Norwegian Confident of Narrowbody Fleet Growth Plan

 - April 26, 2019, 4:07 PM
Norwegian grounded its 18 Max 8s but hopes to add more eventually. The carrier estimates the grounding will cost it between $24.5 million and $57.5 million in Q2/Q3, 2019.

The uncertainty related to the groundings and recertification of the Boeing 737 Max has prompted Norwegian Air Shuttle (Norwegian) to adjust its full-year financial and capacity outlook, though the Oslo-based group does not anticipate the issue will impact the financing of the purchase of the aircraft.

Speaking on April 25 during a first-quarter earnings presentation with analysts, Norwegian CEO Bjørn Kjos said he expects the American authorities will be “even more” behind the financing of the Max than they have been in the past. “Boeing is the biggest export out of the U.S., and it would be a failure I think for any U.S. administration to say they can’t finance the aircraft. You will not be running out of options,” he said.

Norwegian CFO and deputy CEO Geir Karlsen noted the company has secured financing for “a bunch” of Max 8s that are scheduled to come in, adding there is “absolutely no sign” that the financiers are backing out due to the grounding of the aircraft. “They are just sitting there and waiting,” he said, pointing out that actually, no one is really looking to finance the Max right now. “Those discussions are kind of dead right now. No one is taking delivery of the Max. It is in limbo situation amongst everybody; we will have to see when the aircraft is going to fly again.”

Karlsen refrained from commenting whether the worldwide groundings had impacted the value of its order book for the model, claiming “it’s impossible to say” and further noting that “there is no doubt” that the value of the Airbus narrowbody neo order had increased in recent months due to the Max issue.

The grounding will cost Norwegian between NOK300 and NOK500 million ($24.5-$57.5 million) in the second and third quarter, according to Karlsen, saying, “This is the best guidance we can give.” The low-cost carrier (LCC) had 18 Max 8s in operation up to mid-March when regulators, including EASA, issued emergency airworthiness directives suspending the operation of the model and its larger variant, the Max 9.

The LCC has contracted wet-lease capacity throughout August and adjusted schedules to limit disruptions as talks with Boeing over compensation continue. “We have had some productive meetings with Boeing where we have discussed how we can maneuver through the difficulties the Max situation is causing Norwegian,” Kjos said. He emphasized that the company has “a very good” relationship with the U.S. manufacturer and the outcome would be subject to a non-disclosure agreement.

Norwegian is due to receive another 16 Max 8s this year but, cautioned Karlsen, “let’s see how many will be actually delivered.”

The group warned it sees “increased risk related to the target of a positive net profit in 2019” due to the uncertainty related to the Max grounding. The unresolved issue with the model also prompted Norwegian to slightly up its full-year unit cost guidance and widen its capacity growth guidance to 5-10 percent for 2019, compared to 9 percent previously.

Norwegian confirmed further progress in negotiating a new delivery schedule for part of its single-aisle aircraft order book held by its Irish leasing subsidiary, Arctic Aviation Assets. The agreement with Airbus for an undisclosed number of A320neo and A321LR aircraft and a deal with Boeing to postpone the delivery of fourteen 737 Max aircraft originally due for delivery in 2020 and 2021 will reduce the group’s capital expenditure commitments by $2.1 billion for 2019 and 2020. The agreements—especially with Airbus—include “better terms” and not only on the delivery schedule, Karlsen added. He declined to give specifics, citing confidentiality reasons. The restructuring of the order book is finalized, at least for the short-term, he said, adding that “now we can focus on turning this company to profit.”

Norwegian reported a NOK1.48 billion net loss in the first quarter, compared with a loss of NOK46 million a year earlier, on a 14 percent year-on-year revenue increase to NOK6.3 billion. The number of passengers carried rose 9 percent, to 8.12 million, and average load factor fell 3.5 percentage points to 81 percent.

The deal with Airbus, which has been approved but not yet signed, does create options on whether to proceed with the planned leasing joint-venture, asserted Karlsen. Discussions between the three partners—Norwegian, AAA, and Airbus—are “definitely not dead,” he said. “They are still very much alive. The deal makes it much more easy for us to potentially discuss with the same JV partner. Also, we have bought ourselves much more time now, we are not going to have any PDPs [pre-delivery payments] to Airbus until the second quarter of 2021. Now we have to evaluate, do we want to go into a partnership now or does it make sense to wait because we think the values will come up? We have optionality.”