Turn the clock back to the beginning of 2019 and people were wondering whether fast-growing airline Norwegian, with its low-cost short- and long-haul model, had grown a little too fast. A healthy net profit of NOK 1.135 billion (NOK 1 billion = $109 million or £85 million) in 2016 had turned into a net loss of NOK 1.454 billion in the 2018 results announced at the beginning of this year.
Credit: Amy Johnson
The airline’s response was a cost-cutting programme called #Focus2019 which has saved NOK 1.848 billion in costs since it was implemented, largely through better airport and handling initiatives and operating efficiency. It is targeting savings of NOK 2.3 billion for the full year.
The airline’s model is built on highly efficient aircraft and operations. On its key transatlantic routes, the airline says it is 33% more fuel-efficient than the industry average (according to data from the International Council on Clean Transportation).
The company is also aiming to make 2% per annum savings in the cost of fuel through the use of SkyBreathe.
This tool, funded by the EU’s Clean Sky project, uses big data algorithms to analyse and optimise fuel usage. For example, by turning off one of the engines when taxiing to gate, 20 kilos of fuel can be saved on each flight.
In the last couple of weeks, Norwegian has moved back into favour.
At the end of October, the airline announced record pre-tax profits of NOK 2.2 billion for the third quarter, up 38% on the previous year.
This week, the airline raised NOK 2.5 billion through a private placement and a convertible bond, both of which were oversubscribed. As a result, the airline is now funded through 2020.
“The capital raise will secure required financing of working capital during the winter season and create financial headroom as the company moves from growth to profitability The actions we are now taking will enable us to embark on the next chapter of Norwegian, to the benefit of all shareholders, customers and employees,” said acting CEO Geir Karlsen, who took over from founder Bjorn Kos who left the carrier in July.
Yet Norwegian’s efficiency plans are based heavily on the Boeing 737 MAX 8. It has been shifting from the Boeing standard 737 since 2017/18 but the March 2019 grounding of the MAX on safety grounds has cast doubt on the airline’s plans to reshape its fleet. Norwegian is committed to take delivery of 16 MAXs in 2020 alone.
It has, however, changed tack. It has sold 24 aircraft with delivery in 2019 and 2020 with net liquidity effect of NOK 2.2 billion and also established a joint venture with China Construction Bank Leasing International Corporation DAC. CCBLI will finance the acquisition of 27 Airbus A320 NEOs and will reduce the airline’s capital commitments in 2020 to 2023 by another NOK 13.7 billion.
Market sentiment is changing. Many investment analysts downgraded their share price forecasts and advised their clients to sell following the announcement of 2018 losses. Consensus has now largely shifted to hold or buy.
Norwegian has been the pioneer of low-cost long-haul travel and, interestingly, the U.S. is the country driving its recent success. The airline claims to be the largest foreign carrier in New York and the largest European carrier in Los Angeles.
In the current quarter, revenues from U.S. passengers account for around 18% of total revenues, ahead of its home nation (17.5%), Spain (14%) and the UK (11.5%). Revenue from U.S. customers for the year to date is up by an impressive 21%.
It also has a simple corporate discount model with no volume requirements – 8% off flexible fares and 2% off economy and other low fares.
Part of the reason for its success is its product offering – it is a serial winner of the SkyTrax European low-cost carrier award and has been named the world's best low-cost long-haul airline – admittedly not a large category – every year since 2015.
Norwegian seems to have turned a corner but the airline’s new boss will be looking nervously towards Boeing’s headquarters in Chicago for news of when, and hopefully not if, the MAX will be flying again. News that the latest audit of software fixes to the MAX has potentially been delayed will be keeping Karlsen awake at night.