The Noose Tightens at Norwegian as Losses Continue


Norwegian has long been a master of confusion and spin, but at some point, even the experts can’t put lipstick on that pig. The airline’s first quarter results were pretty gruesome, and it looks like some partners are starting to get nervous.

In the first quarter, Norwegian would like you to think that it did very well.

Norwegian reports increased revenue and reduced costs for the first quarter.

And indeed, it did increase revenue and reduce costs. That’s really not all that hard. Growing revenue is quite simple. You just put a bunch more seats out there and, MAGIC, you sell more tickets. With a 17 percent growth in capacity year over year, how could it not increase revenues?

And on the cost side, yes, unit costs excluding fuel have gone down by 8 percent. Some of that is due to the 2 percent increase in stage length, but some of it is due to actual cost reductions. Then again, the biggest unit cost percentage decrease came from this:

Technical maintenance expenses decreased by 5 per cent to NOK 813 million (860) in the first quarter compared to the same quarter last year. Unit cost decreased by 19 per cent. Heavy maintenance cost decreased due to new engine maintenance contracts and reductions in maintenance costs on 787 and 737 MAX 8 aircraft due to less flown hours than planned as well as compensation for 787 groundings.

So maintenance went down because they flew airplanes less and got paid for the 787 sitting on the ground. That’s one way to reduce your costs.

Of course, if you include fuel, the unit cost decrease was only 5 percent. I know that’s not controllable, but the airline still has to pay it. And when we’re talking about generating cash to survive, rising fuel is not helpful, especially on a long-haul operation where you need a lot of it.

So that’s the good news, but what’s the bad news? Pretty much everything else. Even with those cost drops and revenue increases, Norwegian lost 4 percent more in Q1 than it did the year before. Its loss excluding one time gains/losses before interest and taxes was NOK -2,263 million, or about US$260 million. The first quarter is always weak in Europe, but this is indeed bad news for the airline. How did this happen?

Even though Norwegian did increase its revenues, it didn’t increase them nearly as much as it should have. It saw yields rise by 2 percent, but that attempt to keep fares up caused problems in filling seats. The load factor dropped precipitously from 84.5 percent down to 81 percent. The net result was a drop in unit revenue of 3 percent.

Ultimately, this is a cash business, and that’s what determines if the planes fly or not. Does Norwegian have enough cash to survive until some magical day in the future when it can turn a profit? (Note: that magical day may or many not exist.) It’s hard to say.

Cash did spike this quarter. It was at NOK 1,922 million at the end of last year, but 3 months later it was up to NOK 3,151. This, however, didn’t come from running the airline. This came from a rights issue that added NOK 2,900 million to the bank. Its cash flow from operating activities was actually NOK -220 million, worse than last year’s NOK -135 million.

As if that’s not bad enough, Norwegian is now feeling additional pressure from the grounding of the 737 MAX. It may get paid by Boeing for that at some point in the future, but Norwegian doesn’t have that long of a runway. The problem here is that having already exhausted so many avenues to boost cash, Norwegian doesn’t have a big cushion to survive shocks. There’s only so much furniture you can burn when things go wrong.

The walls also appear to be closing in around them as partners get nervous. For example, note this nugget from the earnings report:

Receivables have increased by NOK 3,951 million during the quarter due to increased production, increased hold-backs from credit card acquirers and seasonality.

Increased hold-backs from credit card companies? Basically that means that the card companies will hold on to more of the money travelers pay until the flight actually goes. Instead of getting the cash at booking, Norwegian has to book it as a receivable. Why? That’s done when the card companies get nervous about being stranded with a ton of claims if an airline shuts down. It’s also awful for the airline because it means that cash flow is restricted until those passengers are delivered to their destinations.

This has brought down many an airline before, and it will bring down more in the future. That being said, don’t think this means Norwegian is going away tomorrow. It still has a fair bit of cash thanks to that rights issue, and we’re moving into the best-performing summer season. That should provide some relief in the very short term.

Once summer is gone, however, the ugliness may once again accelerate. The airline has deferred deliveries and is trying to slow growth so it can improve performance, but it’s hard to see how that will be enough. Norwegian has dug a deep hole for itself with its rapid, unbridled growth and massive aircraft spending. It’s getting harder and harder for it to climb out.

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14 comments on “The Noose Tightens at Norwegian as Losses Continue

  1. Norwegian is getting a short-term boost due to the SAS pilot strike which has allowed them to gouge customers by in some cases more than doubling ticket prices within Norway, at least. Although this will hopefully bite them hard when customers have a choice again.

  2. So is this Norwegian Group that’s in trouble, or have they so many subsidiaries that one or more can shut down independently of the rest? Don’t they contract some flight operations to non-Norwegian Group airlines, too?

