Finnair's Network Strategy: Finding New Alternatives

DALLAS – In large and delicate industries such as commercial aviation, encountering a stable market situation in the long term is an exception to the rule, as hundreds of different factors involving economic, environmental, or political decisions cause periodical crises that can in some cases destroy an entire business model for an airline.

One of the most profitable air travel markets involves the transportation of passengers and cargo between the two large financial and cultural centers of Europe and Asia. It is estimated that more than 100 million people travel between these two continents each year, both on direct and connecting flights, therefore representing one of the largest air corridors in the world.

Finnair (AY), despite being the flag carrier of a country with a population of just 5.5 million, has become one of the most significant players in the Europe-East Asia aviation market since 1976, with the opening of its first eastern transcontinental flights to Bangkok-Suvarnabhumi Airport (BKK) from its hub, Helsinki-Vantaa Airport (HEL).

In July 2019, AY was the European airline offering the largest number of destinations in the Asian continent, with a total number of 15 airports, from the busiest Beijing (PEK) to the smaller Fukuoka (FUK). However, three years later, the closure of Russian airspace caused the shrinkage of AY's network drastically, as flying to many cities was no longer possible.

Finnair invited Airways to Helsinki on a behind-the-scenes trip to explain the past, present and future strategies of the airline, and how it has managed to survive the most severe crisis in its history, even larger than the COVID-19 pandemic.

Finnair's Traditional Market Strategy

Until the 1970s, Finnair functioned just as any other European airline, where Helsinki was the only international air entry point to the country. However, with the introduction of polar routes by Scandinavian Airlines (SK) in 1957, Finnair quickly followed and encountered a situation where the geographical publication of Finland allowed for the creation of a large connection hub between Europe and Asia.

If you draw the most direct route between different European and Asian cities, such as Frankfurt (FRA) to Tokyo (NRT), Amsterdam (AMS) to Seoul (ICN), or London (LHR) to Shanghai (PVG), you will see that all of these flights fly exactly over the city of Helsinki while cruising towards Siberia.

Because of that, the Finnish air carrier decided to establish itself as the leading carrier offering connecting flights between these two continents, linking important population centers in Japan, Korea, China, Thailand, and Singapore with the capitals and largest cities in Europe, with a short stop in Helsinki.

This strategy has always worked amazingly for AY, and not only has remained successful through decades, but it has also influenced the culture and tourism of Finland, as connecting passengers many times decide to make a longer stop to visit Finland on their way to Europe. As well, thanks to this, South Asian cities like Bangkok or Singapore have become very popular for the Finnish population as holiday destinations in Winter.

All was eventually coming to an end, when in February 2022, the Russian Government decided to close its airspace to all EU airlines, including Finnair, breaking completely the business model of the airline, as from now on all aircraft flying from Helsinki to Asia need fly around Siberia either northwards or southwards, extending flight times to up to 5 hours in the worst cases.

Finnair's Fleet Optimization Plan

As of May 2023, Finnair owns and operates a fleet of 79 aircraft, of which 42 units are dry-leased from third-party companies such as BOC, ILFC, or GECAS. The fleet is made up of ATR 72, Embraer E-190, and Airbus A320 family jets in short-haul, while the airline has chosen to go full Airbus in terms of widebodies, operating exclusively Airbus A330 and A350 aircraft for long-haul routes.

The closure of Russian airspace to AY has supposed that flight times to Asia have been extended and it has forced Finnair to take game-changing decisions. Topi Manner, CEO of Finnair, said: "We are very fortunate that our A350s have the range to serve Asian destinations even with the 40% longer routine, but the problem is that we have eight A330s, and the range for those aircraft is not enough".

This means now that Finnair, for a moment, has had a very tough situation where a full third of the long-haul fleet was not only unable to cover the large demand for flights to Asia but also that they needed to remain grounded as there was no place for them to go due to their shorter range.

"The range for the A330s is enough to fly to the United States, the Middle East, and India and that's what we have been doing" Topi continued. As of 2023, and due to the A330 range issues, Finnair has opened new routes to be exclusively operated by this part of the fleet, including cities like Dallas (DFW), Seattle (SEA), and Mumbai (BOM).

Of course, opening only three destinations is not enough to keep a total of eight airplanes flying all day, so the airline had to "figure something out". Then, a chance to enter the leasing market came, as Qatar Airways (QR) signed with Finnair a commercial partnership to fly from Copenhagen (CPH), Stockholm (ARN), and Helsinki (HEL) to Doha (DOH), where tickets selling for these services would be shared between the two companies.

Leasing Aircraft, Temporary Yet Good Solution

Of course, the agreement with Qatar Airways is not a leasing agreement. It is a collaboration between the two carriers that are also helping the Middle-eastern one to deal with its aircraft shortage due to the legal battle with Airbus about the painting quality issues with the Airbus A350 fleet, which has forced up to 17 units to remain grounded waiting for a solution.

