Finavia Interim Report 1 January 2009 - 30 September 2009: Demand continues to be weak

The third quarter of 2009 brought only minor improvement to Finland's air traffic figures. The total decrease in passenger numbers in July-September was 6.2% compared with the previous year and comprised a drop of 12.5% in domestic traffic and a reduction of 4.0% in international traffic. The overall development in traffic for the first half of the year was down by 8.4%, so the third quarter, which was only slightly better, did not manage to lift the cumulative figure for all of 2009 from its drop of 7.6%.

In international air traffic, the decline (8.9%) in passenger numbers in Asian traffic, which started in the second quarter of the year, continued to gain momentum in the third quarter, falling by 14.7%. The figures for demand correspond fairly closely to the cuts that have taken place in the supply of flights (e.g. Mumbai, New Delhi), which by quarter were down by 13.6% and 17.1%, respectively. The cumulative development in Asian traffic for the year was down by 7.1%. The cumulative trend in passenger numbers between Finland and the rest of the EU is only marginally better, down by 6.8%, although, unlike Asian traffic, the trend in consecutive quarters of EU traffic is cautiously positive: -10.4%, -6.1%, -4.6%. Similarly to the first half of the year, North American traffic is showing the most positive change in passenger numbers, up by 20.1% in the third quarter as well. When examined cumulatively, the growth figure is 14.2%. However, the importance of North American traffic is relatively minor (2%) so it cannot save the pallid look of the trend in international traffic.

According to the figures of Airports Council International (1) (ACI), the cooperation association for airports, there was a reduction of 8.1% in European passenger numbers from January to August. The corresponding figure for January-May was a decrease of 10.1%, so a slight improvement has taken place during the summer. ACI's figures for cargo for January-August show a drop of 21.1%, which represents a slight improvement of three percentage units in the trend for January-May. A trend consistent with the statistics from ACI is also evident in the passenger figures for the airports (2) in the capital cities of the Nordic countries. During the first half of the year, the total traffic at these airports dropped by 12.6% and in January-September the drop was 10.1%. The corresponding figures for Helsinki-Vantaa showed a drop in January-June of 6.8% and in January-September of 6.4%.

Landings of commercial air traffic in Finland continue to show a decline. However, the rate of decline has slightly started to slow down since the figure in the second quarter was down by 9.1%, whereas now the corresponding figure in the third quarter was down by 5.1%. The corresponding figures for the volume of landing tonnes were down by 12.8% and now 9.4%. The average aircraft size expressed in tonnes was 53.3 tonnes in the third quarter, whereas the corresponding figure for the previous year was 55.9 tonnes. This drop of 4.5% shows that the adaptation by the operators to the weak demand is continuing.

Overflights in Finnish airspace continue to count among the small group of traffic indicators showing positive development. However, there are clear signs of a slow down in the growth as growth in the second quarter was only 2.9% and now in the third quarter just 1.1%. The cumulative figure still shows growth of 3.9% thanks to the good first quarter of +8.8%.

Finavia Group's financial development

1 July - 30 September 2009

Finavia Group comprises the State-owned enterprise Finavia and its subsidiaries. The largest subsidiaries are Finavia's wholly-owned subsidiaries Lentoasemakiinteistöt LAK Oyj and Airpro Oy.

The Group's turnover decreased by 4.2 % during the third quarter compared with the previous year and stood at EUR 76.0 million (79.4). Finavia's turnover dropped by 5.6%, which is EUR 4.2 million, LAK Oyj's turnover dropped by EUR 0.1 million, whereas the turnover of Airpro Oy increased by EUR 1.1 million.

The implementation of savings programmes can be seen in the Group's expenses, which were 6.2% below the previous year during the quarter, standing at EUR 51.2 million (54.6). Expenditure on purchases and external services was a total of 7.2% below the previous year and staff costs at the Group level were in line with the previous year.

The Group's operating result was EUR 18.7 million, which is EUR 6.4 million higher than during the corresponding period last year. Profit during the period under review was EUR 17.1 million (10.2). A total of EUR 7.5 million in non-recurring items have been entered in the result for the quarter. The result adjusted for non-recurring items was EUR 9.6 million (11.0), which is EUR 1.4 million lower than the corresponding result last year. Cost cutting has not completely made up for the impact of the drop in demand on the result.

