Finnair: Re-Discover Russian Market

Transcription

1 Finnair: Re-Discover Russian Market Case study April 2010 Case study by Dr. Andrey Yu. Panibratov, Associate Professor, Graduate School of Management, St.-Petersburg State University, Russia. The author would like to appreciate Finnair s executives Senior Vice President Kaisa Vikkula and Planning Manager Ari Soinola for their kind support and valuable remarks. The case study is developed as a basis for class discussion and is not trying to evaluate the effectiveness of particular business practices and management decisions. 1

2 During the past few years Finnair, as many other air carriers, has been struggling with profitability. The competition in the air carrier industry gets tenser every year and companies struggle with the balance of expensive kerosene price and cheap flight tickets. The International Air Transport Association estimated that in 2009 the world wide net loss for all air carriers was approximately USD 11 billion. It was the Friday of a cold winter week, 22 of January 2010, when the new CEO of Finnair Mika Vehviläinen, closing his eyes, reflected upon the solutions for the company over the lasting financial crisis. His thoughts were: Finnair cannot cope with the current crisis... A radical change can be to freeze the Asian strategy and international competition, and concentrate on the domestic market... If concentrating on the Finnish market the company will shrink to half of what it is now... What if we try to turn to Russia? Company introduction In 2009 Finnair Group was a large company and one of the oldest operating airlines in the world headquartered in Vantaa (suburb of Helsinki), Finland. Its main hub was at Helsinki- Vantaa Airport. Finnair was a flagship of the highly diversified Finnair Group, which incorporated such operations as scheduled passenger traffic and leisure traffic, technical and ground handling operations, catering, travel agencies as well as travel information and reservation services. Finnair Plc had around 7,000 shareholders with the main part of 55.8% of the shares belonging to the Finnish government and around 20% of the company being in foreign ownership. Finnair was always known as financially sound airline. Even when the world financial crisis came, the turnover in 2008 was 2,263 million, comparing with 1,990 million in Nevertheless, the fuel crisis affected Finnair and its first-quarter profit in 2008 of 5.5 million ($8.7 million) was 41% lower than the year-ago period s. 1 Before the crisis Finnair had one of the strongest balance sheets of any European carrier, with zero net debt. The company carried a total of 8.3 million passengers in the Among these passengers 6.9 mln were carried on scheduled passenger traffic routes, 1,3 mln on leisure flights and 1,5 mln. on domestic routes. Cargo and mail carried by Finnair in the year 2008 totaled tones. 2 Finnair had 9,500 employees. Company s fleet numerated 65 aircraft. The average age of the company s fleet was a bit less than 6 years so the ones, especially long-haul, were always being renewed. It consisted of Airbus, Boeing and Embraer aircraft. 1 Finnair / Air Transport World [Electronic Resource] Vol. 45, Issue 7. P Finnair in brief [Electronic resource] / Finland. Finnair Group

3 Finnair operated in 2009 scheduled flights to 11 long-haul destinations: Tokyo, Osaka and Nagoya in Japan; Beijing, Shanghai, Guangzhou and Hong Kong in China; Bangkok in Thailand; Delhi and Mumbai in India; and New York in the United States. Finnair also flied to 12 destinations within Finland, where the domestic route network was one of the densest in the world in relation to population. Finnair s long-term strategy was focused on Europe Asia traffic. Nevertheless with Scandinavian, Russian and Baltic markets Finnish airlines also placed great expectations. Finnair s goal was to be the airline of choice for the quality and environmentally aware flight passenger in intercontinental traffic of the northern hemisphere 3. Despite company focus on international operations, Russian market which was poorly saturated with the high quality and safe flights was mainly served by other foreign carriers. Russians know and used Lufthansa or Air France when choose the long haul destinations. As to Finnair it was mainly attractive to those Russians who take relatively short distanced routes to Europe and who are able to ride with a car from St.-Petersburg to Helsinki, then leave the car in Vantaa, and depart to France, Germany or Spain... History of the company Finnair Group is one of the oldest airlines with a long-lasting history. It was established in 1923 by Bruno Otto Lucander and first it was named Aero Oy. In the beginning Aero Oy had only one aircraft - Junkers F 13 - a single-engine monoplane, equipped with a closed cabin and seats for four passengers. But till 1929 their amount increased and reached 7 Junkers F13, what gave Aero Oy opportunity to start international expansion. Aero Oy started air traffic on the line Helsinki Tallinn in spring The second destination was Stockholm, where Aero operated in cooperation with the Swedish airline ABA. These routes made a stable background for future expansion plans of Aero s board of directors and even received a special name Scandinavian Air Express for marketing the companies' air traffic between Stockholm and Helsinki and between Helsinki and Tallinn. The results of the first year were quite significant passengers, whom Aero carried on these two destinations. But except from Stockholm and Tallinn Aero also started their operations on the domestic market; and to attract more loyal customers within Finland the company lunched the special PR program. The company always had support from the Finnish government. The first subsidy Aero received in 1926 and since that time received a yearly sum which, however, due to the comparative poverty of the country was relatively small. 4 3 Group strategy [Electronic resource] / Finland. Finnair Group Air traffic [Electronic resource] / Finnish Tourist Association

