Norwegian’s creative accounting

By Bjorn Fehrm

March 07, 2018, ©. Leeham Co: In our February 14th article about Norwegian Air Shuttle’s operational losses, we used straightforward calculations to show the airline was losing around 2bn NOK or $300m in the fourth quarter, besides losses in 1H2107. When the airline presented the 2017 results the next day, creative accounting netted the year’s losses to 299m NOK or $32m.

This might change. The Financial Supervisory Authority of Norway (Finanstilsynet) is investigating Norwegian’s accounting methods for 2017.

Norwegian’s 2017

Norwegian had substantial operational losses during 1H2017 and 4Q2017. These were in part covered by sales of shares in Norwegian Bank, a loyalty cardholder bank Norwegian started. After the creation, it owned 20% of the shares in the bank’s holding company, Norwegian Finance Holding (NOFI).

The owned shares in Norwegian Finance Holding formed part of the asset side in Norwegian’s balance sheet.

When Norwegian sold the first 4.6 million shares in Norwegian Finance Holding of a total of 32.6m shares, it changed the way these shares were valued on the balance sheet. Instead of an ownership of shares in NOFI, they were now regarded as a “Financial investment”.

This allowed Norwegian to sell the shares in a cash-settled “Total Return Swap” agreement, meaning it could book the cash income from the sale against the losses and still book the original 32.6m shares as a financial asset.

The same procedure was repeated in 4Q2017 to cover this quarter’s loss, this time booking the income for 2m shares. The asset value for 32.6m shares remained on the balance sheet as a financial asset.

Since December 2017 the Norwegian authorities are not sure they agree with this accounting change. As stated in Norwegian’s 4Q2017 results:

“The company is still in dialogue with Finanstilsynet regarding the accounting treatment of the company’s investment in Norwegian Finans Holding ASA. If… a final conclusion should be (the shares shall be treated as shares) … the equity method of accounting according to IAS 28 would be applied to the investment. As of December 31, 2017, this would result in a reduction of the recognized value of the investment by NOK 1,993 million with a corresponding decrease in end balance equity. Effects of a change back to IAS 28 would also reverse financial gains in net profits of NOK 1,657 million, reverse fair value changes recorded in other comprehensive income of NOK 498 million and increase share of profit from associated companies by NOK 163 million.”

In other words, the low 9% of own equity in Norwegian’s balance sheet would fall to 4.6%, an alarmingly low value. Own equity would be then at 2086m NOK.

The company’s cash position exiting 2017 would go from NOK4040m ($432m) to NOK2048m ($219m).

2018 operational losses

Using the same simple method as used for the 14th of February article, we can calculate the 2018 losses to date of Norwegian’s core flight operations:

  • The airline states the monthly production of Available Seat Kilometers. In order words, how many aircraft are flying and how far. For January and February 2018, this was 12,587 seat kilometres.
  • Norwegian also states the revenue for the months per ASK, called unit revenue or RASK. Multiplying the ASK and the RASK for each month and adding them, gives Revenue as NOK3,273m or $350m for the months.
  • The operational cost is the ASK times the average cost per ASK. For the last quarter, this has been NOK 0.43 or 5.2 dollar Cents. This gives a Cost of NOK5,412m.
  • The core operational loss for the first two months is then NOK2,408 or $229m. This is more than the available cash exiting 2017, should the 2017 accounting change be reversed. 
Will Norwegian survive the spring?

Norwegian still has assets it can sell, like the shares in Norwegian Finance Holding. The remaining shares should be worth about 2,300m NOK. And the company can continue to sell and lease back aircraft. It can also find new investors.

For now, the liquidity is strained and there are more though months to pass before the revenue of the summer months sets in. It’s not clear when Finanstilsynet will make their final decision regarding Norwegian’s 2017 accounting change.

50 Comments on “Norwegian’s creative accounting

  1. Journalism like LNC’s keeps everyone honest in the long term. Bedrock for open, rule of law societies.

    I do still root for Norwegian though. Their model has a place in the sun if they can make it work: More people are enabled to travel and ultimately this is healthier for us all.

    • No. Low Cost is the perfect business model for short haul flights. But there is simply no big cost advantage with a low cost model on long haul flights.

