Finnair Oyj – Annual report – 31 December 2021
Accounting principles (extract)
Impact of the COVID-19 pandemic on the consolidated financial statements
The financial year 2021 was the second annual reporting period severely impacted by the COVID‑19 pandemic. The COVID-19 pandemic and the subsequent travel restrictions continued to have a significant negative impact on passenger demand also in 2021, which was heavily reflected in Finnair’s revenue and profitability. Despite the gradual improvement in passenger demand in the second half of 2021, enabled by the increase in vaccine coverage and the partial lifting of travel restrictions, the number of passenger kilometers (ASK) offered in 2021 was slightly below the level of the comparison period totaling to 12,094 million (12,937 million). This is around one quarter of the pre-COVID-19 levels of 2019 (47,188 million). Finnair’s revenue in 2021 totalled to 838.4 million euro (829.2) and the total number of passengers was 2.9 million (3.5). The relative improvement in revenue relative to the passenger volume was due to the record high revenues of the cargo business, which was boosted by the increased demand for air cargo resulting from the COVID-19 pandemic and global supply chain challenges. Cargo revenue increased by 88.3 percent to 334.7 million euro (177.7). Although Finnair was able to significantly reduce its variable costs during 2021 as part of its cost savings program, the Group’s operating result of -454.4 million euro (-464.5) remained close to the comparison period due to the impact from non-recurring items. The positive impact of non-recurring items in 2020 operating result was 130.8 million euro, whereas for the financial year 2021 it was 14.4 million euro. The loss for the period 2021 amounted to -464.3 million euro (-523.2).
The negative result for the period caused by the COVID-19 pandemic also had an impact impact on the consolidated balance sheet. The Group’s equity declined by 47% to 475.7 million euro (896.6). Total net deferred tax asset recognized in the consolidated balance sheet as at the end of 2021 increased to 191.9 million euro (84.8). Further, the Group’s total non-current liabilities increased to 2,391.6 million euro (2,154.2) mainly because of the four A350 sale and leaseback transactions and one leased A350 aircraft. Finnair also issued an unsecured bond of 400 million euro, which was raised repay some of the earlier, maturing bonds and to provide general funding for the Group. Finnair’s current liabilities increased to 1,179.8 million euro (595.7) resulting mainly from the reclassification of the first pension premium loan repayment of 300 million euro (due in December 2022) to short-term liabilities and an increase in deferred income resulting from the increase in passenger ticket sales.
The Group’s net cash flow from operating activities improved significantly during 2021 amounting to -25.3 million euro (-1,043.1). The improvement was mainly due to the exceptionally large volume of cash refunds (relating to prepaid flight tickets) paid to customers in 2020 and, on the other hand, the increase in ticket sales during the second half of 2022. Finnair’s liquid funds grew by 357.8 million euro during the reporting period and totaled to 1,150.0 million euro (792.2) as at 31.12.2021. The increase in cash funds during the year was mainly due to aircraft financing transactions of the A350 aircraft and an issuance of the unsecured bond totaling to 400 million euro.
Further detail on the Group’s financial figures can be found in the following notes: revenue and operating expenses (note 1.2 and 1.3), deferred income and advances received (note 1.2.4), pensions (note 18.104.22.168), aircraft financing transactions in notes 2.1, 2.2 and 3.3), derivatives and jet fuel hedges in notes 3.1 and 3.8, changes in liabilities and equity (notes 3.3 and 3.9) and income taxes (note 5.1).
The COVID-19 pandemic has also had an impact on the critical accounting estimates and sources of uncertainty. This have been disclosed in more detail in the below section Critical accounting estimates and sources of uncertainty.
Critical accounting estimates and sources of uncertainty (extract)
The preparation of IFRS financial statements requires Group management to make certain estimates, assumptions and judgements in applying the accounting principles that affect the reported amounts of assets and liabilities as well as income and expenses. The application of the accounting policies prescribed by IFRS require making estimates and assumptions relating to the future where the actual outcome may differ from the earlier estimates and assumptions made. In addition, management discretion has to be exercised in applying the accounting principles especially when the IFRS has alternative accounting, valuation or presentation methods. The estimates and assumptions made are based on past experience and management’s best estimate of future events and other factors, that are believed to be reasonable given the current circumstances. The estimates and associated assumptions are continuously evaluated and any changes therein are reflected in the period that the changes occur.
The COVID-19 pandemic has increased the level of uncertainty relating to the near- and long-term development of the economy and its impact on Finnair’s future operating environment. Despite increased vaccination rates and significant actions taken by the governments to contain the virus, it is difficult to forecast how long it will take to bring the global pandemic under control. In addition, the price of fuel is subject to higher than average uncertainty, which is further increased by the possibility of an escalation of the geopolitical situation in Eastern Europe. The escalation and prolongation of the geopolitical situation could affect the overflight permits, routings and costs of Finnair’s flights to Asia. Given the unpredictability of the duration and the reach of the pandemic, price of jet fuel and the geopolitical situation, their impact on Finnair’s future profitability, financial position and cash flows may eventually differ from the current management estimates and assumptions made.