4 During the Second World War all civil aviation was placed under military control and was used for military needs. Nevertheless, despite the hard times for airlines and problems with fuel during the War, Aero made lots of flights both in Finland and abroad, what tells about this company and their board of management as about fearlessness and persistent. After the war Finnish State acquired a majority holding in the company. The 30% of the shares continued to be held by private shareholders, mainly companies. This principle of ownership remains roughly the same today. Aero's administration was also reorganized. The whole organizational structure changed from a 12-member Supervisory Board to a 6-member Board of Directors, with the Chairman of the Board also serving as the company's President and CEO. In 1953 the company started to use the name Finnair in its marketing (this became the company's official name on 25 June 1968). With purchasing of Convairs the rout network expanded with a new route to Paris and London. In 1956 a rout to Moscow was opened, making Finnair the first Western airline to begin a service to the Soviet capital after the Second World War. In 1961 Finnair founded a charter-flight subsidiary, Polar-Air Oy, which flights were handled by Finnair to Tenerife, Palma de Mallorca and Rimini. One year later, Finnair acquired a 27% controlling interest in another Finnish airline, Karair. In 1964 Finnair launched flights to Milan, Hamburg, Amsterdam, Paris, Stockholm, Frankfurt, Gothenburg, Copenhagen, Luxembourg, Barcelona and Malaga. In the same year the scheduled flights began to Leningrad (St. Petersburg) and in 1965 to Athens, Dubrovnik and Brussels. In 1969 Finnair aircraft started to fly across Atlantic to New York. This destination was extended in 1981, when new routes to Seattle and Los Angeles were lunched. Expansion of Finnair to Far East began with the start of the company's direct flights to Bangkok in November Then in 1983, Finnair became the first operator to fly non-stop from Western Europe to Japan when Helsinki-Tokyo flights were started. 5 Five years later Finnair also expanded to China market and started direct flights to Beijing in 1988 what made this company the first Western European airline which had a non-stop route between Europe and China. So, became an era of new long-haul flights, which established the goal for future international expansion to Asia. In the early 1970s Finnair decided to diversify their operations and as a result they invested in hotel and travel agency operations. Finnair Group incorporated such operations as scheduled passenger traffic and leisure traffic, technical and ground handling operations, 5 History after the war [Electronic resource] / Finland. Finnair Group

5 catering, travel agencies as well as travel information and reservation services. However, the core business operations of Finnair are scheduled and leisure traffic (almost the biggest turnover among all divisions of the company Table 1 in Appendices), that is why in the end of millennium the company came up with a decision to minimize the number of business inside the organization and build the structure of the Finnair Group in a goal-directed way. In the 1990s and 2000s, functions that were not the airline s core business were sold, including hotel and restaurant operations and part of the Group s package tour production. 6 The airline industry changed radically around the turn of the millennium. The events of 11 September 2001, the Iraq War, SARS and tighter price competition also compelled Finnair to consider new kinds of strategic solutions. After the 11 September terrorist attacks in New York, Finnair initiated cost-cutting measures and adjusted its capacity to the decreasing demand. The objective of the cost-cutting measures was to achieve savings as soon as possible. Some of the measures were aimed at changing the cost structure. Salaries and the recruitment of new personnel were frozen, shortterm contracts were not renewed, all possible new acquisitions were abandoned, investments were shelved and a restructuring of the route network and capacity was initiated. During the Iraq War in 2003, Finnair flew all of its flights normally, because the flight routes were sufficiently distant from the war zone. Finnair began adjustment measures, however, to secure its financial health. As part of a new wide-ranging cost-cutting programme, Finnair initiated employer-employee discussions based on the Act on Cooperation within Undertakings. In Finnair increased its number of Bangkok and Miami flights by almost a half during winter. The company flew ten times per week to Bangkok in the peak demand periods around Christmas and New Year. Miami, which had returned as a winter destination in 2003, received a third weekly flight. High fuel prices and decreasing demand in affected Finnair. Despite the fact that there was an increase in turnover from 2,181 million in 2007 to 2,263 million in 2008, operating profit results was minus 52 million (Table 2 in Appendices). Finnair lost about 56,4 million in 2008, while in 2007 company s profit was 138,9 million. 7 Despite the fact that the board of directors implemented a cost reduction plan last year and till this time the company has saved about 50 million, it was not enough to become a stable company in this hard time. Finnair did a lot to reduce expenditures during the crisis. One of the ways of cost reduction, which Finnair have chosen for their recovery plan, was a mass discharge of employees, what causes concern of employees and affects the image of good employer and the 6 Hill L. Flying Finns // Air Transport World [Electronic Resource] Vol. 35, Issue 6. 7 Krivobok R. Finnair s losses in 2008 are 56,4 mln euro // RIAN,