      Eurowings long-haul is still making a loss after 2.5 years. Air Asia X produces a small profit after 10 years, but they don’t fly real long haul routes, but almost exclusively medium-haul. Scoot is trying now real low-cost long-haul routes (SIN-ATH and SIN-TXL). On both routes they scale back already.
      Low-cost long-haul routes are only a very tiny niche market.

      Full-service carriers are also relentlessly trimming their business to efficiency. Most of the cost-cutting measures that LCC applies to short-haul flights are not possible on long-haul routes (no network traffic, no crew overnight stay, 20 minutes turnaround, use of very small airports,…). The cost advantage is 20-50 USD per return ticket. For most long-haul passengers, this is not a convincing argument for additional comfort cuts.

      However, new so called “Low Cost” subsidiaries like Eurowings still makes sense for Lufthansa and Air France and other legacy carriers. Not because LowCost is the superior business model for long haul, but because Lufthansa otherwise produces too expensive for primarily tourist long-haul routes. With Eurowings, Lufthansa can break out of traditional cost structures and offer cheaper services. But Norwegian will fail.

      • You’re missing the advantages in employment contracts/costs and wider lack of liabilities that “low cost” (ie new) carriers enjoy and which can apply to any sector lengths.

        Also, as the quick turnaround is really about utilisation rates, although certain sector lengths can’t improve these rates given extant suitable cabotage / fifth freedom rights, I’d imagine that certain sector lengths and network profiles could manage eg getting from 2 sectors to 3 sectors per 24 hours dependent on fleet scale.

        • When I see certain airlines engaged in big deals, I get seriously suspicious.

          Norwegian, Air Asia, Lion Air (All those 737s and A32) , India has one or two.

          It would be good to see some reporting on other than Norwegian

          Where did all the A320s Lion ordered go? Not one listed in their fleet.

          Air Asia and its shifting A330 orders?

      • “no network traffic, no crew overnight stay, 20 minutes turnaround, use of very small airports,…” – When a aircraft is on the air , it does not matter if he flies short or long. It is making a revenue. The 737-8 and -7 can operate from small airports on both sides of the Atlantic , and if used wisely can be airborne on most of the day due to the time differences between Europe and USA.

    • Let ’em die! Setting up foreign companies in countries with more favorable employment laws is a skirt around the spirit of the Freedoms of Aviation. Competition is great if it’s on a level playing field. BTW, let the ME3 die with them!

      • Oh, come, come: do you think every element of, say, Trump Corporation is registered in U.S. And, if so, in which states – any in DE for example? I wonder why that would be…
        Haven’t corps always set up where the shoe fits least tightest or they perceive some other advantage; no need for them to apologise for that, just admit it honestly. Wasn’t it someone or other called Adam Smith who reflected that as soon as a new market had been established pretty soon the protagonists were in the coffee shop agreeing prices?
        ‘Tis like the airlines, who do not fix fares, you understand: if we might use the ‘T’ word, that is known as, er, tariff co-ordination.

  2. Most likely will the Norwegian goverment change its stock holdings by selling its SAS shares and buy Norwegian shares.
    Norwegian can do a stock emission to increase own capital where the Norwegian goverment can go up to 49% ownership.

    Norwegian seems like one accident from going bust if not getting a boost of capital.
    They own a good portion of their 737NG fleet still that can be “sell & lease-backed”

    • The 3 governments with shares in SAS have been down selling for a while. They have an interest in keeping the airline viable as it would be a key contributor to economic development in the region, and dont want it to be part of Lufthansa, British Airways or Air France like other former ‘national’ airlines have become. No way would Norway ‘swap’ from one airline to another higher risk one.

      • Just the goverments in Sweden and Norway has been selling SAS shares and they wait for the Danes to do the same, still waiting. If Norway has to choose to see Norwegian Air Shuttle and its siblings go under or sell its stake in SAS and pump Money into Norwegian they most likely will chose the other unless they are doomed anyway. McKinsey Norway will maybe get a get a call from the Norwegian Finance dep. to figure it out in 2-3 months for a good fee.

