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.
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.
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:
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.
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?