6 most punctual airline. Finnair was preparing for mass redundancy of 2000 stewards in 2009 as a result insufficient figures of company s performance. In 2009 Finnair operated scheduled flights to 10 long-haul destinations: Tokyo, Osaka and Nagoya in Japan; Beijing, Shanghai, Guangzhou and Hong Kong in China; Bangkok in Thailand; Delhi in India; New York in the United States; Seoul in South Korea. The long-haul fleet currently consists of ten wide-bodied aircraft. According to Senior Vice President of the company Kaisa Vikkula, in the end of the first decade of the 21 century Finnair's position in traffic between Europe and Asia was well established and growing strongly. In its Asian expansion, the company was supported in particular by Finland's favorable geographical position: the shortest routes from Europe to the Far East passed through Helsinki. International operations Slogan of Finnair group is The fast airline between Europe and Asia. In 2009 Asian traffic was almost 50% of revenue in flight operations. The location of Helsinki on the shortest route between Europe and Asia made it the most attractive place to start or to continue a journey. When flying via Helsinki, passengers travel in the right direction from almost any Europe to most Asian destinations and vice versa when travelers fly from Asia to Europe, Helsinki is the first European city. As ex-president of Finnair Keijo Suila noted a decade ago, Europe will remain the key to Finnair s business, but at the same time company management will exploit competitive advantage in expanding Asia services, based on a geographic location that offers the shortest Europe-Asia connection and the attractiveness Helsinki-Vantaa Airport itself. 8 The number of passengers on Asian flights quadrupled over the last decade. Finnair also tried to maintain first positions if the European market offering several daily frequencies to all major European cities. With twelve destinations within Finland in 2009, the domestic route network of Finnair was one of the densest in the world in relation to population. According to IATA the sharp growth in air traffic in Asia, particularly in China, was likely to continue unabated, while growth in Europe was expected to slow only slightly 9. In 2004 Asian traffic was about 25% of Finnair's total revenue and 30% of Asian sales derived from cargo 10. In Finnair did a lot to increase these figures. The airline introduced a sixth 8 Hill L. Nordic fast-tracker //Air Transport World [Electronic Resource] Vol. 38, Issue 9. P N. Clark, Airline industry profits heading for decline in 2008 [Electronic Resource] / The international Herald Tribune Flottau J. Finnair Expansion // Aviation Week & Space Technology [Electronic resource] Vol. 161, Issue 23. 6

7 Boeing MD-11 to its Asian operation and increased capacity by 48.9% based on a 56% rise in demand 11. Boeing MD-11 had advantages of both passenger and freight capacity as well as range, what make a competitive advantage over the main rival of Finnair SAS. Nevertheless, Finnair management was going to improve the quality of fleet. The planning manager of the company Ari Soinola said: Now we are changing our old MD11-long haul fleet to modern Airbus A330 and A340. The number of aircrafts remains the same. Last MD11 flight will be operated New long haul fleet gives us more competitive advantage as it uses less fuel than the old MD11. In international traffic departing from Finland, Finnair had a more than 60% market share. In its domestic market, Finnair offered direct connections from Finland to around 50 international and 11 domestic destinations, what all together estimated in around 800 route combinations. Also in the co-operation with Finncomm Airlines flights from Helsinki to Stuttgart and Norrköping were operated by Finnair. (Finncomm Airlines 12 is a privately owned Finnish airline company. The company was established in 1993 as an air taxi operator. Since 1998 the company has had scheduled air traffic. Finncomm has co-operated with Finnair since The schedules have been harmonized to ensure good connections from Finnish domestic routes to Finnair's international route network. Measured by number of operations, Finncomm is Finland's biggest domestic airline. Almost half of domestic flights are flown by Finncomm. In 2008 Finncomm carried approx. 870,000 passengers, in 2009 the figure was expected to be more than one million.) Besides long-haul routes to Asian countries and North America, to such cities as New York, Miami, San Francisco and Toronto Finnair also operated charter flights to more than 60 leisure destinations, mainly to the Mediterranean area, the Canary Islands, Southeast Asia and the Caribbean. However, despite the long-haul routes orientation of the company, Finland s nearest neighbor countries over the Baltic Sea also open up growth possibilities for Finnair 13. The Finnair Group airlines' network is enhanced by code-share routes based on Oneworld alliance co-operation and bilateral agreements. 11 Flottau J. Finnair Expansion // Aviation Week & Space Technology [Electronic resource] Vol. 161, Issue Finncom Airlines [Electronic resource] / Finnish computer airlines oy Access: free. Title from the screen. 13 Hill L. Nordic fast-tracker //Air Transport World [Electronic Resource] Vol. 38, Issue 9. P

