ANNUAL REPORT 2016 FINNAIR ANNUAL REPORT 2016 2 CONTENTS 2 About this report 89 Governance 90 Management principles 3 2016 in brief 95 Corporate governance statement 2016 3 CEO's review 107 Risk management and major risks 5 Highlights 2016 112 Remuneration statement 2016 118 Board of Directors 7 Strategy 119 Executive Board 8 About Finnair 120 Information for the shareholders 9 Megatrends affecting Finnair 10 A changing operating environment 122 Sustainability 12 Value creation and strategy 123 Materiality analysis 18 Stakeholder engagement 125 Reporting principles 19 Fit for the Future 127 Economic responsibility 21 Key performance indicators 130 Social responsibility About this report 139 Environmental responsibility Finnair Group’s core business consists of the airline business. The purpose of the Annual Report, including its GRI section 22 Finance 148 Global Compact content index prepared under the G4 reporting framework, is to account for the company's financial, economic, social and environmental 23 Key figures 149 GRI G4 content index impacts, and to explain their strategic business significance. The report’s intended audience consists of shareholders, inves- 25 Report of the Board of Directors 2016 153 Independent Practitioners' tors, analysts, media, customers, employees, other interested stakeholders and the general public. 35 Financial Statements Limited Assurance Report 81 Calculation of key ratios Finnair considers sustainability a critical and strategic aspect of business performance. Thus sustainability reporting is an inte- 82 Board of Directors' 154 Contact information gral part of its annual reporting framework. The report describes Finnair’s material activities in 2016 across all its units. Mate- proposal on the dividend rial aspects are listed on page 123. The Annual Report contains a description of material events in Finnair’s business units in 83 Auditor's report 2016, a statement by the CEO, a section on strategy and value creation, as well as a review of stakeholder engagement and 87 Tax footprint megatrends. In addition, the Annual Report includes a disclosure on management approach and a tax footprint statement. The GRI section describes the materiality analysis process, and the resulting reporting aspects, indicators and data in more detail. Finnair has made efforts to facilitate reading its financial statements and to clarify the overall picture that can derived from them. • The notes of Finnair’s financial statements have been grouped as business-based sections in order to give a more relevant and less complex picture of the whole. Each section sets out the accounting principles applied in producing these notes together with any critical accounting estimates and sources of uncertainty. • Interesting figures have been highlighted by circling them, and these as well as other highlights are explained in a text box marked with a star. • Illustrating charts have been inserted in various sections of the financial statements so as to facilitate understanding the figures. FINNAIR ANNUAL REPORT 2016 3 CEO'S REVIEW 2016 showed that Finnair is moving in the right direction. We are on a growth path, but we must pick up our speed. There is a spirit of enthusiasm at Finnair as we are location of our Helsinki hub. At the same time, we are implementing our strategy with resolve. We are also opening new connections for our home markets, recruiting and focusing on both the customer and business and leisure travellers alike. personnel experience, developing our brand, figuring out how to utilise new business opportunities provided In order to be able to grow, we need new personnel. We by digitalisation. We are working to develop the Nordic have accelerated in particular the recruitment of flight customer experience. crew, since one widebody aircraft employs directly some one hundred persons. In 2016, the number of personnel In 2016, our revenues increased by 3 per cent to 2.3 in our continuing operations increased by 280 in net billion euros and our comparable operating profit more terms, and we currently estimate we will hire a total of than doubled to 55 million euros. However, in order to one thousand people by 2020 since the beginning of achieve our 6-per cent EBIT margin target, we need 2016. determined steps and profitable growth. Growth also involves growth pains. There were delays The most important strategic decision of the year was to in the deliveries of our new aircraft, and as a result, accelerate Finnair’s growth. Initially, as we are phasing the crew type training was postponed and backlogged. out our last A340 aircraft, we also intended to take At the same time, we were also training new recruits. out two of our A330 widebody aircraft this year, while To mend the resource deficit, we leased more external taking delivery of four new A350s. Instead, we made crew and aircraft than we had initially planned. This also the decision to keep all of the A330s, which materially somewhat affected the customer experience, caused "OUR REVENUE GREW TO strengthens our long-haul