Norwegian Sees Income Improvement, But The Balance Sheet Problem Looms


I realize that’s a headline only an accountant can love, but, well, it’s a nice summary of the issue at hand. A change in strategy has been great for Norwegian, but it took the airline far too long to realize the rapid growth under founder and previous CEO Bjørn Kjos was doomed to fail. Third quarter results are in, and they aren’t bad now that the strategy has changed. They aren’t exactly great either, however. That’s probably the nicest thing I’ve said about Norwegian’s finances in a long time.

The July-September quarter in Europe is the peak of the peak, and it better be a good quarter or else. This year, it was decent for Norwegian. If airlines like Ryanair and Wizz didn’t exist with their stratospheric profit margins, Norwegian might look better.

Pre-tax earnings were NOK 2.2 billion (~$240 million) on revenue of NOK 14.4 billion (~$1.6 billion). But there were “other gains” of NOK 249.9 million (~$27 million) which I removed. That gives the airline a third quarter margin of 13.6 percent. This may sound good, but when put into perspective versus previous years, it’s only the third best in the last five years.

Data via Norwegian Investor Relations reports

The indicators are all pointing in the right direction. Year-over-year yield was up 3 percent with load factor rising 0.7 points to 91.2 percent. That led to a unit revenue increase of 3 percent despite the 3 percent increase in average sector length. (An increase in that usually brings unit revenue down.) This isn’t as strong of a gain as we saw in the second quarter year-over-year, but this is still good to see.

How did Norwegian make this happen? It’s simple. The airline implemented its new strategy to try to make a profit and stopped growing. Capacity was up only 3 percent year-over-year. With the exception of 2015 when Norwegian took a breath, this is the most rational growth we’ve seen by this airline. And this is the kind of thing that helps improve revenues.

Data via Norwegian Investor Relations reports

Ok, so it’s not really THAT simple. Norwegian faced strong headwinds in its home market where demand has dropped. In fact, in the third quarter, the US surpassed Norway as the number one source of revenue for the company. Take a look at this chart. You can see the biggest drops in revenue percentage came from Nordic countries (can you say “flight-shaming”?) along with the UK.

It also had a unit revenue tailwind here in that it has 18 737 MAX aircraft on the ground with more deliveries being delayed. That’s one reason beyond even the new strategy that growth was so anemic. This only helps push up fares, though according to Norwegian it’s a net negative. The airline says for the full year, it will take a NOK 1 billion (~$109 million) hit to profits because of the grounding.

On the cost side, the news was also quite good. Excluding fuel, unit costs dropped a whopping 6 percent. Most staggering is an incredible reduction of 30 percent in maintenance costs over last year. When I see a number like that, I naturally assume that it’s due to maintenance timing or some other fluke, but Norwegian says it was due to “cost reductions related to renegotiated contracts.” That is some serious negotiation.

So what does all this mean? Is Norwegian in great shape now? No, of course not. Year-to-date, Norwegian is still in negative territory. Its pre-tax margin excluding other gains is -2.1 percent. And the fourth quarter isn’t great for anyone in Europe.

The airline spent so many years burning furniture to stay afloat that its balance sheet is weak. European leisure airline life is like that of a bear. They need to get fat and happy during the summer so they can survive through the winter. This result isn’t good enough to make that happen without help. And with each year that passes, it gets tougher and tougher to survive.

That’s why Norwegian had to beg its bondholders to restructure this year. The airline had $380 million in bonds coming due, and it asked bondholders to defer for two years so it could save cash. In exchange, it would pay a premium on the bond, and it would pledge its London/Gatwick slots as collateral. The deal is done, but it means Norwegian now has one less thing it can burn next time it needs help. Its debt costs also became more expensive.

At this point, it’s really a race against time. There is a sustainable business somewhere at Norwegian, but it is burdened by years of bad strategy decisions. Will the airline be able to make it before it runs out of cash during a dark and dreary winter? This is annual game that we’ll continue to play for the foreseeable future.

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14 comments on “Norwegian Sees Income Improvement, But The Balance Sheet Problem Looms

  1. “can you say “flight-shaming”?”

    It always astonishes me that the Nords can be so easily manipulated with such obvious propaganda, but I suppose with “the war on terror” and Obama’s “Arab Spring is totes gonna be good and not destabalize the middle east” we’re just as bad/

    1. “Amen!” In Norwegian, Danish, and Swedish (and “aamen” for the 95% of Finns that don’t speak Swedish).

  2. Another factor is the strong USD vs the NOK, which translates to:
    Higher top line in NOK
    Higher expenses that are paid in USD (some hit to bottom line)
    Some demand shifting from Norway to US due to ForEx shift

  3. Hopefully they can get to a stable (slightly) profitable state. A few months ago I considered taking advantage of the NYC – ATH nonstop, but booked away from Norwegian as I didn’t want to scramble for last minute tickets if they went bust or were forced to drop the route. Also, it is hard to enjoy the islands knowing that one’s return flight may not be operating.

