Norwegian Air Shuttle ASA

OSE:NAS

Earnings Call Transcript

[Tore Ostby]

Well, good morning, and welcome to the presentation of the results or the report for the third quarter of 2021. The presentation will take approximately 20 minutes and will be followed by the short Q&A session afterwards. The presentation will be held by CEO and CFO, Geir Karlsen. So please, Geir.

[Geir Magne Karlsen, Chief Executive Officer]

Of course. So thank you, Tore, and welcome to everyone. I think the quarter that we have behind us has been a much better quarter than what we have been seeing over the last quarters. That's for sure. We have seen -- yes. So we have seen, I would say, a strong uptick in bookings. It started back in June, I would say, relatively flat in July, and then we have seen a pretty steep increase over the last months. And we came out of the quarter with a load in the area of 73% for the quarter as a whole and up from then 57% as we had back in the second quarter. We are coming out in this quarter with an EBT of positive NOK 169 million. I'll come back to the details on that. And I would certainly say that we have a very strong position financially in Norwegian as per today. In Q2, we promised that we could more or less be cash neutral for the quarter. Very happy to say that we have actually a higher position on cash today than what we had back in June. As also guided in the second quarter, we have an increase in the equity ratio due to the fact that we have converted some debt to equity. We have continued the work to work on the -- let's say, on the operational structure in the company and as well on the legal structure. And we have -- we are very close now to having a very much simplified structure compared to what we had back in 2019. And we are also working on the growth for the company. As you know, we have 51 aircraft in the air today. And we are planning to increase that fleet with, I would say, up to 15, 20 aircraft already into the summer season of 2022. If you look at the bookings we have seen over the last months, I mean, we carried 2.5 million passengers in the quarter, an increase of -- in the load to 73%, up from 57%. And we have seen a steady increase, I would say, over the last months. We have been running a few campaigns, as you can see on the right-hand side there, and they have certainly given the results that we have been looking for. I think it's fair to say that we are still not happy with the bookings and the yield, of course, but it's definitely going in the right direction. I think it's important for all of us to realize that the market is, to some extent, back, but it's not really full back in compared to what we saw, for example, in 2019. If you look at the statistics in Norway, for example, today, and [ Aviano's ] numbers, you could say that in September, we had only -- I would say, only 55% of the capacity back compared to what we saw in 2019, slightly higher on, let's say, domestic and obviously then lower on international. But it at least shows that the market is not really back. We also met with our friends in [ Kastrup ] a few weeks back, and they are currently running in the area of 55% as well of the capacity that they saw in the airport in 2019. So even if we are seeing definitely an increase in bookings and more people starting to travel, the market is not really back, and we are still affected by the pandemic, as such. Reward. As you know, we have -- we were forced, I would say, to put some restrictions in the Reward program earlier. I'm very happy to see that we have lifted all those restrictions, and the Reward program is back to its normal and where it should be. We have in the Nordics -- or at least in the Nordics and Finland approximately 4.3 million members. And we are seeing that these members are really starting to get back into the air. If you look at the bookings today, it's, I would say, only 35% that are booked through -- or by our members, which also tells us that there is a huge possibility or capacity in order to increase those number of members. And we are seeing that on a week-to-week basis, now we are getting between -- I would say, between 6,000 and 8,000 new members in the Reward program as we go, and that is an increasing number. We have extended the CashPoint that were supposed to be voided in 2021 into 2022. And -- but again, the Reward program is now fully open and back to where it should be. On the legal structure, this is a work that actually started back in 2019, and we have simplified the structure now massively, I would say. So as per today, we have kind of 3 boxes there. We have on the left side Arctic Aviation. That is the company that owns and leases in all our aircraft. We have the 2 airlines, one in Sweden and one in Norway. So we have reduced the AOCs, the so-called AOCs, from 6 to 2. And I would say for all practical purposes, we have now 1 airline in the company instead of 6 and which also is very cost -- very much more cost efficient, I would say. And then you have the people, the crew on the third box. So we have now the legal structure and the operational structure that we want. And this is a structure that we have been kind of fighting for and working for, for so long now. And I'm very happy that we are now finally there, and we can start to take the efficiency gains out of this structure. This gives us massively more flexibility in order to have the needed crew efficiency, the needed efficiency on the aircraft that are rotating in the market. And then I think you will see the effects of this starting now, and then we will