I may not cover earnings reports all that often here, but when one comes out that’s as bad as Norwegian’s, I take notice. Norwegian spent 2017 floundering as it has done for years, but 2017 was so bad that it actually lost money for the full year. Airlines that lose money in good times like these should be very concerned about the future.
How bad was 2017? Well, the airline lost nearly 300 million NOK (just over $38 million) which gave it a negative 1 percent net margin. Norwegian’s business is highly seasonal (as is the case in Europe in general), but its fourth quarter net margin of nearly negative 12 percent was particularly terrible. Last year, for comparison, Norwegian actually made money in the fourth quarter and for the full year. Those results weren’t great, but the results from this year are just… bad.
At least Norwegian isn’t pretending that this is an ok outcome. Here’s the quote the airline is floating around from its CEO:
We are not at all satisfied with the 2017 results. However, the year was also characterized by global expansion driven by new routes, high load factors and continued fleet renewal. Through our global strategy, we contribute to local economic boost and increased employment at our destinations, as well as ensuring that more people can afford to fly – not least between the continents. In 2017, we received several major international customer awards, which would never have been possible without our dedicated colleagues at Norwegian.
Talk about blowing smoke. This year, as in every year, was indeed characterized by a “global expansion” but that’s only a good excuse if there’s a real end-game here. Saying that Norwegian contributes to local economies through increased employment and lower fares is only a good thing if it’s sustainable. It’s increasingly difficult to see how that’s the case.
It’s true that 2017 was another insane year for expansion. Available seat kilometers (ASKs) increased by 25 percent on the year. Some of that is due to a lot more seats on a lot more flights while the rest is due to flights being longer with all this intercontinental expansion. For 2018, things aren’t going to get any better with a predicted increase in ASKs of 40 percent. Let me say that again… 40 PERCENT.
Norwegian says that it’s in a better place in 2018 despite that number. How so? Well, it says bookings are stronger and labor issues have been resolved. But I’m still having trouble seeing a way out of this predicament. Here’s the chart from 2017 that sums things up.
As you can see, unit revenues dropped in 2017 while unit costs went up. And these aren’t just any unit costs; these are unit costs without fuel. If you include the increasing price of fuel, things look even worse. What’s most important to remember here, however, is that the average flight distance increased by 9 percent. When that increases, you expect the unit revenue and cost metrics to go down. Unit revenues obliged but costs did not.
So, what’s the way out of this? Well, it’s pretty obvious. You either increase your revenues or you decrease your costs. Simple, I know, but actually making that happen is a different story.
On the cost side, well, Norwegian says unit costs excluding fuel will magically drop next year by about 10 percent. (You have to do a little math on slide 26 to get there, but that’s roughly where the airline expects to end up.) I have yet to see any justification for how Norwegian is going to get to that number, though undoubtedly part of the plan is to rely on a further increase in the length of haul. That, of course, impacts unit revenue in the wrong direction as well.
On the revenue side, Norwegian is apparently looking toward the business traveler to boost revenue. That’s a time-honored tradition with low-cost carriers. When easy expansion dries up, airlines start moving upmarket to try to pick off those higher-dollar business travelers. Ryanair has done it, and so has easyJet, but they do it from a position of strength. They’re already making money and moving upmarket to keep fueling profitable expansion. Norwegian, not so much.
To improve its fortunes in this world, Norwegian is actually going to decrease aircraft density by adding more premium cabin seats on its 787s, especially out of London. It’s also going to throw in lounge access for premium cabin travelers, and it’s going to include free wifi. Additionally, Norwegian will beef up frequencies in many markets to appeal to the business traveler. This might (I repeat, MIGHT) make sense for an airline that’s already doing well and wants to try new things, but that’s not what we have here.
This all sounds nice, but there is a much better way to improve revenues. Norwegian could stop growing by 40 percent. The airline admits it can pull back if it wants, but I’m not so sure that’s true. See, Norwegian has found itself in a pretty nasty little cycle. Its cash balance increased in 2017, and that sounds odd for an airline that lost money. But you can see where the cash came from – airplanes. It has sold and leased back some airplanes while redelivering older airplanes elsewhere to increase its coffers. It’s able to finance those new airplanes since others will want them even if Norwegian goes under.