8 According Finnair reports figures of international performance in 2009 the company turnover felt by 21.6% to million euro in comparison with 2008; passenger traffic declined by 8.5%; unit revenues from flight operations fell by 14.9% and unit costs rose by 2.8%. 14 Finnair s traffic altogether decreased by 10.2%, measured in revenue passenger kilometers. Capacity decreased by 10.1%. Passenger load factor was 0.1 percentage points lower than year before, 80.2%. Number of passengers carried decreased by 9.2% and was 656,484. Scheduled international traffic, decreased by 7.4%, measured in revenue passenger kilometers. Capacity decreased by 9.2%. Passenger load factor was 1.6 per cent higher than year before, 81.2%. Number of passengers carried decreased by 6.5% and was 491, Industry overview The airlines industry comprises passenger air transportation both scheduled and chartered, but exclude air freight transport. The global airline industry generated total revenues of $429.9 billion in 2007, representing a compound annual growth rate (CAGR) of 11.2% for the period spanning Industry volumes increased with a CAGR of 6.2% between 2003 and 2007, to reach a total of 2.1 billion passengers in The industry forecasts were quite promising and predicted that the industry will decelerate slightly, with an anticipated CAGR of 10.6% for the five-year period The global market for air carriers consisted of three main parts - Americas region estimated about 51.1%; European part 28,5% and Asia-Pacific 20,4% (Table 3 in the Appendices). Compared to global market European one was much smaller and generated total revenues only of $122.7 billion in The European part of the airlines industry grew by 15.0% in 2007, what was the highest growth since Both global and European markets showed stable slight growth. And this trend was expected to continue over the forthcoming years towards European airline industry volume also increased, comparing with 2003, and reached million passengers, while on global market the number of passengers was about 2,076 million 19. One of the most striking differences between these two markets was the tendencies of domestic and international flights. So, if in Europe international flight passenger volume 14 Early-year result a clear loss due to falling price level [Electronic Resource] / Finnair Group interim report 1 January 30 June Finland. Access: free. Title from the screen. 15 Monthly traffic performance data August 2009 [Electronic Resource] / Press Release. September 8, Finnair. Finland. Access: free. Title from the screen. 16 Airlines Industry Profile: Global [Electronic resource] / Industry Overview [Electronic resource] P Airlines Industry Profile: Global [Electronic resource] / Industry Overview [Electronic resource] P Airlines Industry Profile: Europe [Electronic resource] / Industry Overview [Electronic resource] P Airlines Industry Profile: Global [Electronic resource] / Industry Overview [Electronic resource] P

9 dominated domestic (67% opposite to 33%), in global airline industry the situation was absolutely different and the domestic flight segment accounted for 66.5% of the total global airlines industry volume, while international flight passengers generated only 33.5%. Key inputs and the most expensive factors for airlines were fuel, aircraft and labor. That is why airline industry depended on prices on the fuel so much. As the airline industry is laborintensive, staffing costs usually are substantial, with an average contribution about 25% of the company s total costs. Another 25% of the total cost was the fuel. Air carriers also have to modernize their fleets every years as they become outdated and sometimes dangerous for the exploitation. Last year the price of oil rose to a record high, what made airlines companies very vulnerable. Airline industry was so highly leveraged that there was no need of a big change in one factor to have a significant impact on profitability of the whole company. Soaring fuel prices, weakening demand worldwide, declining revenues in passenger and cargo traffic and the impact of the credit crisis on bank liquidity reduced the cash flows of all airlines companies. According Ari Soinola by the end of 2009 around 50 airlines collapsed around the world. In 2009 the main players in the market for air transportation were Lufthansa, British Airways and Air France KLM. These companies were the most powerful and can influence on some trends in the airline industry. The main competitor of Finnair was SAS which provided air travel and related services including catering and hotel management. The company was headquartered in Stockholm, Sweden. One of the operations of SAS was long haul routes to North America and Asia out of the main hub in Copenhagen, as well as Stockholm. SAS and Finnair were named as two of the safest airlines in the world by the Swedish magazine Flygrevyn. 20 The situation in the airline industry in the 2009 was quite complicated because of soaring fuel prices (at least, unpredictably changeable prices) and slow economic growth. These factors seem to decrease a huge part of profits in the industry in 2009 and this is predicted to happen despite the steady increase in global demand for air travel. Also this may lead to increasing pressure on less-profitable carriers to merge, especially in the USA. As oil prices in 2007 were set at approximately $100 level and the IATA predicted that during 2008 the industry profits decreased by one-third from 7.8 billion dollars to 5 billion dollars. In 2008 the peak of business cycle was over. But still in 2007 airline earnings improved strongly after six unprofitable years after the terrorist attack in the USA in September Also efforts to cut costs have reduced non-fuel expenses by 16% since 2001, sales and marketing 20 SAS, Finnair among safest airlines shows study - Brief Article [Electronic resource] / Airline Industry Information

