Norwegian, profit, results, finance, quarter, hedging
Norwegian

Norwegian delivers better-than-expected Q2 results

Europe’s third largest low-cost carrier surprised the markets when presenting its Q2 results on Thursday June 12.

The Oslo-based low-cost giant Norwegian, presented its Q2 and H1 results for 2018, at its temporary head office on Fornebu in the outskirts of Oslo. Company CEO Bjørn Kjos opened the presentation with a big smile, even bigger than usual, and got applause from an auditorium packed with media and finance analysts.

The reason for his good mood was simple, that Norwegian had delivered a Q2 (April-June) positive net result of NOK 300 million, overshooting the consensus by the major analysts, who had estimated a significant deficit for the quarter. Looking at Q2 in 2017, Norwegian delivered a deficit of NOK 615 million.

Strong focus on costs, but fuel expenses hit hard

One of the main drivers for the positive financial result is a strong focus on cost reduction, and unit costs exclusive of fuel were down 19% and inclusive of fuel the cost was down 9%. During Q2, Norwegian delivered its highest growth ever, more than 10 million passengers carried, up 16% on last year. ASK (availible seat kilometres) was up 48% and RPK (reported passenger kilometres) was up 46%, resulting in a load-factor of 86.9%, down 0.9 percentage points on Q2 last year.

Fuel expenses increased by a formidable 84% to NOK 3.2 billion, partly driven by the fact Norwegian was only limited hedged to protect itself against increase in the fuel price.

Travel news site Check-in asked Kjos at the presentation if Norwegian planned to be more aggressive on fuel hedge in the future. Kjos confirmed that it would hedge more fuel than currently, he expects around 50% of the estimated fuel requirements will be hedged in the future, but added that hedging is a complicated science and could go against Norwegian if the oil and fuel prices declines. But he concluded that hedging gives Norwegian a better and more transparent future cost estimate and hedging 50% will be optimal.

Unit costs still higher than unit revenues

Despite the reduction in unit costs, there is still a big job left as unit costs (CASK) including fuel are at NOK 0.41 while unit revenues (RASK) are at NOK 0.32, resulting in a net loss of NOK 0.09 per ASK and is not sustainable over time. This is partly compensated by a rise in ancillary revenues that increased 19% in Q2, equal to NOK 162 per passenger.

Due to the high fuel prices and limited hedge positions for 2018, Norwegian has adjusted its guiding for average unit costs inclusive fuel for 2018, to NOK 0.425 – 0.430 from the previous NOK  0.415 – 0.420.

Revenues from passenger tickets recorded NOK 8.3 billion but still yield is down 10% to NOK 0.37 and RASK is down 11% to NOK 0.32, versus Q2 last year. This is a clear sign of the pressure on airfares, both on long and short/medium haul and it is expected the fares will continue to fall in the future and the only way to compensate is to reduce costs and secure other revenue streams.

Norwegian has reached its growth peak

During Q2, Norwegian reached its growth peak, the result being that the airline will show a declining growth pattern going forward and the focus will be on cost reductions, rentability and efficiency. Bjørn Kjos also confirmed Norwegian would establish a long-haul base at Copenhagen Kastrup in October 2018. Operations by Norwegian Air Argentina are planned to commence during Q4 in 2018, but Norwegian is clear that it will not be “a walk in the park” to start-up and compete on domestic routes in Argentina. If the Argentinian branch does not deliver satisfactory results or the framework for operating an airline in Argentina gets too complicated and unpredictable, Norwegian will have to evaluate its presence and operation in Argentina.

Norwegian holds large orders at Boeing and Airbus, around 144 various types of aircrafts, some of these will be taken into Norwegian fleet and substitute older aircrafts, other will be sold or sold and leased back, by using various financial instruments.

Future growth also within the Scandinavian countries

The fact that Norwegian mostly grows outside Scandinavia, it will continue to support its home turf, a new long-haul base in Copenhagen and more flights on domestic sectors in Norway are in the plans. Kjos & co expect more competition from other low-cost carriers in Scandinavia, especially from Ryanair, easyJet, Eurowings and WizzAir, but is preparing for increased competition in its home markets.

The positive results gives a clear message to Ryanair CEO Michael O’Leary, who has doomed Norwegian bankrupt on several occations, due to high fuel prices, limited hedging and high debt, now at NOK 27 billion.

IAG and its CEO Willie Walsh will look closely at the  Q2/H1 results and its may be another good reason for IAG to prepare a final bid on Norwegian.

 

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