see the full effect of it through 2022. We have also in-sourced all -- the whole crewing section of the company. And we are now working very hard to make sure that we will get efficiency gains out of the crew in 2022. I'm very optimistic on how this is going to be done and the effects that we will see in the financial results in 2022. So a little bit on the numbers. The top line is coming in close to NOK 2 billion. I would say that it is okay. It's not fantastic, but it's okay. I'm happy to see that the ancillaries is now in the area of 25% of the ticket revenues. It's a little bit -- that's okay. It's still a little bit low if you divide it on pax, but it's also going in the right direction. We are coming out with EBITDAR excluding other gains and losses with NOK 305 million but a positive EBITDAR of NOK 21 million. Obviously, we are affected by the increased fuel prices, as the other guys around are also seeing. I think it's worth to mention that we have a positive FX gain in the NOK 326 million. And I think it's fair to say that we have we have due to -- if you look at the correlation between the fuel price and the Norwegian krone against dollars, we have a kind of a natural hedge, I would say, in the area of 30% to 40%. And that is -- you could say that is reflected in the NOK 326 million. And that -- you have to see that in combination then to take us down to the EBITDAR of NOK 21 million plus. Then we have a few more restructuring effects coming into the NOK 464 million, which gives us a positive EBT for the quarter. And I think I would also like to mention that in the NOK 305 million EBITDAR, we are having approximately NOK 120 million as a result of the restructuring, which is a one-off, which we will not see going forward. And that has to be taken into consideration as well. So NOK 169 million positive for the quarter, 1.8 -- close to NOK 1.8 billion year-to-date. On the balance sheet, a few comments. Intangible assets, that's an old one. We remember that, that's deferred tax assets, which is an asset that we will certainly use going forward, all going well. We have the aircraft side on the asset side. Approximately NOK 5.2 billion of the NOK 5.8 billion is related to the aircraft. And that consists of the owned aircraft and as well as the leased aircraft, as you know. In addition to that, we have some properties, and we have also some equipment that is listed under that. Receivables, NOK 2.9 billion. Close to NOK 1.9 billion of that is what we call holdback, meaning cash sitting with the credit card acquirers. We are still not at the level that we would like to see. We had a higher holdback in Q2 than what we had in Q3. So the holdback in -- by the end of Q3 is approximately 120%, which is obviously not acceptable. This is due -- the reason behind it is, I would say, it's a combination of the pandemic and the fact that even the credit card acquirers are seeing issues with regards to the legal side of the position they are sitting in, especially towards the credit card companies like Mastercard, Visa and Amex. But we are seeing now that in today, for example, we have a lower holdback in 120%. And I think we will very soon see 100%. And then we will start to see the effects coming in of the improved financial results. And then we will start to see this is going below 100%, which will then also then transfer into liquidity. We have seen the last couple of weeks the first signs of credit card acquirers improving the terms. And we have one of them, for example, coming from more than 100% holdback until today, where they have down -- all the way down to 35% holdback, in fact. And so we will see an improvement going forward. That again gives us an upside on the liquidity. And we do expect that this holdback is coming down, and then this will be transferred into liquidity. We promised in the second quarter that we will be close to cash neutral in the quarter. I think we have delivered on that. So we are sitting now with NOK 7.6 billion in cash. I think it's up NOK 160 million from Q2. And I can also inform you about the fact that the cash position as per today is pretty much the same as the cash position in September. Equity is up to NOK 2.5 billion, mostly related to the fact that we have converted the so-called retained or the dividend claim into equity, as also mentioned in the second quarter. And by that, we have also reduced the debt with close to NOK 1 billion, NOK 927 million to be exact, from Q2 until Q3. And then we have the other current liabilities, which is NOK 4.9 billion. Half of that is CashPoints towards our customers. So the net interest-bearing debt is still at a very low level, NOK 642 million. And we are quite comfortable that we have now a very strong position financially, and we are very prepared to go through the low season that is in front of us. Cash, not really much, NOK 443 million from operating activities. And then we have increased the cash position, as I said, with NOK 160 million. Way forward, A.s we know, we have 51 aircraft in the fleet today. We sent out a stock exchange notice yesterday saying that we are sourcing up to 13 aircraft into the fleet. These aircraft will start to deliver already this year before Christmas. We have the so-called power-by-the-hour on all these aircraft as well with 0 minimum, meaning that we could, in theory, park them and not pay anything on these aircraft depending on the season. That's obviously not the plan. But I think we are seeing now that we have too few aircraft. We need to grow. And we are seeing, based on the demand that we are