Listen in as Finnair CEO Topi Manner explains how his airline has adapted its strategy and innovated after back-to-back crises laid waste to its business model.
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Rush transcript
Victoria Moores:
Hello everyone and thank you for joining us for Window Seat, the Aviation Week Air Transport Podcast. I'm Air Transport World European bureau chief, Victoria Moores. Welcome on board. This week I'm joined by Topi Manner, who is the chief executive of Finnair.
So Topi, you joined Finnair in 2019, that's my understanding. Is that correct?
Topi Manner:
Correct. Right on time to face the pandemic.
Victoria Moores:
Yeah. So when you joined, you had an opportunity to experience what a good market looks like in 2019 and then that was followed by all the difficulties between 2020 and 2022. So, I'm just wondering what that experience has been like for you.
Topi Manner:
It has been a kind of experience that it's hard to reflect upon. I had one good year and that was a very good year, wonderful memories of that year, and then three horrible years for us at Finnair. It has been effectively a double crisis.
So first of all, the pandemic obviously, and we were hit harder than the average European airline because of our focus to Asia where the travel restrictions and the closures were more stringent and long-lasting than in the Western world.
And then of course, the Russian invasion of Ukraine and the subsequent closer of Russian airspace smacked right into the middle of our strategy. We were all about connecting Europe and Asia via the short northern route. So we needed to fundamentally change our old business model. I think that this has been an ultimate stress test for our organization, and of course for me personally as well.
But now the good news is that we are back to profitability. We have a new strategy, we are implementing that strategy and the first results are very encouraging.
Victoria Moores:
It's good to hear that things are getting better after such a challenging period. And I'm not surprised that you haven't had an opportunity to reflect and process the whole experience yet. Because to a degree you are still in the middle of that. So Finnair is still facing the challenges of not being able to fly through Russian airspace and I think maybe it's helpful for our listeners, that aren't quite so familiar with the Finnair business model, to remind them what your relationship was with Asian flights and how important that was to your business.
Topi Manner:
Well, the Asian routes were basically the core of our strategy, 50% of our revenue in 2019. The long-haul routes to Asia were also significantly supportive to our short-haul routes in Europe. So, we are a network airline, we run a commercial hub a couple of hundred kilometers out of the Russian border. And from where we are in the northern corner of Europe there's not that much to fly to towards the north, apart from Finnish Lapland, which is wonderful - so I hope that the listeners will visit. But our specific geographical location means that closure of Russian airspace really changes the geography for us. And that has been the major case of adaptation that we have needed to face.
Victoria Moores:
That's a really good way of putting it. It's literally altered your geography because the advantage for Finnair was that you had that short over flight route to get to Asia and then all of a sudden that geography was taken away from you. And I imagine that also affects your connectivity into Europe as well. So it sounds as though your new strategy is beginning to pay off. And I wonder if you could share just a few details of how you've made that transition back towards profitability.
Topi Manner:
Well, absolutely. Rebalancing the network, introducing a more geographically balanced network has been a key part of the new strategy. So, in terms of our long-haul flights, we are pivoting to the West. We are increasing our flights to North America, especially US. We are also looking to the South. So we have been increasing our flights to Middle East. There are commercial partnerships, [the one] with Qatar Airways has been very significant to us. Today we fly from Helsinki, Stockholm and Copenhagen and daily flights to Doha. And we have been also keeping our foothold in the Asian megacities. So going around Russian airspace with up to 40% longer flight times to markets like Japan and Korea. But since in those markets, especially, it is a level playing field, meaning that the local carriers also go around the Russian airspace. For example, the yield levels have adjusted to that reality and therefore we can still profitably fly to Asia.
So this rebalancing of the geographically more balanced network has been a key component of the new strategy. Of course, we are resetting our core space. We have been doing that during the pandemic. So now we are doing it for the second time. As one example, we have been agreeing upon savings packages with 90% of our employees. So pilots, cabin crew, tech ops, ground handling, our office employees. So our employees are taking responsibility of the situation that the company finds itself in. And that is fantastic to see. That is a testament of our culture and identity as an airline.
We are boosting our unit revenues. Our unit revenues increased in Q4 with 25%. Some of that is on the back of the higher fuel cost and therefore the higher airfares. But we have been also significantly changing our distribution. So before the pandemic, direct distribution was less than 40% of our sales, and nowadays, it's more than 65%. So a remarkable shift has happened in that one.
On the back of that, when we are selling more directly to customers, we can be more relevant to our customers on making more relevant offers. And with that we are boosting our revenue. Customers are also more satisfied. But we are also cutting cost because we are taking out the middlemen in the distribution and then therefore we are winning on the both sides of the equation. So, reducing the role of the GDSs, introducing new technologies like new distribution technology, NDC. They all are part of that agenda.
