Norwegian Tries to Fix Itself Before It’s Too Late

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.

Shuffling Routes

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.

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24 Responses to Norwegian Tries to Fix Itself Before It’s Too Late

  1. renatos says:

    What a disaster out Miami International airport with American Airlines: Worse management failure I have experienced.
    AA2525 was delayed about 7 hours for mechanical failures. First engin #2, then #1, than no fuel, finally the crue was over their limit I gues… :-( Worse experience in my 40 years with AA!!!
    You guys should investigate:: Thank you ?

    Sent from The #1 Brickoven Maker: Renato

    • Andy says:

      Not really sure what this has to do with Norwegian and profitablity…

      • MRY-SMF says:

        Maybe he or she could have flown the new and improved Norwegian instead? They serve MIA-LGW. Even if it was a domestic flight, the connection through London might offset the 7 hour delay.

  2. Tim Dunn says:

    kinda surprising that Norwegian is finally figuring out that fares over the Atlantic in the winter are too low to sustain the number of flights that operate in the summer. Point to point leisure routes are esp. vulnerable to low fares. Who knew?

    They now have to figure out how to use their aircraft in the winter- which is especially important since they are expensive, new models.

    Interestingly, American – mentioned here for other reasons – has the highest percentage of summer seasonal flights to year round flights of the big legacies across the Atlantic. It is easy to make money between the US and Europe in the summer and there are no shortage of routes that can be flown but you can’t park brand new 787s for months at a time or fly them to CUN and expect to be profitable.

    I would bet that Norwegian’s finances for the winter will improve dramatically and industry yields will see a nice bump.

    • Oliver says:

      Florida (Orlando, Ft. Lauderdale) in the cold European winter months would seem like a desirable destination. Wonder if they will really come back during the miserable season. ;)

    • Warwick says:

      Norwegian has changed the way we all experience cheap overseas airfare. I now visit countries I would never have thought of traveling to. I enjoy some stopover time in Oslo or Copenhagen when they don’t charge to stay over. I never pay premium economy and travel Light because for baggage prices I can buy and dispose of H &M clothes. In fact I bought a home in another country as a base to fly a lot more – all for the savings I made on BA and AA. Clean planes, safe travel and good destinations…. count me in for the long term. Whenever there is s cheap
      Flight I book and try the experience somewhere new even if it is for a week. I hope Norwegian lasts because they are changing the legacy carrier industry that needs to be shaken up!

      • Chiguy1979 says:

        So much for sustainability, eh? Why pack when you can just buy sweatshop junk and dispose after 1 use! That’s the whole problem with Norwegian and the ULCC model across the Atlantic. Flying isn’t a right – it’s a privilege. And it *should* cost more than $300 to fly from the US to Europe. Norwegian’s whole model is a joke – especially the shell companies set up to avoid taxes and fair wages for crew.

        • Sean S. says:

          Nonsense. Flying and travel isn’t for the rich and the wealth alone. And I don’t see any reason why a person should feel guilty about traveling on a plane packed like sardines while billionaires fly over 1200 private planes to Switzerland every year to be feted as Gods in Davos while eating caviar and guzzling champagne. I’ll give up my trips to see my family in Florida when the ultra rich stop dumping their yacht waste in the open ocean and stop writing off their corporate travel expenses.

          • Georjet says:

            YEAH!

          • NYCtraveler says:

            It seems you struggle with reading comprehension. It seems the point was simply that flying simply for the sake of flying and buying a bunch of disposable crap that gets tossed along the way is a problem. In your mind, what’s a “fair” price for a flight to Europe? I’m guessing your flights to see the family in Florida (yuck by the way – sorry you have to do that) are $250-$400? I’d love your explanation on how a ticket to Europe at 3-4x the cost should be the same price. If you’re not part of the solution you’re part of the problem, right? Safe travels to Tampa…

    • USBusinessTraveller says:

      “They now have to figure out how to use their aircraft in the winter- which is especially important since they are expensive, new models.”

      The problem is they haven’t figured that out, short of sending a few 737s to Guadeloupe to fly to/from the US (and they’ve been doing that for three years already) and one daily LGW-EZE that they fly year round.

      Maybe a couple more BKK ahd/or HKT services ex-LGW/AMS/ORY (they fly there from Scandinavia). But it’s getting too late to announce those and start ticketing. Leisure travelers generally book early and those intent on vacationing there have likely already booked. And they tried LGW-SIN two years ago but that failed.

      What you’re seeing is DY having the same problem now that AA will face starting next year. And vastly improved margins aren’t going to help when operating profits are more than swallowed up by debt repayments. They have $250m in maturing bonds to deal with in December. They’d need DL, no make that RyanAir like margins to survive without another suitor.