10 costs have fallen by 25% and labor productivity has increased by 64%. All these figures lead to the predicted 5.6 billion dollars profit after 13 billion dollar loss in In 2007 air passenger traffic grew by around 7% in comparison with 2006, though the demand was still stable in most regions despite all the concerns about the impact of tightening access to credit. In 2008 economic growth and airlines revenues were tight together: the risk of the US economic downturn threatened to limit spending on air travel, especially among business travelers. But the growth in air traffic in Asia, particularly in China, was likely to continue, while growth in Europe was expected to slow down slightly. With the beginning of the world crisis the airline industry started to decline, what made airlines more vulnerable and forced them to implement innovations, what was quite hard when fuel prices were so high and fuel became a main source of expenses for such companies. According to Giovanni Bisignani, IATA's general director, the industry maintained its estimate of $11 billion full-year losses for Those who were likely to see the biggest drop in profits were North American airlines: 19% decrease in 2008 to 2.2 billion dollars. Also with 35% of its fleet more that 25 years old the US airlines were expected to be hurt by higher fuel costs and the US domestic market represents about 30% of global air traffic. At the same time most US airlines were in debt that makes them vulnerable to fuel price changing or the effects of an economic downturn. Bisignani also said 2010 will look similar to 2007 in terms of passenger traffic and an oil price of around $75 a barrel. He urged airlines to focus on the traditional solutions of conserving cash and cutting costs, while governments should cut taxes. 22 Besides constant competition from fast and inexpensive railway operators, dozens of new airlines including first low-cost companies popped up. As industry itself became more consolidated, the best way for American and European airlines was to cooperate via alliance, because they represented a unique strategy of accessing restricted markets. These airlines, being strong in different geographical regions have shifted from reciprocal and formal code-sharing to flight schedule coordination, common advertising, acceptance and integration of frequent-flyer programs. Competition hence started to concentrate among alliance networks rather than among airlines themselves (see Fig. 1 in the Appendix). Though all its history Finnair always had close relationship with other airlines and special attention was drawn to Nordic companies, with which Finnair established the Nordic Alliance. In 1997 Finnair and British Airways announced a cooperation agreement, in which both companies 21 Klapper, B.S. Airlines expected to lose $5.6 billion in The Boston Globe, Associated Press Writer / December 15, Klapper, B.S. Airlines expected to lose $5.6 billion in The Boston Globe, Associated Press Writer / December 15,

11 were partners. From the 1999 Finnair became a full member of the Oneworld airline alliance. Membership in the Oneworld allowed Finnair customers to benefit from a global network consisting of around 600 destinations offering 350 common lounges areas. In 2009 Finnair was forced to reduce the number of flights in total and eliminate one direction to China. Moreover, during the summer period temporarily the flights to Mumbai, India, were closed. To solve this problem the company resorted to the partnership with Cathay Pacific, which was also one of the members of Oneworld alliance. Together they set one more direction to Brisben, Australia, opening the connecting flight there via Hong Kong. As a result of this strategy Finnair will be able to offer its customers better and more convenient timetable of the flights to Australia. Furthermore, connecting flights through Hong Kong are convenient for passengers, who fly to Australia, as from there lots of destinations to Australia are arranged. Finnair in Russia Finnair was the first western company which entered the Soviet Union airline market. The regular routes between Helsinki and Moscow were established in 1956 and till 2009 more than one million passengers were carried on this direction. In 1964 Finnair added St. Petersburg to its list of routes and finally the last city in Russia, where this company was represented became Yekaterinburg. This city was chosen due to its strategic location near Siberia, what represented new gateway to the company to attract more customers. One of the directions of extending the relationship between Russia and Finland was increasing the number of flights and their frequency between Helsinki and three Russian cities. For example, in the beginning of 1964 there were only two flights per week, while in 2008 this amount was increased to 8 per week. However, according to ex-ceo of Finnair Jukka Hienonen, the company intended to cement relationship with the main players of the Russian airline industry and with their help to increase the frequency of the flights between St. Petersburg and Helsinki 23. In 2008 Finnair frequented the number of flights between Saint-Petersburg and Helsinki and brought it up to 28 flights for a week. But not only Saint-Petersburg was in the interest of Finnair Group, it was also interested in other huge cities on the European part of Russia. Enhancing the number of flights was an important step in commercial partnership with Russian companies. By 2009 Finnair had a strong partnership with the main players of Russian airline market Aeroflot and GTK Rossiya. According to these agreements Finnair and two Russian carriers were obliged to each other to carry passengers of other company if necessary. Exactly this part of their partnership helped Finnair to avoid worst case scenario, when pilots of the Finnish company went on 3 days long strike in November That time Russian partners 23 Finnair will erect the bridge between Asia and Europe / Tourism news