seeing today, both today and into 2022, that we are very comfortable that we would need to increase the fleet. And we think that the increase will generate more profitability in the company. When it comes to the lease cost on these new aircraft, they are all, all of them, below the average on the 51 aircraft. So you will take down the average lease cost by taking these 13 aircraft in. As I said during the last quarter, it's important for us that we can solve what I call the winter problem, meaning that we will have to make sure that we get more flexibility in low seasons going forward. That's why we are very happy that on these 13 aircraft, we have power-by-the-hour also next winter. So on the aircraft side, for the winter problem, as I call it, we have -- that is sold on the aircraft side. And I think we don't -- we are not planning to take down capacity with more than these 13 aircraft, hopefully less, but that is then giving us the flexibility -- exactly the flexibility that we're looking for. And so that's a good thing. We have also started the same process on the crew side. And I'm very optimistic that we will also be able to find solutions together with the unions and our crew, and that will give us the same flexibility also on that side of the business. So I would say I'm much more positive today on that side than just a few weeks back. It's looking good. On the new aircraft that we have taken in, we have also built in on a few of them or let's -- I would say, on half of them approximately, the ability to switch into what I would say is new technology or newer technology. That could mean that we can convert into MAX or we could potentially work into -- convert into an Airbus as well. But that's the flexibility that we have. That is very important for us because we would like to go forward with newer technology, newer aircraft. And I think you will also see that during next year that we will certainly try to take the average age of the fleet down. So all in all, we are planning now for up to 70 aircraft already in the summer next year. And I think if you look at the cost level in the company today, it is too high. I think we have a too high fixed cost base. But also, we also have to realize that we have had a huge project where we have been redelivering in the area of 100 aircraft to their owners. So -- and I would have to say that the technical department in Norwegian have done a fantastic job making sure that all these aircraft have been redelivered to their owners. And we are -- and the owners are extremely happy by the quality that these aircraft still had even if they have been parked up to 2 years. And I think this is probably one of the reasons as well that these same leasing companies is knocking on our door today wanting to lease more aircraft to Norwegian. And the leasing companies that we have sourced the 13 aircraft from is people that we know very well. And a few of them were also the biggest leasing contributors to Norwegian before the pandemic. So just to summarize. On the balance sheet, I think we have been through that. We have a very strong position as per today. We are not happy with the yield and the RASK and not even on the cost, but I think the process of running internally in the company now will give results especially in, let's say, during 2022. Looking at the numbers for October, the current month, we are guiding now that we have a higher load than 80%. And the RASK is also up, definitely up I would say, compared to the third quarter. Looking into the winter, which is obviously the low season, that will be a challenge. That's no secret. But we are very well prepared to go through that period now. And we are very confident that we will sit, going into the high season next year, with a close to a strong financial position as we have today. The Reward program is now fully opened. We are seeing that new members are coming on, 6,000 to 8,000 a week, which is also a very good sign. We're also looking at the booking curve where, let's say, the customers are now coming back also booking much more forward into 2022 winter and spring and even some bookings into the summer season next year. So I would say that it's looking good. We need all to get through the next, let's say, 5 months -- 5 to 6 months before we are turning into to the summer season. We have the flexibility, as we have been discussing, on the aircraft side, and we are going to play that very smart. And we will also see a cost level in this company that will be significantly lower in 2022 than what you are seeing today. And now it's all about seeing and hoping and believing in the market and the fact that, that will come back. We are certainly seeing signs of that, and we have been seeing that since the summer, still not enough. The competition is tough, obviously, but I would say that we are very prepared to compete in the markets that we are operating in. If you look at the different markets we are operating in, you could say that -- I think we'd say, in relative terms, you can say that Denmark has been the best-performing market, let's say, during the third quarter mostly by the fact that Denmark opened up earlier than what we did in Norway. But you're seeing the effect in Norway especially in October, I would say, where we -- where the yields are significantly up compared to Q3 as well as the loads. And we are also then guiding on an ASK, meaning available seat kilometers, close to 30 billion for 2022, which would then translate into number of aircraft in the area of between 67 and 70. I think I'll stop there, Tore.