        • This is pure fiction from your side. The Norwegian government is considering selling the SAS shares now that the value has increased, and it looks like the company can survive on it’s own. Norway’s liberal-conservative government coalition don’t see it as it’s purpose to own airlines, so investing in Norwegian Air makes no sense.

          • We will see how Norweigan will do as overcapacity hits the EU, it get too big to fail in Norway and there is a good chance they will need much more capital as the article describes.
            They still can do sell/leaseback on owned 737 Aircrafts to boost cash on hand.

  3. Norwegian owns the contractual rights to very enviable NEO and MAX delivery slots (combined 222 units, if I am not mistaken), plus 150 options to NEO and MAX combined, ditto) at bargain prices, total 372 new aircraft. This fleet increment has an intrinsec re-market value of + 20 % (conservative assumption), times 372 times 80 MUSD (conservative assumption, it could be significantly lower whence the re-marketing profit would be substantially higher) = 5.95 BUSD or 55.66 BNOK.

    Therefore I venture that Norwegian will NOT fail, whereas Guiso will

      • Norwegian probably needs $500MM to get real “comfortable” financially. Surely, there are some bankers to make this happen. Start with the sovereign wealth funds. P.S. You could probably embarrass the Norwegian fund into the investment by approaching Singapore’s, Kuwait’s, etc. Did you know this fund has a staggering $1 trillion in assets?

        • Those A320s are tied up in various engine issues.

          And now they are leasors as well as operators (seems that where Lion went or wants to)

          You still have to put up the money to get the aircraft.

          • Sorry. Missed your comment above. Maybe several people following this news site asking will encourage the Lion Air article we both want to see! (I used to have more faith that both BA and AB both knew what they were doing customer credit wise. That’s been effectively “lost” for me with both Air Berlin’s and Monarch’s bankruptcies!

          • @MontanaRedTailHawk 🙂
            AirBerlin+Monarch were in drastically different situation:
            -Demographics: aged, with slight negative pop. growth
            -Geography: distances are quite small in europe
            -Economies: limited growth, barely positive
            -Competition: Monopolistic incumbents+other hyper LCCs.

            Total opposite as to what Indonesia and neighbors are into.

            Lion/AirAsia,etc. have a chance when you look at anticipated per capita growth in their markets vs. what other countries experienced when they did experience such sustained growth. Exhibit a: automobiles.
            And those massive orders are spread over many years of delivery.

            The environment may not survive but we are told not to be bothered with such thoughts. lol.

        • Oops. Found out the Fund can’t invest in Norwegian companies! (Weird, perhaps. Oh well, here’s a chance for Berkshire Hathaway to further “dive in” in the airline industry!)

    • Can you ‘onsell ‘ options and delivery rights like that ?
      I cant see any plane maker agreeing to contract terms like that.If you dont take up options or delivery and money to be made out of on selling those slots will be made by the OEM.
      Thats the reason why they ‘overbook’ delivery slots anyway, airlines can be like their passengers, not everyone makes it to the gate in time for takeoff!

      • I’m not saying that those aircraft will be ‘on-sold’ but that if NAS needs cash, they have the ability to respond … Now concerning those contract terms, the whole idea with AAA or 3A, the financial Lessor piloted by Björn Kjos, itself a validated proxy End User for any of those 372 delivery slots, is to pass those aircraft on as/when/if needed …

        • Doesnt work that way. The airline is the buyer/end user. The big lease companies are also buyers, but the orders are in their names.
          Norwegian would get bids for ‘sale leaseback’ with financial groups just before delivery so that Boeing gets its money and Norwegian gets the plane for its service.
          Cant see how having options/delivery slots is in any way asset that can be exchanged for cash.

          • You will agree of course (I assume) that if 3A accepts delivery upon financial settlement with the OEM on day D, then on the next day D+1 it shall be free as the bird on the branch to sell on or otherwise dispose of the same aircraft to any third party airline end user XYZ ? Now if we can agree on that, don’t you think that there are clever enough Lawyers around to put together an appropriate wording to make an asset out of this situation so that Kjos could convince a couple of financial Hedge Fund experts to bank on it based on Venture capital ?

