BOARD OF DIRECTORS' REPORT FOR THE FINANCIAL YEAR, 1 JAN - 31 DEC 2005

The positive trend in profitability continued in 2005. Strong growth in demand, an increase in average prices and an improvement in productivity through operational efficiency and cost-cutting measures strengthened Finnair's profitability significantly.

Air transport in 2005 was marked by a growing demand for flight travel and higher fuel prices. In Europe the competition for market share continued as new companies entered the market. In the USA most of the major airlines were operating under Chapter 11 of the US Bankruptcy Code. Asian airlines focused on increasing traffic on flights within the continent. Traffic between Europe and Asia grew seven per cent.

The strong rise in fuel prices that began early in the year halted the decline in average flight and cargo prices. In the second and third quarters, the average price of air tickets rose four to five per cent. Tighter competition towards the end of the year, on the other hand, dampened the rise in the average price.

Finnair's Asian traffic grew almost 17 per cent. In September 2005 a new destination was added with the opening of flights to Guangzhou in China. Finnair will continue to increase its capacity in traffic between Asia and Europe. In December 2005 the company announced that 12 new long-haul aircraft would be acquired by the year 2014.

The passenger numbers of the Finnair-owned budget airline FlyNordic grew in line with expectations. The company carried nearly 1.2 million passengers in 2005. The price trend in the Swedish market, however, has been weaker than expected and fuel costs have been increasing, so FlyNordic's result remained in the red.

Sales of leisure flights developed favourably during 2005, even if sales in the final months of the year were a little lower than the previous year. A surcharge resulting from the rise in fuel prices has affected demand for leisure travel to some extent.

Financial Result, 1 January - 30 December 2005

Turnover rose 11.2 per cent and was 1,871.1 million euros. The Group's operating profit, excluding capital gains and fair value changes of derivatives, grew to 70.1 million euros (25.2 million). Adjusted operating profit margin was 3.7 per cent (1.5%). The result after financial items clearly improved and was 87.5 million euros (30.6 million).

In 2005 passenger traffic capacity grew 5.1 per cent and demand grew 7.2 per cent. Load factor rose from the previous year by 1.4 percentage points to 72.6 per cent. The quantity of cargo carried grew by 4.5 per cent.

In scheduled passenger and leisure traffic, unit revenues per passenger kilometre rose by 3.2 per cent. Unit revenues for cargo traffic declined by 5.0 per cent. Total unit revenues for passenger and cargo traffic rose by 1.8 per cent.

Operating costs in euros rose during the period by 9.2 per cent. Unit costs of flight operations rose by 2.4 per cent. Eliminating fuel costs and gains from hedging of future cash flow, units costs fell by 1.5 per cent.

Capital gains on asset sales totalled 7.3 million euros (5.8 million).

Earnings per share for the financial year rose to 0.73 euros (0.30). Equity per share at the end of December amounted to 7.73 euros, compared with 6.97 euros the year before.

Investment, financing and risk management

In 2005 capital investment excluding advance payments totalled 57.5 million euros (114.5 million) and included information system investments and technical equipment. Investment during the fourth quarter totalled 18.6 million euros (14.0 million euros).

Operational net cash flow was 191.8 million euros, compared with 129.5 million euros a year earlier. At the end of December, the Group's liquid cash reserves exceeded interest-bearing debt by 155.3 million euros. Gearing has dropped from -3.1 per cent at the beginning of the financial year to -25.1 per cent. Gearing adjusted for leasing liabilities was 66.8 per cent (102.5%). The equity ratio rose from the previous year by nearly two percentage points to stand at 42.2 per cent. Key figures are clearly better than the targets set by the Board of Directors.

At the end of December, the Group had liquid cash reserves of 418.4 million euros, in addition to which there is a total of 200 million euros in unused committed loan facilities.

Risk management at Finnair is a part of the Group's management, directed primarily at risks that threaten the fulfilment of the Group's business objectives. In order to exploit business opportunities Finnair is prepared to take controlled and calculated risks. Meanwhile, no risks are taken in flight safety matters.

Finnair's risks are classified into strategic, operational, financial and accident risks. The Board of Directors and the Chief Executive Officer 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 Executive and Senior Vice Presidents of business units and Managing Directors of subsidiary companies are responsible for risk management in their areas of responsibility.