That means to keep raising cash, Norwegian has to keep growing. That’s going to continue to put pressure on revenues, and it’s going to make it harder for Norwegian to turn profitable. At the same time, liabilities will continue to grow and some day, it’ll have to repay them. Unless this business passenger-strategy magically turns into hugely-increased revenues, this seems like a problematic long term strategy.
In the meantime, Norwegian continues to tinker. It is moving full speed ahead on its Argentinian operation. That’s a market that has a lot of competitors coming out of the woodwork to take advantage of newly-liberalized rules. It’s hard to see how this is going to truly help the airline.
Some may say “just wait until the next downturn. People will start flying Norwegian more when they don’t want to pay big airline prices.” But that’s just silly. In a downturn, the big airlines will match Norwegian to prevent traffic from fleeing. (The big airlines already do match in many instances.) And Norwegian doesn’t have the kind of frequency needed to really be able to pull significant share away. (Chasing that by adding even more frequency will just make things worse.)
Norwegian is a machine that just keeps on growing for now, but at some point, the airline itself has to become a highly-profitable operation so it can start paying down those increasing liabilities. That doesn’t seem to be in the cards anytime soon.
40 comments on “Norwegian’s Awful 2017 Shows Mounting Challenges to the Business”
After my last trip with Norwegian, I’ll pay more and even give up flying direct to avoid flying with them again.
Their booking experience is awful (the last time I booked, between when I clicked the buy button to when I finished entering my credit card information – less than 5 minutes – somehow the fare was no longer available and I was forced to try again at a higher cost). I also paid extra to select my seat, but was not allowed to do so! Customer service didn’t respond until 5 days after I finished my trip (9 days after my first flight).
People will keep flying them, I’m sure, but it’s going to be extremely hard for them to change that culture enough to attract business travelers who aren’t quite as price conscious.
It’s Air Berlin all over again
The pot of profits for transatlantic low cost carriers has not materialized. Europe is still workign through legacy carrier consolidation and business failures. There are good reasons why much stronger carriers like EasyJet and Ryanair won’t touch the transatlantic market.
Saw this movie before many, many year ago. See Braniff Airlines.
Did you see the sequel: “PEOPLExpress”?
Yes. But a lot different. It morphed into a powerhouse HUB for Continental at EWR when CO bought the remnants of People’s, and it is now United’s HUB at EWR. A lot of the former PE employees still work there.
however, CO built EWR into a global, full-service hub. It changed the business model completely. EWR is a success because it is the largest full service global hub in the NE – right in NYC’s backyard (no I don’t want to start a discussion about whether Newark is NYC).
Low cost carriers have always known that their cost advantage relative to legacy carriers is with short-haul, high density routes. As stage length increases, the cost advantage decreases even as the willingness for people to pay for more service increases. The legacy carriers devote huge amounts of space on their longhaul aircraft to premium cabins because people are willing to pay for it. Norwegian chose to use widebody longhaul aircraft like legacies but still have very high density configurations operating point to point routes which means they have lots of seats to fill without the benefit of connections – which legacy carriers have. Add in that Norwegian’s model might work if they expanded slower but they are growing so fast that they can’t afford to let any market develop over a rational period of time, and they probably cannot continue for long. As soon as they stop growing, their costs will skyrocket. As CF notes, when costs are growing faster than your capacity, the business model isn’t working.
Someone can tell me that I am wrong but I don’t think there has been a predominantly widebody longhaul low cost airline become profitable on a sustained basis anywhere in the world. Most current longhaul widebody low cost airlines are part of short haul LCCs and it is impossible to know if the longhaul operations are profitable.
CO wisely made the right choice to convert EWR into a full service hub
I agree
“Someone can tell me that I am wrong but I don’t think there has been a predominantly widebody longhaul low cost airline become profitable on a sustained basis anywhere in the world. Most current longhaul widebody low cost airlines are part of short haul LCCs and it is impossible to know if the longhaul operations are profitable.”
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AirAsia X? They are a separate company to the short haul AirAsia Berhad. They reported yesterday and had a +3% operating margin for 2017. Not brilliant but not bad either.
But of course AirAsia X operates very differently to Norwegian. As a separate company to AirAsia they (and AirAsia) aren’t defocused. But the two work in tandem to maximize connecting feed at KUL and offer unique connecting routes (Gold Coast to Chiang Mai, or Kathmandu anyone). And they’ve grown steadily using A330s not leased Dreamliners.
