Norwegian’s red spring

By Bjorn Fehrm

June 27, 2018, ©. Leeham News: In our March 7th article, we described the creative accounting methods Norwegian Air Shuttle (Norwegian) had used to hide its weak state of solvency after a tough 2017. In two weeks, we will know how the spring went. Norwegian reports its 1H2018 results on July 12th.

But we don’t have to wait until then. As before, we can look at the core operating results for the spring, based on issued monthly statistics. It’s troublesome reading.

A red spring

Norwegian has expanded its fleet and personnel rapidly during 2017 and spring 2018. Passengers and routes can’t keep pace with the fast developments. The result is lower load factors than during the loss-making spring 2017 and worse revenue per seat flown.

At the same time, costs have stayed about the same. Fuel is more expensive than last year but Norwegian has hedged fuel. Combined with slightly lower other costs, unit costs have stayed about the same as spring 2017.

The result is a continuous need of cash to cover the operational losses. Norwegian’s balance sheet is so weak there isn’t any fat left to cover losses with company assets.

The clever financial Swaps the company did last year (selling shares in Norwegian Bank to get cash, but still keeping them as an asset on the balance sheet) didn’t pass scrutiny by Finanstilsynet, Norway’s Financial Supervisory Authority. The sold shares are no longer on the balance sheet. Consequently, the own capital part of the balance sheet was 4.8% and cash at NOK4,039m when exiting 2017.

Spring operational losses

Using the same simple method as used for our March article, we can calculate the losses of the core flight operations during the Spring from Norwegian’s monthly traffic data for January to May:

  • The airline states the monthly production of Available Seat Kilometers (ASK). In order words, how many aircraft are flying, how far and with how many seats.
  • 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 the operational revenue. It was NOK10,613m or $1,380m for January to May.
  • The operational cost is the ASK times the average cost per ASK. For the last quarters, this has been, including fuel costs, around NOK0.43 or 5.2 dollar Cents. This gives a cost of NOK15,830m or $2,058m.
  • The operational loss for the spring until May is then NOK5,282m or $687m. This is 50% of revenue, a phenomenal loss level for a core airline business.

It’s also about NOK1,300m more than the cash position the company had when exiting 2017. Since then about NOK1,300m has been added by its shareholders in March-April and right now there is another money collection round on-going, bringing another NOK200m.

Will Norwegian survive as an independent company?

British Airways (or really IAG) and Lufthansa can see what’s happening. They have both courted Norwegian and offered to buy it. With buyers on the block, it’s no longer if Norwegian will perish, rather how long will it stay independent?

It all depends on the results of the summer months, June to September. If these continue to be red, or close to red, there won’t be any cash in the coffers for the red winter. Then it’s better to sell before having the back to the wall and having to pay for fuel and landing fees in advance.

In two weeks the 1H2018 report will be issued. The reports from Norwegian have turned into song and dance numbers, where one has to read carefully to understand what’s going on, and what are smoke screens to hide the precarious situation. Behind it all, it’s simple. Losses are huge and owners and other investors keep the ship afloat with cash injections (new shares are issued and sold).

The question is: will the money flows dry up before the losses are brought under control, and if so, who will buy the airline?

30 Comments on “Norwegian’s red spring

  1. The Norwegian goverment just sold its SAS shares and might help private Norwegian by shuffling that Money into Norwegian shares thru some banks to make the rescue operation less visible maby using the huge oil fund to pump a few billion € into Norwegian.
    Norwegian still owns a bunch of 737-800’s that could be sold/leaseback, hopefully will summer be really profitable for them filling up with cash for the Winter.

    • Claes,
      Believing that the Norwegian government will invest in Norwegian Air means that you don’t understand why the SAS shares were sold. It’s ideological more than anything.

      The oil fund is making professional financial investments only – the politicians have no say in which companies to invest in, so there won’t be any high risk rescue operations. The purpose of the fund(s) is only to make good investments long term (say 30-50 years) with as little risk as possible. Also, the main fund (Statens pensjonsfond utland/Norges Bank) is only allowed to invest abroad. The domestic fund (Statens pensjonsfond Norge/Folketrygdfondet) is much smaller, but the purpose is the same; to make money long term, with low risk. It’s highly unlikely that this fund would invest in a high risk operation like Norwegian Air.

      • We will see as the end of summer approaches if norwegian has cash for the winter and if there will be a norwegian solution. I think they want to and they have the cash. The Nowegian oil fund will disappear in the future some time after they are out of oil and gas and have to compete in “normal” businesses or look for those jobs in Sweden and Finland.

        • Who are “they” that you’re referring to? And what are your ideas based on? (Any media source mention of this, or is it just your own ideas?)

        • Claes,

          I’m sorry to say, but you’re clueless. The norwegian goverment has nothing to do with NAS and has no interest in owning airlines as the long awaited sale of SAS shares shows. The norwegian government does not engage in shadowy cover operations for the purpose of rescuing failed businesses. If some type of emergency package is ever offered, it will be in the open.

          The “oil fund” is a profit maximizing investment fund, not a policy vehicle unless you view the ethical rules as such. They can not invest in norwegian companies. That is an absolute rule.

          The fund will not disappear anytime soon.

          It’s unclear who you refer to by “them”, but norwegian businesses and employees are, of course, already competing in normal jobs.

          • The once that are certian about the future of Norwegian air shuttle ownership are the suspect ones. From simple calculations you can see that earnings are not sufficient for their business model including fleet purchases with very little biz class sales and something is bound to happen.
            Regarding the Norwegians economy dependence on gas and oil Revenue trickling down into the economy it is huge and makes other competinging inductrial production hard and expensive, also predicitng what happens to Norway after the oil and gas are out is difficult, but change will come.

