Expansion pushes Norwegian Air to larger than expected loss

Company is ‘not at all satisfied’ with 2017 results, chief executive says

Boeing 737-800 aircraft belonging to budget carrier Norwegian Air. Photograph: Johan Nilsson/Reuters

Boeing 737-800 aircraft belonging to budget carrier Norwegian Air. Photograph: Johan Nilsson/Reuters

 

Budget carrier Norwegian Air suffered a worse than expected loss in the last three months of 2017 and ate into its cash reserves as the cost of expansion weighed on its finances.

Unlike other budget airlines that focus on shorter routes, Norwegian is trying to crack the transatlantic market by undercutting established rivals, but faces pressures to control costs and shore up its balance sheet.

The company swung to a net loss of 919 million Norwegian crowns (€94.5 million) from a year ago profit of 197 million crowns.

“We are not at all satisfied with the 2017 results,” chief executive Bjoern Kjos said, while adding that major investments made in 2017 had put the company on course for growth.

“We truly hope 2017 will be the last year with loss. We are very optimistic for 2018. Bookings are looking good and cost is on track,” he told a news conference. Speaking ahead of the results earlier this week, Mr Kjos noted “2017 was not a good year”.

“What could we do? We had already started to sell a lot of tickets. We couldn’t say to the passengers, ‘Sorry we can’t fly you.’ The best thing about 2017 is that it’s now 2018.”

Familiar tale

In a note to clients Davy analysts said: “It may sound like a familiar tale – Norwegian’s fourth-quarter results again missed expectations based on further cost escalation.

“For Norwegian’s investment case to stand up to scrutiny, this trend will need to show an improving trajectory, making 2018 an especially important year.”

The company’s shares were down 6.4 per cent in early trade. It was the worst performing stock on an Oslo bourse up 1.10 per cent.

The full-year net loss came in at 299 million crowns, down from a profit of 1.14 billion in 2016. In three months, the firm’s cash liquidity reduced by 27 per cent to 4.04 billion crowns.

The airline has embarked on an ambitious expansion plan, buying more than 200 new fuel-efficient jets, yet investors worry its drive to put more passengers on more planes is pushing up costs quickly without producing higher returns.

Norwegian’s fate rests on the still unproven strategy of adapting the success of low-cost short-haul travel to long-haul routes, as well as making a parallel bet on leasing out jets to rival carriers pay off.

More destinations

After launching its London-to-Buenos Aires flight this week, Norwegian said on Tuesday it plans to introduce more routes to South America, as well as adding more destinations in the US and Asia in coming years.

While Norwegian expects to add 25 aircraft to its fleet in 2018, it has also initiated a process to sell older planes and thus reduce its capital expenditure commitments.

The company’s gross capital expenditure for 2018 is now seen at $1.9 billion (€1.52 billion), down from $2.1 billion seen in October. In 2019, the company plans gross capex of $2.6 billion, but the net numbers will be lower as older aircraft are sold, the company added.

– Reuters/Bloomberg