Aside from JetStar and Scoot, who are owned by legacies, I can’t think of any other though.
I wouldn’t call Air Asia X sustainably profitable. They’ve had a lot of trouble over the years.
You have obviously reviewed the financials. Good catch on the aircraft sales and leasebacks. And you are right–you can’t grow yourself out of low margins.
It’s like the TWTR of the airline biz with high utilization, low (zero) prices, and suckers willing to keep funding them.
“Grow our way out of financial trouble” ==> “We’re still going to lose money on every sale, but we’re going to make it up on volume.” Consultants might get rich trying to help Norwegian, but I don’t see their current strategy ending well for many other groups.
With the economy doing extremely well, demand for many modes of freight and passenger movement at/near record highs, wages that haven’t yet increased as much as they likely will (at least among non-union employees), and fuel still (relatively) steady and cheap, you have to be doing something pretty wrong to be losing money these days as a transportation provider of almost any type (airline, trucking carrier, shipowner, etc).
As for targeting business travelers… I know of a very small contingent business travelers who prefer Southwest, even when they aren’t paying the tab, but that is mostly due to Southwest’s strength of schedule and convenient nonstops in small cities like Kansas City. Beyond those limited exceptions, I just don’t see how ULCCs can have any significant appeal for business travelers, unless they get lucky and land some big corporate contracts that will put butts in seats for nonstop routes that no other carriers fly.
Re business travelers, spot on. Especially as this focus is on London.
Okay so Norwegian can offer a decent premium economy long haul from London to the US (and Singapore). But what about those business travelers’ short haul needs (Frankfurt, Munich, Zürich, Amsterdam, Budapest, Moscow)? Aside from Scandinavia (and Helsinki) the only conceivable business destinations they can offer from London (and this is stretching it) are Madrid and Barcelona; everything else is beach flights. And LGW-MAD/BCN are also flown by IAG carriers code shared by British Airways.
Business travelers stick with one airline and partners/alliance to earn and use miles/benefits. The only game in town for London based frequent fliers is BA/IAG/Oneworld (possibly Star Alliance) even if you have to fly from Heathrow, though London City is a very convenient airport too.
And even for those travelers that live in Brighton, Redhill or Croydon where Gatwick is a much more convenient airport than Heathrow, you can fly from LGW to New York, the Bay Area and South Florida on BA anyway.
Björn is indeed blowing smoke.
I think you hit it pretty well, especially from the US side. There are nonstop flights from major US international gateways to most of the European cities you mentioned, and I imagine that all else equal those would be the preferred choices. Otherwise, if you have to connect in Europe anyway, especially London, why would you fly Norwegian instead of British Airways, Lufthansa, or another airline with a better service reputation, especially if it’s a member of your favorite mileage program?
The fact that Norwegian flies to many tertiary airports (I wouldn’t consider SWF even a secondary airport, like White Plains or Islip) doesn’t exactly help its case with business travelers either.
I wonder if the end game here is to keep the airline afloat long enough to sell out to another airline (ME3, perhaps?). That’s the only viable way that I can see this show ending without a massive bankruptcy or structural change.
Now that Virgin Atlantic has expanded its joint ventures to include AF/KL, they provide a good option for business travelers as well.
Is a spread of 0.03 NOK between unit revenue and costs really that big?
As a percentage it adds up.
Multiply 0.03 Nok by about 76 billion, their total available seat kilometers (ASKs) in 2017 and work the loss. At today’s exchange rate it’s around $270 million.
And Cranky reported the net loss. In order to lower that net loss Norwegian sold assets (part of their stake in a bank); remember that “other income” in their Q2 financials? Their operating loss for the year was around $250 million, and an operating margin of -6%.
US – Yes, thank you. I was thinking about which number to put forward, but then I decided just showing any kind of net loss was good enough to make my point. The operating result was indeed worse.
It’s a ~10% gap between revenues and costs, in an industry where profit margins are usually in the single digits.
Put another way, just to break even Norwegian would have to increase revenues per seat-km by ~10% while keeping costs entirely flat (without increasing the costs per seat-km at all), or decrease costs per seat-km by ~10% without reducing revenues per seat-km at all. That would be a HUGE accomplishment (think: CEO of the year and multiple Harvard business school case studies type of accomplishment), and just isn’t realistic at all.
