Norwegian Air Shuttle ASA (NAS) Earnings Call Transcript & Summary

Okay. Good morning, and welcome to the first quarter presentation for Norwegian. My name is Jesper Hatletveit, and I'm the VP of Investor Relations here at the company. Today, I am joined by CEO, Geir Karlsen. I'm also joined by our CFO, Hans-Jørgen Wibstad, who joined us only this week. Today's presentation will be held by Geir, and it will be followed by a Q&A from the audience and the web. Geir, please go ahead.

Thank you, Jesper. I would also like to -- welcome to you all. I'd also like to welcome Hans-Jørgen to the team. Finally, you are on board. He have been here for just a few days. So I'm sure he will help me doing the presentations from next quarter. So the first quarter of 2022 was, I think, for us, another special quarter. Finally, we thought when we were coming to the end of 2021 that we would get into some kind of normality. That didn't happen. So -- and we had the Omicron situation kicking in late last year. And certainly, that has an effect on the figures and the results for Norwegian for the first quarter of '22. So we came out of the quarter with NOK 849 million in loss on EBIT. And it's disappointing, obviously. But at the same time, this is pretty much in line with what we hoped for, I would say, when we saw the situation last -- late last year. And we -- I think we -- during the Omicron situation or even early in that situation, we think we acted pretty quickly and we adjusted the capacity. And I think if we hadn't done that, I think the results for the first quarter would have been in the area of NOK 700 million higher when it comes to the losses. We have seen throughout the quarter, though, that the demand has been coming back, and I will get into more detail on that later. We have been pretty good taking care of our liquidity in Norwegian in the last year. We are continuing to do that. So even if we have a loss in the quarter, we have more or less the same liquidity position coming out of the quarter as we had in the fourth quarter of 2021. We are continuing the ramp-up, and we have been doing that throughout the quarter, and the effects of that will be seen now through this current quarter and into the peak season in the summer. We had a load of 76.9% in the quarter as an average, and we took care of 2.2 million passengers. When it comes to the development over the -- through the quarter on yield, on load factors, et cetera, you can see the development here. So what we did back in December when we saw the Omicron situation coming in, reduced the capacity with 26% in the first quarter compared to what we planned for. So we did plan for -- to fly 10% increased capacity compared to Q4, and we ended up flying 16% lower than the previous quarter. But we are seeing a very healthy development in yield and in load. And we are very happy that we are now seeing the April figures, especially when the summer season is really here where we have a pretty nice increase in yield, taking it up to 0.77. We have been ramping up, as I said. We were having approximately 900,000 seats for sale in February, increased to 1.3 million in March. And we have 2 million seats for sale. We had 2 million seats for sale in April, and we are even increasing that figure to 2.2 million into May. The good thing here is that even if we are putting that much capacity into the market, we are still able to fill up the aircraft, and thereby, we are seeing a steady load in the area of 80%. And hopefully, we can continue to do that and even increase it into the summer. And another good thing. And this is -- the graph you are seeing here to the right is kind of the development relative between the 7-day rolling sale on pax and on revenues. And the spread between the 2 is even increasing a little bit, meaning that we are selling tickets at a higher yield, which is very good. In certain parts of the markets we're operating, we are now selling tickets, especially in July, let's say, late June into the whole of July, at between 40% and 45% higher yield than we did in the same period in 2019. As a whole, for the company, if you add in all the routes, all the markets, we are above 30% higher than what we did back at the same period in 2019. We do also know that there's quite a few passengers, people that are going on vacation for the coming summer that has still not booked the summer holidays. And thereby, we do expect to see a pretty nice development, both in load and on yield, going into the peak summer. We have 280 routes for sale, as we have been telling many times, and we are sticking to that. And we are planning to fly those routes as well. We have been working pretty hard on -- to see what we can do on the corporate market in Norwegian. So what -- we have been -- I mean, first of all, we are a company focusing on the leisure market. But what we have been seeing now, both in absolute terms and also in relative terms compared to all our revenues, is that we are seeing an increased portion of our revenues coming from the corporate market. That is nice to see. I mean we have a regularity in the quarter of 99.4%, meaning that the routes we are saying we are going to fly, we are actually flying. And that is also the plan going forward. And I do anticipate that, that is a good thing, and we are now able to kind of attract a little bit more of the corporate travels than what we have done before. So as a percentage of the total revenue, we are