With its gradual privatisation and firm focus on being a successful niche carrier, Finnair sees only benefits in Finland's entry into the European Union. Sara Guild visits Helsinki.

The special gifts that might be expected to come with being the official carrier for Santa Claus since the 1980s have done little to help Finnair in the face of recession and the downturn in the airline industry. Like every other carrier in the world, Finnair has had to struggle hard over the last few years to achieve a return to profitability and maintain its traffic.

Today, however, Finnair is one of that rare breed in Europe - the profitable flag carrier. Perhaps it is not surprising that senior management has steered a clear path on the road to recovery - the Finns are known for innovation and organisational skills. In response to the annual infestation of mosquitoes, some enterprising Finns recently held a mosquito killing contest until environmentalists protested about the rights of the bloodthirsty insects.

Finnair's lifeblood is money and quick action was needed to reduce costs and improve profitability, when the carrier lost money for the first time in 1991. In 1991-4 a group staff reduction of over 1,600 people - more than 14 per cent of the total - cut personnel costs by some FIM265 million ($58.2 million). Further savings came from a freeze on nominal salary increases and an alteration in the pension benefits scheme.

The financial belt-tightening paid off and dividends to shareholders resumed following a group net profit of FIM145.8 million ($32.1 million) in the year to 31 March, 1994 on revenues of FIM5,892.1 million. The half year results of the fiscal year ending 31 March 1995 showed a profit before tax of FIM298.9 million, up from FIM95.3 million in the same period the previous year.

Secure future

Meanwhile Finnair's recent share offer was fully subscribed to the tune of 12 million shares, raising FIM400 million ($87.8 million). The money from the share issue strengthened the balance sheet while decreasing debt with the prepayment of one loan. In the current financial year the carrier expects equity and reserves to jump from 21.6 per cent of capitalisation to 35 per cent.

The issue increased foreign investment in Finnair to 16 per cent and has left the government with 60.7 per cent, which could go to 57.5 per cent if outstanding bonds in the hands of private investors are converted.

The government could eventually reduce its stake to 50.1 per cent but with elections in May nothing is likely to change immediately, though chief financial officer Henrik Arle does not rule this out for the future.

Finnair's success in raising funds in this manner clearly demonstrates its ability to convince potential shareholders its financial future is secure. The reasons lie in the carrier's decision to take cost cutting measures three years ago, while many other European flag carriers seemed content to watch the losses mount and assume state subsidies would be forthcoming if needed.

So how did a mid-sized carrier of 9,700 employees situated on the periphery of the European Union, which only received third package rights last July, manage to move into profit in 1994 when some carriers were only just beginning to grapple with their financial problems?

The answer lies both in the carrier's relentless pursuit of profitability, its raison d'être, and in the exploitation of niche markets. 'We do not try and do not want to be one of the global airlines. The question is, what is a niche and what is our niche?' says president Antti Potila. In fact there are several niches being exploited by Finnair, helped by the carrier's geographical position on the outskirts of Europe.

Ironically, it has been Finnair that has made the most of the much-heralded third package freedoms in Europe. Some routes were already operated with restrictions under the second package and full third package rights were granted on 1 July, 1994.

The establishment of a hub at Stockholm/Arlanda allows Finnair to serve Europe's so-called secondary cities such as Milan, Stuttgart, Oslo, Berlin and Manchester, with an economical fifth freedom stop. Geographically, Stockholm is already on the flight path to Europe, allowing an easy stopover. The same is not true for competitors wishing to set up a base in Helsinki. Thus liberalisation is a very big plus with few drawbacks. 'We have always supported liberalisation [in Europe] because we have more possibilities than we have threats,' says Potila.

The Stockholm-Helsinki route has always been important, and 25 per cent of Finnair's total seat capacity is on flights in and out of Stockholm. The use of fifth freedoms accounts for over a third of Finnair's Stockholm-Helsinki traffic.

Gap in the market

Strategically, Finnair says it is not interested in taking on SAS head to head on Europe's trunk routes. 'We will expand to second cities in Europe,' says Eero Ahola, vice president operations abroad. 'That is how we cultivate the free skies in Europe: we can get the fifth freedom traffic and there is a gap and demand in the market.'

Finnair also capitalises on the position of Helsinki/ Vantaa to serve as a gateway for US travellers to the Baltic and Commonwealth of Independent States. Russia is the main CIS market, since Finnair has long been the number one carrier for US travellers to Russia. Traffic originating in Russia and paying hard currency is growing at an annual rate of 30 per cent.

The Baltic region will come on line more slowly, but the potential is not to be sneered at. 'We can expect that in the next 10 years there will be new flight revenue worth $2 billion from the Baltic region,' says Ahola. 'This is a long-term investment. You cannot invest for just two or three years.'

Helsinki is also a gateway to the high yield business markets of the Far East, although growth is restricted by the bilaterals. In addition to its Tokyo service, Finnair will begin a twice weekly service to Osaka in mid-April. The Chinese market is also expanding quickly with Chinese originating traffic increasing at the rate of 30 per cent a year. Perhaps even more telling is that load factors on the Beijing-Helsinki route are up to 80 per cent. Shanghai would also be a welcome destination but obtaining rights is a problem.

Special interest groups

Business traffic accounts for 35 per cent of Finnair's total volume and, in addition to the high yields of the Far East routes, Europe is likely to provide further business travel growth. With Finland's entry into the European Union, Finnair expects business and leisure travel to EU destinations to increase by 2 to 3 per cent.