And then finally, partnerships are really important for us. For an airline of our size, partnerships in various shapes and forms are a way for us to seek scale beyond our size. And the oneworld Alliance is really important on Northern American markets, American Airlines, Alaska Airlines, their partnership and their distribution power is a key thing for our Atlantic routes. We are selling more tickets in the US than we are selling in Europe for those routes. Qatar Airways partnership in Middle East, I already mentioned, and then we have joint business with Japan Airlines for the Japanese routes. So oneworld airlines and its values, commercial partnerships with them are very important for our strategy.
Victoria Moores:
Absolutely. And among your oneworld partners, Qatar is one that recently you've been developing that partnership further. I'm wondering whether you are looking at any new partnerships because you're an independent airline. Would you be looking for say strategic investors, or further joint ventures, or anything like that beyond what you've got today?
Topi Manner:
This one, we would need to divide into two parts. So when it comes to ownership, we are a stock listed company, but majority owned by the Finnish government, 56% is their stake. And we are developing the airline as an independent airline.
But when it comes to commercial partnerships, not having the ownership component in them, then we would always be open for new commercial partnerships. I stated that is in the core of our strategy and we are definitely on that case.
Victoria Moores:
I'm going to ask you the awkward question which you might not be able to answer. Which is, do you have any significant new commercial partnerships under negotiation at the moment?
Topi Manner:
Let's say that we might have, you never know.
Victoria Moores:
Your answer doesn't surprise me because I know that your stock market listed and you can't talk about anything commercially sensitive. But I do find it interesting that you see your future as an independent airline. You don't see yourself entering on an equity basis into a larger airline group.
Topi Manner:
Yeah, as stated, this is clearly a question that should be addressed to the owners of the company, in this case particularly to the state of Finland. I think that, if we discuss the topic more broadly, we are certainly starting to see a new way of consolidation in Europe, Lufthansa having an LOI, letter of intent with ITA first to take minority shareholding, potentially to develop into majority shareholding. IAG renewing its purchase of Air Europa and some more activity on that space as well. So certainly we are observing the situation. And then clearly in this industry scale matters, so that is of course something that we also need to be mindful of.
Victoria Moores:
So at the moment it sounds as though you are finding that scale through commercial partnerships through oneworld and through your various joint ventures to get you to the critical mass that you need, alongside diversifying your own network.
Topi Manner:
Correct. And then of course at the same time we need to remember that there are also virtues of being fast, nimble, and agile. I think that we have been demonstrating some of that, especially now when we have been adapting to the double crisis. And most recently when we have been adapting to the reality of closed Russian space. A good case in point, for example, could be that starting last April of 22, in a matter of seven weeks after the Russian space closure, we started to negotiate wet-lease deals, ACMI deals with British Airways and Lufthansa. Seven weeks after the start of regulation, with all the regulatory approvals, with all the commercial negotiations, with all the operational arrangements, we were actually able to fly the first flights for BA and Lufthansa. So that goes to show that as an organization we have a tremendous strength in being fast to react and to adapt. I think that in that space we have a story to tell.
Victoria Moores:
Absolutely. And there's two examples that we're going to come back to along these lines. They're interesting innovations that I've heard from Finnair recently. But for the moment I think I'm going to stick with that thread because I'm sure that our listeners are quite keen to hear about your fleet as well. So you mentioned about subcontracting some of your aircraft. What's your vision for the fleet going forwards and has that been tripped up by this change of strategy?
Topi Manner:
Yeah, our fleet is currently 80 aircraft, eight zero aircraft. We are quite happy with that. So we don't foresee big changes in our fleet. We have been doing the subcontracting, the wet-lease deals, often referred to as ACMI deals, to some of the other airlines to increase the usage of the fleet. So that will come back to the stable.
Victoria Moores:
Okay. So I imagine that at some point in the future you'll be reintegrating those aircraft back into the fleet, but it depends on how long the situation lasts for.
Topi Manner:
Correct, correct. I think that when it comes to the war in Ukraine and how that develops. The first thing to say is that I think that the collective West should be supporting Ukraine to win a genuine and lasting peace. And once that happens, and I do hope that happens, then I think that the Russian airspace closure should be one of the first sanctions that should be lifted. Because clearly it's very problematic for passengers, creating too many CO2 emissions, far more than would need to be created, costly. And on top of that, it's creating an uneven playing field on the Chinese market, between Chinese and European carriers. So problematic in many ways.
So once there is peace, I think that there should be a discussion of the airspace closures to be lifted. The past years have shown that there are all kinds of quick developments, quick turns. So I think that Europe on the overall should also start to get ready even for that eventuality. While we need to be realistic that, at the present time, that probably does not seem to be happening very quickly.