Thanks to the contract with QR, Finnair is ensuring that, at all times, three rotating Airbus A330 airplanes are constantly flying fully and profitably on these routes to Doha. This added to the six regular routes from Helsinki to the United States, meant that Finnair was one step ahead of completing the optimization of its long-haul fleet.

In terms of real leasing agreements, Finnair finally signed a crucial deal on 19 May with Qantas (QF) for the wet lease of two Airbus A330 units for two years, switching into dry-lease operations for another two-and-a-half afterward. This action will support Qantas' ramp-up of international flights and the Pacific company will destine these two A330s exclusively on flights from Sydney (SYD) to Bangkok (BKK) and Singapore (SIN).

Topi insisted: "It is a long and fantastic deal, they are a close Oneworld partner to us, and it is now a step down the lane to find profitable flying for the Airbus A330 fleet. With the Qantas deal and the act of us introducing a more geographically balanced network, we have now completed the optimization of our fleet".

Finnair's membership in the Oneworld alliance has helped enormously in the quick deal securing with both Qatar Airways and Qantas. In the Japanese market, the airline still maintains also a "Siberian Joint Business" with Iberia (IB), British Airways (BA), and Japan Airlines (JL). In the US, flights to Dallas and Seattle now make sense thanks to the big connection centers of American (AA) and Alaska Airlines (AS), respectively.

Finnair's Short-Haul Fleet Situation

While Finnair has been performing a massive transition in the widebody fleet, replacing their legendary seven Airbus A340-300 airframes between 2015 and 2017 with the modern and revolutionary Airbus A350-900, in terms of smaller airplanes, Finnair operates a fleet of 57 aircraft with an age of 16 years old on average.

This is of course, including the most recent Airbus A321 fleet, which still is 8.8 years old on average. But without them, the age rises to 18 years old. Finnair is a carrier known for its rapid progress in sustainability, yet it owns and operates one of the most aging short-haul fleets in all of Europe.

About this, Topi said: "During the pandemic we optimized the lifetime of our narrow-body fleet by combining airframes and engines in a new and different way, thereby optimizing their lifetime, and that is why we are very happy with our current fleet. Buying new aircraft means that the maintenance cost is so much higher, that it offsets the costs and benefits of a new fleet."

He continued by saying that eventually, Finnair will need to renew the narrow-body fleet. To do this, the airline will need to come back to pre-pandemic levels to have the investment capability to renew the fleet and digital services: "We are thinking about it, but we are not buying," he referred to a potential upcoming order for new generation aircraft.

Finnair is also wet-leasing part of its current Airbus A320 fleet to British Airways. The deal is set to end in March 2024, but the UK carrier is already again in talks with AY to resume the further leasing of even more short-haul aircraft for their intra-European operations.

Finnair's Cost Reduction Techniques

With the closure of Russian airspace, a series of secondary effects have also been hitting the general European airline industry. Most importantly, the cost of energy as well as kerosene prices, have skyrocketed since the invasion of Ukraine a full 100%, doubling prices since the previous period.

Fuel is of course the number one cost for airlines, and that means that Finnair has needed to reduce costs in many aspects of its product and inflight experience to still offer competitive prices and survive the largest crisis of its history.

One of the most significant actions the airline has made toward the overall cost reduction is to eliminate the onboard selection of duty-free products such as cosmetics, accessories, and other retail items, to reduce the weight of aircraft on both short and long-haul flights.

With weight reduction, Finnair gains a significant advantage, as it is now able to cover that free space in weight by offering more seats on its flights, and therefore gain a higher margin for its fight to keep maintain stable profitability levels in the market.

As well, AY has also declared plans to modify their meal services in Economy Class, specifically on certain long-haul flights, by dropping the second meal service on routes such as Helsinki (HEL) to New York (JFK) or Dubai (DXB), therefore also gaining a margin in terms of aircraft weight and reducing costs.

Charging Extra for Carry-On Baggage

However, the change that has had the highest repercussion in the industry is Finnair's sudden update in baggage policy and the creation of the new "Superlight" fare, which does not include carry-on baggage as a complementary option in the ticket and is charged separately. Finnair is the first premium airline worldwide to have implemented this change, which for many years has been exclusive to low-cost carriers.

Antti Tolvanen, SVP of Network and Revenue Management at Finnair, also spoke with us to explain the circumstances of the decision of adding a new type of fare on short-haul flights: "Our carry-on bag policy is not a rip-off as in some low-cost carriers, that they show you a very cheap price for your one-way travel, and the bag might cost five times as much as the airfare. It is not what we are doing."

Antti said that one of the key reasons behind this decision is the reported issues with punctuality, as excess carry-ons can cause delays in boarding. However, charging extra for this additional piece has more consequences, such as an additional source of revenue and the decrease in weight in aircraft again, thanks to passengers wanting to not purchase this option for their flights.

Related to this, Finnair has created a special ticket for a new quickly-rising section of leisure passengers, which looks for cheap and short journeys for which a small bag that fits under the seat is sufficient. Usually, despite offering complimentary baggage, this type of passenger would not make us this advantage, as it would mean carrying 10kg more around the airport, airplane, and destination.

