MoreNorwegian to cut routes to offset oil and engine costs

Carrier is scaling back expansion to focus on reducing costs. Ian Taylor reports

Low-cost carrier Norwegian Air is reviewing its schedule and plans to axe routes it deems “underperforming” as it struggles to turn around its finances.

The Scandinavian budget giant, which has made Gatwick a major hub for low-cost, long-haul flights to the US, is tussling with two fundamental problems – the high oil price and maintenance issues with the Rolls-Royce engines of its Boeing 787 fleet.

Both issues are affecting multiple carriers, but Norwegian’s low-cost, long-haul strategy depends on the fuel efficiencies of its Dreamliner fleet. However, rather than make savings on fuel, the carrier is haemorrhaging cash on leasing costs for replacement aircraft and compensating passengers for delays and cancellations.

Norwegian chief financial officer Geir Karlsen said: “We are struggling with our on-time performance in the long-haul business. The issues with the Rolls- Royce engines on our 787s has had a huge effect on our profit and loss.” He said: “We have struggled with [the] compensation due to passengers [and] leasing costs to replace the grounded aircraft.”

The carrier has been forced to lease aircraft up to 20 years old to replace the 787s, with Karlsen complaining the leased aircraft “do not have the quality of the Dreamliner”.

He said: “We are bearing all these costs [and] it looks like continuing. It’s impossible to get clarity on when the engine problem will go away. We don’t know how many aircraft we will have on the ground.”

Norwegian had three 787s grounded awaiting replacement engine parts at the start of this month.

Route cuts

The second problem, an oil price above $80 a barrel, appears to have taken Norwegian by surprise.

Karlsen revealed the carrier was just 31% hedged on fuel for the final quarter of this year and is 22% hedged for 2019. Most airlines have more-extensive fuel-hedging arrangements, which guarantee future costs.

Karlsen admitted: “We are struggling with high oil prices. We would like to be more hedged, but that is where we are.”

The upshot is that Norwegian is looking to cut routes. Karlsen said: “We will take out capacity that is not performing well over the next five to six months.”

Details have yet to be finalised but some changes should be announced this month. Norwegian has already said it will halt US flights from Edinburgh next year and axe Gatwick-Singapore services.

However, the airline faces a third issue. The carrier has orders with Boeing and Airbus, including 95 Airbus A320 and A321s. But it no longer wants to take all these. So it is looking to set up a joint-venture (JV) aircraft-leasing business in which it would be a minority partner.

Karlsen said: “We are working on a JV structure. Several parties are interested. We are discussing how to finance these orders going forward, looking for a partnerinvestor. We do not necessarily intend to use these aircraft. Some could be leased to Norwegian.”

He added: “We hope there will be an update by the year end, but there are no guarantees.”

Fleet expansion

Norwegian continues to expand even as it looks to cut costs and refinance aircraft orders. Passenger numbers were up 13% year on year in the nine months to September, and the carrier plans to increase capacity for 2019 by 15%-20%.

Karlsen said: “Growth in the company peaked in June 2018. We are still growing, but not at the same pace.” The airline still aims to increase its fleet from 164 aircraft at the end of this year to 181 next and 210 by 2020 while also aiming to get rid of up to 140 aircraft.

Norwegian reported a thirdquarter profit of NOK1.3 billion (£119 million) for the three months to September, but Karlsen said: “We are not happy.”

However, he insisted “banks and financiers still have a good appetite” to invest in the carrier.

Questioned as to whether Norwegian’s low-cost, long-haul model remains viable, Karlsen said: “We’ve been focused on growth. Now we are making changes to show we can make this possible on a [continuing] basis. We need a lower cost base.”

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