Budget carrier Norwegian Air’s profits fall

Budget carrier Norwegian Air, which last week launched transatlantic flights from Cork to Boston, reported second-quarter earnings significantly below forecasts and cut its outlook for growth, while costs were seen rising more than the budget carrier had previously expected.

"We have had significant additional costs for leasing of aircraft, high oil price and the air passenger tax implemented by the government of Norway last year, which have had a negative impact on the result," chief executive Bjoern Kjos said in a statement.

Norwegian Air now expects its available seat kilometres, known as production growth, to increase by 25 per cent in 2017, down from a previous estimate of 30 per cent, while its unit cost forecast was raised to 0.42 crowns from a 0.39-0.40 crowns range.

Norwegian Air’s chief financial officer abruptly resigned on July 6th after 15 years at the company, sending its shares tumbling.

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From its roots serving European airports with cheap flights, competing with the likes of Ryanair and EasyJet, Norwegian has in recent years expanded heavily in the transatlantic market, a novelty for a discount carrier.

Norwegian began its bid to fly from Ireland in 2015 and started selling flights earlier this year. The airline currently flys from Dublin, Cork and Shannon airports to a variety of US locations.

The strategy comes with its own risks, however, including the purchase or leasing of larger, more costly aircraft and a greater need to secure funding for the expansion.

April to June adjusted operating profit before leasing and depreciation (EBITDAR) fell to 1.19 billion crowns (€125.8 million), down 21 per cent year-on-year and below analysts’ forecast in a Reuters poll of 1.51 billion crowns.

Norwegian Air’s operating result swung to a loss of 863 million crowns from a year-ago profit of 1 billion, while analysts had expected a loss of 246 million.

Negative cost surprises

The results were "light-years behind expectations", Swedbank analyst Hans Ludvigsen wrote in a note to clients, adding the share could drop by 7-10 per cent.

Davy analysts Ross Harvey and Stephen Furlong wrote that the company’s rate of growth makes the scaling process difficult and the scope for negative cost surprises is a concern for investors which will limit the stock’s multiple potential.

“Not for the first time, the main takeaway from Norwegian’s quarterly results is a negative ex-fuel cost surprise this time down to additional leasing/maintenance and personnel costs,” the Davy analysts added.

Revenues rose by 17 per cent year-on-year, but Norwegian’s operating expenses increased by 45 per cent, headed by a 56 per cent increase in technical maintenance costs.

The higher cost of maintaining the fleet was driven by changes in the aircraft portfolio, escalating engine service costs and a depreciation of the Norwegian currency against the US dollar.

“A larger share of leased aircraft in the fleet, and a larger share of 787 aircraft lead to increased unit costs,” the company said, referring to its build-up of long-distance Boeing 787 Dreamliners.

“The demand for travelling with Norwegian and advance bookings have been satisfactory entering the third quarter of 2017,” the company said.

-(Reuters)