In accordance with a financial risk management policy approved by Finnair's Board of Directors, the company has hedged 60 per cent of scheduled traffic jet fuel purchases for the first half of 2006 and 40 per cent for the rest of the current year, and thereafter for the following 12 months with a decreasing level of hedging. With the hedging implemented in 2005, the adjusted jet fuel price was around 500 dollars per tonne.

The weakening of the US dollar against the euro has a positive impact on Finnair's operational result and strengthening has a negative impact, because the company has more dollar-linked costs than revenues.

Shares and Share Capital

The company's market capitalisation grew 121 per cent, namely by 568.6 million euros from the previous year to 1,039.9 million euros on 31 December 2005. At the beginning of the financial year the market value was 471.3 million euros. During 2005 the highest price for the Finnair Plc share on the Helsinki Stock Exchange was 12.15 euros (6.57), while the lowest price was 5.56 euros (4.46) and the average price 8.56 euros (5.40). During the financial year, some 32.2 million (21.3 million) of the company's shares were traded on the Helsinki Stock Exchange. At the end of the financial year, the Finnish State owned 57.0 per cent (58.4) of the company's shares, while 29.1 per cent (18.4) were held by foreign investors or in the name of a nominee.

At the beginning of the financial period the company held 422,800 of its own shares, which it purchased in 2004. On 23 March 2005 the Annual General Meeting authorised the Board of Directors for a period of one year to purchase the company's own shares up to a maximum of 3,500,000 shares and dispose of the company's own shares up to a maximum of 3,922,800 shares. The authorisation applies to shares amounting to less than five per cent of the company's share capital. Under the authorisation, in April 2005 the company transferred a total of 37,800 shares to key personnel as part of a share bonus scheme for key personnel. The Board of Directors decided on 15 August 2005 to initiate the purchase of a maximum of 500,000 of its own shares. The purchase of the shares began on 1 September 2005, and by 31 December 2005 a total of 150,000 shares had been purchased. On 31 December 2005 the company held a total of 535,000 own shares, i.e. 0.6 per cent of all shares.

Two series of Finnair Plc option rights are traded on the Main List of the Helsinki Stock Exchange. At the beginning of the financial period 1,997,500 Series A 2000 options were in circulation and 2,000,000 Series B 2000 options. During 2005 1,601,106 Series A options were exercised to subscribe for 1,601,106 new shares and 1,183,850 Series B options were exercised to subscribe for 1,183,850 new shares, i.e. a total of 2,784,956 new shares. Of the new shares subscribed for by virtue of the above-mentioned options, 2,044,900 shares had been entered in the Trade Register by 31 December 2005. Finnair Plc's registered share capital on 31 December 2005 was 73,783,496.05 (72,045,331.05) euros and the total number of shares was 86,804,113 (84,759,213). Of the shares subscribed for during 2005 by virtue of the above-mentioned options, 740,056 shares were unregistered on 31 December 2005 and were entered in a share issue.

If all the option rights in circulation on 31 December 2005 were exchanged for Finnair Plc shares, the Finnish Government's holding would be 55.8 per cent. On the basis of share options that remain unexercised, the company's share capital can rise by a maximum of 1,030,662.40 euros, corresponding to 1,212,544 shares, which is 1.39 per cent of the company's shares.

Personnel

During 2005, the average number of staff employed by the Finnair Group amounted to 9,447, which was 0.8 per cent fewer than a year before. Scheduled Passenger Traffic had 3,884 employees and Leisure Traffic 336 employees. The total number of personnel in technical, catering and ground handling services was 3,816 and in travel services 1,178. A total of 233 people were employed in other operations. Around 400 staff are employed in foreign units and they are engaged mainly in commercial duties.

Of Finnair Group personnel, half are women and half are men. The proportion of women in management positions, for example in department manager roles, is growing. Finnair Plc's seven-strong Board of Directors has had two women members since 2003. The first in Finnair´s history woman has been appointed to the Management Group as of 1 March 2006.

Full-time staff account for 92 per cent of employees. Around half of part-time staff are employees on partial child-care leave. Some 93 per cent of staff are employed on permanent basis. Seasonal staff are included among those on fixed-term contracts. The average age of employees is 43 years, with most being from 30 to 50 years of age. More than 20 per cent are over 50 years old and one in ten are under 30.

