With new CEO and secured funding, where does Norwegian go next?
On November 20, 2019, Norwegian Air Shuttle announced that the company finally found a replacement for its long-standing Chief Executive Officer and founder, Bjørn Kjos. The man to fill Kjos‘ shoes will be Jacob Schram, a former executive in companies such as Circle K, McDonalds and McKinsey. While experienced in various industries, including gas and food, Schram has no experience in aviation.
With a cumulative debt of $6.7 billion (NOK61.7 billion), according to Norwegian’s latest Q3 2019 report, the new CEO has some big decisions to make, amidst a very difficult environment for the airline, including the 737 MAX groundings and plaguing Rolls-Royce TRENT 1000 issues, which power the 787 Dreamliner – the two aircraft that are the backbone of Norwegian’s fleet.
Yet the skies seem to be getting clearer for the low-cost carrier. A record-breaking quarterly profit and closer than ever 737 MAX un-groundings, including the fact that the company has secured enough cash to operate for the rest of the year, might result in a comparatively great 2020.
“Now, my main focus will be to bring the company back to profitability and fortify the company’s position as a strong international player within the aviation industry,” noted Jacob Shram, who will begin his work starting January 1, 2020.
Norwegian’s strategy, called #Focus2019 has one clear goal – to stabilize the company after a period of massive growth, reduce costs and improve liquidity in order to sway liquidators away from closing down the airline. So far the plan has worked out – Year to Date (YTD) the company has saved $200 million (NOK1.84 billion), as it scaled down. In 2019 alone it sold off four Boeing 737s, with further agreements to sell 11 more in late-2019 and early-2020.
At the same time, Norwegian’s debt has increased massively. The low-cost carrier ended 2018 with a net debt of $3.4 billion (NOK31.9 billion), while it finished Q3 2019 with a hole in its budget amounting to $6.7 billion, leaving little room for flexibility. So much so, that the airline established a joint venture (JV) with China Leasing International Corporation DAC, reducing Norwegian’s potential expenses by $1.5 billion, as the JV will take the financial responsibility of 27 Airbus A320neo aircraft on order, the company announced on October 24, 2019.
The press release included the word initially, meaning that potentially, the company will look to defer more of the deliveries to the JV, rather than taking financial responsibility itself through its leasing subsidiary, Arctic Aviation Assets DAC.
But the joint venture is not the only way for reducing costs – following the 737 MAX groundings, the low-cost carrier replaced the capacity gap with wet-leased aircraft, which proved to be costly. However, the measure was abruptly stopped as some routes were no longer commercially viable. For example, on August 13, 2019, Norwegian announced that it is cutting transatlantic flights from Ireland.
“Compounded by the global grounding of the 737 MAX and the continued uncertainty of its return to service, this has led us to make the difficult decision to discontinue all six routes from Dublin, Cork and Shannon to the US and Canada from 15 September 2019,” senior Vice president of Long-Haul Commercial at Norwegian, Matthew Wood, said.
In Q3 2019, the airline’s report highlighted the fact that its aircraft lease and depreciation costs increased by 10% to $174 million (NOK1.6 billion).
“Efficiency gains from adding new fuel-efficient aircraft to the fleet, increased sector length and several #Focus2019 initiatives to reduce fuel consumption are offset by negative impacts using wet-lease during the quarter.”
During Summer 2019, Norwegian even wet-leased Hi Fly‘s Airbus A380 for flights between New York and several European cities, including Oslo, Norway, Stockholm, Sweden and Paris, France. Some older narrow-bodies, including 737 Classic, were also leased by the airline, increasing its overall costs. So far, the low-cost carrier estimates the 737 MAX groundings to have a negative impact of $109 million (NOK1 billion) on FY2019 profits.
The airline is showcasing positive signs even in Q3 2019. Despite falling capacity, the carrier’s unit yields and unit revenues are both up by 3%, while unit costs, including fuel, are down by 6%. On average, Norwegian earned $21.47 (NOK196) of ancillary revenue per passenger, up by 11% compared to the same period in 2018, while YTD saw an increase of 10%. Much of the growth or ability to stay neutral on its ASK was sustained by the fact that Norwegian is increasing its operational efficiency, as the low-cost carrier averaged 13.2 block hours per day, compared to 13.1 in Q3 2018.
Norwegian’s future in 2020
Looking at the end of 2019, Norwegian’s capacity is staying relatively the same as in 2018 (previously, Norwegian projected growth in Available Seat Kilometers (ASK), which measures capacity), but capacity-adjusted bookings are ahead compared to the corresponding yearly period. The #Focus2019 program alone will reduce costs by $251 million (NOK2.3 billion), $218 million (NOK2 billion) of which are recurring. Going forward, the Oslo-based company forecasts a reduction of ASKs by 10% in 2020 compared to 2019, as it continues to “re-asses, optimize and fortify” its network.
