Fleet Reliability Agreements And 10% Capacity Expansion Will Drive Operational Efficiency

Key Takeaways

• Finnair's capacity expansion and fuel-efficient aircraft investments aim to boost revenue growth and improve net margins.
  
• Strategic growth in ancillary sales and potential route efficiencies offer opportunities for higher earnings despite industrial challenges.
  
• Rising costs, industrial disputes, and declining ticket fares may negatively impact Finnair’s revenue, net margins, and long-term performance.

Catalysts

Operates in the airline business in North Atlantic, Asia, Europe, Middle East, and internationally.

• Finnair plans to increase its total capacity in terms of Available Seat Kilometers (ASK) by approximately 10% in 2025, which is expected to drive revenue growth as more capacity can accommodate increased passenger demand.
  
• The company anticipates a potential positive impact on costs and route efficiency if Russian airspace overflights are reinstated, which would reduce flight times and create opportunities for redeploying planes on other routes, improving net margins.
  
• Finnair is seeing growth in ancillary sales, which aligns with its commercial strategy and indicates potential for higher margin sales, thereby improving overall earnings.
  
• The renewal of the narrow-body fleet is in progress, and investing in more fuel-efficient aircraft could reduce operating costs and improve net margins over time.
  
• Despite ongoing industrial action, the company maintains a healthy cash balance and continues to see strong demand for its summer season, suggesting resilience in revenue growth despite current disruptions.

Finnair Oyj Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Finnair Oyj's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 2.7% in 3 years time.
• Analysts expect earnings to reach €97.5 million (and earnings per share of €0.48) by about June 2029, up from €60.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €116.5 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.9x on those 2029 earnings, down from 17.3x today. This future PE is lower than the current PE for the GB Airlines industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.11%, as per the Simply Wall St company report.

Risks

• Rising costs, including a €10 million increase in environmental compliance costs and another €10 million in sustainable aviation fuel and ETS costs, may reduce net margins.
  
• Industrial action, leading to €22 million in costs, along with lost revenue and disruptions, negatively impacts both revenue and net margins.
  
• The decline in ticket fares of 4.6%, particularly due to a double-digit decrease in Middle East traffic, may reduce overall revenue.
  
• Increased traffic and landing charges, along with higher maintenance costs, have led to an 8.4% increase in operating expenses, potentially reducing earnings.
  
• The absence of a resolution to industrial disputes, notably with pilots and cabin crew, could further harm Finnair’s performance and reputation, impacting long-term revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €3.43 for Finnair Oyj based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €3.8, and the most bearish reporting a price target of just €2.9.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €3.6 billion, earnings will come to €97.5 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 11.1%.
• Given the current share price of €5.06, the analyst price target of €3.43 is 47.4% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.