[Tore Ostby]

Thank you, Geir. We will now open up for questions. Please wait for the microphone if there are any questions in the -- here physically. We also have some questions over the web.

[Hans Jørgen Elnæs]

Hans Jørgen Elnæs, analyst in Winair. Geir, interesting figures that you showed today and you delivered on profit operational and cash flow. That's very good. But there's one thing that I would like you to get a bit more into, and that is the yield. And if you [ peer ] Norwegian with SAS in the period of July to September, you had 2.4 million passengers, SAS had 3.1 million. And the RPK in September, more or less on [ peers ]. But SAS had an average yield on SEK 0.97, while Norwegian had NOK 0.53. And still, we could say that the corporate market is not back. Why is SAS able to take out so much more yield than Norwegian during these 3 months?

[Geir Magne Karlsen, Chief Executive Officer]

Well, I think if you -- I don't think it's 100% correct, I would say, if you're going to focus only on the yield with SAS. I mean if you look at the yield in SAS compared to the load, I mean, they have a pretty much lower load than what we are having. If you compare SAS to Norwegian during the quarter, we are also seeing that we have an increase in number of -- in load and in number of passengers. By looking at the SAS figures, they are pretty flat, I would say. And so I think you have to look at, I think, they call it in PASK in SAS. And so that is probably the number you should compare. As I said, we are definitely not happy with the yields that we have. It's partly obviously due to the fact that the market is not back. And to a certain extent, you could say that we have been buying load by setting the prices. But again, we have 73% load in Q3. We have more than -- higher than 80% in Q4. And I think in the market, especially in Norway, we have been -- we have competitors here where we have been competing wing to wing with Wizz earlier this year. We have new friends in [ Fluor ]. Now we haven't seen SAS participating in that lately. However, we are now seeing that they are also reducing their prices. And I think for the first time in a very long time, you are seeing that SAS is also taking down the capacity in Norway massively, all the way up to 50% in certain routes. So I think, yes, we are not happy with the yield, as I said, but it's definitely improving. But I don't think you should focus on the yield numbers as such with SAS, and you have to look at the loads as well.

[Hans Jørgen Elnæs]

I agree with you on that. And I think actually, in October, if you deliver on 80% load factor, you will have more passengers than SAS. And also, I think that when you have finalized now the rapid growth from July in terms of ASK and you're flatting out in Q4, there is a fair chance that you will be able to deliver a little bit more on the income KPIs.

[Geir Magne Karlsen, Chief Executive Officer]

Yes. No, I agree on that. I mean, I think, let's say, with the cost level that we will have in 2022 and looking at the revenue side of the business today, I think we are pretty close to where we want to be. And then -- but obviously, you will have a slower -- a softer winter. There's no doubt about that. So we will -- and we will take down capacity during the winter. You will also see us taking down capacity in the first quarter next year compared to what we are flying now. Now we're really flying with full capacity, I mean, in October. And that capacity will be taken down. So we have kind of -- you could say that, let's say, from now until, let's say, March or April next year, we have -- you are seeing the top of the capacity in Norwegian today. And why do we take down? Well, because we have the ability to do it, obviously, due to the flexibility that we have. And -- but we will certainly make sure that we can protect the market share that we have as well. So we are ready and we are very, very comfortable that we are sitting here Easter next year, and we'll be extremely ready for the high season coming in then.

