Finnair chief Keijo Suila knows his carrier's financial health and independence will depend on finding a sustainable competitive edge and keeping costs low
If any European flag carrier has good cause to fear the drive towards industry consolidation, then surely it would be Finnair. In its small home market extending to the Arctic Circle, the 80-year old national carrier of Finland is not only geographically isolated, but surrounded by the home territory of SAS Scandinavian Airlines and Lufthansa, two giant competitors teamed in the Star Alliance. Yet under the leadership of chief executive Keijo Suila, Finnair is far from ready to draft its own epitaph.
Rather, the carrier is confidently expanding its long-haul services to the Far East, undertaking a refleeting exercise and even launching a bold incursion into the heart of SAS's home market, all while keeping finances steady in a difficult profit environment.
At the airline's unassuming headquarters building near Helsinki-Vantaa Airport, Suila explains how his carrier will ensure its long-term viability. Perhaps not surprisingly for a leader who arrived in the industry only five years ago after a long career in the consumer goods sector, his vision borrows more from general business strategy than traditional airline wisdom. It centres on the idea that Finnair will be successful only if it makes every move mindful of its own limitations and competitive advantages, and operates aggressively within them.
Comparative advantage
"Our ambition is not to provide everything for everyone," he says. "We won't try to cover the world, but will be active in those areas where we have a competitive edge. When we identify an area that provides us with competitive, sustainable opportunity, then we're in business - we're attacking."
On the revenue side of the profit equation, one area where the carrier enjoys a comparative advantage is, paradoxically, its location. "On the one hand, we are in the northeast corner of Europe, in a way on an island. But, on the other hand, we are located right on the great circle route, directly on the optimal route from Europe to the Far East." Most cities require a stop on the way to Asia, anyway, and there is no faster connecting service between the two continents, he says, adding that this advantage is enhanced by Finnair's small and uncongested hub facility at Helsinki.
Recognising the potential of its location, Finnair has made service to Asia the cornerstone of its long-haul offerings. While the carrier 10 years ago served five destinations in North America, it now flies only to New York JFK. And whereas its Asian operations were once limited to Tokyo, the airline now also flies to Bangkok, Beijing, Hong Kong Osaka and Singapore and, in early September, initiated service to Shanghai.
"We traditionally have looked to the West, but we're now focusing on the East. We've doubled our volume to Asia in the last two years and are not yet done," he says. To support its Asian ambitions, Finnair added two Boeing MD-11 widebody aircraft to its fleet of three, one from the stable of now-defunct Citybird, which it leased from Boeing Capital, and one it brought over from its own charter division.
This geography-based strategy obviously poses risks, as became painfully clear when the SARS epidemic decimated demand for travel to and from Asia. As passenger and cargo traffic dried up last spring, Finnair quickly reduced frequencies to the Far East and added Miami to the schedule.
However, Suila is adamant that Asia is where the carrier's long-haul future lies, and seems to hint that, although the Miami flight is "selling well and doing its job", it will be a one-season service. Looking to the future, he says that Finnair's SARS-reduced schedule to the East is a thing of the past, that it has recently increased frequency on some routes to the region and that traffic levels are already above last year's.
Natural advantage
The other area where the carrier has a natural advantage, according to Suila, is in its home region. This advantage is under attack, with pressure mounting from the low-cost sector, most notably including the just-launched Flying Finn. That challenger, ironically, is mounting its campaign on the backs of two Finnair-retired Boeing MD-83s, and has hired a pilot and mechanic corps that used to work on the type for the flag carrier.
To combat this incursion into its home patch, Finnair has gone to an all-economy product on several routes, including St Petersburg, Prague, Warsaw and the capitals of the neighbouring Baltic states. It already serves destinations in its domestic network and those to southern Europe with single-class service, the latter through its scheduled-charter division.
Additionally, the carrier recently rolled out a transparent pricing structure as part of a programme which has also eliminated most restrictions on changing tickets and minimised the penalties for booking close to departure. Finnair plans to use the scheme, which it appears to have taken out of the low-cost handbook, to stay strong in its own backyard, and Suila plainly states that, after Asia, its expansion plans centre on the northern Europe region and the Baltic states of Estonia, Latvia and Lithuania. Estonia is home to regional carrier Aero Airlines, in which Finnair holds a 49% stake.
Pressure to defend the five million-strong home market has also come from SAS, which has regional subsidiary Air Botnia flying within Finland and to SAS hubs in Copenhagen, Oslo and Stockholm. While conceding that Air Botnia's activities have not helped fare levels any, Suila is confident that the home carrier can more than sustain itself in Helsinki. And what is more, it is not afraid to launch its own raids into SAS territory.
A few years ago, it collaborated heavily with Maersk Air to break into Denmark, but found its efforts thwarted by its erstwhile partner's subsequent collaboration with SAS, which Brussels ruled illegal. Undaunted, Finnair in August completed a transaction to purchase an 85% stake in Stockholm-based, low-cost carrier Nordic Airlink.
