Finn in the Game: Against tough odds, Finnair plots a break with its mediocre past. Is a merger its only hope?

FinnairIf the best you’ve done all decade was a 2% operating margin (in 2012), then you’ve got problems. And if all you could muster during last year’s cheap fuel environment was a 1% operating margin, well, it seems as though things aren’t improving. Here’s looking at you, Finnair.

Tucked into a corner of northeastern Europe, in a country with a small population and economy, Finnair’s chronic inability to earn even decent profits shouldn’t come as a surprise. But as discussed in a detailed presentation to investors and financial analysts last week, the airline thinks it has its best shot ever to create a brighter future.

What has changed? For one thing, Finnair finally has the labor concessions it wanted for many years, enduring some labor unrest along the way but with a more competitive non-fuel cost base to show for it. Its rivals Lufthansa and Air France/KLM, meanwhile, haven’t yet secured the labor concessions they want. Just as importantly, Finnair is breaking with its recent past and becoming a growth airline. Today, the airline is only 8% larger than it was in 2011—in ASK terms—having grown no more than 3% in any given year since then. And one toxic byproduct of this relative stagnation is creeping labor seniority, which implies higher labor costs. But Finnair is now dialing up annual ASK growth to between 8% and 10% for the next few years. With that comes downward pressure on average labor rates. Sure enough, to support the more ambitious growth, the airline has already hired more than 500 new workers, most of them pilots and flight attendants, with plans to hire another 900 by the end of 2018.

Finnair’s Helsinki hub remains a vibrant connecting point between Europe and East Asia thanks to its geography. Along with enabling quick journey times, the airport’s precise location means one aircraft can reach Asia and back in a day. So just two aircraft are necessary for daily service in a market in both directions, rather than the costlier three required from every other European hub, including nearby Stockholm. That’s a big advantage. So too are Helsinki’s low airport costs compared to alternative European hubs, and the fact that it’s a smallish and easy-to-use airport, where Finnair can schedule tight connections. Make no mistake: This is not a small market. Finnair estimates that 23m people fly annually between the Asian and European cities it serves, either using its own flights or those of other…

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