1 January - 30 September 2009

Group turnover dropped by 3.0% from the start of the year compared with January-September of the previous year, standing at EUR 241.1 million (248.6). Finavia's turnover dropped by 4.2%, or EUR 9.8 million, LAK Oyj's turnover dropped by EUR 0.3 million. Airpro's turnover grew by 15.3%, or EUR 2.9 million, from the start of the year.

The Group's expenses increased by EUR 1.1 million (0.7 %) in January-September compared with the previous year. Purchases and external services were 2.0% below the previous year, but staff costs increased by 6.9%. Staff costs include non-recurring items related to pension contributions.

Excluding these non-recurring items, staff costs increased by 5.6%.

The Group's operating result from the start of the year to the end of September is EUR 34.8 million (42.4). Profit for the accounting period was EUR 28.1 million. The result includes non-recurring items totalling EUR 9.4 million. The result adjusted for non-recurring items is EUR 18.7 million, which is EUR 11.5 million less compared to the previous year (30.2). The major reason for the significantly worse result than the previous year stems from the collapse in demand. It has been possible to mitigate the effect on the result caused by the change in demand through savings measures.

Finavia's finances

1 July - 30 September 2009

The turnover of the State-owned enterprise Finavia decreased in the third quarter by 5.6% compared with the previous year and stood at EUR 70.5 million (74.7 million). Income from traffic decreased by 9.4%, whereas non-traffic income increased by 2.4%. Income from international traffic decreased by 8.3% and from domestic traffic by 17.2% from the corresponding period last year. The decrease in turnover stems from the clear reduction in passenger numbers and the number of operations as well as from the reductions in traffic charges that came into effect on 1 September 2009.

On 28 August 2009, Finavia's Board of Directors decided to reduce the airport and air navigation charges for commercial civil air traffic as well as the price of security charges by around 10% as of 1 September 2009. The impact of the discount on the turnover for 2009 will be around EUR 6.7 million.

A decision on the prices for the years 2010 and 2011 will be taken later. The reductions follow the policies presented by the Government in its budget session. The aim of the reduction policy decided on is to improve the operating conditions for air traffic.

Finavia's expenses decreased by 6.7% compared with the third quarter of the previous year and stood at EUR 49.0 million (52.6). In the spring, Finavia launched a programme aimed at improving cost efficiency, which aims at cost savings at the annual level of around EUR 20 million.
Staff costs decreased by 3.8%, purchases by 7.3% and expenses for external services by 1.5%.

The cooperation negotiations that started in March were concluded in September. The aim of the statutory negotiations was to save over EUR 5 million in staff costs during 2009. This result was achieved almost in full. The negotiations resulted in a temporary lay-off for the entire staff of 13 working days or 18 days in the office, or alternatively the staff could exchange their bonus holiday pay for time off.

In addition, voluntary staff benefits were stopped, the payment of the increases agreed under the collective labour agreement were postponed, and severance packages were offered to the personnel on a voluntary basis. As a result of implementing the voluntary severance packages, reorganisation and making the operations more efficient, the number of personnel will drop by a maximum of 50 by the end of the current year.

The operating result of the period under review was EUR 17.1 million (11.4) and the result EUR 16.8 million (10.5).

The result for the third quarter contains non-recurring items boosting the result by a total of EUR 7.5 million in other income from the operations. Of this, EUR 5.7 million comes from the sales profit of the waterworks, which has been entered against September. Finavia sold Helsinki-Vantaa Airport's waterworks to the City of Vantaa.

Non-recurring items also include an entry of EUR 1.8 million for bad debt refunds and interest income on overdue payments. Two aircraft used by the Flying Finn air carrier were impounded at Helsinki-Vantaa airport in 2004 as a guarantee for the outstanding account for traffic charges. The payments were made for the aircraft from the leasing company that owns the planes in 2004 and 2005, since which time the case has been the subject of litigation. Finavia has won all the legal proceedings. The opposing party did not contest the judgment of the Court of Appeal that was issued in June, so the provision was released in the result.

The adjusted result after non-recurring items is EUR 9.3 million, which is EUR 1.8 million less than the corresponding figure for last year.

1 January - 30 September 2009

The turnover of the State-owned enterprise Finavia decreased cumulatively by 4.2% compared with the previous year and at the end of September stood at EUR 222.8 million (232.6 million). Income from traffic decreased by 7.1%, while non-traffic income continued to increase in spite of the market situation, and was cumulatively 1.7% greater than the previous year. Income from international traffic decreased by 6.1% and income from domestic traffic decreased by 14.0 % on the corresponding period for last year.