    Perhaps a one-time payday from Boeing will arrive soon as compensation for the MAX groundings. This reduced capacity and likely payout may be a blessing in disguise.

    1. If they expect to get any 737MAX payments from Boeing in 2019, the expected loss to be booked in 2019 should take that into account. They may be expecting it to take place in 2020, though.

      1. As long as they’ve reached an agreement (at least a tentative one) with Boeing, they may be able to accrue the receivable from Boeing against 2019 loss – I’m not sure of Norwegian GAAP, so I can’t say for certain.

        The link Brett posted for the 3Q results is returning a 404 – I’ll try to see if I can find any details later (this is a lunchtime post) to see if there’s any forward guidance on treatment or a 4Q and/or 2020 forecast of cash flow.

  4. The most significant parts of Norwegian’s financial statements and exec commentary are that they are shifting from a share maximization to a profit maximization strategy. It is damning for the stockholders that any company would admit that they knew they were intentionally using strategies that hurt shareholders. It is good news for all players across the Atlantic – and in Europe – that Norwegian has recognized they cannot continue the path they were on. Pulling significant amounts of capacity esp. in the winter will help everyone.

    Perhaps the fear of Norwegian collapsing forced some major concessions from suppliers/vendors but they did negotiate some very serious cost reductions.

    They are relying heavily on US point of sale which is barely there in the winter when deep discount travel is largely European originating.

    Finally, selling a majority of the company and its future is not exactly evidence of success but just an attempt to stay in the game for a few more years. A further weakening of the European economy which could be triggered in part by Brexit could push Norwegian over the line which they have danced around for years and now think they have moved far enough back from.

    1. “It is damning for the stockholders that any company would admit that they knew they were intentionally using strategies that hurt shareholders.”

      I think you can call that “blind faith in Björn Kjos”. He officially retired in July at Q2 earnings but I suspect he’d been marginalized and all but ousted after their (latest) recapitalization in March.

      The operating financials for the last two quarters are astounding improvements (+9% margin swing in Q2 and +7% in Q3). That indicates that the capacity that was cut wasn’t just unprofitable but recklessly loss making.

      The new (acting) CEO and team are doing a good job. As well as the bond payments being deferred and other concessions, they’ve finally got the aircraft leasing JV done (something Kjos insisted was “just a few weeks away” for three or more quarters) and means they can rid themselves of the now unwanted new delivery aircraft (and possibly offload others).

      They’re certainly not out of the woods yet for everything you say, and they may still need another recapitalization this winter, though an airline demonstrating financial responsibility should get that. But I’m a lot more optimistic for them than six months ago.

      My wager is still on acquisition as the best long/medium term outcome. How about Virgin Atlantic? They’re looking to grab a ton of slots at the (if) expanded LHR and for that they’d need aircraft and crew. The long haul fleet (RR powered Dreamliners) is a fit. Word has it that VS was interested in buying Thomas Cook UK but the entire TC company’s bankruptcy scuppered any chance of that.

    1. Wow – they must have gotten a serious sweetheart deal on those aircraft *and* they must really highly value that EuropeAsia routing.

  5. I’d like to ask Cranky (and everyone else) to stop using the term ‘Flight Shaming’, no one is being shamed out of flying; people are making an educated and informed choice about reducing their overall environmental impact. It’s hardly surprising that Norway and Sweden lead this trend, they already have high levels of renewable energy, great energy efficiency in their homes and businesses and Norway has the highest uptake of electric vehicles on the Planet.

    Using the term ‘flight-shaming’ is dismissive, derogatory and very worrying in the mouths of people in the airline industry. Over the medium to long term, the current airline business is under systemic threat in a carbon constrained world and insulting your potential customers’ intelligence doesn’t seem like good business to me.

    1. Cranky hardly invented the term.

      Back in 1968, the best-selling book The Population Bomb warned that unless we enacted immediate measures to curtail reproduction, overpopulation would doom the human race. But as Leigh Phillips, author of Austerity Ecology & the Collapse-Porn Addicts, points out, this sort of belt-tightening always falls most heavily on the people already struggling to get by.

      (ed…over 50 years later, the doom has not arrived. In fact, more people have been lifted out of poverty over the past 50 years than in the entire history of humanity before.)

      “(Climate activist Greta) Thunberg’s sailboat to New York, for instance, was a yacht copiloted by the grandson of a Monaco prince and Grace Kelly; her Tesla is on loan from Arnold Schwarzenegger. The symbolism of Thunberg’s lengthy journey clearly resonates, but in practice, it’s unrealistic for the vast majority of Americans.

