RISK MANAGEMENT IN FINNAIR

Risk management in Finnair is part of the Group's management activity and is directed primarily at risks that threaten the fulfillment of the Group's business short- and long-term objectives. To exploit business opportunities, Finnair is prepared to assume managed and considered risks, taking the company's risk-bearing capacity into account. In flight safety matters, Finnair`s objective is to minimise risks.

In Finnair, risk management means a systematic and predictive way of recognising, analyzing and managing the opportunities and threats associated with operations. Continuity plans have been prepared in case of the realization of risks, particularly as far as strategic and significant financial risks are concerned.

The Board of Directors and the President & CEO are responsible for the Group's risk management strategy and principles as well as for the management of risks that threaten the fulfilment of strategic objectives. The President & CEO is responsible for ensuring that risk management is in other respects appropriately organised. The Senior Vice Presidents of the business units and the Managing Directors of subsidiaries are responsible for risk management in their own areas of responsibility.

Organisation of risk management
Finnair Plc's Executive Board, which acts as a risk management steering group, assesses and directs risk management in Finnair Group. The company's internal auditing coordinates the reporting of risk management as well as adherence to the specified operating model.

The Operational Risk Management Department, which operates under Finnair Plc's Quality Manager, as specified in the Airline Operator's Licence, regularly audits and assesses the company's own and subcontractors' actions that impact on flight safety.

Finnair's quality system is IOSA certified*. The IOSA programme is an evaluation method, required by IATA, for airlines' operational management and monitoring systems. Auditing based on IOSA certification assesses whether the airline's quality control systems fulfil both IOSA and international aviation regulation standards.

Management of risks relating to loss or damage is divided into two main areas: flight safety and corporate security. Development work in these areas is coordinated by the flight safety department and the corporate security unit.

Operating environment risks
Demand and the price level of passenger and cargo traffic have been influenced most by market-area economic development, economic cycles, competition in the industry as well as various unexpected events, such as terrorism, environmental accidents and epidemics. The company has plans of action to minimise the operational impacts arising to air transport from various external disruptive factors.

The current trend clearly indicates that competitiveness in the air transport sector depends on how flexibly the company can react and adapt to surprising events, changes in demand and a constantly changing competitive environment.

A critical factor for operational flexibility is the adjustment of fixed costs to fluctuations in demand. The company's ability to react quickly in adjusting capacity, routes and costs to correspond to changing demand and economic and security conditions is also an essential factor in increasing the company's profitability. In recent years Finnair has implemented, and has under way, a number of projects that are intended to increase structural flexibility.

Finnair manages the residual value risk related to aircraft capacity and ownership by acquiring part of the aircraft belonging to its fleet through operating lease agreements of different durations. Operating lease agreements have been made especially for narrow-body fleet, where turnover rate is greater than for wide-body aircraft. The leasing of aircraft provides an opportunity for the flexible dimensioning of capacity in the medium and long term.

Market risk
The air transport business is sensitive to both cyclical and seasonal changes. Competition in the sector is intense and the market situation is continually changing, which has reduced average ticket prices over an extended period. Airlines are cutting their prices in order to increase volumes, achieve sufficient cash flow and maintain market share.

Finnair constantly makes market situation analyses and actively monitors its own reservation intake as well as competitors' changes in pricing and capacity. Finnair is able to react quickly to pricing changes that take place in the market by utilising its advanced optimisation systems.

Finnair is growing in markets in which it is not as well known a brand as in its traditional domestic market. This presents a challenge in marketing communications to highlight Finnair's competitive advantages.

A change of one percentage unit in the average price level of scheduled passenger traffic services affects the Group's operating profit by less than 15 million euros. Correspondingly a change of one percentage unit in the load factor of scheduled passenger traffic services also affects the Group's operating profit by less than 15 million euros.

Operational risk
Finnair's operations are based on a rigorous flight safety culture, which is maintained through continuous and long-term flight safety work. The company has prepared an operational safety policy, for which the company's Senior Vice President, Operations is responsible for implementing. Every employee and subcontractor working directly or indirectly with the flight operations must undertake to comply with the policy.

When operational decisions are made, flight safety always has the highest priority in relation to other factors that influence decision-making. Flight safety is an integral mechanism of all activities as well as a required way of operating not only for the company's own personnel, but also for subcontractors.

The main principle of flight safety work is non-punitive reporting of deviations in the way intended by the Aviation Act and the company's guidelines. The purpose of reporting is to find reasons, not to assign blame, as well as to identify predictively the risks of the future. The company, however, does not tolerate wilful acts contrary to guidelines, methods or prescribed working practices. Decision-making not directly related to operations must also support the company's objective of achieving and maintaining a high level of flight safety.

Reliability of flight operations
Reliability is an essential prerequisite for operating successfully in the airline industry. The air transport business, however, is exposed to various disruptive factors, such as delays, exceptional weather conditions and strikes. As well as their impact on operational and service quality, air traffic delays also increase costs.

Finnair invests continually in the overall quality and punctuality of its operational activities. The Network Control Centre (NCC) brings together all the critical parties for flight operations, thus enabling the most effective overall solutions to be implemented. Finnair Technical's service punctuality and diverse expertise as well as its detailed specification of technical functions ensure the reliability of flight operations.