Suila explains the move: "We have always viewed Scandinavia - which for us means Sweden, Norway and Denmark - as a home market. We had made inroads there through our co-operation with Maersk, but then its cartel with SAS was formed and we saw Maersk was not going to be a means for sustainable, profitable growth. The low-fare market, however, is an interesting opportunity."
Scandinavian ambitions
Observers have questioned whether the Nordic Airlink purchase was made in response to Air Botnia's growth in Finland, but Suila is quick to object, presenting the case in strictly business terms. "There are many routes from Scandinavia where competition is limited. We know the competition's cost structure and we know what kind of opportunity there is for us. This is not a reactive step - it's an offensive step."
Suila knows that SAS will not take kindly to the acquisition, the terms of which he declined to disclose, but he seems undaunted. Allowing that "we anticipate a fight in the marketplace", he feels that by offering a low-price product with fewer routes but more frequencies than Snowflake, the SAS low-cost product, Nordic Airlink can be a financial success.
One reason Suila is confident that Finnair can profitably compete in Stockholm is the carrier's track record in understanding the desires of the customer. He believes the linchpin to this expertise is the carrier's use of what he calls layers of differentiation.
He cites the quality of the wines served in business class as a small factor that can make a big difference in passenger perception. "It's a detail," he says, "but it's important to our premium passengers and it's indicative of our thinking." A layer of differentiation more telling than its wine cellar is Finnair's use of technology.
The carrier, which in 2002 received the first Airline Business award for excellence in technology, has been a perennial market leader in IT. It was the first carrier to offer passengers the ability to check themselves in over the Internet, it teamed with alliance partner American Airlines to offer the first e-ticket interlining agreement across the Atlantic and it has brought to the fore several other technology-based innovations.
Speaking of the carrier's pioneering work in the area, Suila explains that the technology programme benefits greatly from the expertise in the sector possessed by the nation. In addition to being home to such companies as mobile telephone giant Nokia, Finland has the world's highest per capita number of IT engineers.
Even in this new era, when security concerns have pushed many of the convenience-enhancing innovations the carrier was introducing onto the shelf, the company maintains the same lofty goals with its technology programme. "I want to avoid us being seen to be doing gimmicky things. Rather, I want us to do things, such as e-Gate, that add real value to the passenger," says Suila. E-Gate, which security concerns have limited to domestic flights, automatically checks in frequent flyers through their mobile telephones as they enter the airport, allowing them to board the aircraft without ever touching a piece of paper.
The field of technology also illustrates what is perhaps Suila's biggest focus: getting and keeping Finnair's costs low. In addition to using customer-friendly tools like e-Gate to minimise airport staff costs, the carrier has instituted Internet-based ticketing for its corporate customers. What is more, it has used outside players to maintain its ability to provide top customer service while lowering its costs.
Outsourcing expertise
In 2002, Finnair formed a joint venture company with IBM that provides all of the carrier's IT services. In addition to allowing the carrier to concentrate on the passenger business, the deal also frees in-house capacity to concentrate on other projects. Suila explains part of the rationale for the initiative is that "it helps us safeguard our ability to stay ahead and not have to use our skills and capacity to repair and maintain existing systems".
And the company has not limited its use of external service providers to IT, but has employed it to reduce costs across the spectrum. During Suila's tenure with the carrier, it has outsourced much of its ground-handling, as well as hotels and restaurants and some of its travel agencies. Finnair has even jettisoned its much-vaunted wine cellar. The chief executive explains that "wine is still important to us, but it's just not part of the core business". In any case, he says: "It's not that we no longer offer premium wines, it's just that we no longer hold millions of euros worth of bottles in stock."
This focus on the core business activity is only one way he has worked to bring expenditures down. The quest to lower costs is a mantra with Suila, who was brought onboard in 1998 after 13 years with the Huhtamäki consumer goods company.
"I am not an airline man," he says. "I'm a businessman. When I came here, I said it's not enough to be a great airline, we have to be a great business enterprise. Swissair - which a lot of people used to compare us to - was a great airline. It wasn't [being a bad airline] that killed the company, it was its corporate strategy."
Suila obviously has made it his mission to ensure that his carrier does not follow in those footsteps, and establishing a lower cost base has been a key part of that since his arrival. "We started to work on our cost structure earlier than most European carriers, eliminating unprofitable routes in 1999, when there was still a healthy tail wind for the industry," he says.
Last spring, Finnair furthered the cause by launching a programme aimed at achieving annual savings of €160 million ($180 million) by 2005. Besides cutting routes and increasing its use of outsourcing, the carrier has been forced to lower its headcount, which in 1999 stood at 10,700, but by the end of June, was at 9,500, with 500 more redundancies planned for next year.
Labour pains
Predictably, Finnair's employees have not been overjoyed with this development. In June, ground staff staged a two-day strike when their positions were transferred to a third-party company. The action forced the carrier to cancel all its domestic services and many in Scandinavia and elsewhere in Europe.
