
I think that you covered it well, the only thing that we have been probably saying related to yields previously is that we would be expecting the normal seasonal patterns of yield to apply. So that, of course, gives you some idea of Q3 as well.
Kristian Pullola
And I think if your second question was a bit on what drove yield in Q2, clearly the demand has been broad based, we see good demand for all of our business, including domestic business, and as a result of that, that is visible also in prices. And in that sense, I don't think there is a one single reason for the strong yield development versus ’19. And the Qatar deal by itself isn't kind of moving the needle on this one. So, it is a broad base development across the board, which is coming from also the fact that we are addressing the customers that we fly more directly and as a result of that we have been successfully managing revenue in the direct channel, which is then also visible in yields.
Achal Kumar
Right. The other one, I wanted to understand if you could please help on the, so you mentioned that you have come up with a different with a new product, like a light fare. So, is that the product you've launched on all of your network? Or is it just for the European network? What’s the status? And if that is the case, do you have any sort of long-term target for your ancillary revenue?
Kristian Pullola
So, the Superlight fare that we have now introduced during the course of the Q2 is only applicable to our European short-haul traffic. We do have light fares, and that are a little bit different from the Superlight fare that we apply in our long-haul part of the business as well. And this, yet again, comes back to our strategy of offering various travel classes, various fare types, to different types of customer needs ranging from very price sensitive consumers to affluent, premium oriented consumers, and everything in between.
Achal Kumar
Right. Any long-term targets for ancillary revenue?
Topi Manner
No, we haven’t disclosed any long-term target of ancillary specifically. But clearly, when we come back to our strategy updates that we just covered, the customer centric commercial and operational excellence is obviously zooming in on this part in particular, so I think that we have been taking significant steps forward in this agenda. And the next step really is the customer need and data driven retailing, also driving loyalty going forward. And in the loyalty partner business, we see that we are under penetrated at this point of time. So that would be an example of where we see upside going forward. So, we are very focused on driving upselling, meaning upselling of fare types, upselling of travel classes at this point of time, and we are very focused in terms of increasing the ancillary sales, and then we are proceeding well on that strategic agenda. And it is clearly contributing positively to the RASK development that we have currently. So to the 27% RASK increased that we saw in Q2.
Kristian Pullola
You could say that the long-term target is more.
Topi Manner
Yes.
Achal Kumar
Right, fair enough. Could you please also give us a bit of a color in terms of trading in different markets, and then how the competitive landscape looks like in those markets, please?
Topi Manner
Well, I mean, as stated, we have been seeing broad based good level of demand across our travel, travel classes. So that's good too, good to see. I mean, if I take a travel class by travel class, or travel category by travel category, in Asian traffic, the market has adopted it to Russian airspace closure in the markets like Japan, Korea, Hong Kong, Singapore, India, Thailand, there's level playing field. And even though the cost of flying has been going up significantly, also the yields levels have been going up significantly. At the same time, we see that European network carriers have not been deploying as much capacity to these routes as before, because they are also having these capacity bottlenecks that we alluded to, and they have profitable flying elsewhere, for example, in the Atlantic traffic.
So therefore, the profitability of the Asian travel, that traffic category for us, has been clearly a positive surprise. And we see high sustained yield levels there. When we talk about long haul, the Middle East traffic category, there the commercial agreement with the commercial partnership with Qatar Airways is working well. We have stability in our operations. But of course the seasonality of that traffic is little bit opposite to our own seasonality. So when interpreting the traffic numbers, you will need to take this into account. In the North American traffic category, I think that there we see probably the most competition at this point of time. There's quite a bit of competition in the Atlantic. Yet again, we are benefiting from the distribution power of our one world partners, American Airlines and Alaskan airline in the US markets. So on the overall we are happy with that travel category as well.
And then Europe and domestic included is performing well. So the demand for short-haul traffic, both to and from Finland has been strong and that clearly has been reflected in the yield levels.
Achal Kumar
But how does the competitive landscape look like in Europe market, European marketplace?
Topi Manner
Well, I mean, if we see look, look at the market share development in Helsinki hub, that is probably the most relevant number for us. We see a stable development of the market share. So the competition definitely is there. And we meet it every day. But market share wise, there has been, there has not been any big swing developments to one direction or the other.
Achal Kumar
Right. Fair enough. In terms of Asia, I think you rightly mentioned that most of the European carriers are still limiting to the capacity they are deploying in Asian markets. Now, of course the yield has been very strong, and that's why I think you have deployed the Asian, you deployed some capacity in Asia. But I mean, of course, tomorrow, of course, there's a clear risk of yields get normalizing. And in that situation, of course, in case the Russian market, Russian airspace remain close, then, of course, these operations will not be, really not be profitable. So, do we have any sort of anything in mind as to what will happen to your Asian operation? And where would you deploy that capacity in case these things happen, and then given that yield is so strong and then of course, the passenger will have an option to fly with Chinese carrier who have access to Russian. So how does the overall equation look like in your mind? Do you have color or thought process there?
