Finnair's next CEO must find partners to keep carrier aloft

HELSINKI Sat Feb 9, 2013 3:01am EST

An employee of Finnish national airline Finnair sprays anti-freeze liquid on a Finnair passenger plane on the tarmac of Helsinki International Airport in Vantaa December 20, 2010. REUTERS/Jussi Nukari/LEHTIKUVA

An employee of Finnish national airline Finnair sprays anti-freeze liquid on a Finnair passenger plane on the tarmac of Helsinki International Airport in Vantaa December 20, 2010.

Credit: Reuters/Jussi Nukari/LEHTIKUVA

HELSINKI (Reuters) - Finnair's departing CEO Mika Vehvilainen will leave the flag carrier in stronger financial health than when he took over four years ago, but he will also be leaving his successor the toughest part of the turnaround: finding partners.

The airline posted its first annual profit in four years on Friday but is still far from stable and needs to share costs on its unprofitable European short-haul flights in order to focus on more profitable long-haul, analysts said.

"Cutting costs in a substantial way is extremely difficult in Finnair, and it will not be any easier for the upcoming CEO," said Nordea analyst Pasi Vaisanen. "If there was an attractive-looking deal, Finnair would already have that partner."

Vehvilainen announced his resignation at the end of January. The company has yet to announce his replacement.

Stiff competition from discount carriers and high fuel prices have put pressure on airlines like Finnair as well as Nordic rival SAS (SAS.ST), whose survival was in doubt until cost-cutting plans received union backing last year.

Finnair launched a cost-cutting programme in 2011 targeting annual savings of 140 million euros by outsourcing operations and cutting jobs. Last year it said it would cut an additional 60 million euros in costs.

It also handed over a third of its European routes to low-cost British airline Flybe (FLYB.L).

Analysts said more partnerships for the remaining short-haul routes would help it outsource jobs and focus on more profitable flights. Without deals enabling it to reduce its exposure to unprofitable routes, the company could slip back into the red, particularly as it buys new planes for long-haul flights.

Finnair was barely profitable in 2012 with an underlying, or "operational" profit of 45 million euros. It hopes to achieve an operational profit margin of around 6 percent from 1.8 percent last year, requiring a profit boost of around 100 million euros.

POLITICAL RISK

As with many European airlines, Finnair's major challenge is political.

The state owns 55.8 percent of the airline and lawmakers are exerting pressure on the company to appease powerful unions who want to maintain the status quo.

In his last presentation to Finnair investors on Friday before heading to a new job at Cargotec (CGCBV.HE), Vehvilainen said the company's labour contracts were unsuitable for competing in the current open market.

"With regard to personnel costs, we are still more expensive than our competitors, and this problem has to be solved," he said.

Two of Finnair's top executives have resigned in the last three years after continuous disputes with the unions and public anger about proposed changes.

However some members of the current government, led by the right-leaning National coalition, are willing to lower its stake in Finnair to give it more leeway. The most likely scenario would be for the government to dilute its stake by standing back if the company issued new shares.

Analysts said lower state ownership would allow the new CEO, as well as newly-appointed board chairman Klaus Heinemann, to focus more on investor returns rather than local politics, and could also attract more international investors.

But left-leaning members of the government's six-party coalition may not approve such a move.

The small Nordic economy is seen as one of the healthier members of the euro zone, but its exports have been hit by the region's crisis and voters are worried whether the government is doing enough to promote its industries.

"With the unemployment rising, the state's role in the economy is picking up. With that, a nationalistic, even protectionist tone is getting more attention," said Ville Pernaa, Director of the Centre for Parliamentary Studies in Turku. (Editing by Sophie Walker)