ch-aviation CEO Thomas Jaeger caught up with Juha Järvinen, Chief Commercial Officer (CCO) of Finnair, for a chat about the airline’s growth strategy, expanding in Asia, and European partnerships.
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In the last 5 years, Finnair has grown from about 8 million passengers to 11 million. You’ve grown your load factors from 73% to around 80%. What were the key driving factors that allowed you to manage this growth, which is relatively high compared to other European carriers? How did you achieve that?
Yes. The main driver for us has been the Asian growth. We started, as of 2015, to start accelerating capacity growth. You can see in 2016 and in the next years to come that we are going to have ASK growth between 8-10%, which is more than double what we used to have. So of course, there are certain increased risks, but at the same time we believe that the business model that we have, around Helsinki being the bridge between Europe and Northeastern Asia, still has growth potential. In 2015 we were at 10.3 million passengers and 2016 we are aiming to reach close to 11 million.
And really the accelerating factor is the A350 aircraft, of which we now have seven delivered. We have focused a lot on revenue management, really working actively on capacity management, so that we have increased the load factor in general, but also we manage the overbooking process much more efficiently. We have invested a lot in forecasting the overbooking, and also generating considerable additional revenue by overbooking systematically and managing that, which has created very healthy yields on the very high demand routes.
You still struggled these last five years to get to a level of constant profitability. What do you think has mainly driven that? You always had a year that was good and then a year that was bad. Was it the exposure to Russia and Japan which had similar swings in economic disparity?
I would say that we still have work to be done on the cost space. At the end of the day, that’s the element that you can control. The revenue environment is challenging always, and if we look a few years ahead we do not see the RASK (Revenue per Available Seat Kilometer) level going up. The market RASK will continue to decline. It has been declining for a long time and will continue to decline. So it means that, first of all, we have to cut our cost base, but also we need to make sure that we can actually create new revenue sources. So that is why we are starting to work a lot with the ancillaries.
In 2017, we are planning to launch a proper retail platform in-flight; we are now outfitting all long-haul aircraft with Wi-Fi, to be completed by this summer. Then by summer ’18 the short haul Airbus fleet will also have Wi-Fi. So the retail revenue stream is something that we aggressively plan to focus on, because the margins are better on the ancillary side, and the fact is that we do not see the competitive environment around us easing in the years to come. It’s going to be a tough market, so we need to continue cutting the cost and sort of getting more out of the system.
And of course, by growing, usually your unit cost improves, automatically, as long as you keep control over your costs. Because the more flying you can do with the same head office staff, with the same back office staff, will definitely improve the CASK.
You said before and you really emphasized that you were flying to Northeastern Asia when you talked about Asia. In Northeastern Asia, you have a very strong partner in Japan Airlines, but within Oneworld, you kind of lack feet on the ground in Korea and in mainland China. Is that a serious issue for you? Or is it to your advantage as well that you address the market yourself and do not need to share within the alliance?
A bit of both. We are looking for a Chinese partner airline, that’s no secret. We are mapping the markets and of course we do see the benefit of teaming up with a Chinese carrier so that we can build a product together. But today, we are relatively comfortable with the position we have. We are one of the biggest European airlines now to China with roughly 6% market share between Europe and China. So it gives us a good base.
Also, we have been able to attract Chinese consumers. Many of our Chinese flights actually have more Chinese passengers than European passengers. So in that sense we do not have any acute need. But we do see, from a strategic perspective, it would be beneficial to have a Chinese partner. So we are on the search.
I didn’t think about that before, but you now have Tianjin Airlines flying from Tianjin to London, and Air China flying Chengdu to Paris and so on. Has it really impacted you much in China that you now see the Chinese carriers starting routes from smaller cities in China to Europe? Do you have a fear that you are going to end up in the same situation, like Delta ended up with their Tokyo hub, where everyone is just over-flying them from China to the U.S.? Do you think people will start over-flying Helsinki? Or you haven’t seen any impact yet?
I would say that I believe that there is a market for both, for direct capacity and then for a network model, like we do. But of course, in the short term, there are certain cities where we are under heavier pressure, where the markets are less developed. Like Xi’an or Chongqing, where in a market, even though it’s big (Chongqing with 30 million people), the share of people who travel to Europe is very small. So, you get the seasonal impacts when there is a lot of capacity increase–like Xi’an last summer with very fast growth in European capacity by Chinese carriers. This of course has an impact short term.
But we sort of, longer term perspective, believe that because of the Chinese growth and the growth of the middle class, there is enough space for both. For non-stop capacity and then also the network model. Because Chinese consumers, when they come to Europe on their first trips, they want to see multiple locations. They are not going for only one city. So we believe there is a space for both.
Are you restricted at all with your growth in Korea, Japan, China as far as bilateral traffic rights are concerned? Or are you still nowhere close to the limit of what you can do?
Well, both China and South Korea are regulated. We have a good relationship with both Chinese and Korean authorities to discuss traffic rights and we would like to have more than what we have. Especially for the big cities like Shanghai, Beijing and Seoul. But we have an active process to acquire more rights. We are fine now, but for future needs we need more traffic rights.
