“Norwegian cuts costs, boosts competitiveness”, but yield declines, along with share price

The LCC lost money in the quarter, which Mr Kjos attributed mainly to the impact of closure of European skies

According to Norwegian CEO, Mr Kjos, “As expected, our Q2 results are strongly affected by the closing of European airspace. By irregularly opening and closing the airspace, the Authorities contributed to an uncertainty among our passengers that has resulted in decreased demand. In addition, a third party strike in Norway affected our overall traffic. Norwegian had an actual loss of 100 million NOK as a result of stalled sales,”

Norwegian Air consolidates cost cutting, but sees yield slide in 2Q

Mr Kjos, spoke very positively at yesterday’s results announcement on the carrier’s cost reduction achievements and its strong balance sheet: “We are particularly pleased with our ability to cut costs and continue our competitive position. Our cash holding is 760 mill NOK higher than just a year ago, a favourable position in the current environment and when investing in new aircraft,” he said.

But he was understandably less forthcoming on Norwegian’s yield decline. Unit revenue (RASK) for 2Q2010 was NOK0.39, down 18% from NOK0.48 in 2Q2009, a significant drop by any standards. Yields fell 15%, from NOK0.62 to NOK0.52. This, reported the carrier, “partially” reflected a 4% longer stage length.

But the real impact must be coming from Norwegian’s rapid expansion.

Traffic was up15.% to 3.2 million passengers in the quarter, but total revenue lagged, at only 7.0%. Meanwhile, load factors were down 3.0ppts to a relatively low 75.0%.

As the report notes, demand is only “satisfactory”: “The demand for travelling with Norwegian and advanced bookings has been satisfactory entering the third quarter of 2010. Norwegian’s capacity increase from introducing larger aircraft (737-800’s), with a lower cost level, brings with it lower fares and even higher passenger volumes”.

And despite improvements in cost reduction, the prospect of more capacity sets bells ringing

The carrier continues to make good cost reductions, partly as a result of the new equipment it is brining in, replacing B737 classics with -800s. Non-fuel unit costs for the quarter were down 10.0%, but increased oil prices (over last year’s very low levels) meant that the cost containment was limited to a fall of 1.0% only.

Thus, cost reductions are not keeping up with unit revenue declines, something that could bite even more deeply as new seats come into the market. The report’s guidance suggested addition of a total of 30% (ASKs) for 2010 “mainly from increasing the fleet by adding 737-800’s”. However it added, “Norwegian may decide to adjust capacity deployment depending on the development in the overall economy and in the marketplace.

In outlook, Norwegian advises that, “Assuming a fuel price of USD 730 pr ton and USD/NOK 6,30 for the remainder of the year (excluding hedged volumes) and with the current route portfolio, the company is targeting a unit cost (CASK) of NOK 0.47 (including current hedges) for 2010”.

Unless unit revenues make a substantial leap to that level – from their recent NOK0.39, unlikely if further large amounts of capacity are added – that suggests a large gap that will convert to sequentially large losses.

See related report: Scandinavia’s largest LCC, Norwegian Air Shuttle, slips into the red in 2Q2010 as yields decline

Europe selected airlines daily share price movements (% change): 13-Jul-2010

SAS sees strength and shares rise

SAS (+5.2%) meanwhile improved on positive news. The carrier announced it will increase frequency this autumn on several intra-Scandinavian routes “due to strong demand”. Between Copenhagen and Stockholm, SAS will add two daily departures, increasing daily fequency to 15 as of 1-Sep-2010. SAS will also increase service on Copenhagen-Bergen, Copenhagen-Oslo, Copenhagen-Stavanger and Oslo-Stockholm, for a total of 62 new weekly frequencies.

Robin Kamark, Chief Commercial Officer was upbeat: “Besides a record high load factor, we have also noted a positive booking trend within our Scandinavian network. In order to provide our customers with the most and best departures, as well as transfers, we will offer an additional 62 new departures this autumn".

Meanwhile, CEO Mats Jansson was telling reporters that SAS should meet its target of becoming profitable in 2011, benefitting from an upswing in business demand.

An SAS top executive told a Swedish daily that the airline -- half-owned by the governments of Sweden, Norway and Denmark -- was reaping the benefits of an upswing in business and leisure travel.

Other movements

And hints of Lufthansa improvement to be announced today pushed the carrier’s share price up 1.8%. Thomas Cook (+5.4%), TUI Travel (+4.3%) and Aer Lingus (3.9%) led the others up, on a day when all airline shares rose, aside from Norwegian.

Want More Analysis Like This?

CAPA Membership provides access to all news and analysis on the site, along with access to many areas of our comprehensive databases and toolsets.
Find Out More