Employees' average length of service is 14 years. One third of Finnair's personnel have been in the service of Group for more than 20 years. Nearly half of these have been employed for more than 30 years.

Staff receive an average of five days of training per year. More than 300,000 euros was spent on activities aimed at maintaining the working capacity of employees as well as on recreational and hobby activities. Job satisfaction is measured regularly on a unit level. An index measuring the well-being in work of Group employees moved in a positive direction during 2005. This has been the unbroken trend since autumn 2002.

The Group has formulated an updated equality plan for 2005-2006. The purpose of the plan is to promote the implementation of equality in the Finnair Group.

The company has collective employment agreements valid at least until 30 September 2007 with six labour unions and with pilots until May 2008.

On 1 July 2005, the Finnair Pension Fund transferred the management of the Finnair Group's employer pension liabilities under the Employees' Pension Act (TEL) to Ilmarinen Mutual Pension Insurance Company, in accordance with an agreement signed on 22 June 2004. The TEL pension liabilities and obligations transferred to Ilmarinen were covered by assets totalling 491.8 million euros. The Finnair Pension Fund still continues to provide voluntary supplementary pension insurance.

A change in the rules of the Finnair Pension Fund and changes in pension legislation were taken into account by Finnair in 2004. In 2004 and 2005 Finnair's pension expenses have been exceptionally low compared with the long-term annual level. The positive impact on pension expenses for 2004 was felt particularly in the final quarter of the year. In 2006 pension expenses will reach normal levels.

For 2005 a 7.6 million euro provision has been recognised for profit bonus based on the Group's financial performance and payable to Finnair's Personnel Fund.

Management

The Annual General Meeting held on 23 March 2005 re-elected the following members to the Finnair Board of Directors: as Chairman, Minister Christoffer Taxell and as members Director General Samuli Haapasalo, Deputy CEO Markku Hyvärinen, President and CEO Kari Jordan, Senior Vice President Veli Sundbäck, Vice President Helena Terho and D.Sc. (Econ) Kaisa Vikkula.

Samuli Haapasalo submitted his resignation from membership of Finnair Plc's Board of Directors on 22 June 2005 on being appointed Director General of Finavia.

The Annual General Meeting appointed as regular auditors APA Jyri Heikkinen and PricewaterhouseCoopers firm of auditors and as deputy auditors APA Matti Nykänen and APA Tuomas Honkamäki.

Jukka Hienonen, who has been appointed to succeed President and CEO Keijo Suila, who retired on 31 December 2005, joined Finnair on 1 November 2005. Mr Hienonen took over as Finnair Plc's President and CEO on 1 January 2006. Before joining Finnair, Hienonen was Executive Vice President of Stockmann Oyj Abp with responsibility for the department stores group.

EVP Scheduled Passenger Traffic, LL.M. Henrik Arle was appointed Deputy CEO starting 1 January 2006. New arrangements have also been made at Finnair regarding the position of Accountable Manager. The Accountable Manager is responsible for the Airline Operator's Certificate and other operating licences granted by the authorities. Starting 1 January 2006, Finnair Plc's Accountable Manager is Deputy CEO Arle.

In 2006 changes took place in Finnair's Management Group when SVP Corporate Business Development and Strategy Eero Ahola retired on 31 December 2005. SVP Technical Services Jarmo Vilenius moved to become Managing Director of Finnair Facilities Management as of 15 January 2006. The new SVP Technical Services is Kimmo Soini, who transferred to the post from his role as Scheduled Passenger Traffic's VP Technical Operations.

SVP Leisure and Travel Services Mauri Annala will retire on 1 March 2006. Kaisa Vikkula D.Sc.(Econ) has been appointed to replace him. She has been a member of Finnair's Board of Directors since 2003. Vikkula left her Board position on 16 February 2006.

Finnair SVP Administration and Human Resources Tero Palatsi has resigned from Finnair. As of 15 February 2006, Palatsi's duties have been taken over temporarily by VP HR-Services Ari Kuutchin.

Performance of business areas

The primary segment reporting of the Finnair Group's financial statements is based on business areas. The reporting business areas are Scheduled Passenger Traffic, Leisure Traffic, Aviation Services and Travel Services.