In order to reflect the increased uncertainty in its estimates and assumptions caused by the COVID-19 pandemic, Finnair’s management has considered three different forecast scenarios incorporating possible variations of the expected pace of the business recovery based on its best estimate at the time. These scenarios are discussed in more detail in the earlier section of the notes called Board’s assessment of Finnair as a going concern. Further, in order to consider the increased uncertainty also in its impairment testing performed at the year-end, Finnair is using the expected cash flow approach which incorporates expectations about all forecast scenarios instead of relying on just a single, most likely, cash flow estimate.
Information about the estimates and judgement exercised by management in applying the Group’s accounting principles and the areas where estimates and judgements have biggest impact on the financial statements are highlighted in the following table Critical accounting estimates and sources of uncertainty.
3.3 Financial liabilities (extract)
State aid in pension premium loan and rights offering
The European Commission has concluded that the State of Finland’s guarantee of Finnair’s pension premium loan up to EUR 540 million, which was approved by the European Commission on 18 May 2020, and the State of Finland’s participation in the rights offering are so closely linked that they must be regarded as an overall transaction that constitutes State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union. Under the Commission’s decision, the Company has agreed to certain conditions following the offering, which include, among other things, a ban on acquisitions, restricting the Company from acquiring a stake of more than 10 per cent in competitors or other operators in the same line of business, including upstream or downstream operations for a period of three years from the offering.
As a result of the restrictions based on the Commissions decision, the remuneration of each member of Finnair’s management will not go beyond the fixed part of his/her remuneration on 31 December 2019. For persons becoming members of the management on or after the rights issue, the applicable limit of the remuneration for such new member will be benchmarked to the remuneration of comparable managerial positions and areas of responsibility in Finnair applied on 31 December 2019. Finnair will not pay bonuses and other variable or comparable remuneration elements during the three fiscal years 2020–2022 to the members of the management.
Further, Finnair is committed to publishing information about the use of the aid received within 12 months from the date of the offering and thereafter periodically every 12 months, for a period of three years. In particular, this should include information on how the company’s use of the aid received supports its activities in line with EU objectives and national obligations linked to the green and digital transformation, including the EU objective of climate neutrality by 2050.
State aid in hybrid loan
Finnair and the State of Finland signed an agreement in 17 March 2021 for a hybrid loan of a maximum of 400 million euros to support Finnair. The decision was made by the Plenary Session of the Government on 18 February 2021. The arrangement has the approval of the EU Commission’s competition authority in line with the European Union’s state aid rules. Of the credit limit, approximately 350 million euros can be used by Finnair based on the state aid decision made by the Commission on 12 March 2021. Finnair is able to access the funds, if its cash or equity position would drop below the limits to be defined in the facility’s terms and conditions. The EU Commission’s competition authority approved the remaining, ca. 50-million-euro share of the hybrid loan facility on 10 February 2022. Therefore, as disclosed also in the note 5.4 Events after the closing date, the whole 400 million euro hybrid loan facility is at the company’s disposal according to the terms and conditions of the facility.
5.3 Events after the closing date
The increased uncertainty related to the COVID-19 pandemic is still evolving and will have a significant impact on Finnair’s operating environment also after the review period. In addition, the price of fuel is subject to higher than average uncertainty at the time of the publication of the financial statements, which is further increased by the intensified geopolitical situation in Eastern Europe. The escalation and prolongation of the geopolitical situation in Eastern Europe could have a strongly negative effect not only on the price of fuel, but also on the usage of airspace, routings and costs of Finnair’s flights to Asia.
Finnair announced on 17 March 2021 that the company and the State of Finland had signed an agreement on a hybrid loan of maximum 400 million euros to support Finnair. The company also stated that of this credit limit, approximately 350 million euros can be used by Finnair based on the state aid decision made by the European Commission on 12 March 2021 and that the remaining approximately 50-million-euro share will be brought to approval by the Commission at a later stage. Finnair announced on 17 February 2022, that the Commission has approved the remaining 50-million-euro share. The company is able to access the funds, if its cash or equity position would drop below the limits to be defined in the facility’s terms and conditions.
4.5 Related party transactions (extract)
Related parties of the Finnair group includes its subsidiaries, management, associated companies and joint ventures and Finnair pension fund. Subsidiaries are listed in the note 4.2 and associates and joint ventures in note 4.4. Related party transactions include such operations that are not eliminated in the group’s consolidated financial statement.
The State of Finland which has control over Finnair owns 55.9% (55.9%) of Finnair’s shares. During financial year 2020 the State of Finland participated in the rights issue in proportion to its holding by 286.1 million euro and guaranteed Finnair’s pension premium loan up to 540 million euro. The European Commission concluded that these transactions, in combination, constituted state aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union. The conditions relating to the state aid approval are described in the note 3.3. All the transactions with other government owned companies and other related parties are on arm’s length basis, and are on similar terms than transactions carried out with independent parties.