Really too bad. Flew on their premium product (LGW/LAX) last fall and was really impressed by the value proposition. But if they can’t make it profitable, that doesn’t matter much.
I disagree with your assumption that “in a downturn, the big airlines will match Norwegian to prevent traffic from fleeing.” Just because an airline has the financial means to sustain losses doesn’t mean it will want to. There is no reason for an airline to want to keep its customers if its losing money on those customers.
An airline’s willingness to lower costs in an economic downturn is largely dictated by its variable costs of flying. The major airlines have older fleets, hence larger operating costs for fuel and maintenance. Norwegian on the other hand has a young fleet. In a down economy, the major airlines are more likely to retire their oldest planes and drop their least profitable routes.
Of course, if the economic downturn is combined with a decrease in fuel costs, this is less likely to be true. If we see an economic downturn combined with rising fuel costs, airlines will be quicker to downsize by retiring old planes.
That’s an oversimplification though. The past few years have seem legacies on both sides of the Atlantic aggressively unbundle their products, densify their cabins, and invest in lower cost platforms (basic economy in the US, inhouse LCCs in Europe/Canada). Clearly the established players pay attention to LCCs and ULCCs in the shorthaul space and they’re doing the same in longhaul as we can see with those same product trends spreading.
exactly. It is worth noting that this is not the first attempt at low cost carrier transatlantic service. Remember People Express, Laker et al?
The legacy carriers are more profitable than they have ever been. They will do what they need to do to protect their franchise for the long-term.
Note also that US legacy carrier transatlantic RASM was particularly strong in the 4th quarter of 2017 – just as Norwegian struggled the most. In addition, British Airways is taking Norwegian VERY SERIOUSLY at LGW in addition to AA/BA’s operation at LHR.
In 2017 flew British, Norwegian and Virgin Atlantic from London to JFK.
Service was very good on all three. Although I prefer BA’s Terminal at LHR most.
Also flew United LHR to EWR RT twice, and the Queens Terminal at LHR is very good as well. Flew Business Class on United, which obviously was much better than the others, but not a fair comparison versus economy on the others.
At JFK customs clearance was a headache with Norwegian and Virgin Atlantic, but better at British. EWR was the best with United with the smoothest and fast Customs Kiosks.
how about the total cost of each of those trips, if you don’t mind? or at least expressed as a percentage that would indicate if Norwegian was really much cheaper…
I post frequently on an air travel forum, and almost every time (from other posters’ experiences and my trying dummy bookings) when you compare apples to apples (round trip, one checked bag and in flight meals) Norwegian works out more expensive than the US/UK legacies on the TATLs. Many people work that out and book away.
Or, it makes one think that they may be attracting the true backpacker traveler determined to save money who’ll not check a bag ($45 each way) and will forego the meal ($45 each way) for sandwiches from home/supermarket and a soda bought airside. For every one of those Norwegian is losing $180 in ancillary revenue per round trip simply by advertising those low fares.
Either way it looks like a “United’s Basic Economy teething mess” up but with much more serious damage for Norwegian.
True.
Many, may years ago, a BA officer said, ” We will never let anyone get ahead of us like we let Virgin Atlantic. We just didn’t take them seriously. We were arrogant. That will never happen again.”
I think they remember the quote.
As well as BA aggressively taking on Norwegian at LGW, Delta/Air France/KLM are now offering Basic Economy on TATL. They too are up against Norwegian from London, CDG and shortly AMS. And Aer Lingus also has an unbundled hand baggage only “saver” fare for TATL.
MellowBellow – This has nothing to do with trying to keep customers when it comes to a downturn. Airlines will match because a) in a downturn, there will be less traffic to fight for and b) if they can put pressure on a new entrant, that new entrant has a higher chance of failure and that means capacity will moderate.
I’d be interested to see just how much of a cost advantage Norwegian has in longhaul compared to its competitors. I may have mentioned this before, but there was an interesting point made in Airline Weekly a ways back: There’s a “sweet spot” in terms of distance where an LCC enjoys the biggest cost advantage relative to a legacy carrier and beyond that, the gap narrows significantly. It’s one reason why the model has been so inconclusive in longhaul despite its shorthaul success.
And yet CAPA seems to be really bullish on the airline (and to most LCCs in general, even struggling ones like Fastjet). Don’t really understand why.
