Norwegian, IAG, Argentina, oneworld, Nordic, markets, revenue, 2018, quarter, result, revenue, loss, Q1, Kjos, analysis, presentation

Analysing Norwegian’s latest Q1 results

The airline reports a significant loss for its first quarter, but the bottom line is not as bad as it could have been…

Europe’s third largest LCC presented its Q1 results at its headquarters in Oslo on April 26.

The expectations for a poor result had already been revealed by Norwegian in March, when it guided a negative result for the period in the range of NOK 2.6 billion (€269 million).

The actual Q1 result came in a little better, with a loss (EBIT) of NOK 2.22 billion. Compensated by financial income of NOK 1.64 billion, the net loss ended on NOK 46.2 million against a net loss of NOK 1.49 billion in Q1 2016 (including a financial loss of NOK 206 million).

The first quarter of the year is normally the weakest period for airlines in Europe that operate both short and long-haul routes, as Norwegian does. This is reflected in the unit revenue (RASK) declining 1% to NOK 0.28 and yield decreasing 1% to NOK 0.33. Both the increased flight distance (+17%) due to massive expansion on long-haul and pressure on fares drive this KPI down.

On the cost side the picture is somewhat better, as unit cost (CASK inclusive depreciation and fuel) decreased 2% to NOK 0.46 and unit cost (CASK inclusive depreciation and exclusive fuel) decreased 5% to NOK 0.35.

On-board sales and ancillary revenues increased by 17% to NOK 162 per passenger. However, the Q1 deficit is mainly the result of the difference between unit revenue RASK (NOK 0.28) and unit cost CASK (NOK 0.46). The gap between unit revenue and unit cost is NOK -0.18 per ASK (available seat kilometre) in favour of costs.

This fact is why CEO Bjørn Kjos was clear in his message at the presentation that focus on the reduction of costs is the main task for Norwegian.

Norwegian has hired a large number of new staff to cater for its fast growth, which is why personal expenses are up 33% on last year (LY) to NOK 1.55 billion.

More aircraft and longer flights result in higher fuel needs, with aviation fuel costs up a stunning 48% to NOK 2.25 billion, and as more planes enter the fleet the leasing costs also soar, rising 36% to NOK 1.01 billion for the period.

Total operating expenses climbed to NOK 8.88 billion, an increase of 35% on LY. Norwegian is also heavily leveraged, its net debt by end Q1 being NOK 24.7 billion.

The good news
Passenger numbers are up 12% to 7.5 million and capacity growth (ASK) is at 36%. Reported passenger kilometre (RPK) was 37%, resulting in a load factor increase of 0.1 percentage point to 84.5%.

Norwegian plans to divest up to 140 aircraft it has on order via its leasing arm, Arctic Aviation Assets, primarily Airbus A320s and A321s to be divested.

According to Kjos, it was never the plan to utilise these aircraft in Norwegian’s fleet, but when the carrier got the opportunity to strike a favourable deal with Airbus and Boeing in 2012 it was too good to turn down. Kjos also referred to the fact that the market for the sale of such aircraft on order is good.

During mid-2018, Norwegian will reach its growth peak and the focus will shift from growth to cost cutting, efficiency and revenue optimisation.

Norwegian, result, Q1, quarter, 2018, loss, profit, revenue

CEO Bjørn Kjos presents the results. Photo: Hans Jørgen Elnæs

Nordics’ reducing significance
The percentage of total network revenue generated by Norwegian’s operations in Norway, Sweden, Denmark and Finland is declining. Norway is down to 22.5%, Sweden to 10.5%, Denmark to 8% and Finland to 4.5%. The growth is coming from the USA, which now represents 17%, Spain 14% and UK 10% of total network revenues in Q1 2018.

Meanwhile, the planned start of domestic flights in Argentina are postponed to October-November and the Boeing 737-800 that is currently based in Argentina, mainly used for training pilots and crew, will be repositioned back to Europe as soon as possible, to be used during the summer high season.

The focus on Argentina has not changed, but growth will be aligned with market development. The flights between London Gatwick and Buenos Aires that started up in February have already transported more than 10,000 passengers.

Kjos defines the market potential in Argentina as great, but there are regulatory challenges, and this results in the need for Norwegian to plan for sustainable growth in this market.

Looking into a possible takeover by IAG, this may then open up cooperation between Norwegian Air Argentina and LATAM, the biggest airline in South America, which is a oneworld member, the same as IAG.

Outlook for the rest of 2018
Norwegian will focus on cost reductions, efficiency and revenue optimisation. The rising oil price can have a negative impact as Norwegian is only hedged for 27% of its fuel consumption (in the second half of 2018, the hedge is 19% of total estimated fuel consumption).

The bonus system, Norwegian Reward, is estimated to reach 9 million members during 2018.

If IAG is successful in acquiring Norwegian, it will be the largest airline group in Europe with 138 million passengers (2017 data), ahead of Lufthansa Group with 130 million and Ryanair with 128 million.

Kjos states that Norwegian has received multiple inquiries from other potential companies that are showing interest in a bid on the airline, since IAG announced it had taken 4.61% percent of the shares in the carrier.

Future bookings for Q2 and Q3 are above the same period in 2017 and booking revenues have already reached NOK 11 billion.