  3. Oliver says:

    Is Boeing compensating airlines for the grounding of the MAXes already? Difficult to see how an airline like Norwegian could survive paying for expensive assets that it can’t use for months and months. And, if they are leased aircraft, can the airlines pass the problem on to the owner of the asset? If I lease an apartment that I can’t actually live in due to something not under my control, I probably wouldn’t pay rent.

  4. Oliver says:

    What are they doing with/for passengers who already booked tickets on now cancelled routes? Refund the ticket and wish them good luck finding alternative transportation?

    • CF says:

      Oliver – I don’t believe compensation has been worked out yet for the MAX but with 18 on the property right now (best I can tell), you’d think Norwegian would be due some payments.

      As for refunds, yeah. We’re pretty far out so I doubt it’s booked much, but those who have booked will be due a refund if there is no other option. From some of these cities, Norwegian may have connecting options available.

  5. John says:

    At the moment Norwegian operates at least 5 wide-body wet-leases – and if they foresee B787 engine issues to continue also during winter season, then why would they continue paying ACMI to Hi Fly, Evelop & Wamos? Cancelling unprofitable routes will allow them to keep own aircraft flying, improve profitability and save cash!

  6. Gordon says:

    I hope, now, that they have closed these routes, that means they’ll have money to improve their customer service, food quality on premium economy + lounge use, get rid of the vamos air and other miserable things, and get into an airline alliance so that they can help pax in case of cancellations!

  7. Tuesday, 4:50 pm (DEN time)

    There are 3 wide body non stops DEN to London, UK this evening.

    FYI, airfares DEN to London, UK, in terms of how Norwegian has affected the market, at least today.

    Norwegian leaves DEN tonight (Tuesday, 16 July) at 8:45 pm non stop to London Gatwick, the one way fare for this flight is $ 360. Of course, everything else is extra.

    Source: google.com/flights

    Wamos has been operating this flight for some time now with an A330, due to the engine problems, on the Norwegian 787 leased planes.

    Here is trip report on the Wamos flight, DEN to LGW, in Feb. 2019.

    https://www.airlinereporter.com/2019/02/wamos-who-long-haul-economy-on-norwegian/

    The United non stop 787 DEN to LHR, departing at 5:35 pm, one way is $ 2,044.

    BA non stop 747 DEN to LHR, departing at 7:35 pm, one way is $ 2,405.

  8. USBusinessTraveller says:

    While their operating numbers improved significantly, when you’re in as much trouble as Norwegian you just have to look at the cash in the bank. And that fell from 3.2bn NOK at the begiining of the quarter to just under 1.7bn due to (presumably) debt repayments. They have less available cash than at the end of their disastrous Q4, and all that 3bn NOK raised through that rights issue has been burned.They’re mired in debt and that’s what’s going to kill them.

    Jettisoning Kjos must be because the execs feel they can do better deals without him. There’s a joint venture supposedly weeks away for their aircraft leasing business. Or is it, because they’ve been talking about that for ages? The best chance for Norwegian is acquisition and Kjos blew that with IAG last year. Will the new management persuade Willie Walsh back, or can they attract another suitor? Rumor has it that Virgin Atlantic is looking around troubled airlines, and maybe DY can turn VS’s eyes away from Thomas Cook.

  9. ewwer says:

    How serious are the engine issues on the 787? I am flying them friday and very concerned

    • CF says:

      Ewwer – It’s not a problem when the airplanes are flying. They do checks and catch any issues on the ground. The problem is having enough good engines available to keep the fleet flying.

  10. CraigTPA says:

    I’m not convinced that moving the SF Bay Area flights from OAK to SFO will result in enough additional revenue to offset the higher expenses. Other than that, all these route suspensions make sense, except perhaps the Florida destinations, unless the yields are such crap that even loading up on freezing Europeans wanting to thaw out doesn’t cover costs.

    • Oliver says:

      Yeah, the switch to SFO makes no sense to me. Frankly, the clientele targeted by Norwegian in the US probably doesn’t care about the departure airport, and I think they probably already advertised it as San Francisco/Oakland in Europe for European travelers.

  11. AnnTay says:

    Our Copenhagen flight was cancelled May 31. They told us to get in a dofferent line to rebook. After 2.5 hrs in line found out it went nowhere. Online site was crashing and customer service recording said too inundated to take calls. Tried to get on any flight to Europe but woukd have to pay and ask for a refund. Finally found someone after 4 hours that booked us the next day to Rome with a 8 hour layover. Lost 2 nights at the hotel and flew economy when we paid for premium. It was a nightmare. No customer service. Submitted a claim 6 weeks ago and other than getting a claim number have heard nothing. Flight to Oslo was cancelled at the same time that night.

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