No, Norwegian Hasn’t Turned Into a Profit Machine

I don’t usually cover earnings here on the blog, but there were so many stories wrongfully touting Norwegian’s miraculously-profitable Q2 that I had to write it up. The airline is a master of confusion when it comes to corporate structure and earnings information, so I can understand why some would just take the easy way out and call it profitable after last year’s terrible losses. After all, that’s what the press release says, so it has to be accurate, right? But even a slightly deeper look at the Q2 report shows that things are hardly as rosy as the airline would like you to think. Earnings appear to be better than last year, maybe, but that’s like saying that this glass of spoiled milk tastes better than the last one you drank. It still doesn’t taste good.

Norwegian’s press release sings it from the rooftops: “Norwegian reports solid profit in Q2.” Solid. Presumably this is a classic effort to try to put lipstick on a pig. There are already multiple airlines interested in buying Norwegian, so if it can juice its numbers in the short-term, it’ll be able to help increase that sale price. I’d just be careful. Getting too greedy (or being too cocky) could result in investors losing everything.

The reported net profit of NOK 300 million sounds remarkable, especially compared to last year’s disastrous NOK 691 million loss. Bloomberg apparently fell for this narrative with an article entitled “Norwegian Air Shares Jump After Reporting Surprise Profit” and another ridiculously bullish piece headlined “Norwegian Air Shuttle Conquers America.” You would hope Bloomberg wouldn’t be so superficial. I looked at the airline’s full Q2 report to dig in further.

Why didn’t this smell right to me? Well, here you have an airline that’s growing extraordinarily quickly. It saw available seat kilometers (ASKs) grow 48 percent over last year. Meanwhile, its fuel costs increased by 84 percent. On a per tonne basis, that’s an increase of nearly 28 percent. The airline’s load factor dropped almost a point, and its unit revenue declined by 11 percent. Sure, some of that decrease is offset by the fact that the average sector increased by 20 percent — longer flights have lower unit revenue — but it still seemed impossible that the airline could turn such a profit looking at those numbers. Then you look at unit costs, and you can under why. Those dropped like a rock by 19 percent excluding fuel. But how?

Let’s start with the most obvious problem here and work our way down, shall we? Norwegian had one-time gains and losses which it lumps under the title “other.” I’ll let Norwegian tell you about that. From the report:

Other losses/(gains) amounted to a net gain of NOK 455 million, compared to a net loss of NOK 197 million last year.

Well, sure. A massive NOK 652 million swing in one-time gains/losses year over year is going to skew those results. If you just take that NOK 455 million out of the net profit number, Norwegian immediately swings to a net loss.

But there’s some other funny stuff in here. Year-over-year, Norwegian has added 22 new airplanes while redelivering 4. It has also suffered through big 787 engine issues. Yet with all that, its maintenance expense was effectively flat. (It technically rose ever-so-slightly from NOK 647.1 million to NOK 650.6 million.) How is that possible?

Norwegian gives us some insight in this Q2 presentation.

Lower technical cost (-32% per ASK) due to one-off effects related to renegotiation of technical maintenance contracts

Well that’s interesting. Because when you look at the one-off items that Norwegian listed out under that NOK 455 million we talked about before, this isn’t there. Those costs are described as follows:

Other losses/(gains) include effects from foreign currency contracts, forward fuel contracts, total return swaps, losses or gains on translation of working capital in foreign currency and net losses or gains on sale of fixed assets.

So this magical one-time maintenance holiday just shows up as lower maintenance costs on the year, I assume. And presumably since Norwegian itself describes them as one-offs, we’re going to see maintenance costs rise significantly next time.

Sure, even with some adjustments the numbers look better than last year, but last year had that “kitchen sink” feel to it where Norwegian just threw a bunch of bad stuff in there. Something to counter the idea that last year was worse… the cash flow statement. In Q2 of this year, Norwegian saw net cash from operations of NOK 1,246.7 million. Last year, during the disastrous second quarter, the operation actually generated more at NOK 1,396.7 million. Food for thought.

As has always been the case, deciphering Norwegian’s results can be a harrowing and confusing experience for anyone. But for all those outlets that gushed about how Norwegian is now profitable, you don’t need to dig that far down to see it’s not really true. Norwegian wants its results to look good… and they do on the surface. But underneath? The patient has not suddenly been cured.