Leeham News and Analysis
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Leeham News and Analysis
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Bjorn’s Corner: Kjos departure signals changes at Norwegian
By Bjorn Fehrm
July 12, 2019, ©. Leeham News: Norwegian Air Shuttles’ (Norwegian) founder and CEO for 17 years, Bjorn Kjos stepped down yesterday. Over the last year the CFO, Board chairman and now the CEO have changed.
This signals a change in strategy for Norwegian. The new management is focused on halting growth and cutting costs. Norwegian must now consolidate itself to profitability.
Figure 1. Norwegians Intercontinental network spring 2019. Source: Norwegian.
Norwegian goes from growth to consolidation
Norwegian has grown to the worldwide leader in Low-Cost long-range flying and has built an intercontinental network (Figure 1) over the last five years.
This fast expansion has cost a lot of money, with each winter bringing losses of around two to three billion NOK ($250m to $375m) which has been covered by selling assets and issuing of new shares.
As shareholders have grown tired of injecting more capital, the growth rate has slowed and new airline management is now working to get revenue and costs to balance.
The last half year is showing signs of improvements with an operational loss of 836m NOK ($100m) 1H2019 compared with 2,073m NOK ($240m) 1H2018.
The loss during the winter, which exceeded 4bn NOK, was covered with selling new shares for 2,927m NOK in February.
In the last year, the number of shares went from 45 million spring 2018 to 137 million today. The share price tanked with 69% as a result.
New management is now taking over with the CFO, Geir Karlsen, who arrived April last year, as acting CEO while a consolidation minded CEO is sought.
This new recruit will work with the new board chairman Niels Smedegaard which came onboard mid-April, replacing longtime Kjos ally Bjorn Kise.
Time to tighten the ship
The last year has seen a stop to the growth of Norwegian’s operations. Lofty aircraft purchase programs have been cut back.
The ordered Airbus A320neos and A321LRs have been rescheduled for later and 18 737 MAXs have been postponed. The 14 grounded Max 8s will cost Norwegian an estimated 700m NOK this year. Compensation will be sought from Boeing.
In total $2.1bn of aircraft investments have been pushed out of 2020 and 2021. To get cash, Norwegian owned 737-800s have been sold and leased back. The fleets halted expansion is visible in Figure 2.
Figure 2. Norwegians fleet development. Source: Norwegian.
The new management must reduce cost and consolidate revenue so enough profits can be made in the summer months to cover the tough winter months.
This is work to be done as the second quarter of 2019 reported yesterday saw revenue exceeding costs with only 83mNOK ($9.6m). With a balance sheet with 3% shareholder equity, there are no margins for further losses without capital injections.
The question is whether the new management is preparing Norwegian for a take-over. Both IAG and Lufthansa have looked at Norwegian. With Kjos and Kise gone, a sale might be in the strategic plan.
I’m wondering how Brexit will affect a nominally Irish airline ( registered in Dublin but run from Fornebu-Oslo in Norway) have access to routes out of Gatwick. Under the EU rules European airlines had the same rights as British ones- at various times Air France and Lufthansa have had flights originate from London to US and other places, and may still do so?
It’s a different arrangement to flights to and from from UK to Europe as there are reciprocal arrangements.
Depends on the type of Brexit:
Soft Brexit: Nearly the same as today.
Hard Brexit: Back to basic international rights – agreements between countries e.g. UK and EU but there are no such agreements yet. The EU offered already 9 months of tolerance to clean up the mess in such a case for British airlines but I have no idea about EU airlines in the UK.
I doubt Mr Trump will let EU airlines fly from the UK to the USA or from the USA back to the EU. Why should he, or the head of state of any other non-EU country for that matter?
I expect the same would apply to UK registered/owned airlines flying within the EU or from the EU to non-EU, non-UK countries.
It’s still something of a mystery what the UK CAA will do from November for ATS, aerodrome licencing, crew licencing, engineering training, maintenance, certification etc. Up to now they’ve shared that burden and marched in lockstep with behemoth EASA but will have to do it all by themselves with far inferior resource once the UK is out. Are they prepared for that? Or is the master-plan to muddle through and hope for the best? Rhetorical question.
@MHalblaub,
First, I’m not so sure of a “soft Brexit” even happening given the current situation. Also,IMHO a “soft Brexit” will still probably need new negotiation rights from the UK (maybe someone has more information on this?).
Regarding Norwegian TATL:
Due to time constraints, my family and I still take the legacies. Only because there are more resources from the legacies if something happens.
That being said, I always purchase travel insurance on international flights.
https://www.gov.uk/guidance/air-services-from-the-eu-to-the-uk-in-the-event-of-no-deal
Not really clear about flights from UK to non EU country , but operated by ‘EU airline’ – as Norwegian is . It seems that UK wants very liberal rules but EU is more restrictive.
Thanks for the info. Seems like it might be “dicey” as UK “wants to have their cake and eat it”. IMHO, this is not going to go well for the UK in an event of a “hard Brexit”.
Their LCC model is quite good for Intra-Europe routes but a huge disappointment for long-range. I experienced a 48-hour delay on a Paris-NY flight and they were still unclear after 2 days if they would operate the flight. In desesperation, I purchase a ticket on another airline. No compensation offered by Norwegian – despite EU rules – so we are going to court.
Former Malaysia CEO Peter Bellew just left Ryanair (as COO).
I’ll let the smart people here put two and two together 🙂