    1. Eric C – It’s the group overall, but they have constructed such a crazy and convoluted structure that it feels like jenga to me. Pull one piece out and the whole thing might collapse.

      1. Financial jenga is a great way to describe a lot of the games that companies like Norwegian and Sears play with all the shell companies.

        The big thing is that loss of confidence in a company’s financial liquidity is extremely contagious, as we saw during the collapse of Bear Stearns and of many retailers. Sounds like we’re already heading that way with the increased CC holdbacks, as Norwegian’s suppliers jostle to avoid being the last ones holding the fullest bag of crap.

  3. Credit card holdbacks shoved Frontier into bankruptcy a decade ago. It’s certainly not an automatic death knell but it does hurt.

    Hopefully they do really well this summer and actually end up with more money in the bank at the end of the quarter, without rights issues, than they have right now. Because they’re the reason AUS-LON (and maybe beyond) is cheap from that I can tell. If they failed and IAG picked up the pieces we’d absolutely lose that flight, and fares would bump up significantly

    I say this, and that BA flight got three seats spoken for from the conference I’m helping with, and Norwegian got zero. Between poor LGW connection timing and sub-daily scheduling Norwegian has to fill their 787-9 at a fair sized discount vs. the BA flight (which right now is on a 747). But they’re probably still profitable on the route by this time.of year.

  4. Sounds like the oft repeated tale of Daedalus and Icarus in the airline industry.
    Sounds like they can’t take the heat for long before they plummet like Icarus.

  5. Groundhog Day anyone? They would have gone bust if it were not for that 2.9 billion Krone rights issue underwritten by one of the CEO’s oil billionaire friends. So they’re basically in exactly the same position as they were this time last year. And so, I see a smaller loss in Q2 (with a cash positive special item put in so they can call it a “solid profit”), a moderate profit in Q3/summer before the wheels come off again in the fall/winter. And then around Christmas/New Year we’ll be talking about the same thing as last time; will Norwegian survive? Or, how many more gullible billionaires are there to bail them out again?

  6. Perhaps a stupid question but Norwegian’s fleet is made up almost entirely of 737-800 and 787s – aircraft which are commonly used by other airlines and for which Boeing has a long backlog between ordering and delivery. They’ve over-expanded and now seeing the pain. Is it perhaps possible for Norwegian to either sell or lease out some of their aircraft so as to try to shrink their balance sheet a bit and reduce some of the losses ?

    1. Selling aircraft to help reduce losses? With grounded 737 Max 8 aircraft, I don’t think selling these planes will be that easy once they get approval to fly again.

    2. David – Well, Norwegian has already raised a bunch of cash by selling airplanes and then leasing them back. So Norwegian has fewer airplanes left that it can actually sell at this point. It does have its leasing arm which, oddly, has A320 family aircraft. But there just isn’t enough left to burn.

  7. At the end of the day, is there any path to profitability for this company — other than shuttering its transatlantic operations? There is zero evidence that their transatlantic business model works, or could ever work. It’s why established low fare airlines have consistently refused to get into that game. It seems likely that Norwegian can avoid bankruptcy for at least several more months, but what’s the point if there’s no future?

    1. iahphx – Norwegian will tell you that it’ll be profitable once it stops growing, but I remain skeptical. It was a profitable short-haul low cost carrier. Then it went long-haul and burned all the furniture. Now it just doesn’t have much in reserve. There may be some version of a profitable airline hiding in there, but I think it could very well be too late for that piece to come out.

  8. CF, there’s a very high risk that Norwegian won’t survive this summer unless they find another dumb billionaire willing to throw their money away to recapitalize the company or bondholders waive the NOK 1.5B book equity covenant. AFTER the NOK 2.9B equity raise, Norwegian had book equity of NOK 3.03B at the end of Q2.
    Looking at 2Q2018, absent one time credits (for hedges), Norwegian lost NOK 150M. This quarter, multiple items will have a greater negative book value impact compared to last year.
    Norwegian downplayed the hit to their operation of the 737 Max grounding, but that aircraft represents ~10% of its fleet.

    There are two items in particular that could kill Norwegian quickly:
    1) Norwegian is now running insanely cheap fare sales for seats that extends through their best quarter, Q3. They are now burning family heirlooms to keep the doors open.
    2) As ironic as this sounds, lower fuel prices will cause losses on Norwegian’s fuel hedges to the point where it could wipe out most of Norwegian’s book equity. At the end of 2018, Norwegian had unrealized hedging losses of NOK 1.989B and the only thing that saved the company in Q1 was a strong rise in oil prices – truly ironic.

    Norwegian will have a hard time tapping the credit markets, as their bonds are now yielding ~20% and they have pretty much tapped out lines of credit. The only save at this point is another equity raise, and I think that this spring’s equity raise eliminated that as an option. This looks like they’re very, very close to having to close their doors.

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