12 managed to at least partially duplicate Finnair in its flights to Russian Federation and some other destinations around Baltic Sea (for other passengers were following options: changes of travel date free of charge or full price compensation). In the beginning of 2000s Finnair Group set its renewed strategy on the Russian market. At this year they decided to reduce the number of their agents to ten persons and focus their work on developing their own brand and trademark and on increasing the number of loyal regular customers. In 2003 a meeting of minister of transportation of Russian Federation, directors of Russian airlines and CEO of Finnair Group took place, where issues of collaboration of Russian airlines with Finnair Group were discussed. At this discussion Russian party was interested in the education of Russian flight personnel and technical personnel using the Finnish training equipment. At the same time representatives of Finnair were interested in providing technical service of the flights and in collaboration with Russian air companies Pulkovo and GTK Rossiya. While Finnair was exploiting Russian market, it signed a code-share agreement in 2004 with Aeroflot Russian airlines. 24 This agreement was intended to improve flight availability between Helsinki and Moscow and other destinations. Both airlines continued to operate one daily flight between the cities, but thanks to the agreement both can offer a morning and evening flight. Both Finnair and Aeroflot used Airbus aircraft on the route. "The Finnair growth strategy has proceeded according to plan in Asia, the Baltics and Scandinavia. The code-share agreement is continuation for the technical co-operation, which has made Aeroflot the second largest outside client for Finnair Technical Services", commented Finnair CEO Keijo Suila. 25 In May airlines operated to/from and within Russia, all major alliances being represented on the market (see Fig.2 in the appendices). Such a tense competition made Finnair to ensure the approach to the biggest cities of Russia. The launch of few Embraers (new short haul plains) in was expected to provide Finnair with the chance to reach a set of large Russian cities with high figures of population (see Fig.3 in the appendices). According Ari Soinola, the demand from these Russian cities was typically at the beginning and not that strong so Embraer with seats was very suitable for this kind of operations. Long haul planes have capacity of more than 250 seats and it s too much for these regional markets of Russia. 24 Aeroflot and Finnair signed code sharing agreement [Electronic Resource] / RATA-news Access: free. Title from the screen. 25 Finnair and Aeroflot begin cooperation [Electronic Resource] / Press release, June, Finnair Group Finland. Access: free. Title from the screen. 12

13 One important aim of Finnair in Russia was to improve communication with three main Russian cities and increase the passenger volume not just for flights to Finland, but more for transfer flights through this country as it is the main strategy of the company. All passengers had a great variety of options where they can go via Helsinki airport about 40 destinations in Europe and Asia. Finland was very popular among Russian people, what makes this route very attractive for tourism. For several years Finland was in the first places among the most visited countries by Russians. During the year 2008 there were more than 3 million of Russians went to Finland, including 667,000 of tourists. That was 20 per cent more than one year before. Despite some 17% of Russian tourists came to Finland from Moscow, the main market is North West Russia; 70% of visitors are from St. Petersburg and its suburbs. 26 Finnair Group to be on the forefront of the development on the market decided to buy St. Petersburg tourist company Calypso. It was the one that was bought in 2007 by the subsidiary company of Finnair - Aurinkomatkat-Suntours. This company specialized on individual and corporate tourism and ticket sales. The Finnish company has significant flows of tourists (around thousands tours are sold annually per year) and after signing the contract on the organization of charter flights from Saint-Petersburg they may take up a leading place on the market. Kaisa Vikkula pointed out that the first goal of Finnair Group here was to attract more customers by selling quality tour packages. And the second goal according to Finnair s CEO was an interest in customer base of Calypso, what can be used as an additional source of increasing the number of customers. Calypso specialized in VIP and tailor-made travel and employed 60 people. With Calypso's help, Finnair wanted to gain access to Russia's rapidly growing travel market. In Russia Finnair s target group was the increasingly affluent middle-class, which wanted to travel and see the world. The deal price was not announced and was estimated by experts at around US$1 million. Calypso travel agency had nearly 15 thousand customers annually. Russians always saw Finland as a perfect place for the holidays. There were three main destinations within this country, which Russians preferred to visit Lapland, industrial cities as Helsinki and cottage holidays in the countryside. For example, in 2005 it was about 7550 passengers, who arrived to Lapland by air directly from Russia. 27 Except this route lots of 26 Tourist relationships of Finland and Russia, Tourism News, RIAN, 03/06/ Nigel Halpern. Lapland's Airports: Facilitating the Development of International Tourism in a Peripheral Region // Scandinavian Journal of Hospitality and Tourism [Electronic resource] Vol. 8, No. 1. P