fleet. And due to the growth operative irregularity, and, as a result eroded our 2.3 BILLION EUROS AND in our long-haul traffic, we are also strengthening our profit by twenty million euros. Nevertheless, Finnair’s feeder traffic with new A321 narrowbody aircraft. customer satisfaction showed very positive develop- COMPARABLE OPERATING ments in 2016. PROFIT MORE THAN DOUBLED Capacity growth reduces our average unit costs and is necessary for our competitiveness. It also enables The spirits at Finnair are high, although the transition TO 55 MILLION EUROS." us to provide new destinations and frequencies to our period requires all of us to go the extra mile. In order to – PEKKA VAURAMO, PRESIDENT AND CEO customers. In line with our strategy, our growth focuses support our staff cope with the increased workload we on traffic between Europe and Asia, where we have a are driven to develop our internal operating culture and geographical competitive advantage due to the central improve the people experience further. Our people are FINNAIR ANNUAL REPORT 2016 4 "CUSTOMER IS AT THE CORE OF OUR BUSINESS". excited about our growth and the new kinds of business Hence, we are part of the Finnish tourism sector, which emerging, new colleagues and career opportunities. has considerable growth potential. We also implemented an organisational reform, high- The past year was also significant from the perspective lighting customer experience and an overarching focus of sustainable development. In the general assembly on digitalisation. The customer is at the core of our of ICAO, the International Civil Aviation Organisation, business. We want to provide a unique Nordic experi- a far-reaching emissions agreement was concluded, ence, which inspires to choose Finnair again and again. which stabilises the emissions of the sector at the level The Nordic customer experience means among other of 2020. Finnair is among the undisputed pioneers in things reliability and straightforwardness; things which sustainability in the sector, and we received kudos for we as Finns can be proud of. Digitalisation also plays a this in several independent assessments during the year. key role: Some of the most prominent examples are the In 2016, we also reformed our sustainability programme application facilitating the trip throughout the service and Code of Conduct while implementing SEDEX, a chain, the entertainment offered on board, our online system created for the aviation industry, in the review shop supporting ancillary sales both on the ground and of the sustainability of our supply chain. We are also in the air, as well as the gradual introduction of wireless committed to complying with the responsibility princi- internet on all of our aircraft. ples of the UN Global Compact initiative. Last year, we made an assessment to ensure that all of our operations As Finland is celebrating its hundredth anniversary, it are comprehensively aligned with the UN’s sustainable is exciting that the attractiveness of Finland as a travel development goals. destination is clearly on the rise. In 2016, Finnair signed a strategic partnership with a major Chinese travel plat- Finnair has now taken off, relying on cooperation. I want form, making Finnair and Helsinki one of their key Euro- to thank our investors and passengers for the trust they pean gateways to destinations in the Finnish Lapland have shown in our company. I also want to express my and Europe. Towards the end of the year, Rovaniemi and gratitude to our personnel for their enthusiastic and Ivalo together were the top destination for our Chinese inspiring work both on the ground and in the air. passengers in the whole of Europe. In addition, together with other parties in the travel sector, we have developed Pekka Vauramo a stopover service for tourists who would like to stop in President and CEO Finland for a few hours or a few days during their trip. @pekkavau FINNAIR ANNUAL REPORT 2016 5 HIGHLIGHTS 2016 Finnair updated its growth strategy In May, the Finnair Board of Directors, as part of the company’s annual strategy work, determined the matters on which Finnair will focus in 2016–2018 in order to meet the company’s strategic objectives. These are: • Profitable growth – Finnair revised its capacity and market share targets slightly upwards. The company announced it would retain two A330 widebody aircraft, which it was initially plan- ning to give up in 2017. The growth supports Finnair’s profitability by decreasing unit costs. • Customer experience – the Company will develop its customer service in a determined fashion, aligned with its vision of a Nordic customer experience. • People experience – Finnair will focus on human resources development as part of its growth and productivity strategy by developing leadership, workplace community and occupational health initiatives, competence and cooperation. • Digital transformation – in developing its activities, Finnair will utilise opportunities provided by digital innovations and best practices in business transformation.