Special Report: Norwegian rejects cash crisis claim

Budget carrier Norwegian Air hopes a new year sale will bring a cash boost. Ian Taylor reports

Norwegian Air launched a new year sale of long-haul flights from Gatwick last week after dismissing reports it faced a cash crisis over Christmas.

The carrier has one-way transatlantic fares on sale from as low as £135 for departures up to the end of May. Fares from Ireland are even lower at €99 one way.

Passengers departing from Gatwick can fly to Boston or Chicago from £135 one way, New York from £145, Orlando from £150, Las Vegas from £165 and Los Angeles from £170, while one-way premium fares start from £420.

Norwegian is due to launch flights from Gatwick to San Francisco, Miami and Rio de Janeiro in March. Yet it continues to grow faster than it appears able to fill the additional seats.

The airline carried more than 37 million passengers in 2018, adding 35 routes and 25 aircraft in the year. It is now the third-biggest operator at Gatwick, with capacity across its network up 34% year on year in December.

However, Norwegian’s revenue per available seat kilometre (Rask) was down four percentage points at the end of the year on December 2017. That followed a near five point fall in the carrier’s load factor – a standard industry measure of efficiency – in November.

At the same time, Norwegian’s fuel costs continue to rise. The airline lost an estimated $170 million on its fuel hedging in October and November alone.

Trio of challenges

Norwegian confirmed a £185 million cost-cutting programme on Christmas Eve as it dismissed media reports that it risks breaching an agreement with its banks following an analyst’s report for Scandinavia’s Danske Bank which described the carrier’s figures as “soft”.

In a statement issued on Monday (January 7), Norwegian chief executive Bjorn Kjos insisted: “Our international footprint continues to grow stronger.”

But he noted “tough competition, high oil prices and operational challenges have particularly affected our long-haul operations”.

Kjos said: “The company will now enter a period of slower growth. We have adjusted and optimised our route portfolio and capacity. We have also made seasonal adjustments for the winter. We have launched a series of cost-reduction measures to boost our financials in 2019.”

The carrier faces three overriding issues: the fuel price, the problems with the Rolls-Royce engines on its Boeing 787 longhaul fleet and the cost of a large number of aircraft it has ordered but can no longer profitably deploy.

Chief financial officer Geir Karlsen told Travel Weekly in November: “We are struggling with high oil prices.” At the time, the carrier was 31% hedged on fuel for the final quarter of 2018 and 22% hedged for 2019 – a fraction of the rates at which most major airlines hedge.

Norwegian subsequently sought to catch up, noting in this week’s statement: “During the last period, Norwegian has hedged fuel for 2019.” However, the oil price has fallen sharply since early November, forcing Norwegian to report: “The company has an unrealised loss on this hedging.”

Divesting aircraft

Norwegian has reached an unspecified compensation deal with Rolls-Royce over the problems with its engines, which Karlsen reported in November “had a huge effect on our profit and loss”.

“We have struggled with the compensation due to passengers, [and] the costs of leasing to replace the grounded aircraft,” he said.

Norwegian noted his week: “The company has reached an agreement with Rolls-Royce, which will have a positive effect from the first quarter of 2019.”

However, efforts to establish a joint venture with an aircraft leasing company – to take Norwegian’s aircraft orders off its hands – appear to have stalled. The carrier has more than 200 aircraft on order.

Karlsen said in November: “We are discussing how to finance these orders, looking for a partner investor.” At a minimum, he said: “We aim to have financing in place for deliveries for the first half of 2019.” In the event, it managed to secure financing for deliveries up to June. It announced on Monday: “The process of divesting aircraft continues. The discussions about forming a joint venture for aircraft ownership also continue.”

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