The Noose Tightens at Norwegian as Losses Continue

Norwegian has long been a master of confusion and spin, but at some point, even the experts can’t put lipstick on that pig. The airline’s first quarter results were pretty gruesome, and it looks like some partners are starting to get nervous.

In the first quarter, Norwegian would like you to think that it did very well.

Norwegian reports increased revenue and reduced costs for the first quarter.

And indeed, it did increase revenue and reduce costs. That’s really not all that hard. Growing revenue is quite simple. You just put a bunch more seats out there and, MAGIC, you sell more tickets. With a 17 percent growth in capacity year over year, how could it not increase revenues?

And on the cost side, yes, unit costs excluding fuel have gone down by 8 percent. Some of that is due to the 2 percent increase in stage length, but some of it is due to actual cost reductions. Then again, the biggest unit cost percentage decrease came from this:

Technical maintenance expenses decreased by 5 per cent to NOK 813 million (860) in the first quarter compared to the same quarter last year. Unit cost decreased by 19 per cent. Heavy maintenance cost decreased due to new engine maintenance contracts and reductions in maintenance costs on 787 and 737 MAX 8 aircraft due to less flown hours than planned as well as compensation for 787 groundings.

So maintenance went down because they flew airplanes less and got paid for the 787 sitting on the ground. That’s one way to reduce your costs.

Of course, if you include fuel, the unit cost decrease was only 5 percent. I know that’s not controllable, but the airline still has to pay it. And when we’re talking about generating cash to survive, rising fuel is not helpful, especially on a long-haul operation where you need a lot of it.

So that’s the good news, but what’s the bad news? Pretty much everything else. Even with those cost drops and revenue increases, Norwegian lost 4 percent more in Q1 than it did the year before. Its loss excluding one time gains/losses before interest and taxes was NOK -2,263 million, or about US$260 million. The first quarter is always weak in Europe, but this is indeed bad news for the airline. How did this happen?

Even though Norwegian did increase its revenues, it didn’t increase them nearly as much as it should have. It saw yields rise by 2 percent, but that attempt to keep fares up caused problems in filling seats. The load factor dropped precipitously from 84.5 percent down to 81 percent. The net result was a drop in unit revenue of 3 percent.

Ultimately, this is a cash business, and that’s what determines if the planes fly or not. Does Norwegian have enough cash to survive until some magical day in the future when it can turn a profit? (Note: that magical day may or many not exist.) It’s hard to say.

Cash did spike this quarter. It was at NOK 1,922 million at the end of last year, but 3 months later it was up to NOK 3,151. This, however, didn’t come from running the airline. This came from a rights issue that added NOK 2,900 million to the bank. Its cash flow from operating activities was actually NOK -220 million, worse than last year’s NOK -135 million.

As if that’s not bad enough, Norwegian is now feeling additional pressure from the grounding of the 737 MAX. It may get paid by Boeing for that at some point in the future, but Norwegian doesn’t have that long of a runway. The problem here is that having already exhausted so many avenues to boost cash, Norwegian doesn’t have a big cushion to survive shocks. There’s only so much furniture you can burn when things go wrong.

The walls also appear to be closing in around them as partners get nervous. For example, note this nugget from the earnings report:

Receivables have increased by NOK 3,951 million during the quarter due to increased production, increased hold-backs from credit card acquirers and seasonality.

Increased hold-backs from credit card companies? Basically that means that the card companies will hold on to more of the money travelers pay until the flight actually goes. Instead of getting the cash at booking, Norwegian has to book it as a receivable. Why? That’s done when the card companies get nervous about being stranded with a ton of claims if an airline shuts down. It’s also awful for the airline because it means that cash flow is restricted until those passengers are delivered to their destinations.

This has brought down many an airline before, and it will bring down more in the future. That being said, don’t think this means Norwegian is going away tomorrow. It still has a fair bit of cash thanks to that rights issue, and we’re moving into the best-performing summer season. That should provide some relief in the very short term.

Once summer is gone, however, the ugliness may once again accelerate. The airline has deferred deliveries and is trying to slow growth so it can improve performance, but it’s hard to see how that will be enough. Norwegian has dug a deep hole for itself with its rapid, unbridled growth and massive aircraft spending. It’s getting harder and harder for it to climb out.

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