For his part, Suila understands why there is staff frustration, but says the overall level of job satisfaction is good. "I'm not surprised there are tensions. How else could it be when you are reducing their staff levels by 20%? But, at the same time, I have received e-mails from several of the union heads congratulating me on the Nordic Airlink investment," he says. "We have a committed workforce, and, even with the tension, the quality they turn in is of a very high level. In the scheme of things, a two-day illegal strike is very little."
In any case, he argues that he has little choice but to push forward with the cost-cutting programme if the carrier is to continue as a viable concern. "We've seen our yields coming down for many years and they will continue to do so. If you're not able to adjust your costs accordingly, you're out of business."
Suila says he is satisfied with the progress to date. "There's nothing for us to be ashamed about in our efforts. We have come down in our unit costs trend- wise since 1999 and our second quarter results show that every cost component except fees to airport authorities were down."
The carrier's operating costs were down 5.7% for the quarter versus the same period in 2002. Fuelling a substantial part of the fall in costs was a 20% drop in ground handling and catering expenditures, and a restructuring of its marketing operations which lowered those costs by 30%.
Another area Suila is counting on to provide help down the line is its membership in the oneworld global alliance, through which it provides codeshare service to 14 cities in North America. Although he says he is satisfied thus far with the results the grouping has generated, he believes there is still potential yet to be realised.
"I don't think we've utilised the advantages as well as we can, on either the revenue or cost side," he says. "There are more opportunities to synchronise operations to stimulate win-win structures, but there has been progress on this within the bilateral framework and I'm convinced that we're on the right track here."
Another activity aimed at achieving long-term cost reduction is fleet simplification. There has been much recent progress on this goal, with the last active McDonnell Douglas DC-9 only retired in July. The carrier still operates a few MD-80s, but has renewed more than one-third of its fleet in the past three years, with the Airbus A320 family, of which it has 24, apparently the short-haul aircraft of the future.
On the long-haul side, the carrier continues to stand as one of the few developed world passenger carriers operating the MD-11. Suila defends the aircraft, saying: "It is a very good workhorse for us. It has good range and a good mix of passenger and cargo capabilities, and cargo, especially high-tech goods between northern Europe and Asia, is very important for us."
He adds, however, that the 296-seat aircraft will not be a permanent fixture in Helsinki, hinting that a phase out in the latter half of this decade seems on the cards. "There's no hurry to get rid of it - it's doing its job well - but you have to plan for the future," he says.
The road ahead
All of these efforts are of course aimed at achieving financial security, and Suila is pleased with what has already been achieved on his watch. While Finnair posted an operating loss of €9.9 million in the second quarter, compared with a €30 million profit for the same period in 2002, this owes largely to the impact of SARS. Suila is confident that traffic to Asia will continue to bounce back and that on-going work on costs will see Finnair return to profitability. "We have no illusions that fare levels will jump up, but thanks to the cost work we've done in the past, our balance sheet is strong," he says, adding that "the company remains net debt free".
Even as it steers itself on to a course of financial viability, there are those who doubt that the industry will long have room for carriers of Finnair's size. Predictions that the future of Europe's sector will see Air France, British Airways and Lufthansa dominate intercontinental services do not seem to overly worry Suila.
"There will be major intercontinental airlines and low-cost carriers," he says, "but there will also be niche players. Consolidation in the industry will happen, but in a way that it is the financially unhealthy airlines that disappear from the map. It will not go in a direction that there's only room for major players. Size is not everything: bigger carriers may have more passengers, but they don't have our sustainable cost structure."
He adds: "If you're able to offer your customers a better product in a cost-effective way, there will be room for you. For us the key lesson is: if you're not the biggest, you have to choose carefully where to be the best."
REPORT BY RICHARD PINKHAM IN HELSINKI PHOTOGRAPHY BY ETIENNE DE MALGLAIVE
Flying Finnish
Keijo Suila was born on 3 September 1945 in Laihia, Finland.
He joined Finnair in 1998 after 13 years with the Netherlands-based consumer goods company Huhtamäki, where he had worked since1985 and ascended to the rank of vice-chairman. Before that he served as executive vice-president at Finnish brewer Sinebrychoff, having previously worked at Unilever, where he began his carrier as a marketing trainee and left 13 years later as marketing director.
When Finnair began the process of finding a successor for long-serving chief Antti Potila, they approached Suila, who had earned a reputation for marketing excellence, as well as for being a "very frequent flyer". When he was offered the job, he was "at an age where you either decide to stick with what you're doing until you retire or take one last big move". Having opted for the latter, Suila has capably held the reins at the flag carrier throughout the most tumultuous period in the history of the industry.
Keijo Suila is married. Like many Finns, he is a keen outdoorsman and enjoys spending time at his summer cottage in the southwest of the country.
Source: Airline Business
