Is Norwegian overstretched?
This article was written by Aviation Analytics and first published here.
On December 8, 2017, the Financial Times reported investor concerns over profitability and debt at Norwegian Air Shuttle.
Europe’s Low-Cost Long Haul (LCLH) trailblazer has become a disruptive force, at one point launching 19 transatlantic routes over a period of just four months last year. Norwegian now has 145 aircraft, compared to 68 in 2012, the year it placed a mammoth order for more than 200 new planes.
Worries that rapid expansion has left Norwegian overstretched have hit its share price, which fell 40% in 2017.
Norwegian Air Shuttle Share Price
How far are Norwegian’s investors right to be concerned?
In our previous blog from 1 November, we illustrated problems in Norwegian’s UK network, namely that it was the loser from aggressive airline competition and overcapacity over the summer, which led Norwegian to axe 10 UK routes in October.
In this article we look to what extent these issues extend to Norwegian’s European network and at the performance of its trailblazing LCLH business.
As always, the following analysis uses data from Network Grandstand, which provides estimates of seat profitability based on our accurate accounts-derived seat and average fares from our Low Cost Fares Database.
A mixed bag
Here we benchmark Norwegian’s performance using our AAIndex, a measure of route performance using an A to E Index, as follows:The following performance split covers all sectors flown by Norwegian in 2017.
AAIndex Route Performance Split: Norwegian Air Shuttle Whole Network (Sectors) 2017
The picture, whilst mixed, is also not dire. 26% of Norwegian’s sectors were highly loss making, compared to 39% which were highly profitable. However, if summer seasonal sectors flown between June and August only are excluded, the number at “A” grade falls from 374 to 294.
Route churn is noticeable in Norwegian’s network, with just 38% of sectors flown year round, compared to 54% at EasyJet.
Another observation of Norwegian’s network is that it does not have the Scandinavian fortress which its name and history suggests. Flights departing from Norway had an average Profit per Seat of €2. From Denmark it was -€2 and Sweden -€9.
Nevertheless, the picture so far is line was Norwegian’s Low Cost rivals. Here we compare Norwegian’s network with those of Ryanair, EasyJet and Wizz Air in the same period.
AAIndex Route Performance Split: Low Cost Carriers Whole Network (Sectors) 2017
The gulf between Norwegian and its peers, it turns out, is not the proportion of unprofitable routes but the magnitude of the loss. The average Loss per Seat on Norwegian’s unprofitable sectors was -€43 (the average Profit per Seat on profitable sectors was €37, or €29 if summer only routes are excluded). This compares to an average Loss per Seat on EasyJet’s unprofitable sectors of -€12.
This is largely due to Norwegian’s long-haul network, more on which below. However, there is also a weakness in Norwegian’s European network which belies the figures above. Norwegian’s average Loss per Seat on short-haul flights was -€17, compared to -€12 for EasyJet.
To understand this difference, we next look at each carrier’s network average fares and costs. Again, this data covers all sectors flown in 2017.
Low-Cost Carriers Network Averages 2017
As in the UK, Norwegian’s higher cost base means that it struggles against its Low Cost competitors, with an average Profit per Seat €12 lower than that of EasyJet in a like-for-like comparison.
In it for the long haul
However, it is Norwegian’s long-haul business that is the biggest drag on its profitability. The following graphic shows average Profit per Seat on Norwegian’s transatlantic routes by origin airport.
Norwegian Air Shuttle USA Destination Routes Average Profit per Seat by Origin Airport 2017
Once again the stronger performing markets tend to be based on fewer observations. For example, transatlantic routes from Rome operated in November and December only. Bergen flew between July and September and Cork in July, October and November.
Norwegian CEO Bjørn Kjos recently commented that Dublin is one of its strongest transatlantic bases and this is borne out by our data – Dublin was profitable for Norwegian in four out of six months.
Norwegian’s other long-haul routes to Bangkok from Stockholm and Copenhagen also fared badly, with loses greater than €100 per seat on all sectors and no individually profitable months.
Given that Norwegian is a pioneer in LCLH, it is difficult to benchmark against other operators. However, equity research by Barclays suggests that Norwegian’s transatlantic routes are making a margin of two to three per percent, compared to the 15 to 20 per cent made by legacy carriers on transatlantic routes.
The game changer for LCLH could be the deployment of next generation narrow-body aircraft, such as the AS21 LR due to come into service in 2019, which will be able to fly six to eight hour sectors at a lower cost than even the most efficient wide-bodies.
However, given Norwegian’s current loses and any prospect of viability dependent on a low fuel price, it remains to be seen whether it can wait that long.
The road ahead
A network average Loss per Seat of -€10 would represent a €10 fall on 2016 for Norwegian. However, our observations exclude premium fares on multi-cabin long-haul flights. According to its own published accounts, Norwegian recorded a Profit per Seat of €3 in 2016. Assuming a similar fare uplift, our forecast is that Norwegian made an average loss in the region of €7-8 per seat in 2017.
Norwegian Air Shuttle Network Average Profit per Seat
We concur with the Financial Times article that things are not yet critical. Our observations support the conclusion that Norwegian is struggling to absorb its gargantuan aircraft order. Furthermore, it is showing signs of weakness in its home markets and it is still expanding, fast. Norwegian is banking on the competitive transatlantic market, but the legacy carriers are alive to the threat from their new
Low Cost rivals – they won’t make the same mistake twice! Nevertheless, Norwegian still has many strong routes. More than half of its network is profitable. One can therefore reasonably assume an ongoing degree of route turnover as Norwegian tries to straighten out its costs and finances in 2018, with some parts of its network remaining relatively unaffected whilst other undergo rationalisation. Norwegian’s case highlights the importance of airport managers being fully aware of the performance of their own and surrounding airline route networks.
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