Finnair has also 'branded' itself as a carrier that caters to special interest groups, offering tailored overseas tours to Finnish travellers through its network of travel agencies. One example was a tour organised to China for Finnish doctors wishing to learn more about acupuncture. The carrier can also make arrangements for local groups to hold conferences or events in Finland.

'This type of direct approach is a clear indication of a niche carrier. Special interest traffic - sports, cultural, hobby - is very important and is created through sales work. If we do that properly then we have the customers that other airlines are not interested in,' says Ahola. 'Their economies of scale mean that below a certain line they are not able to compete for these niche markets,' he adds. Special interest markets account for 20 per cent of the carrier's total volume, with ethnic travel or visiting friends and relatives accounting for a further 25 per cent.

Domestically Finnair, with its subsidiaries Karair and Finnaviation, controls most of Finland's internal routes and, although independent Air Botnia operates some routes, this is done in cooperation with Finnair. The two subsidiaries have all but merged and provide the feed for Finnair's international traffic from Helsinki. Fares on these domestic routes are low, however, which makes it unlikely that European competitors will ever attack Finnair's own backyard.

The carrier's charter operation makes good use of the widebody fleet, carrying Finnish traffic south in the cold winters and serving the transatlantic market, which is strongest during Finland's summer months. The charters are primarily to the Mediterranean, the Canary Islands, Singapore, Bangkok and the Caribbean.

Finnair's alliance with Lufthansa helps it to pursue this selective and profitable niche strategy, while continuing to offer 'global' coverage. However there is a possibility that Finnair's 'favoured' status may be usurped by rival SAS, which is said to be talking to Lufthansa as it reviews its strategic alliances.

Limited options

'We of course try to convince Lufthansa that the cooperation with Finnair is something they need, but being realistic we understand there may be attractions somewhere else too,' says Potila. 'We are a small airline and business is business.' Potila says Finnair would be interested in participating in a three-way cooperation, as he recognises the options for Finnair are limited.

Currently Finnair's cooperation with Lufthansa includes joint venture flights on some routes and block space agreements on Helsinki-Berlin, Stockholm-Berlin and Stockholm-Stuttgart. The two carriers also share frequent flyer programmes.

In addition to the global reach offered by Lufthansa, Finnair is using alliances to fortify its 'home market' of Scandinavia. Currently Finnair has arrangements with Transwede, which shares terminal two at Stockholm/Arlanda with both Finnair and Lufthansa, a move which further strengthens Finnair's identity at its secondary hub. Finnair also cooperates with Danish carrier Maersk Air and Norway's Braathens. Finally the carrier has route-specific agreements with carriers such as Air Canada and Air China.

Reducing employees, a low wage structure and a restructuring of pension benefits were all important in reducing costs. But Finnair also managed to counter losses on the domestic and charter operations, which were especially hard hit with the downturn of the Finnish economy, by leasing out surplus aircraft during the recession and carrying out third party maintenance.

Employee numbers fell from a peak of 11,396 in 1991 to 9,531 at the end of 1994, and a recent report by SG Warburg Securities says Finnair's salary costs per employee put it ahead of market leaders British Airways and KLM. However CFO Arle is wary of comparisons, saying similarities can mask significant differences. And the carrier is careful of becoming complacent. 'We are very pleased and satisfied with what we have done, but the most important message is that we are not going to just rest and be satisfied. There are certain areas where productivity needs to be improved,' says Arle.

These include better utilisation of the narrow-bodied fleet and more efficient planning of crew schedules, says Arle. One of the biggest savings came from a reduction in the pension liability through a cut in voluntary additional pension contributions. The loss in benefits to employees was offset by an increase in retirement ages. A further incentive for employees was the promise of a total company bonus of up to FIM50 million, which Arle says the carrier will pay at the end of the 1995 financial year.

Finnair's policy of leasing out some of its fleet during the recession enabled the carrier to generate revenue while maintaining flexibility for the upturn that was sure to come. 'It has suited us well to do this [leasing] with our maintenance capabilities,' says Arle. 'We are the right type of lessor for charters and startups. We offer aircraft, maintenance and pilot training.' In 1993-4 leasing brought in FIM200 million, or around 5 per cent of revenue, while third party maintenance accounted for a further 5 per cent of total revenue.

Longer term, the proceeds of the recent share offering will be used to pay for the fleet renewal programme. The carrier has recently announced it will replace its 17 ageing DC-9s with three to five year old MD-80s. The carrier estimates it will spend FIM1.7 billion on the replacement and modification of the MD-80s, which could come from Swissair.

One area left intact during the restructuring was Finnair's network of travel agencies and tour operators and its three hotels. Potila says there are no plans to sell, though Finnair would be interested in a partner for its hotels in Helsinki and Moscow.

Distribution costs

The travel agency network provides Finnair with the ability to control some of the distribution costs that are plaguing other airlines globally by cutting down on commission costs. 'Having the travel agencies of our own means we can control them from a management point of view. We know where the costs are. We do not give large distribution commissions,' says Potila.

In addition the network provides support to the sales teams trying to target special interest groups. 'We feel they [travel agencies] are valuable marketing channels for us,' says Potila. When Finnair moves to the ticketless travel concept, the travel agencies will continue to sell the Finnair brand, he adds.

With enormous potential growth in at least two of its key niche markets, Finnair feels it is well positioned for the next upswing. As the market polarises, successful global carriers will hold court at one end, leaving plenty of room for opportunistic and profitable niche operators like Finnair at the other.

Source: Airline Business