As a result of savings measures, the development in Finavia's expenses has been moderate. Total expenses in January-September were 0.1% higher than the previous year. Staff costs have increased cumulatively by 4.6%, although other expenses are 3.0% below the previous year.

The operating result for the period under review was EUR 30.0 million (39), which is a drop of EUR 9 million on the previous year.

Financial items weakened the result with net financial items being EUR -3.4 million (-4.4). The result in January-September stood at EUR 26.7 million (34.7). The result includes non-recurring items totalling EUR 9.4 million. The result adjusted for non-recurring items was EUR 17.3 million (30.1). The adjusted result is EUR 12.8 million lower than the previous year.

Finavia's cash flow from operations was EUR 53.6 million (58.7). The decrease compared to the previous year was 8.7%. In September, Finavia drew EUR 40 million from its line of credit with the European Investment Bank. This was the final instalment of financing for the expansion to Helsinki-Vantaa T2 that the EIB is financing.

Group operations

Finavia has reformed its business structure and, as of the start of 2008, the operations have started in line with the new structure. Each business operation is responsible for its own offering and the development of its own operations throughout the whole network of airports. Airports and the regional air navigation services produce services guided by regional demand.

Airport Operations is responsible for Finavia's network of airports. It provides airport services, and is responsible for the infrastructure of the airports and their development.

Airport Operations' income comprises airport charges, which include landing fees, aircraft parking charges, and passenger and security charges. Income is affected by the number of passengers and landings and the weight of aircraft.

Airport Operations' income in January-September stood at EUR 126.4 million (131.1) and was 3.6% less than the corresponding period last year.

Several development projects are underway within Airport Operations and the aim is to improve the cost efficiency of the services. One of the most important is the introduction of the basic airport concept at small airports.

Helsinki-Vantaa's waterworks were sold to the City of Vantaa on 1 September 2009. This is part of the operating efficiency programme under which Finavia is focusing on its core operations.

The division of terminals into domestic and international at Helsinki-Vantaa Airport was abandoned as of August. In addition, the first stage of the extension for long-haul flights was opened to passengers in August and the renovation of terminal T2 started. The new service agreements for security check services at Helsinki-Vantaa Airport came into force at the beginning of October.

These measures will enable Helsinki-Vantaa to develop and grow and improve the services for air carriers and passengers.

Air Navigation Operations is responsible for controlling the use of Finnish airspace and providing the related en-route services and air navigation services at Finavia's airports.

Air Navigation Operations' income is mainly comprised of the airports' air navigation charges and route charges. In January-September of 2009, the TN units of commercial aviation - on which the air navigation charges of airports are based - decreased by 8.2% compared with the corresponding period last year. Commercial aviation service units, which are used as the output for route fees, decreased by 7.1%. Air Navigation Operations' income was EUR 44.8 million during the period under review (46.3) and decreased by 3.2% on the previous year.

During the first part of the year, Air Navigation Operations started measures to improve the efficiency of operations and to develop the production of services. The most important ongoing projects are the centralisation of briefing services, the structural reform of regional air navigation services and the project to reorganise airports used jointly by civil aviation and the military (YTY/Fresh).

Commercial Operations is responsible for the commercial services at Finavia's airports. The services are offered directly to passengers or in cooperation with other service providers operating at the airport. Commercial Operations include leasing of commercial spaces in terminals and parking services, as well as shops and cafés.

Income is strongly dependent on total passenger numbers. The services provided vary from airport to airport. The income of Commercial Operations in January-September stood at EUR 48.1 million, which is a drop of EUR 0.5 million on the previous year. The development in the turnover of Commercial Operations is affected by the decline in passenger numbers and the effect of the uncertain economic situation on passengers' inclination to buy goods and services. There are many development projects under way in Commercial Operations that are aimed at boosting sales and the range of services, as well as reforms that will improve the cost efficiency of the operations. The aim of these measures is to reduce the impact of falling passenger numbers on the operations.

Finavia's Real Estate Operations are handled by Lentoasemakiinteistöt Oyj (LAK). The company offers facilities services to companies operating at the airport and operates as a developer of respective construction projects and owner of premises located at the airports. In January-September, the turnover of LAK Oyj decreased by 3.7% due to a decrease in rental income, and stood at EUR 7.1 million (7.4).

Airpro Oy develops and provides traffic, airport, and travel services for logistics and tourism companies and directly for passengers. Airpro's turnover in January-September increased by 15.3% and stood at EUR 21.7 million (18.8). Underpinning the good result are new customer agreements and the focusing on business operations.

