Finnair Seeks Mergers, Asia Ally to Swell Emirates-Style Hub

Finnair Oyj (FIA1S), building Helsinki into a hub offering the shortest flights from Europe to northeast Asia, said it’s seeking a partner with which to operate the services while pursuing local takeovers to boost Nordic traffic.

Finnair is keen on an Asian accord with antitrust immunity that would permit joint sales and revenue sharing, similar to ventures between European and U.S. carriers across the Atlantic, Chief Executive Officer Mika Vehvilaeinen said in an interview.

“We’d welcome further cooperation,” Vehvilaeinen said in London. “One of the best markets this year has been the North Atlantic, and I don’t think that’s entirely separate from the fact that they have a bit more control on capacity and demand.”

Finnair already operates 74 Asian flights a week and aims to double the number by 2020, exploiting Helsinki’s position on the quickest “Great Circle” routes to China, Japan and Korea. Vehvilaeinen said he’s also keen to consolidate short-haul operations closer to home, squeezing Nordic rival SAS Group by building on the July takeover of Finnish Commuter Airlines Oy.

Long-Haul Value

The CEO is right to focus on immunized joint ventures as providing benefits beyond those accruing from basic membership of a global alliance, said independent analyst Chris Tarry.

“In a multilateral alliance you wear the badge and sit at the table, but that costs money and you need to get the benefit out through individual bilateral relationships or ventures,” he said. “You want to provide long-haul work -- where the value is -- and look to your partner for traffic at your destinations.”

Finnair was trading 1.1 percent lower at 2.80 euros as of 10:53 a.m. in Helsinki today, taking the stock’s decline this year to 44 percent and valuing the company at 359 million euros.

Finnair has boosted sales to Asian corporate customers by 50 percent this year after doubling them in 2010, Vehvilaeinen said. Passenger numbers rose 14 percent to 1.22 million in the first 10 months, seven times the total on trans-Atlantic trips.

The carrier, which is almost 56 percent owned by the Finnish government, serves 11 cities in the Asia-Pacific region, including three in Japan and three in China, where it will add flights to Chongqing on the Yangtze River next May.

‘One Basket’

Revenue from Asian routes should double to about 2 billion euros ($2.7 billion) by the decade’s end, according to Finnair’s strategy, which parallels that of Gulf carriers Emirates, Etihad and Qatar Airways in aiming to build an airport with a tiny home market into hub where long-distance travelers change planes.

While disruption from the Japanese earthquake and tsunami limited 10-month growth in Finnair’s Asian traffic to 16 percent as it increased capacity 26 percent, with the result that seat occupancy fell by 6.5 percentage points, Vehvilaeinen said he has no doubts about the model’s long-term logic. The Europe-Asia market is forecast to be the fastest growing in aviation in coming years, after intra-Asian flights, he said.

“If you have to have all your eggs in one basket I’d rather have them in that basket than any other,” he said. “Today our primary focus is the European business traveler going to Asia, but in the future it’s going to be on Asian business travelers coming to Europe, as well as huge numbers of Chinese tourists.”

China Option

Deutsche Lufthansa AG and All Nippon Airways Co., already partners in the Star Alliance group of carriers, were first to be granted antitrust immunity for a joint venture between Japan and Europe, winning permission in June. ANA also began cooperation in April with United Continental Holdings Inc. (UAL) on flights across the Pacific, where the trend is more advanced.

The only northeast-Asian member of the Oneworld group of which Finnair has been a member since 1999 is Japan Airlines Co., which said yesterday it’s “examining the full gamut of possibilities” in terms of its European route strategy.

“We want to enhance our competitive power every chance we get and form deeper alliances to strengthen our position,” said Tsutomu Ando, the Tokyo-based carrier’s executive officer for international relations and alliances.

Among China’s three major carriers, Air China Ltd. (601111) is in Star, while China Southern Airlines Co. and China Eastern Airlines Corp. joined SkyTeam, led by Air France-KLM (AF) Group and Delta Air Lines Inc. (DAL) That could change depending on Chinese state policy, Vehvilaeinen said.

Korean Air Lines Co. is also in SkyTeam, while Korean No. 2 Asiana Airlines (020560) Inc. is a Star recruit. Further south, Hong Kong-based Cathay Pacific Airways Ltd. (293) is a Oneworld member.

‘Stronger Hold’

Closer to home, Finnair is examining takeover opportunities to enlarge a local catchment area where rivals include discount carrier Norwegian Air Shuttle AS (NAS), as well as SAS and its Finland-based Blue1 unit, the CEO said. The initial purchase of Finnish Commuter in a joint venture with Flybe Group Plc (FLYB) is “working extremely well,” the executive said.

“We’d like to have a stronger hold on the Nordic market,” he said. “Finland on its own is an awfully small country of five million people. If you look at the Baltics and Scandinavia its about 30 million and that starts to be a different ballgame.”

Finnair’s load factor, a measure of seat occupancy, averaged only 53 percent on domestic flights during the first 10 months and 67 percent within Europe, compared with 76 percent for Asian traffic and 82 percent across the North Atlantic.

Takeover Pragmatism

Vehvilaeinen said there are also strong arguments for mergers among major carriers, especially within Europe.

“If you look at how far it has gone in the U.S., and at the cost pressures and advantages of economies of scale and network, I don’t see any reason why European airlines wouldn’t go further,” he said in the interview on Nov. 9.

The CEO said he concurs with Willie Walsh, head of Oneworld ally International Consolidated Airlines Group SA, in viewing deals within the three main global groups as most likely. Walsh, who formed IAG from a merger of British Airways and Iberia in January, has said he has a list of 12 potential bid targets.

The Finnish government has always had a “quite pragmatic” view of takeovers, for example in divesting telecommunications assets, Vehvilaeinen said. State-owned phone company Sonera Oyj was bought by Sweden’s Telia AB to form TeliaSonera AB in 2002.

“The question is do we see Finnair as part of a larger entity down the road,” he said. “I wouldn’t rule that out. I do think that the industry has to consolidate further.”

To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net;

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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