          • Even if you sell the Aircraft to your leasing company the day after delivery you still have to pay the down payments to Airbus/Boeing. Those payments cannot the leasing companies cover as the Aircraft is not made yet. So having a stream of 737MAX and 787’s coming you have to find the cash and then later worry about lease payments after the slae-leaseback.
            B. Kjos wanted to make a bigger airline than SAS before retire or go bust and by now I think it is bigger or close to.

          • 372 units make up a LOT of aircraft … let’s say Kjos could make a creative use of 120 of his MAX slots to assist with hedge finance to cover his PDP on the remaining other 252 (whence mostly A32X NEO) slots … would that suffice to suit Kjos’ fleet growth megalo-ambitions ?

          • I’m with dukeofurl re ‘onsell’ rights. Can’t imagine any OEM contract people being daft enough to allow a secondary market in production line positions. Lose the direct connection with end buyers, lose the negotiating position with them and so on.

            But Frequent Travellers D+1 certainly seems reasonable. Make a sort of derivative of the business (not financial) asset. Maybe this is already happening with some airlines/finance providers? Not VC territory though, more Private Equity.

            Incidentally, there is a long and interesting look at aircraft finance courtesy of Nils Hallerstrom at PK Air Finance (a GECAS business) at

          • Closest I can think of doing arbitrage, was Ryanair some years back who made more money from selling planes than carrying passengers- that was a while back! Of course they were selling planes as part of their normal cycle, at about 5-6 years old.

  4. Their cash position exiting 2017 would not be affected by any such accounting change. The reduction in equity would be matched with the reduction in the asset value of the investment in Norwegian Finans Holding

  5. Do not worry about Norwegian cash, – half of Europe is booking holiday flights for the summer period at this time, and the cash flow is usually very solid in this period.

    Would I book Norwegian for my summer holiday? No! Wouldn`t dare to.

    • Old Chinese proverb say: ‘You can never sell enough seats at below cost to make a profit…’

  6. Scott and Bjørn, thank you both for these type articles. Any thoughts on Norwegian’s Asian “twin”, LionAir? Last I looked, they were two to three years behind on audited financials, while still with monster order books with BA and AB. This could merit a similar article to this on LionAir.

    • LionAir is private. Where have you seen audited financials?

      • You’re right of course, Scott, it’s a private company. I was just thinking you guys would have the industry contacts that might have seen their financials, and could opine on same.

    • They are more like HNA Group that also expand quicker than Money flew in and have to talk to the banks and public partners and sell off assetts to continue. HNA subsidary HK Express is leasing some A320neo’s from Norwegian and I don’t know if they pay the lease invoivces in full and in time?

      • Article in AW&ST today indicates they’re stretching and partially stiffing their FUEL SUPPLIER! Odds are, if they’re willing to do that, well, it’s not good for their lessors!

  7. It started with Freddy and he got knocked down.

    Each time this shows up (long haul economy) it seems to have issues.

    The only ones that make it work I have seen are the Charter/Tour companies.

    • Freddy tried it in a different era with de-regulation still in its infancy. He probably would have still failed anyways. And remember out of Laker Airways’ ashes sprung Virgin Atlantic.

  8. @Bjorn/Scott
    Since many are using this post to ask for topical articles… i’d like to (kindly) request your (ventured) views around how Brexit is likely going to affect the aviation sector… such as on airlines, passenger rights, manufacturers, certification, landing slots rights, etc.

    Love to see also how the blog readers do their own (of course polite) predictions.

  9. You’re using very strange and inconsistent exchange rates in this article, varying from 6.66 to 10.52. Both are way outside of anything close to reality for the past year.

  10. One last passing, but relevant thought: With the staggering number of BA aircraft on order, and with 12 total BA a/c to come Norwegian’s way in 2018, and 11 787s in 2019, does Boeing Capital “step up” with a bridge loan? And, didn’t they lay a precedent for same with Monarch?

  11. Kind of interesting to have this latest updated Comment section from LeeHamNews followed in my e-mailbox by one headed: “Norwegian Air Shuttle Named Value Airline of the Year: Reserve Your Seat at the Airline Industry Achievement Awards…”

Leave a Reply

Your email address will not be published. Required fields are marked *