How does a small flag carrier based in a remote European capital chart a path toward profitability?

For Finnair, the answer is to aim for markets that turn its liabilities into assets, carefully cultivate a “boutique” image among core customers and leave the things it does not do well to partners. For example, it set an expansion course in regional service this year with the acquisition of Finnish Commuter Airlines, but that is being rebranded Flybe Nordic with the U.K.-based regional experts firmly in the control.

For more than a decade, Finnair's main focus has been far to the east. Asia-Europe traffic is the second-fastest growing air market in the world. Only the growth of domestic travel within China outpaces it. And Finnair is no newcomer. The location of its base allowed it to become the first European carrier with nonstop service to Japan (with a DC-10 in 1983).

Helsinki is Europe's northernmost hub. It allows Finnair to fly daily over the pole both to and from Singapore, for example, with only one airplane—something no competitor can do. That makes it a good hub for Asia traffic to and from Northern and Eastern Europe the way Reykjavik does for Icelandair in the North America-Western Europe market.

In 1999, Finnair had 10 flights a week to Asia. Now, it has 74 and is aiming for steady growth to 140 or more. Finnair serves 11 Asian cities, more than KLM-Air France and almost four times as many as British Airways, its Oneworld ally. But with just 7.14 million passengers annually and 19.2 million revenue passenger kilometers (11.9 million RPMs) last year, Finnair remains a small intercontinental player.

“Without Asia, I'm not even sure this airline would exist,” says Mika Vehvilalnen, Finnair's CEO since February and a firm believer that further airline consolidation in Europe is inevitable.

If the Asian strategy has an Achilles heel, it may be the Siberian overflight fees Finnair pays to Russia—$550 million a year, a startling number, given annual revenues of less than $3 billion. Analyst Craig Jenks of Airline/Aircraft Partners, Inc., estimates that amounts to a whopping $100 per passenger on an Asia-Europe roundtrip. What is more, with the EU poised to impose cap-and-trade carbon emissions restrictions on all flights to Europe, Moscow has made it known it might retaliate by boosting overflight fees even higher.

The fees become especially problematic given the aggressive rise of carriers based in the Middle East. For flights to Asia from Dubai, Russia is not a factor. To appreciate the impact on Finnair, Jenks suggests looking at city pairs without nonstop service. For Madrid-Hong Kong. connecting in Helsinki is faster than Dubai, but the maximum saving in flight time is only about 1 hr., not enough to induce most customers to pay a premium.

Finnair's focus on being a high-quality boutique airline does not mean it will not look to squeeze out costs. For example, the carrier will probably outsource catering.

So far, results are mixed. While not in dire straits, Finnair has hardly been a star in recent years, losing a little in some years, making a small profit in others. And after solid performance early in 2011, this month management warned that it did not expect to turn a profit in the second half of the year, because of a decline in business-travel bookings for the fourth quarter.

By 2020, Finnair aims to be the dominant carrier in the Nordic countries, which would mean knocking a struggling SAS Scandinavian Airlines off that perch. Luckily, SAS has been shrinking itself to fit an entirely different market, the leisure traveler, and eschewing development of hubs in favor of point-to-point service (AWST Oct. 3, p. 53). Meanwhile, Finnair jettisoned 25% of its leisure-oriented capacity last year.

Not for a moment does Vehvilalnen kid himself into believing that step alone will assure Finnair's long-term viability.

“We're not going to be the most cost-effective airline. And we're not the automatic choice, except perhaps for Finnish corporate customers.” So beyond the hub's location, Vehvilalnen is banking on customer service to distinguish Finnair.

Flight attendants and other personnel are trained to think of air travel as an emotional experience for the passenger. Reflecting Finland's historic regard for fine design, aircraft interiors and new uniforms have a cool, crisp, clean look. Factor in a young 63-aircraft fleet (average age 6.7 years), an easy-to-manage hub —Helskinki's airport handles just 13 million passengers a year—and an airport club whose amenities include seemingly every known variety of bath and massage, and Vehvilalnen believes, “We're generally better than our competitors.” But still elusive are the numbers to prove it.