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Low-cost airline Norwegian’s plans to be profitable in 2019 are under threat from the grounding of the 737 Max aircraft.
While cutting capital expenditure and taking out costs will inevitably put the business on a more stable financial footing, the temporary unavailability of the Boeing jet will cost the carrier $57.6 million (NOK 500 million).
“Due to the uncertainty related to the Max grounding, the company [sees] increased risk related to the target of a positive net profit in 2019,” the company said.
Norwegian currently has 18 Max aircraft in its fleet and is due to get another 16 in 2019.
“None of them are of course up and flying, and we don’t expect them to be up and flying this summer,” CEO Bjørn Kjos said on at an earnings presentation on Thursday after the release of the company’s first-quarter results.
For the moment Kjos is staying tight lipped about any potential compensation from Boeing that might be due because of the problems. He said the company had a “a very good relationship” with the manufacturer and any agreement “would be subject to an NDA [non-disclosure agreement].”
Norwegian has continued to make progress on cutting costs from its business as it switches from growth to profitability.
The first three months of the year is traditionally a quieter one for airlines and travel companies, with many reporting a loss over the winter.
Norwegian cut its operating loss by 55 percent to $168 million (NOK 1.5 billion), with revenue up 14 percent to $920 million (NOK 8 billon).
Norwegian managed to cut $54 million (NOK 467 million) in costs from the business, exceeding its target for the quarter, but total operating expenses actually rose thanks in part to fuel-price increases.
The airline’s load factor dropped 3.5 percentage points to 81 percent, with overall passenger numbers up 9 percent to 8.1 million.
“Today’s results were good enough for this company to continue flying in the near term but do not fully solve underlying structural issues,” analysts at brokerage firm Bernstein said in a note to investors.
Having had to raise funds in the recent past, Norwegian is now confident it won’t need to do the same at least for the next 12–18 months.
It has pushed back deliveries and moved capital expenditure commitments of $2.1 billion from 2019 and 2020. It has also secured extra headroom from credit card companies, having previously had issues in this area.
“What we are seeing in the 12- to 18-month window, we don’t foresee the need for any additional equity,” Kjos said.
Norwegian’s slightly better financial situation could also mean it’s less in need of securing a fleet joint venture partner. Last year the airline said it was in “advanced talks,” but it has yet to conclude a deal.
The airline has been working on finding a partner to co-invest in its fleet, and chief financial officer Geir Karlsen said those discussions involved three parties.
“We have actually 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. We have to evaluate now do we want to go into a partnership now, would it make sense to wait because we think the values are going to come up? We have optionality as I see it,” said Karlsen.
“That said, those discussions are definitely not dead, they are still very much alive.”
British Airways owner IAG had looked at buying Norwegian but dropped its interest earlier this year.