Scheduled Passenger Traffic

This business area is responsible for sales of scheduled passenger traffic and cargo, service concepts, flight operations and activity connected with the procurement and financing of aircraft. The Scheduled Passenger Traffic business area leases to Leisure Traffic the crews and aircraft it requires for its operations. The division consists of the following units and companies: Finnair Scheduled Passenger Traffic, Aero Airlines, FlyNordic, Finnair Cargo Oy and Finnair Aircraft Finance Oy. The Scheduled Passenger Traffic business area's Marketing Division became the Commercial Division on 1 August 2005.

In 2005 the business area's turnover rose by 12.1 per cent to 1,407.9 million euros. Adjusted operating profit was 34.3 million euros (-5.5 million).

Demand for Finnair's scheduled traffic grew by 10 per cent last year while capacity grew by 5.8 per cent, which resulted in the passenger load factor rising 2.6 percentage points to 67.7 per cent.

Unit revenues for scheduled passenger traffic improved 0.7 per cent in 2005. Average prices rose in all types of traffic.

Owing to the tight competitive situation, unit revenues for cargo traffic fell by 5.0 per cent. The number of cargo kilos carried grew by 4.5 per cent. The number of cargo kilos carried in Asian traffic grew by 12.9 per cent.

Finnair's market share in traffic between Asia and Europe has grown further as a result of increased capacity and new destinations. In international traffic, Finnair has maintained its market share relative to its main competitors.

In 2005, the arrival punctuality of scheduled traffic flights was 88 percent (90%). As in previous years, Finnair is Europe's top airline for arrival punctuality.

Leisure Traffic

This business area consists of Finnair Leisure Flights as well as the Aurinkomatkat-Suntours package tour company, which is the biggest in its field in Finland with a market share of more than 35 per cent. Finnair Leisure Flights also enjoys a strong market leadership in leisure travel flights, even though more competition has entered the market.

The business area's turnover grew last year by 9.2 per cent to 387.3 million euros. Summer-season demand was better than the previous year, while late in the year demand was slightly below last year's level. The business area's adjusted operating profit was 20.3 million euros (24.8 million).

Finnair Leisure Flights evacuated 2,600 tourists from the devastation caused by the 2004 Boxing Day tsunami in Southeast Asia The disaster interrupted flight series for a couple of weeks at the start of 2005.

The lease agreements of four Boeing 757 aircraft used in leisure traffic were renewed at the beginning of April 2005. The new agreements were concluded on more favourable terms and have contributed to reducing the unit costs of leisure flights and to strengthening competitiveness in the leisure flight market. Compared with the earlier agreements, the saving totals more than five million euros per year.

Following the positive resolution of new aircraft lease agreements and terms of employment agreements with flight personnel, Finnair is preparing to incorporate its leisure traffic operations into a separate company.

To boost capacity utilisation, Finnair Leisure Flights operated from the UK with two Boeing B757 aircraft on behalf of Air Scandic during the 2005 summer season. Cooperation with Air Scandic ended in September 2005 after the company encountered financial difficulties. In view of the scope of the operation, no substantial costs arise from the ending of cooperation. The remaining flights were flown to the end of the agreement period in cooperation with tour operator Excel Aviation/Air Atlanta UK. This arrangement will also continue in 2006.

In 2005 demand for leisure traffic grew by 1.2 per cent, while capacity grew by 3.3 per cent. The passenger load factor was 87.3 per cent.

Aviation Services

This business area comprises aircraft maintenance services, ground handling and the Group's catering operations. The Aviation Services business area also includes the Group's property holdings, the management and maintenance of properties relating to the Group's operational activities as well as office services.

Aviation Services' turnover fell by 1.6 per cent to 400.9 million euros owing to a fall in the price level of services provided. The business area's adjusted operating profit, excluding capital gains, improved to 25.5 million euros (21.4 million).

The increase in operating profit is the result of implemented productivity improvement measures. In a number of Aviation Services functions, operations are being improved using the LEAN process concept.

At the beginning of 2006, Finnair Technical Services initiated a competitiveness project which will review the entire organisation and attempt to make operations more cost-efficient by improving processes and operating models.

Finnair Technical Services has concluded a number of significant new customer agreements. Of the business area's turnover, sales outside the Group have risen to around one third and this year totalled more than 50 million euros.