Topi Manner
So I think that we need to divide this into two. So when, as started when we look at markets, like Japan and Korea, Singapore, these types of markets, there is a level playing field, and local carriers are going around Russian airspace, like the European carriers are going around Russian airspace, and we expect this situation to prevail going forward. So we expect there to be a level playing field also going forward, given the way the geopolitics is developing, given the way democratic nations in Asia and in Europe alike are responding to the war in Ukraine and the aggression of Russia on their world. Then, China is a different case, there is no level playing field. As we know, the Chinese carriers are flying through the Russian airspace. And they have a significant competitive advantage in the Chinese traffic. And that is probably the reason why many European carriers have been cautious in adding capacity to the Chinese market.
But at the same time, there has been slowness on the Chinese market in terms of how the government has been issuing new passports and visas to Chinese citizens. And therefore, the demand from the Chinese market to Europe has not developed as quickly as many anticipated during the springtime. The Chinese carriers, however, cannot sort of increase their market share a lot in the China-Europe traffic simply because of the fact that in order to increase capacity, they would need more aviation rights from European countries. And they would need more slot times from European airports. And none of that is up for grabs at this point of time.
Achal Kumar
Right, fair enough. In terms of capacity, just wanted to understand that you have guided to a capacity of 80% to 85% for the full year, if we normalize it for the increased stage length towards Asia, how the underlying capacity would look like versus pre-COVID levels?
Kristian Pullola
We've said that if you adjust it, it's approximately 15% higher.
Achal Kumar
Sorry, 15% higher in terms of –
Kristian Pullola
The ASKs would be approximately 15% higher if you would use actual flying distance.
Achal Kumar
Okay, so this 80% to 85% is for the adjusted one, right?
Kristian Pullola
No, the 80% to 85% is calculated using the great circle distance.
Achal Kumar
Okay, understood, fair enough. I'm sorry. My last question is about the growth. So basically, at the moment you're not looking at ordering any fresh narrowbody aircraft. So now for the next two, three years, I mean, of course you you’ve achieved load factor of already 76%, so how should we assume the growth coming forward? I mean, the yields are very strong at the moment, but of course, the yields could start normalizing. So on one side, probably while you're increasing the load factor, the yields could decline. So, what sort of growth are you thinking? I mean in terms of the revenue, of course, you mentioned the 6% rate margin, but in terms of revenue growth, how are you expecting the growth over the next three years, four years, please.
Kristian Pullola
So, again, we haven't guided on revenue growth, the only thing that we've said as Topi mentioned was that we do see that we can grow with the existing fleet. We can fly the existing fleet more efficiently by turning around the planes for example, quicker having schedules that accommodate more flying. So there is growth to be achieved with the current fleet. In addition to that, we also have the four narrowbodies with British Airways, which we can take back and use for own flying and as a result of that, we do see that we can grow with the market.
Topi Manner
And to go back to your earlier question about ancillary sales. As stated, this customer centric commercial and operational excellence focus area in our strategy means that we will be focused on next generation of retailing, including loyalty, and therefore, we would expect that our revenue actually can increase more than our capacity going forward.
Achal Kumar
Okay, just a clarity, how many aircrafts have you placed with Qantas?
Topi Manner
Two Airbus 330.
Operator
The next question comes from [Yonus Elvenen from Evely.]
Unidentified Analyst
Hi, it's Yonus from Evely. Congratulations with respect to the results. I also have a question related to your comments about the upcoming winter season, perhaps from a more qualitative perspective. So do you see any notable consumer travel trends or themes for example, the life music industry has been generating many headlines recently that seems to be one hotspot which is also affects travel demand. So do you see any of these kinds of themes or issues that might be sustaining your favorable volume development going forward?
Topi Manner
Yes, thank you, Yonus for that. So I think that perhaps the sort of most important qualitative insight to this one would be related to the winter travel to Lapland. Last winter, probably was the first winter when Lapland clearly benefited from the situation that Lapland can offer guaranteed snow whereas Alps potentially cannot go forward due to the climate warming that was visible in the in the ski travel to Alps last winter, and then most likely, that will be continuing to be visible also in the winters to come. So, this is something that we clearly experienced during Q1 of this year. And we expect that will be visible also during the course of next summer. Then generally, I mean, if we look at things a bit on the long term. I mean, the global warming is of course, very, very unfortunate. I think that over the long term, there's a possibility that will be improving the attractiveness of Finland also as a summer travel destination, given the beautiful nature but also the sort of agreeable temperature during the summer months in Finland and the Nordics as opposite to the heat waves that are currently being experienced in parts of Europe.