Furthermore, in operational activities the contribution of partners and interest groups is essential. Finnair monitors the quality of external suppliers within the framework of standards specified in advance and through regulations prescribed for flight operations.

According to statistics compiled on European network airlines, the arrival punctuality of Finnair's flights in 2009 was 86.7%. In relation to Asian traffic, the transfer of passengers and goods from one flight to another at Helsinki-Vantaa Airport is increasing, in the short term, the risk of delays, owing to the airport's space restrictions. The opening of a terminal extension in autumn 2009 and the gradual introduction of a new baggage handling system from February 2010 will significantly improve logistical efficiency and operational reliability at Helsinki-Vantaa Airport.

Authorities and the environment
An airline registered in the European Union can operate freely within the entire area of the Union. To date Finland, like other European countries, has been accustomed to negotiating bilateral operating agreements with countries outside the European Union.

In future, regulation at the European Union level will bring the negotiation of aviation agreements between countries inside and outside the European Union under the European Commission. Existing bilateral operating agreements will remain in force in the new situation.

As a negotiating party the Union is stronger than an individual country and thus can strengthen the position of European airlines when negotiating operating rights. In some cases this may have an adverse impact on Finnair and may weaken the company's competitive position in relation to other European airlines. Finnair will actively strive to influence the parties who negotiate operating rights and Siberian overflight permits in order to safeguard its interests.

The European Union has decided to include air transport in the carbon dioxide emissions trading scheme (ETS) from 2012. Air transport within the EU will be subject to emissions trading as will flights departing from and arriving in the EU. This will have a particular impact on the competitive situation of intercontinental air transport. If non-EU states do not become part of the emissions trading scheme, this will give a competitive advantage to airlines whose hubs are outside the EU. Companies will be able to offer market routing changes such that emissions trading will burden them less than the EU airlines or not at all. A trade war may also be possible if non-EU countries do not accept the EU emissions trading rules. Finnair has successfully delivered the monitoring and reporting plan on its own emissions to the Finnish authorities and has also taken part in the preparation of national legislation. In addition, Finnair has also actively lobbied for a global emissions trading agreement.

Finnair has been active in environmental and social responsibility issues for a long time. Social responsibility and environmental issues are reported annually in a report according to Global Reporting Initiative (GRI) guidelines, by the company's participation in the Carbon Disclosure project, and through active interest group communications. The GRI report includes, in addition to social and financial responsibility indicators, lots of information on the effects of operations on energy consumption, emissions, waste amounts and noise values. The task of Finnair's Vice President Sustainable Development is to promote the realization of Finnair's environmental goals in the Group's business operations, in such a way that Finnair is among the leading airlines in terms of environmental activity. Transparent interest group cooperation is particularly important in order to be fully aware of the impact of legislation on operations and to meet the growing interest and demands of stakeholders.

Risk of loss or damage
Risk management in this area encompasses, for example, risks to flights, people, information, property and the environment as well as liability and loss-of-business risks, and insurance cover. The priority in the management of risks relating to loss or damage is on risk prevention, but the company prepares for any possible emergence of risks with plans, effective situation management preparedness and insurance. Aircraft and other significant fixed assets are comprehensively insured at fair value. The amount of insurance cover for aviation liability risks exceeds the minimum levels required by law.

Accident risk
The management of occupational health and safety is diverse and challenging, because the Finnair Group's operations are spread across many fields of business. Occupational safety risks are known to be high in precisely those areas - services, food industry, heavy aircraft maintenance, warehousing and transport - of which Finnair's operations principally consist.

The development of occupational safety is long-term work, and Finnair's goal is to minimise the number of accidents. Developing occupational safety is part of the everyday work of line organisation and the responsibility of every employee.

Means of improving occupational safety include identifying and evaluating occupational health and safety hazards in the workplace and preventing accidents and hazardous situations. All reported risk situations and accidents are investigated and lessons learned in order to develop safer working methods.

Telecommunications and information technology risk
The diverse use of information technology in support of operations has increased and there is greater emphasis on the importance of the availability of information. Systems' vulnerability and the development of new global threats represent a risk factor in a networked operating environment. Finnair is continually developing its information security and situation-management preparedness for serious disruptions to information systems and telecommunications. Such preparations have a direct impact on information technology and data security costs.

Developing information system solutions and the IT environment requires continuous investment. Careful selection of external partners in IT solutions also reduces the technology risk.

The coordination of the Group's information system architecture as well as its IT purchases and strategies have been centralized in the Group's information management department. This brings synergy benefits and improves cost efficiency.

Principles of financial risk management
The nature of the Finnair Group's business operations exposes the company to foreign exchange, interest rate, credit and liquidity, and fuel price risks. The policy of the Group is to minimise the negative effect of such risks on cash flow, financial performance and equity.

The management of financial risks is based on the risk management policy approved by the Board of Directors, which specifies the minimum and maximum levels permitted for each type of risk. Financial risk management is directed and supervised by the Financial Risk Steering Group. The implementation of financial risk management practice has been centralised in the Finnair Group's Finance Department.

In its management of foreign exchange, interest rate and jet fuel positions the company uses different derivative instruments, such as forward contracts, swaps and options.

Financial risks have been described in more detail in Note 31 of the Notes to the Financial Statements.

*IOSA = IATA Operational Safety Audit
IATA = The International Air Transport Association

More detailed information of financial risks.