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Norwegian, low-cost long-haul disruptor: what will 2019 bring?

Despite experiencing a tough year in 2018, especially in recent months, CEO Bjørn Kjos foresees a much more promising 2019.

Norwegian, the world’s leading LCC on long haul, had a tough year in 2018 resulting in a deficit before tax (EBITDA) of NOK 2.2 billion, while gross revenues ended on an all-time high of NOK 40.3 billion.

Fuel costs soared during the first half of the year and Norwegian was ‘limited hedged’ (instrument for fixed fuel price), and in the latter part of the year when the oil price increased to record levels it went into a stronger hedging position. Then the oil price suddenly dropped and it was stuck in its hedging position resulting in a massive loss in the fourth quarter, estimated to be NOK 1.2 billion.

In general, low-cost carriers (LCCs) tend to secure between 40-90% of their estimated fuel consumption on a rolling 12-15 month basis, in order to have clear visibility on their cost base going forward.

Such visibility enables them to use their dynamic pricing systems more efficiently and set competitive fares for their tickets.

Engine problems

Rolls Royce, defined as the ultimate in quality and style, was behind another serious setback for Norwegian due to problems with its brand-new jet turbine Trent 1000.

This turbine is in use on all Boeing 787 Dreamliners operated by Norwegian (and other airlines) and the problems, unscheduled maintenance and certification issues have grounded much of Norwegian’s Dreamliner fleet for long periods of time. Currently five Dreamliners are on the ground.

This has resulted in route disruptions, cancelled flights, wet leasing of aircraft and scheduling problems, and has incurred more than NOK 2 billion in extra expenses for the airline.

Rolls Royce will pay handsome compensation to Norwegian during the first quarter of 2019, and when the five currently grounded Dreamliners are back in service it is expected the problems with the Trent 1000 turbines will be solved once and for all, according to Rolls Royce.

Growth, Growth, Growth 

During 2018, Norwegian added 35 routes and 25 new planes and transported in excess of 37 million passengers, resulting in an incredible ASK (available seat kilometre) growth of 37%.

The passenger load factor dropped by a marginal 1.7 percentage points to 85.8% versus 2017. The drop in the load factor is mainly due to the strong ASK growth on long-haul routes and Norwegian tending to use a more conservative pricing strategy, where the goal is to sell higher fares than fill up the flights with fares that are too low.

A smart move, going forward, is that Norwegian will have to focus even more on cost reduction to compensate for lower fares, as the competition and seat capacity will increase both in Europe and on long haul, driving airfares further downwards in 2019, probably applauded by consumers around the world.

Looking into Norwegian’s core markets, it is clear that profit is made large scale on domestic routes in Norway, together with routes too, and from Norway and the rest of Scandinavia, while routes to and from UK are still generating losses mainly due to extreme growth on long haul and heavy competition. Although losses on the UK operations are declining and could break even or even see a profit in 2019, a Brexit without a deal is looming and could have a negative impact on UK operations.

IAG pays a visit

The most significant news at Norwegian in 2018 was IAG in April buying 4.6% of its shares and announcing it had the intention to bid for a full takeover and bring Norwegian into the IAG family.

Two bids are rumoured to have been placed by IAG, both of which were rejected by the board at Norwegian, and last week on January 24 IAG announced it would not pursue another bid and plans to divest its holdings in Norwegian.

Looking back to April last year, when IAG surfaced, the media went bananas and many said this was the best deal and partner Norwegian could ever get. But for Norwegian and its management it was business as usual and limited attention was given to IAG as all energy and resources were used up on Norwegian’s own operations.

Loaded with debt

Due to the fact Norwegian is loaded with debt, currently around NOK 30 billion, banks and bond owners have set some minimum financial criteria that must be fulfilled at all times. The most significant are minimum equity capital of NOK 1.5 billion and minimum cash availible at NOK 500 million, both of which are non-negotiable and must not be violated.

In order to be within this financial framework, Norwegian made a rights issue of NOK 1.5 billion in March 2018. On January 29, a new rights of NOK 3 billion was announced, but this time it was guaranteed by John Fredriksen a shipping billionaire, DnB Markets and Danske Bank, together with Bjørn Kjos and Bjørn Kiese, the two main shareholders in Norwegian.

This capital infusion will secure Norwegian the financial strength it needs to maintain its present speed, altitude and direction, even if there is turbulence ahead. Kjos, the company’s CEO, even promises to deliver a positive result for 2019.

Surplus in 2019

To deliver a surplus for 2019, Norwegian has implemented a cost-cutting program, Focus2019, that pledges to deliver between NOK 2 and 3 billion in savings during this year. Already Norwegian has said it will close a number of bases in southern Europe, mainly in Spain and Italy, and unprofitable routes will be cut and ASK growth will level off.

There will also be delays in new aircraft deliveries from 2019 to 2020. Cost cut are planned without staff layoffs, and pilots and crew at bases to be closed will be offered new jobs at other Norwegian bases, although competing airlines are already in motion to capture as many of these pilots and crew as possible.

Another capital boost that may occur this year is a joint venture or cooperation with financial institutions, leasing companies or airlines on 140 aircraft Norwegian has on order but will not use in its own operations. Negotiations are ongoing and when completed this can supply Norwegian with up to NOK 10 billion, together with a significant reduction of the current debt.

2019 will be a year of consolidation for Norwegian, but the first quarter (January to March) will be a tough one and the markets do not expect anything but a deficit, before Norwegian flies into profit from the second quarter (April to June) and delivers a positive result at year-end.

Kjos is the man

Despite speculation on Kjos stepping down and leaving the yoke to fresh blood, this is not likely to happen until Norwegian is well established, and that may take another two years. One should keep in mind what the current management and the entire Norwegian organisation have built up from their head office in Oslo since 1993. The business started with a handful of F50s, growing to 164 aircraft today flying in four continents and counting, and for that well done Bjørn Kjos & co.