MID-AIR MUD-WRESTLING
When I forecast last year in the title of this review that we had a difficult year ahead, we hadn't even heard of SARS. At that stage, in the early months of 2003, we were seeing encouraging growth in demand, despite the preliminaries to the war in Iraq. Last year again showed, however, the nature of the new challenges facing the airline industry.
The recovery of demand that began after 2001 - the crisis year for commercial aviation - came to a halt in the summer of 2002. Over-capacity was not removed from the air transport market to the extent required by changes in demand. On the contrary, new companies, eager to take advantage of redundant aircraft and personnel, appeared on the market. At the end of 2002, over-capacity led to intensifying competition and downward pressure on prices.
Falling average prices at the beginning of 2003 were followed by fears of war in Iraq, the war itself and the SARS epidemic, all of which contributed to a collapse in demand for air travel. We adjusted our capacity accordingly in line with contracting demand. Sensible alternative uses for freed capacity were sought and the decision to open the Miami route, for example, was made in precisely those circumstances.
The future is in Asia
As the SARS epidemic receded at the end of last summer, we restored our capacity on Asian routes as demand recovered. The normalization of traffic and the opening of new routes to Osaka and Shanghai once more resulted in strong growth in demand in Asian traffic. In the third quarter the proportion of passenger and cargo revenue coming from Asian traffic exceeded revenue from domestic traffic for the first time.
Our strong success factors in the growing Asian travel market provide a sustainable foundation for our chosen strategy. We offer the fastest connections between our Far Eastern destinations and dozens of European cities. In three years our China traffic has grown from two Beijing flights per week to 16 return flights per week to three destinations in China.
Competition tests our staying power
Last year, new companies entered our domestic market, just as our traditional competitors were increasing their capacity on routes that were already well served. Our competitors clearly operated below break-even point, even as load factors remained modest. Competition, however, reduced the average prices of all operators.
Last autumn we reformed our domestic and European ticket pricing structure to one of flight-specific pricing based on supply and demand. The new pricing is flexible in line with customers' needs. Passengers can now make more flexible choices based on flight price or schedule. The reform was evident in a strong pick-up in demand at the end of the year.
Cost-efficiency remains a key factor in competition between airlines. In a climate of falling prices, the lowering of unit costs was one of the most important goals for Finnair in 2003.
Last spring we initiated an operational efficiency programme whose primary objective was permanent, structural cost competitiveness. The 160 million euro programme has progressed according to plan and most of its effects will be apparent during 2004. The full financial impact will be felt in 2005. We have also continued to develop the Group structure in line with our strategy. During our efficiency drive, we have succeeded in maintaining our position among the European elite in terms of operational and service quality.
From defence to attack
As part of our goal-directed growth strategy we acquired at the end of last year an 85 per cent majority shareholding in the Swedish airline Nordic Airlink, which has a light-weight cost structure and a flexible operating culture.
We aim to achieve a strong market share on Scandinavian routes with high passenger streams - routes on which there has been little competition to date. The company, armed with a new operating philosophy, began flying from Stockholm to Oslo, Copenhagen, Gothenburg and Luleå in late 2003. This year we will open new routes.
For Finnair, Nordic Airlink is a strong opening into new markets. In terms of initial investment the acquisition is small, but it has the potential to achieve a significant share of the Scandinavian market. Our aim is to grow Nordic Airlink into the Nordic countries' leading budget airline.
Another of our subsidiaries, the Estonian company Aero Airlines, began operating between Helsinki and Tallinn two years ago. Aero acts as an excellent bridgehead in the Baltic states, which will become part of the European common market in May 2004. Since last autumn Aero, with its light-weight cost structure, has also handled part of our turbo-prop operations in Southern Finland.
Competition in our own backyard has intensified quickly after the removal of restrictions. We cannot live on the illusions of the past. Competitors come and go; the staying power of each operator will be decisive. Those who can control their production costs and at the same time offer their customers a competitive service in terms of quality will win through in the end.
Responsibility to customers and interest groups
For 80 years Finnair has served its customers reliably, and in future we will continue to develop our operations from a long-term perspective. All of our passengers, whether on domestic routes, travelling from Asia via Helsinki to Europe or flying with Nordic Airlink in Scandinavia will receive value for money in terms of reliability, quality and safety.
Our responsibility is also evident in how we are prepared to take the measures necessary to ensure our competitiveness in a rapidly changing environment. By maintaining our financial health we will also keep the future of all our jobs on a sustainable footing - while safeguarding our shareholders' interests at the same time.
As a financially sound airline we are also able to shoulder our responsibilities towards the environment. In recent years we have rapidly renewed our fleet with the more environmentally friendly Airbus aircraft. Amidst violent fluctuations in demand, last year we were able to maintain our load factor at a reasonable level and thus ensure the eco-efficiency of our operations.
Air transport is an important part of an operationally effective society. We offer the best connections via Helsinki to more than fifty domestic and international destinations. Finnair's cargo services are an important link in the logistics chains of Nordic high-technology companies. Our growing gateway traffic between Europe and Asia is a clear indication of our ability to offer competitive services to an entirely new customer base.
In Finland, a well planned integrated transport policy is now needed. Other forms of transport are generously funded with public funds in the form of investment aid and support purchases. When air transport has to carry its own costs at the same time, it's clear that the different forms of transport are on an unequal competitive footing.
We support free competition between airlines and different forms of transport. By utilizing the strengths of the different forms of transport, however, solutions could be found that are both desirable for the national economy and sustainable from an environmental perspective.
A return to profitable growth
In recent years competition in the field of air transport has required airlines to produce services more cost effectively than before. At the same time, external threats require from airlines an ability to adapt quickly to changing conditions. Faced with such challenges, large size is not necessarily an advantage, but staying power and flexibility most certainly are. In the new environment, success will come only to those who have what it takes to compete, whose quality of service is in good shape and whose finances are on a sound footing.
As a result of the goal-directed measures we have undertaken, we have come through a difficult year reasonably well. Due to our good basic health and excellent growth prospects, I believe that Finnair's finances will develop positively in the current year and that we can expect to record a profit for 2004.
I would like to thank our customers and our shareholders for the trust they have placed in our company and also for the contribution of our employees in difficult circumstances.
Keijo Suila
President and CEO, Finnair Plc |