seeing the corporate market is having an increase. And that is something we will look into going forward as well, to try to see if we can make it a little bit more attractive for the corporate travelers compared to what we have done previously. The results, I mean we're not happy with the results, just to make that clear. But at the same time, I think we have done quite well over the quarter. We have, obviously, a decrease in the total RASK, down to NOK 0.48. Looking at April, though, we have a RASK at approximately NOK 0.6. We had reduced the capacity, as we see, on the RPK with 16% compared to the last quarter. Ancillaries is having a nice increase of 10%. Hopefully, that will continue, and we can see higher values over the next months. And then we have, as I said, the NOK 468 million loss in the quarter, but at the same time, we have been able to -- then to preserve the liquidity, and we are still sitting with NOK 7.5 billion in cash. Looking at the P&L, top line of NOK 1.9 billion. We have a reduction in costs of approximately 10%, even taking in the fact that we have a pretty steep increase in the fuel price. And we have a CASK cost per seat kilometer of NOK 0.55. We are certainly not happy with that. But at the same time, I think we will see going forward that we will have a drastic reduction in CASK going into the peak season. Looking at the P&L. I think it's important that you know that we have been -- yes, we have been reducing the capacity. We went into the quarter with, I would say, too much capacity also on the crew side. But at the same time, we were very happy that we could avoid to furlough people or our colleagues throughout the quarter because it really makes sense. We had also a struggle with very high sick leave due to the Omicron. And by that, we decided not to do any furloughing throughout the quarter. At the same time, we have, I would say, invested massively into recruiting new colleagues that we are planning then to use when we are ramping up the operation into the summer season. So we have taken in more than 800 people, employees into the company throughout the last very few months. And it's 540 in the cabin and 280 pilots. And we have done that investment, meaning that we are taking them into the company. We are doing all the training necessary, and thereby, we -- and we will then put them into operation throughout the next months. And by that, we are quite comfortable that we have enough crew and pilots for the summer season. And that is obviously a high investment that we have taken throughout this quarter. Other than that, we have EBITDA of NOK 468 million minus, as I said. We have NOK 183 million on net financial items. We have NOK 17 million in interest income, and we have NOK 165 million in interest expenses. When we are ramping up the way we are doing now, that's when we are seeing -- we will start to see the effect on the scale that we are building into the operation. And especially on the cost side, you will see an effect. So we are saying here today that we do expect to see -- we have already finished with April. So in April, we have a CASK of low 40s. And when we are going into the summer and throughout 2022, we have a target from now until the end of the year to have a CASK below NOK 0.40. That's when we are starting to see an area where we should be, and we will continue throughout the remaining part of this year and also into next year to even push that level down. That's when we are starting to get really competitive. And that's when we are also starting to get closer to the best guys in class, and this is where we need to be in order to be competitive for the periods forward. Balance sheet, not much to mention. Obviously, we are putting in 6 more aircraft this quarter compared to the fourth quarter of last year. We are seeing a pretty nice, as we have promised, development towards the credit card acquirers. We were coming from a level last year of a holdback. It was actually more than 100%, then we took it down to 120%. We had in fourth quarter 109%. And now we are down to 73% holdback. You are seeing that the accounts receivable is increasing. That is an absolute increase in holdback. But if you see it -- if you look at it as a percentage of the air traffic settlement liabilities of NOK 3.6 billion, you are seeing that the holdback is actually in percentage coming down. That means that we are getting better terms with the credit card acquirers, and we do expect that, that level will continue to come down where it should be. And I think where it should be is probably below 50%. I think it will take a little bit of time before we are getting there, but let's hope we can get there as soon as possible. The liabilities are going up with -- from NOK 15.5 billion to NOK 17.8 billion. As long as the main reason for that is the traffic liabilities, I'm happy because that means that we have sold more tickets. And that's a good thing. Cash flow, a very simple view of the cash flow. So what you're seeing here is that if you look at the operations, the operating activities, and that includes the change in the working capital, which also includes then the effects from these credit card acquirers, and that's -- I would say that, that is probably the main reason that we are not burning cash in this quarter. And we are now into the summer season, and we can start to really ramp up and to look at good figures into the high season. So we are, cash