Victoria Moores:
Absolutely. I think that everybody hopes that the stability will be rediscovered very soon. But I'm wondering when you do get to that position of stability again, will Finnair's network evolve further? So do you see yourself refocusing on Asia or do you see yourself keeping the network diversity that you've created into the business over these last few months?
Topi Manner:
Well, in that event we would be having a natural geographical advantage toward Asia. So that would be meaning that we would be recovering some of our Asian network and then increasing our capacity towards Asia at that time. But I think that going through this experience also has shown us that we would probably not be dependent on that Asian traffic to the extent that we were previously. So, we would want to still maintain a more balanced geographical presence, even though we would be increasing a bit in Asia.
Victoria Moores:
So your plan is to keep the Middle East and the US strength that you're building up, and I'm wondering whether that changes your fleet plans at all. Because when the network does come back to Asia and you've got these networks that you've created more recently to diversify, does that change things in future in terms of your number of aircraft?
Topi Manner:
Not to any significant extent. So especially Airbus A350s are a significant part of our long-haul fleet and we are very happy with the aircraft. It has the range, basically, to service a whole variety of destinations to different geographical directions. So, that aircraft gives us the flexibility that we need, network wise. And we still have a couple of them on order coming to our fleet during the next three years.
Victoria Moores:
Do you think it's likely that you might push those back again or is it likely that you're going to maintain the schedule as it is?
Topi Manner:
I think that we will be keeping it pretty much as it is.
Victoria Moores:
Okay. So I'd like to go back to those two points of innovation that I mentioned earlier. So, obviously distribution, revenue maximization, is very important for airlines, particularly as they recover from the crisis. There's been a real push towards maximizing ancillary revenue, so the extras the airline sell. But Finnair is doing something quite different here. I noticed that you are removing onboard sales from your aircraft. Now, I'm not talking about the likes of food and drinks for passengers. This is your duty-free items, the saleable items that some airlines have on board.
So, I'm curious when everybody else is really trying to push their ancillary revenues, how come Finnair is taking that part away?
Topi Manner:
Yeah, it was driven by two things. First one was the customer behavior. So, clearly there was a trend-like decrease in onboard sales of those product categories, perfumes and candy and whatnot. So physically customers voted with their behavior.
And then the second one was that we did the math. So, having those products on board increases the weight of the aircraft and that increases in turn the fuel burn. And there's also a degree of product waste and costs associated with the product handling. So, it was no more economical and more sustainable for us to let go of that piece of sales. And I think that our customers have responded well. They have understood the rationale.
Victoria Moores:
Yeah, I think that that's a very interesting move. And what I see from Finnair is that you are taking a blank sheet of paper and figuring out what works and what doesn't work and not making any assumptions.
So the final question, and we're just about up for time now, that's about your new business-class seats. So you've just invested quite a lot of money in the overhaul of your aircraft cabins. And I was reading about the details of your new business class seat that it doesn't recline. And again, that's going against this trend of lie-flat seats, high-tech. So could you explain a bit more about that?
Topi Manner:
It is revolutionary, it doesn't recline, and the customer feedback is overwhelmingly positive. It's a wonderful piece of furniture, beautiful Nordic design, which is basically an embodiment of our brand and the identity of the airline. It might be a bit counterintuitive, but when the design is good and when you have pillows with which you can adjust your position in the seat, you can actually find a comfortable sitting position. You can find a comfortable lounging position, and then the sleeping experience is second to none. So we are very proud of it and I would encourage you to come and experience for yourself.
Victoria Moores:
That's really interesting. And one of the things that I read was that typically most people's sofas in their living room don't recline. And it's about creating more of that kind of experience for a passenger. It also struck me that alongside that living room type experience, you've got potentially lower maintenance costs and a more sustainable seat as well.
Topi Manner:
Spot on. It is more sustainable, it is more cost-efficient, but it's also more beautiful because the design is beautiful and it really works. I think that this is also a showcase of the airline that we are. We need to think differently and we need to differentiate with our product. When you come on board our long-haul aircraft, you really will see that. But also you will see the same when you come to the brand new Helsinki Airport. It really works and there's a very smooth transfer experience that can be as tight as 45 minutes and still works, and you even get your baggage.
Victoria Moores:
So one of my favorite thoughts is that people don't generally notice things which are the same. They notice things which are different and it sounds as though Finnair is really trying to distinguish itself by trying new things. But overall, my hope for you right now is that you get to spend more of your time developing the product and being creative around what Finnair offers rather than dealing with all of these multiple crises in quick succession.
Topi Manner:
I will accord with that. We hope that too.
Victoria Moores:
So that concludes our Window Seat Podcast for today. Thank you Topi. And thank you to our listeners.
Make sure you don't miss us each week by subscribing to the Window Seat Podcast on Apple Podcasts or wherever you listen. Until next week, this is Victoria Moores disembarking from Window Seat.
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