14 passengers used Helsinki as transit hub to go to other parts of Finland. And Finnair here occupied one of the main positions. The natural and sparsely populated nature of Lapland means that it is one of the few remaining wilderness areas of Europe, what makes it hard to achieve this place without airport. Also the fact that trends in tourism are moving towards a shortening of the longer main holiday in favor of shorter, fragmented holidays further lends itself to air transport due to the time cost savings that it can generate compared to other transport modes. 28 At the same time Russian tourism to Finland was constantly exposed to seasonal demand fluctuations. There was always the great demand during summer, New Year holidays and school holidays. For airlines the good thing is that the most popular tours were the ones during winter to the northern parts of Finland (such as Lapland). This leaded to the increasing demand on air transportation services during this period. In the summer period (about 3-4-monthes) and winter, especially New Year, Christmas and other holidays, thousands of people not only from Russia, but also from Great Britain, France and Germany come to visit all parts of Finland, which is famous for its landscapes, nature and Lapland. It is very hard time for main airports of Finland and for main carriers as Finnair also. However, during autumn and spring there is a small demand for flights to Finland from Russia. At this time it is much more likely to see people, who go somewhere in Europe or Asia via Helsinki. Usually it is businessmen or people, who want to take advantage of fast transit via Vantaa airport and plenty of available destinations and who is not interested in travelling within Finland. There were no charter flights from other countries to Finland and a lack of flights from other countries to other cities within Finland. That made tourists from Russia to choose traveling by car instead of travelling by air. Also sometimes it was more convenient to take car instead of aircraft as it was cheaper for the short distance. It was a great problem for Finnish and Russian airline companies, what reduces the number of potential customers of Finnair from Russia and especially from St. Petersburg as it was situated very close to Finland. Other limit to Finnair operations in Russia were of more legislative character, being quite common for all foreign air carriers. First of all, it was forbidden by law in Russian Federation for a foreign company to become a stakeholder in an aviation industry company. This way government protected own market players, and also restricted competition to which Russian carriers were not ready. 28 Nigel Halpern Lapland's Airports: Facilitating the Development of International Tourism in a Peripheral Region // Scandinavian Journal of Hospitality and Tourism [Electronic resource] Vol. 8, No. 1. P

15 Secondly, foreign companies were not allowed to perform charter flights through Russia in order to continue to other countries. Such restrictions were seriously limiting possibilities of Finnair to expand its flights to Asia more effectively. For example, Dubai was a hub for many Airline companies. And thanks to its opened airspace such companies as Lufthansa were able to fly from Frankfurt/Munich to Bangkok/Singapore via Dubai. This way there was no need to use giant intercontinental air carriers, but low cost carriers can be used instead. Also passenger flow can be optimized. The same could work for Finnair in Russia for flights Helsinki- any city in Russia - any city in Asia (like Seoul or Bangkok). Thirdly, it was also forbidden for foreign companies to perform local flights across all Russian Federation. Finnair made an attempt to penetrate the market of local flights in But as a result of introduced law on foreign companies and inner flight routes it temporarily opened a direct flight Helsinki-Petrozavodsk. Nevertheless in 2 years this project was closed due to its low profitability. That time it was much more demanded by passengers to potentially have flight Petorzavodsk - Saint-Petersburg. In 2009 this project was still not exploited. To sum up, Finnair management met following implications and challenges of Russian market for the company. First of all, Russian market was poorly saturated with the high quality and safe flights. Many Russian airlines have not modernized their fleets, which was one of the reasons for high costs. The room for growth in Russian market was especially important at the framework of worldwide decline in the industry with such problems, as decreasing demand and redundant facilities, declining profitability of the airline business, unpredictable changes of fuel prices and threat of budget airlines (which also deteriorate the situation for all airlines to some extent). At the same time there were a number of barriers for foreign airlines on Russian market. One of the most significant was that they were not allowed to operate internal flights. Jukka Hienonen, ex-president of Finnair, believed that these artificial barriers can not last long. He compared situation on the Russian market with the European situation 20 years ago, when European market was just as closed as Russian. Secondly, existing partnerships with Aeroflot and GTK Rossiya allowed Finnair to economize on purchases and other expenses also providing technical service of the flights. Probable merger of Aeroflot with Rossiya, Kavminvodyavia, Orenburg Airlines, Vladivostokavia, Saratov Airlines, Sakhalin Airlines may to augment the market share of future Russian Airlines from 15% up to 30-35%. The industry consolidation was forces by the crisis and the intention to help airlines to deal with loss-making assets. What can be especially important for Finnair, in St-Petersburg 50% of traffic from Pulkovo airport is controlled by GTK 15