      “Flight-shamers seem to forget, too, that many people may be traveling by air not for leisure but because they are immigrants visiting family overseas. They forget that to tell residents of places like Alaska, Hawaii, Puerto Rico, or Guam that they shouldn’t fly is akin to telling them they shouldn’t participate in mainland American life. Americans currently lack access to the extensive rail networks and generous vacation leave that would make lengthy journeys feasible.”

      The fires in California and the Amazon – both the result of mismanagement of natural resources – have a far greater negative effect on the atmosphere than commercial aviation which is still the most ecologically effective means of moving significant distances.

      Norwegian’s financial challenges have come from its transatlantic operations and not because of its European business. Other than staying home and undoing centuries of human progress, there is no other means besides aviation that is as minimally ecologically impactive as aviation.

      And, Norwegian has one of the lowest ecological impacts because of its high density cabins on latest generation aircraft.

      1. I think you’ve missed the point of my post. People making environmental choices over their flying is not new and nor is the term. I too am envious of Norwegians and others who have better options than me for transport. I’d love a fast train (or even just a reliably on time train) from Melbourne to Sydney but there isn’t one.

        The fact is people who can make a choice are making a choice, a choice they can make. As devastating as the fires in California and amazon are, there’s nothing the average Norwegian can do about it. You’re absolutely right we can all travel like Great Thunberg but we are able to make our own decisions.

        Saying what about immigrants from far afield or people in Guam, or Americans without access to good alternatives to flying wilfully misses the point. There is a segment of the airline customer base that is choosing not to buy the product and that is risk to all airlines.

        It is progress to invent a low cost way of getting people to any point on the planet, it is progress to decide not to do it and it would be even more progress to come up with a way of doing it sustainably.

        I love to travel and I love to travel far, my family is scattered across the globe, I want airlines to understand the concern I ahem over the impact of my travel and come up with products that allow me to travel in a way that is sustainable. I would like not to be described as a ‘Flight Shamer’ because I have these concerns.

        1. Ed,
          I’m not sure what part of the world you live but the points I am making are that
          1. the US and Canada largely built their intercity transportation systems around highways and airports that allow private companies to offer transportation services. Trains are great but they were built w/ a significant amount of government money which the US and Canada chose not to spend, in part because the economics don’t work to move large amounts of people across the North American continent by surface transportation. The sheer size of the US requires high amounts of travel but the US has grown to a size where it has created efficiencies of scale in transportation and energy usage and production better than other massive countries such as Canada and Russia.
          2. Even where rail or surface transportation are reasonable alternatives from a time and cost standpoint, they represent a fraction of total medium to long-haul transportation and surface transportation simply does not compete in the long-haul transportation market which is where Norwegian has expanded its business model.
          3. The term “flight shaming” came from Europe and it arose because of people like Greta shaming others that made choices to fly rather than go by surface transportation. The hypocrisy is that she chose to cross the Atlantic in a yacht which is far more environmentally damaging than an airplane – as well as being an economic impossibility for all but a fraction of the 1%ers. When any movement is led by a fraction of the 1% who hypocritically use their resources to get around the pain of the choices they push others to make, few real people are moved and will push back at 1%ers that shame us to do (or not do) something while they make more damaging choices.
          4. A real look at history will show that the UK was an absolute environmental disaster during the Industrial Revolution. They recovered. They have cut CO2 gases much faster than other developed countries but they still generate a higher percentage of electricity from fossil fuels and continue down the path of doing so. Germany burns some of the dirtiest coal to generate electricity. The US still generates more power from nuclear energy than any other country – more than twice the amount of France which generates the majority of its electricity from nuclear power which is much more environmentally clean. Because of the risks and costs of nuclear power, the US is now leading the world in building cleaner burning gas and coal-fired power plants.
          5. The greatest growth in CO2 emissions are coming from countries in Asia while some of the countries in Europe are reducing their growth in greenhouse gasses while the US is growing its greenhouse gasses at a slower rate than the growth of its economy. At a personal level, I can consolidate trips, buy a smaller car (which I have), turn the thermostat down etc but I feel no shame for the choices my country is taking for dealing w/ the ecological challenges the world faces, even while becoming the world’s largest petroleum producer (which is inherently hard on the planet but which has enormous geopolitical implications for whoever holds the title).
          6. I can’t control what Brazil does in the Amazon or Californians do to clear shrubs and remove fire risks but I can make my own choices – even while living connected to the world.
          7. As long as Norwegian is allowed to serve and grow in longhaul markets, telling consumers that they should not fly is anathema to the free enterprise system upon which many of the 1%ers made their money.

          Airlines around the world are buying new generation aircraft as fast as manufacturers can produce them. Airline fuel efficiency and emissions have improved dramatically and will continue to do so. Airplanes are fuller than ever. I support good environmental choices among consumers and companies but I, like most people, are not going to move back in time or spend more time or money to make choices that are negated by other countries that now want their time to grow w/o regard for the environment just as many European countries did centuries ago.

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