Travel Services

This business area consists of the Group's domestic and foreign travel agency operations - including Finland Travel Bureau, Estravel and Area - as well as the operations of the reservations systems supplier Amadeus Finland Oy.

The business area's turnover was 91.2 million euros (91.6 million) and adjusted operating profit was 8.1 million euros (6.3 million). Turnover has remained flat; although business travel picked up towards the end of the year, competition between travel agencies has reduced the level of service fees. The business area's operating profit, however, improved slightly from the previous year due to cost cutting.

The bankruptcy of the travel agency Töölön Matkatoimisto in spring 2005 resulted in a credit loss of 2.6 million euros for the Finnair Group. At the same time, however, the Finnair Group's travel agencies won new business.

During the last three years the Finnair Group's travel agencies have successfully adopted a new earnings logic as airlines have abandoned the payment of sales commissions. The process of adaptation and productivity improvement is continuing, however. Finland Travel Bureau announced in January 2006 that it will begin statutory employer-employee negotiations with around 40 employees.

Services and Products

The Finnair route network consists of a comprehensive domestic network as well as an international network that includes more than 50 destinations, of which ten are on long-haul routes. Finnair's success in European scheduled passenger traffic is based on the morning-evening concept favoured by business passengers.

The long-haul strategy exploits Helsinki's ideal position on flight routes between Asia and Europe. Finnair has purposefully increased the number of its Asian flights since 1999. In early September 2005, a new route was opened between Helsinki and Guangzhou in China. Finnair will fly to the new destination three times a week. Finnair already flies more than twice a day to China and daily to Bangkok and Japan.

Asian traffic will also grow in future. A new destination, Nagoya in Japan, will open in June 2006 and Delhi in India in November. In Europe, five new destinations, which will serve the needs of both local demand and Asian traffic, will open by next summer. The new destinations are Edinburgh, Geneva, Kiev, Krakow and Florence. Flight frequencies on the St. Petersburg and Warsaw routes will be increased.

The type of aircraft used in long-haul traffic is the wide-bodied Boeing MD-11. The wide-bodied fleet is being expanded to satisfy growing Asian traffic demand in the next few years. The cabins of the wide-bodied fleet will be refurbished by summer 2006 and new lie-flat seats will be installed in business class.

The first four of ten new Embraer 170 aircraft being acquired by Finnair joined the fleet at the end of the year. The new Embraers have 76 seats and conform in terms of travel comfort to the standard of large passenger jet aircraft.

The electronic ticket, or e-ticket, is already in use on all of Finnair's domestic routes, on several European routes and on long-haul flights. Over 60 per cent of all flight tickets are now sold as e-tickets.

The oneworld alliance will be strengthened by Japan Airlines, Malev of Hungary and Royal Jordanian, which have applied for membership. oneworld is an alliance of financially sound airlines.

Adoption of IFRS reporting practice and change of recognition principles

On 29 April 2005, Finnair published both annual and quarterly comparative data for the Group's 2004 income statement, balance sheet, cash flow statement and key figures as well as segment-specific key figures and new accounting principles according to the IFRS reporting standards.

For Finnair the most significant changes arising from the introduction of IFRS compared with the Finnish Accounting Standards (FAS) were an improvement in the result for 2004 and a reduction in shareholders' equity.

More detailed transition data can be found in material published on Finnair's website, www.finnair.com/investor.

The adoption of IFRS accounting principles will affect the result and shareholders' equity for 2005 particularly through changes in the fair value of financial derivatives (IAS 32 and 39). Operational cash flow is hedged by derivatives, which are recognised in the accounts in two different ways.

On the one hand, income from approved derivatives within the sphere of hedge accounting is recognised in the income statement only when it is realised and the timing of the impact of derivatives income on the result coincides with the ending of the hedged risk. On the other hand, income realised from derivatives outside hedge accounting as well as the change in fair value of the derivatives portfolio are recognised in the income statement item "other expenses". Forward contracts used for hedging jet fuel purchases and USD currency risk represent the most significant part of the derivatives portfolio.

Hedge accounting dampens the effect on Finnair's result of changes in the market value of derivatives. In 2005 the effect of changes in the market value of derivatives outside hedge accounting was to reduce other expenses and improve the operating profit by 4.5 million euros. Key figures also present the operating profit excluding capital gains and fair value changes of derivatives. The operating profit adjusted in this way (70.1 million euros) describes the operational result.