Investments

The current year's investment plan for the Group totals EUR 125 million. Due to the poor development in air traffic, Finavia has adjusted its investment programme to correspond to the level of demand.

At the present time, the investment programme for the current year approved by the Board of Directors is EUR 94 million, which includes EUR 74 million in projects launched during previous years. Group investments in January-September totalled EUR 62.7 million (82.4), which is 23.9% below the level of the previous year.

The largest investment is the construction of the extension to the long-haul section, which is underway at Helsinki-Vantaa Airport. The extension is being taken into use in stages. The inauguration of the terminal will take place in December.

Progress of the savings programme

As a result of the weak demand for air traffic, Finavia has initiated several measures to safeguard cost efficiency and the cash position: in December 2008 the investment programme drawn up for 2009 was cut by EUR 30 million and this target was achieved. In January, an assessment got underway with the aim of identifying operations and assets that can be outsourced or sold. This will also help in concentrating on the company's core business. By the end of September, Finavia has sold Helsinki-Vantaa's waterworks and stopped producing telecommunications services at the airports.

The savings objective for expenses is EUR 20 million at the annual level. The objective is extremely challenging because the cost structure of the State-owned enterprise is fairly fixed and the price levels of many expense items, such as charges for utilities, increased considerably at the beginning of 2009.

The increase in staff costs is primarily the result of pay settlements. The number of personnel has remained fairly stable. As a result of the savings measures, co-operation negotiations concerning the entire personnel were launched. The savings objective, set at EUR 5 million, was achieved almost in full in the statutory negotiations. Savings measures relating to staff costs will continue, for example by developing shift planning.

The savings programme focuses not on one-off savings but on solutions that will improve the cost structure in a more permanent way. The development in expenses during the final quarter of the year will be effected by weather conditions, which impact greatly on maintenance costs.

The situation at the end of September appears to show that it will be possible to achieve the objective at the annual level. All the measures will not yet be apparent in full in the result for 2009.

Outlook for the rest of 2009

In its short-term forecast, which appeared mid-September, Eurocontrol's Statfor unit (3) estimated that European air traffic operations (4) will decrease by 5.9% in the current year. The forecast is marginally better than the one published two months previously which presented a reduction of 6.1%. With respect to Finland, the forecast is slightly more pessimistic than the average as a drop of 6.8% is presented as the figure for this year. As with traffic in all of Europe, the trend for traffic in Finland is a couple of tenths of a percentage point better compared to the forecast from a couple of months ago. In July, the forecast for 2009 was still given as -7.0%. For comparison, the latest forecasts for Scandinavia are the following: Sweden -10.0%, Denmark -8.0% and Norway, which is clearly the best, -4.6%.

Forecasting the development in air traffic for the end of the year is very difficult, although demand is predicted to continue to be weak at least until the start of next year. The International Air Transport Association (IATA) anticipates that the rest of the year as well as 2010 and 2011 will be challenging times for air traffic.

Continuing weak demand and the pricing decisions that have been implemented will weaken the result of the State-owned enterprise this year and also in the following years. The total passenger number during the final quarter of the year is expected to fall slightly below the cumulative figure for January-September.

During the current year, Finavia will complete the expansion project to its main airport Helsinki-Vantaa, which has been constructed in stages since the turn of the millennium. The extension to the terminal at Oulu will get underway at the end of the year, otherwise only the most immediate renovations will be undertaken. The framework for investment expenditure for 2009 will be kept within the remit of EUR 94 million, which was decided upon by the Board of Directors in the spring.

The operating result for the operations in 2009 will not reach the set performance targets, although the result will be improved by the sales of assets and other non-recurring items. The importance of non-recurring items in the result for 2009 will be considerable. In order to make the operations more effective and to safeguard cash flow, Finavia is actively seeking operations or assets that could be outsourced or sold.

The future prospects for the air traffic sector and the corporatisation process underway may highlight facts relating to the determination of the value of the balance sheet and the size of the pension liability, which may have an impact on Finavia's final financial statements as a State-owned enterprise.

1 ACI Europe represents over 400 airports in 46 countries in Europe.
2 Stockholm-Arlanda, Copenhagen, Oslo-Gardermoen and Helsinki-Vantaa.
3 Statfor, which operates under Eurocontrol, produces statistics and forecasts on air traffic in Europe and monitors and analyses trends in the aviation sector. The unit produces forecasts on the development of flight operations on average every two months.
4 Total IFR operations (includes overflights).