16 Rossiya. By increasing the number of flights between St. Petersburg and Helsinki, Finnair can also expect transit flights via Helsinki to grow. It should be only taken into consideration, that while Finnair Group was a part of One world alliance, Aeroflot entered Sky Team. According to legislation, air carriers from two different alliances should establish completely a new company. Finnair once met difficulties when had serious negotiations about the possible unified company with SAS. Despite Finnair belonged to One World Alliance and SAS to Star Alliance, two companies had a lot in common: SAS had also been struggling during the past few years with profitability and the company had announced about EUR 440 million saving program. Thirdly, Finnair entered the Russian tourism market in an attempt to diversify its business. The company management believed that the flow of tourists going abroad from Russia will grow. The average price of tourism services in Russia was 30 per cent higher than in Finland. They discovered weak competition in this market. There were also not enough flights or packages deals and discounts in this market. Reorganizing Calypso according to their business model, they could decrease prices and during next ten years become a great competitor on this market. At the same time Russian tourism flows were highly seasonal. So, the problem was also a seasonality of the foreigner`s demand for domestic flights. And there were also a number of substitutes, which could be more convenient or cheap as cars, trains, buses. Finally, Finnair was considering charter flights. The company management faced organizational and legal difficulties. It s a seasonal business and they could operate charter flights for about half the year, with high customs taxes and VAT making this business unprofitable. The charter activity could deteriorate the image of precise airlines and also not be very profitable due to legislative barriers. While there were a great number of challenges for Finnair Group on the Russian market, there was also a huge potential for company`s expansion, diversification policy and possibility to become a first mover in case of changes of legislation concerning operation of internal flights for foreign airlines. Existing profitable partnerships with Russian airlines, unique geographical position and traditional trade relationships among two countries should also influence Finnair`s Group strategic decisions toward Russia. Questions for discussion 1) Specify theories and approaches that may help to better understand and analyze the industry of air transportation. Explain how those theories can be applied within the industry and major players analysis. 16

17 2) What can be future actions of Finnair in reacting to a global crisis besides reducing costs with the help of redundancy? What should be the strategy of Finnair when oil prices are low and the demand for flights is declining? 3) Why some Russian customers give preference to Finnair and some not? How Finnair should promote itself in Russia? 4) How the Finnair s strategy of growth may correspond to the ideas of the costreduction? What methods of cost reduction may be developed except the cut of salaries? 5) Evaluate perspectives of acquisition of Calypso by Finnair group. 6) How the company could overcome the seasonality of the demand? Recommend the marketing policy via 4P concept. 17

18 APPENDICES Table 1 Turnover of Finnair units in

19 Table 2 Finnair group key figures 29 UNIT Net sales mill. 2,263 2,181 1,990 1,871 1,683 Operating profit (adjusted). EBIT* mill Operating profit (adjusted)*, % turnover % 0,3 4,4 0,6 3,7 1,5 Operating profit, EBIT mill Result before taxes mill Unit revenues on flight operations cents/rtk 70,1 72,6 74,0 73,7 71,0 Unit costs on flight operations cents/atk 43,5 43,5 46,1 45,3 50,7 Earnings per share -0,33 1,04-0,16 0,73 0,30 Equity per share 6,04 7,70 6,77 7,73 6,97 Gross investment mill Interest-bearing net debt mill Equity ratio % 38,1 47,0 37,2 42,2 40,2 Gearing % -11,6-22,5 7,1-25,1-3,1 Adjusted gearing % 63,2 35,1 112,8 66,8 102,5 ROCE % -2,5 14,2-0,1 11,1 6,1 Average number of employees 9,595 9,480 9,598 9,447 9, Finnair data

20 Table 3. Global Airlines Industry Segmentation Airlines Industry Profile: Global / Industry Overview [Electronic resource] P

21 Figure 1. Airline Consolidation landscape. Source: Finnair data 21

22 Figure 2. Air carriers and alliances acting in, from, and within Russia. Oneworld 3% LCCs 2% Star 9% SkyTeam 31% Others 55% Source: Finnair data 22

23 Figure 3. New Embraers range toward Russia. Source: Finnair data / Tilastokeskus 23