Slump in aviation not slowing Finnair investments

First of new Airbus planes delivered last week

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The economic slowdown, which has reached nearly historic proportions in commercial aviation, has not yet led to changes in plans by the Finnish airline Finnair to modernise its fleet of aircraft.
      Finnair’s investment plans continue to be close to EUR 2 billion.
      On Thursday evening, the first of Finnair’s new Airbus A330-300 planes landed at Helsinki-Vantaa Airport.
      The wide-body twin-engined plane, which carries 42 passengers in its business class and 229 in economy, is to replace the ageing MD-11 aircraft on routes to Asia and New York. The longest route to be flown with the A330 will be between Helsinki and Osaka, with a flying time of nearly 11 hours.
      The new model will consume nearly five tonnes less fuel on the same route than Finnair’s other new long-haul aircraft, the A340.
     
This year and next, Finnair is to take delivery of eight A330 planes, at a cost of EUR 400 million this year and EUR 300 million in 2010. The next phase in fleet renewal comes in 2014 - the A350, which still exists only on the drawing board.
      Finnair decided on the investments a couple of years ago, when things were looking bright in the aviation industry in general, and with Finnair in particular. Since then the sector has plummeted into an unprecedented slump, with airlines recording losses in the billions, and with Finnair itself seeing a sharp decline.
      “The first quarter will be clearly in the red", says Lasse Heinonen, Finnair’s CFO and Senior Vice President.
      Although the company’s profit, which was a cornerstone of the planned investments, has collapsed, Heinonen says that the fleet investments are to be implemented, as decisions on such investments are not made on the basis of one business cycle.
     
The main reason for going ahead with the investments is that the defence of market share is a key aspect of Finnair’s strategy, which requires input into service, which will not succeed without modern aircraft. The new models are also more fuel efficient, and put out less emissions.
      The financing of the investment nevertheless needs to be re-examined. As capital from the company’s own business is drying up, the proportion of borrowed money is growing, at a time when credit is increasingly difficult to come by - at least under reasonable terms.
      In such a situation, leasing aircraft is very tempting for an airline. Finnair’s original plan was to lease half of its new planes, but this option is being reconsidered.
      Heinonen says that the leasing fees of new aircraft have grown by more than 20 per cent. Therefore, the new A330 has been bought and not leased, as was originally planned.
     
Leasing companies, which require considerable capital, are having a difficult time. The US Federal Reserve had to bail out one of the largest of these, ILFC, which was having big difficulties in refinancing. ILFC is part of the infamous insurance giant AIG, and Finnair is one of its customers.
      Heinonen says that Finnair has had to seek new sources of finance. The company has the option of borrowing back EUR 400 million in work pensions, and it has received a promise of credit from the European Investment Bank. Airbus is not willing to directly finance the buyers of its aircraft.
     
Cancelling the order of the eight planes scheduled for delivery this year and next is difficult in Heononen’s view, no matter how low the economy sinks. The order of the A350 was made under such generous terms from Finnair’s point of view, that the airline would not easily cancel it.
      The decision to buy new aircraft is linked with the seven Boeing 757 aircraft now being used for Finnair’s leisure flight operations, whose leasing contracts with ILFC end in a year.
      Heinonen says that Finnair must decide by the summer whether or not to continue the contracts, or to use some other aircraft to fly its leisure passengers to holiday destinations. Finnair is also considering the possibility of using the same planes flexibly for scheduled, or leisure flights. This has been the more common procedure for the company over the years than the present one, in which leisure flights use a separate fleet.


Previously in HS International Edition:
  Finnair cuts over 120 jobs (16.1.2009)
  Finnair to lay off its entire cabin crew staff for two weeks as cost-cutting measure (3.12.2008)
  Finnair CEO denounces price dumping by competitors (8.8.2008)
  Finnair to add three weekly connections between Helsinki and New York (18.3.2008)
  Temporary layoffs for 700 Finnair pilots (16.3.2008)

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