Norwegian's route expansion pays off with big traffic increase in May

The LCC Norwegian, now the fourth largest budget carrier in Europe and about half the size of SAS, is widely regarded as one of the success stories of Scandinavian aviation. The Oslo-based airline reported passenger numbers rose by 25% in May-2010 as a direct correlation with the introduction of new routes during the period Jun-2009 to May-2010. But there is still some concern about its yields.

The actual total number of passengers flown in May-2010 was 1,185,373 compared to 946,082 last year, an increase of 239,291. Compared to the same period last year total passenger traffic (RPK) increased by 37%; total capacity (ASK) increased by 38% and the load factor was 77%, which is equivalent to last year.

Compared to the same period last year the Group has a significantly larger operation across all three Scandinavian countries and in particular energies were focused on building a base at Copenhagen, Denmark during the period, effectively replacing the operations of Sterling there that were not taken up by Cimber Sterling.

The average flying distance for the Group increased by 5% in May compared to the same period last year as it has added routes such as Chania, Heraklion, Istanbul-Sabiha Gökçen (commencing this month) Kos, Lanzarote, Larnaca, Marrakech, Rhodes, Santorini, Sharm el-Sheikh and Tenerife. Norwegian replicates some of those routes out of Copenhagen and Stockholm and flies to Dubai from all three of the primary Scandinavian airports as it gravitates towards the status of a short, mid and long haul carrier.

And it may not stop there. Last November it was reported that Norwegian had applied for slots in Bangkok and New York, and that flights might start as early as summer 2010. Also that it was planning 15 new long-haul non-stop flights in total from Scandinavia to destinations in the US, Asia and South America. There is no evidence of an immediate introduction of these services, which will now be delayed until 2011.

During the period the load factor remained stable at 77%. However, yield per RSM was down to NOK0.51 (EUR0.064) and revenue per ASK to NOK0.39 (EUR0.492) – in both cases by -14% - “reflecting a significantly adjusted route portfolio and the introduction of 12 new B737-800 aircraft with higher capacity and lower unit cost since May last year”, according to a company statement.

Norwegian also appears to have escaped relatively lightly from the volcanic ash cloud airspace closures of May-2010, having cancelled a total of only six flights though April was a different story as it was for most northern European airlines.

Norwegian entered into new fuel/exchange hedging contracts during May-2010, estimating a quarter-to-date loss of approximately NOK9 million related to the hedge positions by the end of May-2010. The carrier has the following future-term contract for jet fuel and currency:

  • Jet fuel:
    • 2Q2010: 29,750 tons at USD700/ton;
    • 3Q2010: 42,000 tons at USD711/ton;
    • Post 3Q2010: 81,549 tons at USD759/ton;
  • USD/NOK hedge positions:
    • 2Q2010: 14.5 million at USD5.80;
    • 3Q2010: 10.0 million at NOK5.84;
    • Post 3Q2010: 20.6 million at NOK5.87.

Norwegian ordered 42 B737-800 aircraft (Ryanair’s preferred model) with an option on a further 42, in Aug-2007. The USD3 billion order is being delivered at the rate of ten a year, supported by US Eximbank.

In Oct-2009 it ordered an additional six B737-800s, taking the LCC's total B737NG orders to 48 and confirming the B737NG as the future bedrock of the fleet. Then in December it stated it planned to increase its fleet with 70 new B737-800 aircraft by 2014.

Throughout 2009 its financial position was sound. For the full year to Dec-2009 net profit was EUR55.4 million (2008: EUR489,000), EBIT EUR71 million (2008: -EUR41.9 million), EBITDAR EUR166.4 million (+571%) and EBITDA EUR89.4 million (2008: -EUR25.8 million). Passenger numbers were up by 18% via expansion of services, ancillary revenues per passenger by 44.5% and, gratifyingly for the airline, yield was up by 3.2%. Norwegian’s biggest problem had been its yields, which declined heavily early in 2009 as fuel surcharges were removed. From the figures presented for May-2010 it looks as if they are back in negative territory again.

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