flow-wise, liquidity-wise, very well positioned, I would say, and we are heading into the high season. If you look forward and the fleet plan, we are flying today 61, 62 aircraft. We are in the process of adding in 7, 8, 9 aircraft into the peak season. So we will have 70 aircraft, as we have been saying also previously, during this summer. We have also signed up 15 additional MAXs that we will take delivery of early next year. I mean, I think a few of them already come in this fall, but the ones coming in this fall will have power by the hour, so we're not paying for them until we are starting to fly them into the spring. I think that the MAXs that we have signed up for next year has attractive terms and certainly below the terms that you are actually able to get today. And then -- so we will go into the top season in 2023 with 85 aircraft. We have 5 redeliveries next year. So in net, going into the fall of 2023, we will have -- we will be down to 80. One thing that is very important also to say is that the 19 aircraft we have taken in this year has power by the hour also next winter. And I think you will see -- I don't know if it's the first time in Norwegian's history, but you will see next winter that we will take down capacity. We will fly less, and we are aiming as per today to take down the capacity with probably as much as 25%. That means that -- and we have the capacity -- we have the ability to take down the capacity on the aircraft side be that much as well on the PBH side. We have also been able to, let's say, arrange to get to a solution with the pilots and the crew, which also gives us that ability. And thereby, we are -- we have the flexibility we need in order to have a winter season that could be pretty good as it looks today. This is very important for Norwegian going forward as well. We don't have an issue with this for the coming winter. So it's all about now finding the good solutions also for the winter of 2023 and 2024. So what we are trying -- what we try to do is to -- we will probably not park aircraft, but we will fly them with less capacity. We are also trying to put as much of the heavy maintenance of our fleet into the winter season, and by that, freeing up that capacity also throughout the summer season. And as I've been saying many times, I think it's all about -- if you're going to deliver a good result in this company, it's all about the winter really because I think we have lost too much money previously in the previous winters, and we need to fix that. Everyone can make money during the summer. It's all about the winter. And I think we are very close now to finding a solution on that. So just as a summary, I think we are not happy with the first quarter results. We have, though, seen very nice development both in yields and in RASK over the last months. We have, as I said, a strong liquidity position. We have the flexibility that we need. We are -- we have taken this year kind of a bet. And you are seeing that the ticket prices for this summer is more expensive, unfortunate for the passengers. But you could say in an indirect way that the fuel prices, the high fuel prices is starting to get into the ticket prices. And if the fuel price is continuing at the high level we are seeing today, I think, unfortunately, you might see that the ticket prices will stay at the level they are today and even getting higher as the loads are getting higher as such. And that is just the result of, let's say, the environment. So -- but we have not pushed out a lot of what we call cheap tickets over the winter because we do believe that there is a pent-up demand in the market. We think we will see and we are already starting to see that flow. I mean we are selling now on a 7-day rolling sale between 400,000 and 500,000 tickets a week. I think that will increase. And there's a lot of people that has not booked their summer holidays still, and hopefully, they will soon, and then we will just see how this develops. When we are looking at the different markets for the coming summer, we are seeing that we are selling very well in certain markets. While we are not doing that well in other markets, so we are -- we will be spending a little bit of time now in May to fine-tune the network. We might do some small changes. It will not affect the passengers, but this is just to optimize the capacity and to use the capacity where the passengers would like to travel. And -- but this is what I would say is fine-tuning and not any dramatic changes. And very importantly, we are continuing the work on the cost side. I think for the years to come, it's going to be a cost game. And we're now starting to see what we have been promising to the market, meaning that we will take the CASK level down, 0.55 for the current quarter, not happy with that at all. But at the same time, it is difficult when you're reducing the capacity with 26%, and you are keeping the cost, you have high sick leave and so on. But now we are really starting to see it. So April CASK demand behind us. We are down to low 0.40s, as I said. Target is to get below NOK 0.40 for the remaining part of this year. And then we will just continue that. We have an organization today that is running 60 to 70 aircraft. I think we can run with the same administration. We can probably run 20 to 30 more aircraft with the same cost on the fixed cost side. So we have more capacity to put into a bigger fleet. With that, I think we conclude, Jesper.