Since we are just staying in Asia, how far south do you have to go to feel the effect of the three Middle Eastern carriers? Or Norwegian flying to Bangkok? Are you worried about that becoming a bigger operation?
Well, anything above Bangkok in the Asian scenario, that’s where we have the geographical benefit. Of course, also the Russian overflight rights, which Norwegian currently doesn’t have from all Scandinavian countries, gives us a certain advantage. So that’s why increasingly our network plan focuses on anything above Bangkok and north, because that is where we have the advantage. And of course, considering the Gulf carriers and Qatar, our Oneworld partner, serving Helsinki now, that adds a new dimension. Of course, through Qatar, through Oneworld, we can then offer new travel destinations which we have been unable to do in the past.
For you, Thailand is quite an important market, because there is a lot of O & D traffic; there seems to be a lot of Finnish people around Thailand wherever you go. So that’s probably why you’re able to sustain that despite the competition from them.
Yes, there is definitely – especially in the winter season – more demand than capacity. So we fly twice a day to Bangkok, and then Phuket and Krabi as well. And we’ve been very happy with our Thailand flights. I personally see that there is even more growth potential beyond what we do today. But of course, it’s a very competition-led market as well. The Gulf capacity is huge, and all carriers fly to Thailand. But still, the local demand is strong and the Scandinavian demand is strong. So we’ve been fortunate to have an improving route result on that.
And now of course with the Airbus 350, it also lowers our cost, so we can actually burn less fuel. We can actually already see that there is a considerable fuel saving by using the new aircraft. So that gives us of course leverage to improve the CASK.
Going back to Europe, there has obviously been a lot of change with your regional feed, not really in the fleet, but in your strategy, in that Flybe. Nordic has now become NoRRA, independent from Flybe. I have seen that you have started to get BRA involved in doing some flying for you. You wet-leased in CityJet for a while in 2016. Are you looking at building up a regional fleet from different carriers through wet-lease agreements? Or through codeshare agreements to feed the Helsinki hub more with regional flights? Or is that just my wrong observation?
No, it’s a correct one. We do see both a wet-lease scenario and partnering. We started with BRA from Sweden. We had CityJet on a short-term contract because we had a lack of aircraft. But we do have analysis ongoing on the Europe level, how to increase the feed to the network. Because of course, it’s not the most cost efficient on smaller city pairs to operate from Helsinki. Ideally, we would have a daily departing flight from the destination into Helsinki and back so that we can improve the Asian connectivity further. So we are in an open search for regional partners to do the feed for us. NoRRA is one, but then BRA is another one now in Sweden.
And then NextJet – that’s then a codeshare agreement, so there we are codesharing with their service. But the BRA operation is our risk, so it’s a wet-lease scenario. So definitely, that is what we need to grow. Because we are getting congested in certain city pairs, so we need to widen our offer as a whole. But also we need in certain cities to upgauge to a larger aircraft, like we now do with London Heathrow–we operate the morning rotation with an A350 on a permanent basis, but by spring it’s going to be daily, because we need more feeder capacity. There are some other cities where we are also relatively congested, so we need to upgauge to a larger aircraft, possibly even with the widebody.
So, the fact that you have wet-leased in CityJet with their Superjet is obviously quite interesting for the industry, because you are the first Western European airline that has really tried and tested the Sukhoi in real life operations. Can you tell us a bit about what the experience has been like for the passengers and how it’s performing compared to the Embraer E-190?
I’ve been fortunate to actually fly myself with CityJet on our service to Warsaw, which they flew for us. And I have to say, it’s a very nice aircraft. Very fresh. Absolutely no issue. The cabin feels big, so it’s definitely a good match to Embraer. And of course with the excellent crew by CityJet I have absolutely nothing to complain about. I think it’s a nice service and I strongly believe the Sukhoi has a future in the regional segment because it is a very competitive aircraft, from a customer experience.
On your fleet strategy in general, I think that the A340s are obviously on their way out. If you are planning to expand long haul ASKs are you planning to keep the A330s longer than you had envisaged? Or are you planning on ordering additional A350s?
Yes, the last A340 will be gone this winter. Now, we have already decided to extend two of the leases of the Airbus 330s, which then accelerates the growth plan. We had two aircraft supposed to leave the fleet in 2017–330s–but we decided to extend them, which then accelerates the growth. 330s are still relatively new for us, so they are in a very good phase of their lifespan, so we have no reason to terminate those. We see the longer term scenario hopefully in 330s and 350s for our long haul. But of course, the 350 is the flagship aircraft for us now and we still have in total nineteen deliveries of which seven have arrived. That is going to really be the backbone for the long haul.
For your European network, out of Helsinki, what’s the biggest threat that you see in the near future? It’s a market that doesn’t have very high low-cost carrier penetration yet. Would that be the biggest threat that you possibly see? Or would it be that SAS starts growing again? Or where do you see potential issues for you there on the horizon?
We have a relatively good position on intra-European now. We have close to 65% market share out of Helsinki. But of course we can never take it for granted. There is always a risk the LCCs will enter. But at the same time, we believe that by having the combination of local traffic and then the Asian feed, we can offer the best product to the market: number of departures, especially for business traffic. So, we believe that we are in a good position, but of course it is likely that there will be more LCC competition at some point.