While the 787 Dreamliner continues to struggle due to the issues with its Rolls-Royce power plant (and no fix in sight until 2021), the eventual MAX un-grounding will provide relief for the airline due to its positive impact on operational economics. Seemingly, Norwegian is taking the low-risk route of optimizing its network instead of relying on the eventual return-to-service of the newest 737, as evident by the fact that the carrier is looking to minimize its capacity during the next year.
A high-risk, yet high-reward route would be to increase the capacity with the re-entry of the MAX, which would allow Norwegian to expand with much lower unit cost, which the MAX delivers compared to the Boeing 737 NG. The currently grounded jet will allow the low-cost carrier to further minimize its operational costs, including fuel. In addition, Norwegian, shortly after the MAX was grounded, stated that it would seek compensation from Boeing.
A321LR or A321XLR for Norwegian?
Currently, the airline has 88 (plus seven from Arctic Aviation Assets) Airbus A320neo family aircraft on order, according to the latest figures presented by the manufacturer. Most of the aircraft will go to the previously mentioned Arctic Aviation Assets that will lease out these jets to clients. However, what if Norwegian were to take these aircraft?
First things first, the possibility of such an event happening is very unlikely, as the carrier has barely any free cash laying around to invest additional funds into an extra aircraft type in its fleet. Pilot, cabin crew and engineer training would take time and money, something that Norwegian cannot spare in the short-term. But switching its fleet around, in the long-term, might be a potential prospect.
Following the example of Scandinavian Airlines System (SAS), which recently announced that it will deploy its first A321LR from Copenhagen, Denmark (CPH) to Boston Logan International Airport (BOS) in September 2020, Norwegian could also look into exploring the possibilities of the two long-range variants of the A320 family, namely the A321LR and the A321XLR. Comparing the two Airbus jets to the MAX, it is vividly evident that the two Airbus aircraft would provide Norwegian with more flexibility on its transatlantic routes, considering the bigger range of the A321 family:
The A321LR, with an extended fuselage and three Additional Centre Tanks (ACT), is able to fly up to 4,000 nm (7,400 kilometers), with the exit limit of 206 passengers, according to Airbus’ data. From Norwegian’s main base in Oslo Gardemoen Airport (OSL), the A321LR is able to reach almost all of the United States’ east coast, including such mega-hubs as Chicago, New York and Atlanta. From London-Gatwick (LGW), where Norwegian long-haul is based, the A321LR could theoretically reach destinations in the Caribbean key cities on the U.S. east coast.
Meanwhile, the A321XLR, with a range of up to 4,700 nm (8,700 kilometers) and a maximum seating capacity of up to 244 passengers, would also allow the low-cost carrier to expand eastwards, as the A321XLR would be able to reach the majority of Indian cities from Oslo (OSL).
The longest range on the 737 MAX is on the MAX-7, which is able to fly up to 3,850 nm (7,130 kilometers). The 737-7, while give-or-take has a similar range to the A321LR, has an exit limit of 172 passengers, meaning it would diminish the demand on the highly popular transatlantic routes.
Two of the airline‘s routes, which were inaugurated fairly recently, would not be serviceable with either the A321 family or the MAX family, namely London-Gatwick to Buenos Aires, Argentina (EZE) and London-Gatwick to Rio De Janeiro, Brazil (GIG). Both of these routes are served with a 787 Dreamliner, as the two city pairs are separated by 5993 nm (11098 kilometers) and 4974 nm (9212 kilometers), respectively. On the other hand, most of Norwegian’s revenues come from European and United States-based markets.
The United States has become the biggest market by incoming revenue with Norway, Spain and United Kingdom not lagging far behind, with these four markets being responsible for around 60% of the airline’s revenues. The carrier also highlighted Italy as the market with the second-biggest growth for the past year.
With the capacity downsizing coming, however, the prospects of Norwegian ending flights to South America are in the realms of possibility. On the other hand, it is unlikely that it will cut flights to Argentina – the low-cost carrier has established itself in the country, where it has an Air Operators Certificate (AOC) and has based three dedicated 737 NG aircraft to serve domestic and routes to neighboring states.
The company that Schram is taking over is not in the best place right now, especially for an executive that has little to no experience in the industry. Nevertheless, Norwegian is already setting up its foundation for the short-term future, in order to make it long-term. The fact that, barring any freak events, the airline has enough funding to continue operating in 2020 and it is able to operate past the difficult winter period, will provide a cushion for the newly appointed CEO.
But at the same time, 2020 will be a make it or break it year for Norwegian, as it already strained its resources, including numerous bond issues, to have enough liquidity to continue operating.
Fact check: Belarus captured a mysterious drone. Who built it?
Recently, Belarus accused Ukraine of violating its airspace and published a picture of a downed drone. But what model wa...
Airbus v Boeing in China: who has the upper hand? | Data
Airbus and Boeing are trying to outcompete each other everywhere. But what about China? How do the two giants fare there...
Does World Tourism Day still matter?
For World Tourism Day, we explore a number of tourism campaigns and ask, during a global pandemic, is it still relevant?...