Okay. We then open up for questions from the audience. Please raise your hand and wait for the microphone.

Hans Jørgen Elnæs, Winair. The fuel impact for Q1 versus Q4 was plus 35%. But if you look in the relative increase in the fuel price from December through April, it's up like 70%. And there is a lag, this impact on Norwegian. So we should expect that the fuel impact will be higher in Q3 -- Q2 and Q3? And how will you compensate that? If you can go a little bit further into that. And secondly, you are going to look for more aircraft, and the listing regime is now not as good as it was before. Can we see that Norwegian is going more aggressively to close the deals now for the future? And can you give an update also on the situation with Boeing?

I think on the fuel side, obviously, that is something that is impacting us all at an oil price of between $105 and $107. And it's kicking in, and it's definitely -- it is having an effect on the results. I mean if you saw the fuel price, the fuel costs in this quarter compared to fourth quarter is actually down. It's not because the fuel price has reduced. It's because we're just flying less. And that's also a way to kind of mitigate those losses. That said, I think if you look at the fuel price now and also going forward, I think in the current -- let's say, in the current quarter, I think you could say that it has starting to flow into the ticket prices. And I would say that the relative fuel increase we have seen over the quarters, I think we have compensated close to 50% of it into the ticket prices so far. And as I said, I think if that level is continuing into the next 2 quarters, meaning that you were seeing a jet fuel price at $1,100, unfortunately, I think that will probably flow into the ticket price and even more than what it is doing -- have done so far. But it will have an effect. It will have a negative effect to us. Seeing -- looking at the market that we are operating in, I would say, we are in pretty much the same situation as the other guys, especially the main competitor, which is SAS, where they are sitting in the same position not hedged as such. And I wish we had been doing some hedges last year. We didn't, mostly because we couldn't due to the fact that we came out of this restructuring, and we had to wait for a little while. Today, we have all the necessary lines we need, and we can hedge whatever we need. But -- so this is something we just need to follow. On the fleet side, yes, it is correct, Hans Jørgen. The leasing market is tightening in very much. I mean in 3, 4, 5 months ago, you could probably take in a MAX below -- way below $300,000 a month. Today, you're probably paying $350,000-plus to take in a brand-new MAX. We have secured what we need for next year, the 15 MAXs at, what I would say, attractive terms. We have continued the dialogue with Boeing as well as with Airbus. And I think I can say that we are definitely much closer to a solution on the plan going forward. And we will share the news when we have the news to share, but we are definitely closer to a solution. I think going forward, what we would like is to have a portion of the fleet, maybe even more than 50% owned. I think we have -- if we are doing well going forward, we should have a credit that should give us the ability to finance our assets probably cheaper than we have done ever. I think that is important, is necessary in order to keep the cost levels and the cost levels in general in the company going forward. And that's the only way to go, in my opinion. Did it answer your questions, Hans Jørgen?

Yes, it did. And I think I support you in that to own aircraft today versus leasing at the current situation going forward that we have a better deal for you if you buy the aircraft from Boeing, if you got a deal with them.

Okay. We will then open up for some questions from the web. We will start with Ole Martin Westgaard from DNB Markets. First question, are you able to pass on the higher fuel cost to the passengers? I think you have answered that.

I've tried at least.

You've tried a couple of times. We'll move on to the next question. How do you see capacity growth in the Nordics for the summer season?

Well, in the Nordics, it's -- I think the market is -- for which period, by the way? Going forward?

Summer season.

Well, I mean, we have said throughout the last months that we have set the network, both for the spring and into the summer. That is still the network we are trying to fly, 70 aircraft. You have our friends in Flyr. They have -- I think they have 8 or 10 aircraft today, maybe adding in a couple of more. So that is what they are going to contribute with. We're obviously seeing that SAS is taking down capacity. They have been taking down capacity already in certain parts of the markets. They are -- they shared the news last -- or this week. They're doing 4,000 cancellations. And they will probably fly with somewhat lower capacity than what they were planning to do a little bit earlier. I think, as I said, that we have been carefully planning the summer season on the crew side, and that's why we have invested massively into taking in crew throughout a difficult quarter in first quarter, but we are comfortable that we will be able to fly what we are going to do. And other than that, what we are seeing is that if we look at RyanAir, for example, they have -- they are not flying more than they have been planning to do. We are seeing that Eurowings is doing a massive marketing campaign now into Arlanda, for example. But at the same time, I think they are flying less than 50% of what they were trying to fly. And so I think we are comfortable with the competition and the capacity coming into, what I'd say, our market. And then we will just see.

We then move on to a question from Jaakko Tyrvainen at SEB. How comfortable are you with the current equity level?

Well, as I tried to say, I mean, we -- obviously, we had to -- we took a hit on equity level now in this quarter. That's not the plan going forward. And I think even if we have a relatively strong balance sheet, in my opinion, today and definitely compared to our competitors, it's not like we're going to fall asleep on this level. I think we have to even strengthen the balance sheet, and we will try to find all the measures to be able to do that. And I think we need a more -- a stronger balance sheet than what we have today. And so let's see how we can get that done going forward. I think in 2022, it's all about coming out of the year with a black figure on the bottom line. I think we will be able to do that. And even with the loss in this quarter, let's see how we can do it, but I think we can, and then continue from there. But as I said, it's all about getting the cost level to the level it needs to be, and then we will work on the top line as well. We are also looking into the reward program. We have a fantastic reward program. It's very much like by our loyal customers. We have more than 4.2 million members today. We are working to get -- to increase that, but we're also looking into what we can do with -- or can we make it even more attractive. Can we think even a little bit more smarter on the reward program to -- so let's see over the next period if we can share some news on that.

Okay. There are no further questions. So I think we conclude the session there. Thank you.

Thank you for coming, guys.