Despite all of this, this practice is still considered an abusive clause in some countries such as Spain. To address the legal boundaries of charging carry-ons, Antti said: "We are focused on having the customer understand everything that is included in the ticket, and that those terms do not change."

Sustainability is Worth It for Finnair

Along with the cost-reduction techniques mentioned above, Finnair has also bet strongly toward sustainability, aiming to halve its CO2 emissions from the 2019 levels and, with luck, be fully carbon neutral by the end of 2045.

To achieve this, the discontinuity of inflight duty-free product selling and the charging for carry-on baggage are measures that can significantly reduce the overall weight of airplanes, which will result in less amount of fuel burn, and with that, a large reduction of CO2 emissions.

Finnair has also cut off two routes to Tampere (TMP) and Turku (TKU), which have been replaced by more eco-friendly bus rides from the city centers. As well, the fleet renewal involving the replacement of the Airbus A340 with the more fuel-efficient A350 also allows for a reduction in fuel burn.

Finally, Finnair purchased 750 tons of Sustainable Aviation Fuel (SAF) in March 2023, which according to the airline corresponds to approximately 400 flights between Helsinki and Stockholm. SAF can cut carbon emissions by 80% compared to standard air fuel.

The truth is that, in the aviation industry, investing in newer and more sustainable solutions is widely accepted by airlines because cutting CO2 emissions involves decreasing fuel burn. It is a perfect coincidence which shows airlines a new incentive to help the environment with the collateral effect of cutting significantly the very high cost of fuel, especially during this period when prices have skyrocketed.

Finnair's Alternative Markets

With the closure of Russian airspace, Finnair has had to look for new alternative markets to move onto, as the airline has closed many routes to Asia due to its profitability in the current situation. Today, apart from the enormous campaign of aircraft leasing of its Airbus A330 fleet, AY has placed focus on two regions of the world; the United States and Southern Europe.

Thanks to the opening of flights to Dallas and Seattle, Finnair can connect passengers from the United States not only to its current East Asian destination list but also to Southern Asia, including India, Thailand, and Singapore. Differing from other airlines in the Scandinavian region such as SAS (SK), Finnair is playing alone in transporting customers via Helsinki, as no other long-haul airline flies out of Vantaa.

Scandinavian Airlines, on the other hand, deals with very high competition from carriers such as TUIfly Nordic, Norse Atlantic Airways, Thai Airways, Air India, and Singapore Airlines, on flights from its main hubs in Norway, Sweden, and Denmark, to countries like Thailand, Singapore or India. However, according to Antti Tolvanen, this does not mean that Finnair is in full control of its pricing methodologies.

As the big majority of passengers on flights from HEL to Southeast Asia are connecting from Europe and the United States, Finnair does not need to worry about an airline joining in operations from Helsinki, but in the entire Scandinavian region, which as well is nicely positioned geographically to offer quick travel itineraries to Asia.

On the other hand, Finnair is also optimistic about the summer season of 2023, as demand for flights between Finland and the Mediterranean is rising quickly at the same time as the intra-European market has fully recovered from the effects of the COVID-19 pandemic.

What Can We Expect In The Coming Years?

Given the full strategic update Airways has received from Finnair's CEO Topi Manner, as well as from Finnair's SVP of Network and Revenue Management, Antti Tolvanen, about the airline's past and present network and fleet strategies, what can we expect to see in Finnair in the coming years, regarding the closure of Russian airspace to EU airlines?

First of all, in terms of fleet, the leasing of aircraft to third-party airlines is a temporary solution for AY. The Finnish carrier will always study leasing opportunities closely and on a case-to-case basis, as few airlines can rise to Finnair's operational quality. The Qantas deal for the widebody airplanes wet-lease operation, as well as British Airways' Airbus A320 contracts, are the last in a long time to happen.

On the other hand, Finnair will receive its two next Airbus A350 units in 2024 and 2026, and the airline is not considering purchasing new-generation short-haul airplanes. However, in the coming years, and with the dramatic aging of its narrow-body fleet, we could expect an aircraft order at lease in terms of dry leasing contracts, to start a refreshment of its current A320 family fleet.

Finally, regarding the controversial baggage policies, Antti Tolvanen declared that Finnair is not favorable to offering "flight bundles", but rather offering different products separately. By doing that, the customer can more easily compare different airlines to which service is more pleasing for it and gives the passenger the option to choose what he wants to pay for at all times.

"We are an airline that does things differently. Courage is one of our values". These are the words Topi Manner used to describe Finnair, and its methods of addressing and solving the crisis that has remained quite unknown to the world, but that has been the worst in the airline's 100 years of history.

Featured image: Finnair painted two Airbus A350 airplanes with a special "Moomin" livery, celebrating its 100 years of existence. Photo: Adrian Nowakowski/Airways

https://airwaysmag.com/finnair-charge-for-carry-on-luggage/