I don’t really understand the pessimism wrt Norwegian and business customers. When EasyJet and RyanAir first went after these customers, they might have been more financially successful than Norwegian is now, but Norwegian offers a better product that is a better fit for the business traveler. On short-haul, the Norwegian experience is comparable or better than the BA experience (assuming both are flying out of the same airports). Same food / drink policy and same baggage policy, but slightly more pitch and free wifi. The only reason I wouldn’t actually pay more to fly Norwegian is that I am already going to have to pay more to get to Gatwick rather than Heathrow. Long-haul is trickier, but it isn’t a knock-out for BA by any means. Especially when you consider the Norwegian premium cabin has a full 8 inches more pitch than BA premium economy, while being priced relatively similarly.
I frankly don’t know enough either loyalty program to know how big of a difference there is in the richness, but then neither Ryanair nor EasyJet really have any kind of miles program.
The issue is that Norwegian doesn’t fly short haul from London to meaningful business destinations apart from in Scandinavia, Helsinki and Madrid. All other flights are to leisure/vacation places. From Paris (another long haul “hub”) it’s even worse, with only one short haul route to Oslo.
Business travelers stick with one airline/alliance to get and use frequent flier status and elite benefits. Quite simply if Norwegian doesn’t fly short haul non-stop from the business traveler’s home to the major European cities (or have partners that do and recognize the FF program) they’re not going to get those travelers’ business to anywhere no matter how better the aircraft.
Their (Norwegian’s) loyalty program is very bare bones and nowhere near as beneficial as the major legacy carriers.
We are losing money on every seat…but we will make up for it with volume!
Almost everything about Norwegian’s transatlantic expansion has been baffling. There’s a ton of data out there which suggests that a low cost transatlantic business model is extremely risky — largely because most of the money is traditionally made in the premium cabins. This is why established low fare airlines like Southwest and Ryanair steered away from it. So if you were going to try something risky and new, logic would suggest you’d start slow — to see if the idea actually works. Nope. Norwegian bought a ton of planes and launched routes that no route planner would think had a snowball’s chance in hell of working (like pretty much anything from Newburgh, NY). They then decided to charge fares (I put some family members on $65 transatlantic flights) that couldn’t possibly cover their costs.
The fact that the USA airlines are actually increasing unit revenue across the Atlantic while Norwegian is losing gobs of money would seem like a big, gigantic signal that something is very wrong with Norwegian’s business plan. But Norwegian seems completely clueless about this and just behaves like “more of the same” — actually “much more of the same” — is somehow going to work brilliantly. And this is now after the big boys seem to have successfully honed their strategies to deal with low fare airlines: Delta, for example, is borrowing from their domestic playbook to offer transatlantic basic economy fares. This obviously isn’t going to help Norwegian. Why anyone would invest a nickel in that company at this point amazes me. Honestly, I’m just dumbfounded by the abject financial foolishness that seems to pervade that company and its investors. It’s the closest thing to lighting money on fire that I’ve seen since Turkish Airlines decided it was a great idea to spend a zillion dollars on a Batman Super Bowl ad last year. And Norwegian doesn’t have a government that will bail them out.
Longhaul low cost does not work. Norwegian is proof in action. At some point Norwegian needs to extract a premium on longhaul, and there’s just no sign of that ever happening.
Since ‘Norwegian’ is a tangled conglomerate of sub-corporations, staffing agencies and planes flying under different flags…does anyone know their overall hard asset value?
Im wondering if the endgame is to dilute yields & sell off these different ventures to competitors? Create chaos in a market where buying and eliminating the operation is the best value proposition.
I’ve never flown on them but looked into it them last year and figured something must be going wrong with them. I was looking at LAX-FCO-LAX for late-October/early-November last year and just the plane ticket alone on Norwegian was about US$150 more than BA or AA.
Didn’t really care where I had to transit as I’d been warned away from AZ by my Italian co-worker so I checked every carrier irregardless of the transit point (AF, KL, LH, LX, etc).
The only Norwegian flight that was near the BA/AA flights in price was via Copenhagen with a ~15 hour layover. AA/BA was the LHR transit with between a 2-5 hour layover depending on which LAX-LHR flight you selected.
Norwegian was consistently more pricey unless you enjoy 12+ hour layovers. Maybe it’s because of the timing from LAX over the Atlantic but I found them to be more hype then reality during my search. Now Vueling on the hand…that was a lovely intra-Europe flight for a good price.