There are changes afoot over at perennial money-loser Norwegian. After years of rapid growth and poor financial performance, the airline has finally pumped the brakes. Growth is down, routes are being re-shuffled, and its founder and CEO is gone. Will this be enough to save the airline or is it too late? It’s hard to say. But at least things are finally heading in the right direction.
In the Black, Barely
Let’s start with the airline’s second quarter financial results. In the press release, the first number Norwegian crows about is a NOK 2.3 billion profit excluding ownership. That’s a completely useless number since ownership is a hugely expensive piece of the puzzle. You know what else is important? Interest costs since Norwegian has borrowed a ton of money. So really, I’m looking at earnings before taxes (EBT) as being the best metric.
Indeed, this number was much lower at NOK 111.4 million (about $12.9 million), but hey, it was positive. That’s more than I can say for the second quarter last year. And really, that number isn’t entirely fair either. Excluding one-time losses, Norwegian actually pulled in NOK 239.8 million (about $27.7 million). Not bad, right? Well actually, it’s not great.
That gives a pre-tax margin excluding one-time losses of just under two percent. Remember, the second quarter includes June, a month that should be a peak performer. This is when Norwegian should be making so much money that it can subsidize the weaker winter months, but it’s barely above water. That being said, there are some positive indicators.
Norwegian grew only 6 percent year-over-year which is a huge decrease from its usual torrid pace. It is now expecting to grow less than 5 percent this year overall — though that’s assisted by the reduced capacity due to the MAX grounding. Slowing things down has allowed the revenue numbers to improve.
- Load factor climbed from 86.8 percent to 88 percent
- Yields improved by 11 percent
- The combination of those two led unit revenue to increase by 13 percent — this despite a 5 percent increase in length of haul, something that usually depresses the number
Undoubtedly some of this increase is due to the MAX being pulled. Less capacity makes it easier to goose yields/load factors. But it’s still a welcome change. Combine that with unit costs that went up 2 percent without fuel or 3 percent with, and these are significantly better numbers than last year.
Again, they aren’t great. But they are an improvement. Now Norwegian has to figure out how to keep up the momentum and turn in results that are actually good. So what is the airline doing?
Bye, Bye, Bjørn
The biggest news is that founder and CEO Bjørn Kjos is stepping down. This was a rather abrupt announcement since he left without a replacement the day it was officially announced. CFO Geir Karlsen will step in as interim CEO and Chairman Niels Smedegaard “will take on a more active role” until they’ve found someone else to step in.
The abruptness of his departure suggests that the board is finally getting serious about turning this into a real business. Smedegaard’s quote in the press release outlines the plan that they’ve been talking about.
We have to ensure that Norwegian is well prepared and positioned to handle volatile markets and unexpected events. It is crucial that we continue to deliver on our cost reduction initiatives and that we constantly ensure that we have a route portfolio that yields profit. It is also important that the new CEO develops an organization that embraces continued improvement and operational excellence
Ok, gauntlet thrown down.
The early seeds of this plan were planted some time ago. The cost reduction plan has been in place, and a slew of route changes were announced just recently for the winter season.
- Oakland to Barcelona and Paris move over to San Francisco
- Las Vegas to London is canceled
- Orlando to Stockholm is canceled
- Boston to Paris will not operate this winter
- Chicago to London will not operate this winter
- Denver to London will not operate this winter
- Ft Lauderdale to Copenhagen will not operate this winter
- Los Angeles to Copenhagen, Oslo, and Rome will not operate this winter
- New York/JFK to Copenhagen and Stockholm will not operate this winter
- Orlando to Oslo will not operate this winter
In theory the ones that won’t operate this winter will come back in the summer, but we don’t actually know that yet. It seems pretty clear, however, that these routes were poor performers… for at least half the year. Before, that didn’t really matter to the airline. It was all about heft. Now, it matters.
With a focus on profit and not on growth, Norwegian now is on the right track. The problem is that it waited a really long time before realizing this was the way to go. Norwegian has piled up its debt commitments, sold and leased back airplanes, and generally just burned a lot of furniture. With this extra weight, recovery may not be easy. That’s not to say it can’t happen, but with one arm tied behind its back, this is going to be a major challenge.