Finnair CEO Sees Cash Flow Funding $4.5 Billion Fleet Plan

(Bloomberg) -- Finland’s national carrier Finnair Oyj is starting its next big round of investments: as much as 4 billion euros ($4.5 billion) on modernizing and expanding its narrow-body fleet of aircraft to fly between European cities.

The investment comes on top of 2 billion euros spent over the past five years on transforming Finnair’s long-haul fleet to boost fuel efficiency, and in the process cut costs and emissions.

Chief Executive Officer Topi Manner says the extra spending will be covered by the company’s strong cash flow. Finnair is currently mostly an Airbus SE-operator and recently announced plans to expand the fleet by about one-fifth to 100 planes.

Manner says Finnair will generate more cash as it increasingly relies on digital technology and automation. In an interview on Wednesday, he also said fuel efficiency is high on the airline’s list of priorities. At about a fifth of total operating costs, it’s Finnair’s biggest single expense.

“With this focus we think we can also improve both profitability and cash flow generation and thereby be able to finance our planned investments,” he said.

Finnair has about 1 billion euros in cash. It expects to generate about 3 billion euros in ready money over the six years needed to revamp its short-haul fleet. (The company also aims to use at least a third of its earnings per share on dividends over an economic cycle, which has left some analysts wondering whether the goals are compatible.)

Manner, who was an executive at Nordea Bank Abp before becoming CEO at Finnair, says he will ensure the balance sheet stays “healthy.” That entails a closer look at borrowing costs, he said.

“We are getting ready to refinance and reduce the amount of hybrid debt,” Manner said. “We continuously optimize our balance sheet structure.”

Finnair’s 200 million-euro perpetual hybrid bond has a coupon of 7.875%, and its 2022 senior unsecured notes pay 2.25% a year.

“It is critical for the company to succeed in improving its cash flow in the coming years in order to finance dividend payments and redeem hybrid debt,” Inderes Oy analyst Antti Viljakainen said.

Aviation leaves a hefty climate footprint, but Manner says Finnair has a number of improvements planned. New short-range aircraft will cut its emissions in European traffic by 10-15% and the airline is exploring bio-fuels. It’s also looking into various ways to offset its carbon footprint.

At the same time, Manner says Finnair wants to increase revenue by adding more frequencies to Asia’s largest cities. He also sees a “robust” Chinese market with “a lot of new demand.”

For transporting cargo, the U.S.-China trade war has resulted in a somewhat bleaker picture, with Finnair bracing for slower growth in its main markets, he said. The latest ceasefire in the dispute buoyed cyclical stocks on Friday, Viljakainen at Inderes said. Among them is Finnair, which rose as much as 5.8%, the most since June.

--With assistance from Christopher Jasper.

To contact the reporter on this story: Leo Laikola in Helsinki at llaikola@bloomberg.net

To contact the editors responsible for this story: Kati Pohjanpalo at kpohjanpalo@bloomberg.net, Tasneem Hanfi Brögger

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