The recognition practice for the passenger taxes of Finnair's subsidiaries FlyNordic and Aero was changed in the third quarter of the year and thereafter so that the passenger fees collected by the airlines and transferred to the airport holder no longer appear in the airlines' income statements. The change has reduced traffic charges in the latter part of the year and correspondingly other revenue and turnover. The figures for the comparison year have been adjusted to correspond to the new recognition practice.

Future prospects

The stable and sound long-term development of Finnair will continue, even though this year competition in European traffic will tighten and price levels will come under pressure. The price of fuel is expected to remain at the present high level.

Higher fuel costs will increase pressure to raise ticket prices also in 2006 but the tight competitive situation will ultimately determine whether price rises are possible. At the current price level of jet fuel, fuel costs are expected to be around 20 per cent of turnover in 2006. In 2005 fuel costs were equivalent to 15.6 per cent of turnover. The company has hedged 60 per cent of scheduled traffic jet fuel purchases for the early part of the year and 40 per cent for the rest of the year, and thereafter for the following 12 months with decreasing level of hedging. In leisure traffic, fuel surcharges are applied according to an agreement between tour operators and Finnair.

Growth in demand and the improvement of load factors is expected to continue during 2006. Capacity increases will be directed to Asia traffic. The arrival of the Embraer 170 aircraft to Finnair's fleet, which began in late 2005, will bring flexibility to capacity management and replace the Boeing MD-80 aircraft in the parent company's services by summer 2006. The introduction of the Embraer aircraft, which have fewer than 100 seats, means that seat capacity in Europe and Finland may fall slightly, thus improving the load factor in this traffic segment. The new technology will also improve eco-efficiency.

A seventh long-haul traffic Boeing MD-11 aircraft began operating in January 2006. In the winter season, the capacity brought by the new aircraft will be used to cover for withdrawals of aircraft for maintenance related to the refurbishment of the wide-bodied fleet's cabins. The increased capacity will be in operational use in spring 2006. Finnair aims to introduce an eighth long-haul aircraft in summer 2006.

In December 2005 Finnair decided to commit to growth in Asian traffic by acquiring 12 new Airbus A340/A350 wide-bodied aircraft by 2014. One or two new destinations will be opened in Finnair's Asia network each year and flight frequency to current destinations will be increased.

Work to improve competitiveness will continue in all business areas. Finnair is implementing an operational efficiency programme in which processes are improved to enhance their cost-efficiency and productivity. Particular attention will be paid to the competitiveness of units that provide support services to flight operations. The introduction of Embraer for Boeing MD-80 aircraft currently under way will result in a short-term weakening of productivity in flight operations due to crew transition training.

In leisure traffic, the rise in fuel prices and operating environment risks have led customers to delay the decisions to travel and which also complicates forecasting the future development of the leisure travel business.

Competition will intensify to some extent in the Northern European market and will exert pressure on the development of average prices. Asian traffic is expected to grow by more than ten per cent and the level of average prices to remain good.

The ratio of fuel costs to turnover has risen from 13 per cent to 19 per cent, so profitability in the first quarter will fall short of last year's level. The result for the full year is expected to be clearly in profit.

Thanks to President and CEO Keijo Suila

The Finnair Plc Board of Directors wishes to extend the warmest thanks to President and CEO Keijo Suila who retired at the end of 2005 for his significant work for ensuring the success of the company in historically difficult times. Under his leadership Finnair has claimed its position in the European airline elite. One of the most significant accomplishments has been the determined realisation of the Asian strategy based on sustainable, profitable growth. "Best in northern skies, a European excellence" is President and CEO Suila's timeless vision for Finnair.

Board of Directors' proposal on the dividend

The Group´s distributable equity amounts to 352.6 million euros, while the distributable equity of the parent company comes to 311.3 million euros. The Board of Directors proposes to the Annual General Meeting that a dividend of 0.25 euros per share (0.10) be distributed, a total of 21.7 million euros euros, and that the remainder of the distributable equity be carried over as retained earnings. The proposed dividend is equivalent to over one third of the earnings per share and is thus in line with Finnair's dividend policy.

FINNAIR PLC
Board of Directors