Finnair drops hope of joining airline consolidation, looks to Asia

By Jussi Rosendahl and Tuomas Forsell

HELSINKI (Reuters) - Finnair has dropped hopes of taking part in industry consolidation because politicians oppose relinquishing state control and will instead look to Asia to expand alone, its chief executive said.

Finland's flag carrier, 55.8 percent government owned, has for years urged lawmakers to scrap a clause obliging the state to hold a majority stake.

Former minister for state-owned firms, Heidi Hautala, failed to win support in her push for change. The current center-right government considered the idea but dropped it and has no plans to discuss it again, two government sources told Reuters.

Finnair Chief Executive Officer Pekka Vauramo said any plan for a tie-up was "off our table at the moment" and said the airline, with annual sales of around 2.6 billion euros ($3.2 billion), aimed to expand on its own with a focus on Asian routes.

"We will go for our growth opportunities and define our future by ourselves," he told Reuters in his office near Helsinki-Vantaa airport.

Europe's airline industry has faced turbulence with the collapse of Monarch and Air Berlin, while Alitalia filed for insolvency protection, although airlines also saw a rise in global passenger traffic in 2017, up 7.6 percent.

Vauramo had told Arvopaperi magazine in September that Finnair was too small and had suggested tying up with a larger player would help, echoing comments he had also made in 2016.

Relations with the state have been strained. The board member for management compensation said he would quit this month, after the government criticized the board's approval of a supplementary pension arrangement for Vauramo.

A government source said Finnair's ownership was "just too sensitive a thing, politically" given the desire to have a state airline. The source said discussion on changing ownership would have to wait for a new government after the 2019 election.

MODERNIZING FLEET

Finnair, which struggled for several years to compete with discount carriers, has recently seen profit grow on the back of cost cuts, low oil prices and a focus on passengers flying between Europe and Asia from its Helsinki hub, which offers a shorter route to Asian destinations.

"Asia remains the direction which we are looking for future growth. We have very strong routes to large cities for which we are looking to open more daily flights," Vauramo said.

Finnair's share price has almost tripled from a year ago while revenue grew 11 percent in 2017, helped also by renewal of its wide-body fleet. Finnair recently received 11 new Airbus A350 aircraft and has eight more arriving in the next few years.

Vauramo said the company would look into renewing its European narrow-body planes, likely to happen around 2025.

But competition remains tough. Norwegian has said it was considering using Helsinki to serve some of its long-haul destinations, possibly for flights to Asia.

Vauramo played down the threat to Finnair's business, saying the airline had flown over Siberia for 35 years, making it the largest European airline operating in Japan and one of the largest in China.

"We have added these overflights little by little to almost 100 weekly flights as of today. I doubt that someone would be able to get that in a one go," he said.

But Inderes Equity Research analyst Antti Viljakainen said Finnair could be left behind in a changing industry.

"This is extremely competitive business," he said. "In an industry which is consolidating, being left alone is a risk in the long term."

Media reports in 2015 had suggested British Airways owner IAG was negotiating to buy a stake in Finnair, a member of its Oneworld alliance. Both denied there had been any talks.

($1 = 0.8073 euros)

(Reporting by Jussi Rosendahl and Tuomas Forsell; Editing by Edmund Blair)