Finnair keeps its eye on the Philippines

Finnair's future lies in Asia

February 16, 2009

Helsinki - Nordic airline Finnair Oyj (FIA1S.HE), Finland's national airline, keeps its eye on Manila and the rest of Asia despite the global financial crisis and the global decline of international passenger traffic from Europe.

The Philippines allocated four flights per week between Manila and Helsinki in its first Bilateral Air Service Agreement with Finland in October last year. However, the Philippines refused to give Fifth-freedom rights from Manila, its intended destination. It opened Clark instead to any point in Asia. This put Finnair's plan in limbo as it ordered aircraft that is not capable of flying direct to Helsinki.

In December 2005 Finnair made the biggest investment decision in its history with more than one billion euro commitment to acquire long-haul Airbus aircraft. The airline continues its modernization of the wide-bodied fleet in 2009 with the acquisition of five new Airbus A330-300 long-haul aircraft and in 2010 with the acquisition of three more. It just converted its A340 order to the A330 series last year making its service to Manila more difficult. All its A340 fleet are far east bound.

The destination as a leisure route is not however remote as they intend to operate flight this year. It may have to lease another A330-200 from XL Airways just to serve the route. Other Leisure Flights long-haul destinations include Phuket in Thailand, Vietnam, Penang in Malaysia, India, the Caribbean and Brazil as well as Fort Lauderdale in Florida.

The Airbus A330-200 will allow non-stop flights from Helsinki to Manila. The aircraft has a total of 328 seats, of which 42 are in Comfort Class located in the front section, and 286 in Economy Class. The leased aircraft delivers a very high standard of passenger comfort; the seat spacing in Economy Class is 32–33 inches (81-84 cm) and in Comfort Class 38 inches (96 cm).

Philippine Airlines on its part has said that it is not keen on reviving European routes for now because of stiff competition from state-subsidized Middle Eastern carriers.

Finnair President and CEO Jukka Hienonen said "We still believe in our Asian strategy. This is our lifeblood in the coming years. Even in the most difficult of times, we cannot concede our place as one of Europe's most significant Asian operators. Our task is now to adjust in order to put our profitability on a sustainable basis. " The carrier just announced a 9.5% reduction in its network and a range of layoffs, furloughs and personnel expense reductions aimed at maintaining financial health. However no fleet reductions are planned this year.

Traffic numbers from Nordic countries to the Philippines proved too good to ignore, almost accounting to half of Europe's total visitors count to the country. A report from Europe Tourism Attaché Domingo Enerio III, head of the Philippine DOT office in London recorded that tourist arrival breached the 40,000-barrier for the first time in 2007. The figure exceeded earlier expectations and raised hopes that it could breach the 50,000 mark in 2008. Overall, tourist arrivals in the Philippines for 2007 rose 8.7 percent from the previous year to a record 3.09 million, as the country positions itself to become a major travel destination in Asia. Tourist arrivals for the first ten months of 2008 to the Philippines recorded an all time high of 2,607,118 visitors which is a 4 percent growth over the same period last year.

The Philippine market turns out a surprise in 2008 registering positive growth of 4% despite the economic slowdown while the rest of Asia reported negative trends. Amsterdam based KLM already capitalized on the market by fielding its new triple seven on daily basis and as the only European carrier, has registered more than 80% load factor of its EU flight despite the market downturn.

Hienonen when asked if his airline can survive in the current market said that its getting difficult and the only strategy left is connecting Europe to East Asia via Helsinki. He further said that "the natural growth of Asian air transport is 7-10 per cent per year, according to all available forecasts. We do not believe that even possible crisis or economic disruptions will change this overall picture over the long term".

Finnair last week reported a fourth-quarter operating loss of 60 million euros ($77.5 million) and it does not expect the flexibility to remain stable during the current market downturn. Finnair was €2.1 million ($2.7 million) in the black through the first nine months of 2008. In Asian scheduled traffic, Finnair cut capacity by 8 percent in January, resulting in a less than 2 percent increase in traffic figures. "To date we have kept our aircraft reasonably full of customers, but the price level has fallen as costs have risen,” says Jukka Hienonen.

According to a recent UBS Investment Research , among Europe's 13 largest carriers, only two carriers had increased the number of available first-quarter seats for long-haul operations. Iberia and Finnair are showing overall increases, with BA, Lufthansa, Air France-KLM and Alitalia each showing overall decreases. Carriers that made particularly sizable cuts include Alitalia, to Asia and the Middle East (down 38 percent and 32 percent, respectively); British Airways and Lufthansa to South America (down 10 percent and 8 percent, respectively); and BA to Asia (down 8 percent).

Finnish carrier's Asian strategy has made Finnair one of the largest airlines utilising the Siberian airspace. And the airspace utilization does not come cheap. The relatively small Finnish national airline recompenses Aeroflot around EUR 20 million per year, nearly a tenth of the entire annual European Airline dues. The sum could have been used to ease its severe profitability pressures.