          • Claes,
            You’re the only one who seems to “know” the future of Norwegian Air Shuttle, by stating that the Norwegian government will invest oil money into the company. That’s a fantasy.

    • Or, Boeing Capital And/or Airbus? They’ve both got a lot of orders at stake!

      • Their 30 A321LR’s on order are the “odd ball” in the fleet, although potentially suiting Norwegians requirements can see this go, first deliveries 2019?

        • Think they have to sell the delivery positions to raise cash.

      • Definitely not Airbus capital. They wouldn’t mind if that order would be cancelled. They could sell those delivery slots real fast.

        Not sure about Boeing’s position.

    • Isnt the ‘Norwegian long haul’ actually an Irish airline ?. The Norwegian angle is just marketing, a bit like Norwegian Cruise lines

      • Norwegian has 4 long haul subsidiaries: Norwegian Long Haul (registered in Norway), Norwegian Air International (registered in Ireland), Norwegian Air UK (registered in the UK, obviously) and Norwegian Air Argentina (registered in Argentina…).

        All of them are owned by Norwegian Air Shuttle (registered in Norway). So it’s not just marketing.

  2. As far a I know Norway is not part of the EU. If a “no deal” situation arises could Norway become a gate way for air travelers between the UK and Europe which will suit Norwegian.

    • Even though Norway isn’t an EU member, Norway is part of the Schengen area (common outer border, visa policy etc.). UK on the other hand, was never part of Schengen. In many ways it’s already easier to travel between (most of) the EU and Norway, than between the EU and the UK.

    • EU travel wont change after Brexit. Just as travel between EU and the rest of the world is largely seamless now. Britain ( along with Ireland) was outside the EU open borders. Norway in spite of being ‘out of the EU’ is inside EU for a lot of things.

  3. With the curretn turmoil of Brexit and the US nut case throwing tariffs here and there, I don’t see that as anything other than fatal to Norwegian.

    Frankly they look to have gone fatal several years back with over expansions (the famous huge Boeing and Airbus 737/A320 orders)

    That is a shame as it looked like it might be an interesting model going forward.

    As the engineer of the Titanic told the Captain, its not a matter of if, just how soon we sink.

    • Its a pity, found Norwegians pilots very good flying into some challenging conditions/airports.

      But you right, the vultures are circling. Would have been nice if a core airline could survive with say 10 B787’s and 100 or so 737-800/8’s connecting Scandinavian destinations and giving a good LCC option into the US from Europe.

      But its a tough market with Legacy airlines offering “low fare” Transatlantic and easyJet, Ryanair and Wizz Air there for inter Europe. Looking at some of Norwegians routes AirBaltic and WoW could be well position to pick up some traffic if Norwegian goes belly up.

  4. Well seeing as how they are Red already, maybe a natural candidate for Soviet purchase?

    • Qatar crossed my mind, they into Italy and moving into India. Norwegian could give them another “hub-X” into the US? Then there is also the IAG-Qatar connection.

    • Soviet and red – are you referring to Norwegian’s so-called “tampon livery”?

  5. Candidates for a take over (either complete or in parts):
    IAG, would make them even more dominant on the transatlantic UK-US market.

    Lufthansa, are they in a position to take over another LCC that soon after Air Berlin?

    Qatar, (as mentioned by Anton) interesting combination.

    Air France – KLM (in combination with Delta) will want to block IAG from taking over the long haul part of Norwegian (in particular transatlantic), AF-KLM is not in a good position currently due to strikes and turmoil at AF.

    Ryanair, due to it’s size and deep pockets it would be able to take over Norwegian. Good match due to B737 fleet. I think they prefer organic growth over take overs.

    Other candidates?

    • Totally unrealistic but think about Southwest, Norwegian feeder between US and Europe and spoking in Europe, and its all Boeing?!

  6. If Norwegian is losing money and burning cash at such a high rate, why are IAG and Lufthansa interested in buying it?

    • LH want to grow and eat weak airlines even though they will cause huge losses for some time, like, Swissair, Austrian, Sabena, BMI, Air Berlin, now Alitalia and Norwegian. They would love also to eat KLM, SAS and LOT if possible. We will see.

      • Like the fat man in the Monty Python restaurant skit? Vomit bucket, sir? Oh, just one more chocolate bonbon? Remember how that ended? LOL

  7. I do hope Norwegian will illustrate airlines in the government bail out zone with their next interim report. I kind of miss that.

    Their incredible boys with toys game is coming to an end soon – no doubt what so ever. If becoming global airline was this easy it would have been done already.

  8. Norwegian is a target to get taken over.
    It’s more the question who and when than if.

    Lufthansa or IAG – it’s a battle for market share and espacially for the low cost base.
    Everybody was up to buy Air Berlin, or better Niki (now Laudamotion), not because it was a sucessful airline but for it’s low operating cost.

    Same is for Norwegian – everybody knows growth is expensive. But if you can get IGA or LH yields on Norwegian cost base, it would be a gold mine.

  9. Has all the hallmarks of a land grab.
    Never set up to survive long term — only proof of concept.
    Then wait for someone to come along and buy them out.

    Exec level walk away with big bonuses and the plebs have the longer term issues to deal with.

    Is £300 / €400 / $500 return fare — plus taxes — across the Atlantic for 2 x 8/9 hour flights sustainable?

    Headline figure with some Forex flex.
    Building block fare above:

    Economy has a multiplier of 1.
    PE has a multiplier of 1.5 plus.
    48” pitch Business has a multiplier of 3.
    78” pitch Business has a multiplier of 5 plus.

    With my Glesga angle I think it would wash its face but it would be tight especially as oil reaches $80 per barrel.

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