Finnair (FOY; NR/BB+ S) 2Q Results (3m to June)

A planned 10% capacity increases paired with subdued demand is driving load factors down. Add-on airfares that are falling faster than costs - it's leaving FY EBIT guidance down -2 to -40%yoy. It will increase BS leverage, but it is sitting on a healthy cash pile - some of which it used to paydown pension and lease liabilities this quarter.

Reminder 2-notch uplift for Finland Government's (Aa1/AA+/AA+) 55% ownership with CoC at par (29s at €99.2). We maintain a cheap view on the line, mainly on RV, with mids at Z+220/B+260. Please scale risk for single carrier and bordering Russia tail risks.

• 2Q revenue at €766m (+2.3%) with 3m passengers (+5.4%) more than matched on capacity increase of +8.4% (ASKs) including wet leases. Left load factors at 74.7% (-1.6ppt). Ticket prices were down -4%yoy and drove unit revenues down -3.9%. Unit costs fell -0.6%.
• Its attributing headline increase (yoy) to ancillary revenue €45m (+34%) and cargo at €51m (+9%). Passenger revenue was flat at €614m.
• By region traffic was 46% Europe, 33% Asia and 12% NA - similar split in capacity and revenue. Domestic was ~5%.
• Adj. EBITDA was €126m (-15%) at 16.4% margin (-3.4ppt). Adj. EBIT was €43.6m (-34%) at a 5.7% margin (-310bps). Reminder it targets 6%...which leaves it bottom of the pack. Operating expenses increased due to capacity growth - margin still contracting despite net of hedging unit fuel prices were lower yoy. Jet fuel is holding flat this quarter {JET1NECC Index; 820}.
• Cash flow from operating activities was €173m and benefited from +€64 WC inflow (seasonal), Net of €50m in gross capex and of loans/lease paydowns totalling net €160m it left cash little changed at €966m.
• Gross debt came down on above paydowns to €1.9b leaving net at €909m. Assuming a -16% fall in FY24 EBITDA to €400m (see guidance below) it will be levered 4.75x/2.3x.
• 42 aircraft including future orders under ownership totalling €1.7b (24 leased).

• Reiterates capacity increase guidance for FY of +10% (incl. wet leases) - mainly coming out of Asia and Europe.
• Revenue guidance now given at €3-3.2b (unch to +7%yoy) and adj. EBIT €110-180m (-40% to -2%yoy).* 3Q results come in October, FY guidance subject to revisions then.

• It has pulled (clean up call) the remaining €61 (of €400m) untendered 25s at par (+0.4pts). €500m 29s are the single remaining bond.