And then I mean, the third one worthwhile to mention that this goes relatively close to your point about live music is that generally we see a trend of customers moving from consumption of goods to consumption of services, and within the category of service consumption, the consumption of various kinds of experiences, be that live music or be that restaurant and hospitality or be that travel is increasing. So, clearly on the back of the pandemic, consumers are prioritizing these kinds of experiences more, and they are prioritizing the spend to the services more and these are partially mutually reinforcing. So travel to live concerts in various countries support also the travel demand. And I think that is also sort of consumer behavior trend that will be supportive of travel demand.
Kristian Pullola
And I think if you then add on top of that, the fact that out of the traveling, frequently traveling customers, many are in roles where hybrid work has grown in proportion, which means that every week is a potential long weekend from a travel point of view that will also then most likely kind of further emphasize the fact that more services, more experiences and through that more travel versus then buying goods.
Operator
The next question comes from Pia Rosqvist-Heinsalmi from Carnegie Investment Bank.
Pia Heinsalmi
Hi, Topi and hi, Kristian. I got four questions, if I may. And starting by just checking your comments regarding the prolonged maintenance schedules, and there or its impact on cost. So the cost level will see now in the second quarter, would that be a normalized level going forward?
Topi Manner
Again, I think as we said, we did have some more downtime because of prolonged maintenance schedules, because getting spare parts at the moment is trickier than in the past. I don't think there is a kind of a new normal here or anything, the only point we are making is that it was not a big driver for somehow a lower cost level in the quarter. The level of activity in general will be driving maintenance cost also going forward.
Kristian Pullola
And of course, there are all always sort of certain sort of maintenance events that can then occur. So, there will always be a degree of volatility in the maintenance cost going forward, just driven by the nature of the business.
Pia Heinsalmi
Clear, thank you. Then the second question is regarding your agreements with Qantas. So can you somehow quantify now the impact on your income for say the full year ‘24 and then ’25?
Topi Manner
Well, we are not disclosing the details of that agreement. But suffice it to say that we have been very sort of diligent in terms of driving our strategy and all agreements and all measures that we have been taking the Qantas agreement included, we have been viewing through the lens of our strategy implementation using those financial criteria.
Pia Heinsalmi
Okay, thank you. Then a question regarding the new financial targets set for the end of 2025. If I recall right before the pandemic broke out, you had a newly launched target over reaching profitability over 7.5% over the cycle. So for you to come back to such a level, what would be required, I mean, in addition maybe to the Russian overflight rights to be, again, possible.
Topi Manner
As stated, we have been moving forward well in our strategy implementation. So basically, we have been faster and better in implementing our strategy as we originally anticipated. And due to that, we are now able to increase our profitability target to 6% by end of 2025. We have shown that it is possible to adapt to the closure of Russian airspace to the extent that we did not think that was possible before. And when we have taken long and hard looks to various parts of our operation, both related to revenue as well as cost, we have found new possibilities, and we have been able to capture those possibilities. So personally, I think that in the retailing space, including loyalty, we will be having a lot of new opportunity to further penetrate the customer base, find relevant offerings to our customers, the kinds of offerings that customers are willing to pay for. And when we combine that with the fact that we can increase our capacity, cost efficiently by increasing the aircraft utilization, faster turnaround times, pulling back the aircraft to our own use, we can also increase the passenger numbers.
So this combination will be key for us boosting the revenue and thereby profitability going forward. And if we are successful with that agenda, then I think that there's some further upside possibility in that.
Pia Heinsalmi
Great, thank you. Then a clarification regarding your plan to call the EUR 200 million hybrid bond in September. So just to clarify, is your plan to now to I mean, call it back and not issue a new one? And maybe then continue still on your comments regarding your longer-term ambitions and the need to renew the narrowbody fleet. So would it be a proper time to do an equity race to strengthen the balance sheet then sustainably now or then later?
Topi Manner
So first of all, I think we have now shown how we can improve the balance sheet over time by focusing on profitability. And as a result of that, we've now put ourselves in a position where we can call the bond without having to refinance it. So to your first question, we don't have any plans to refinance the hybrid, we will use existing capital and existing liquidity to do that. And then when it comes to how will we further strengthen the balance sheet from here, we will continue down the course that we've started, which is focusing on profitability and through that improving the balance sheet to retain earnings and thus setting ourselves up to be in a position to invest for example, in a narrowbody fleet down the road. As we've said earlier today, we don't see that that's an imminent need. We have a fleet which is on average 20 plus years and the fleet still have some 10 plus years of life in it.
Operator
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Erkka Salonen
As we have no further questions, it's time to conclude the call. So many thanks for the excellent questions and joining the call. We wish you a great day.
Topi Manner
Thank you. Thank you for joining. Enjoy the summer.
For further details see:
Finnair Oyj (FNNNF) Q2 2023 Earnings Call Transcript