[Tore Ostby]

Thank you. We have a question from Jaakko Tyrvainen at SEB, related to the same topic. If you look at the yield, is the price -- current pricing reflecting the increased oil price?

[Geir Magne Karlsen, Chief Executive Officer]

Good question. I mean if you look at the peers that we have, the main competitors like SAS, for example, and I think others as well, we are -- as we have said, we have not hedged for 2022, and we are currently unhedged as well. I would say, luckily, the closest competitors are in the same position. We're not planning any fuel charge as such, but we will just follow the market, and then we will see how that develops. And I think it's fair to say that it's -- if the fuel price should stay at the current levels into 2022 and through 2022, well, the market will decide whether that will build itself into the ticket prices. But it is something that we are obviously following very closely.

[Tore Ostby]

A second question from Jaakko. In short term, are you aiming for market share even if that could come with lower load factors? Or are we focusing -- I think the question is related to whether we go for load factor or pricing.

[Geir Magne Karlsen, Chief Executive Officer]

As I said, I think through the winter and up to now, I would say, in 2022, we have -- in 2021, we have been very careful in taking the capacity too low because we want to protect the market shares in the markets that we are now really focusing on, which is in the Nordics and in and out of the Nordics to Europe. And I think that we will just -- we have the financial position that we need now. We are going -- we are working very hard on the cost level of the company. And I think that compared to pre-COVID, as I've said many times, we are probably more competitive now than what we have been in a very long time. I think there's still more to go on in Norwegian, which we will show to the market next year. And I do think that it is a cost game that we are looking at. And I also think that we don't have the necessary scale as per today with 51 aircraft. And we have, as I said, also a cost base -- a fixed cost base that is too high for 51 aircraft. We need at least to get up to 70 very soon. That might happen already next summer. And then I think we will also have to increase that fleet to 80, 90 aircraft as soon as possible. But we will do it in line with the market. And I think we have a fixed cost base today that will probably operate 70 to 80 aircraft with the same cost level. Then you will start to see the effects on the CASK, and we will be even more competitive compared to our peers. But we are -- as I said, we will have a cost level that will allow us to really, really fight with whoever comes into this market in the Nordics.

[Tore Ostby]

A question from Petter Nyström at ABG. How should we think about cash burn in Q4? You have previously indicated cash burn of NOK 150 million to NOK 300 million.

[Geir Magne Karlsen, Chief Executive Officer]

We're not guiding on cash burn for the fourth quarter. What we are saying that it will be very controlled, meaning that we will have a relatively low cash burn in Q4 almost regardless of the market situation. We have also still a 100% -- 120% holdback with these credit card companies, which also gives us some, I would say, upside on the liquidity side. But with the flexibility we have, it will be a challenging 45 months ahead of us, for us and for the other guys around, and we will have a cash burn but relatively low. I think that's what we can say.

[Tore Ostby]

Another question from Petter. Did I understand it correctly that CashPoint liability is NOK 2.5 billion? Do you have an estimate on how much you expect to be used?

[Geir Magne Karlsen, Chief Executive Officer]

Yes, NOK 2.5 billion, it's NOK 2.4 billion. Well, we do anticipate that when we're opening up now and taking away all the restrictions, the burn on the CashPoints will increase, which is good. That means that the passengers can now start to use the CashPoints without any restrictions. I think it's also fair to say that we have a portion of the CashPoints sitting outside the Nordics and even outside Europe, and they are valid until the end of next year. But other than that, I mean, it's NOK 2.4 billion, and then we will see through next year what's the burn and how the situation will look then.

[Tore Ostby]

We have a few questions from Ole Martin Westgaard at DNB as well. Can you comment on your initiatives to drive costs further down? What is the potential?

[Geir Magne Karlsen, Chief Executive Officer]

Well, I think I've said it last quarter as well, we have -- we are focusing on very few things, I would say. I mean, obviously, profitability is the main goal. But in order to build the flexibility on -- let's say, between the seasons is obviously very, very important. As I said, we have solved that problem now on the aircraft side. I'm very optimistic that we will also be able to solve it on the crew side. I've also said that the crew efficiency in the company is not good enough. And looking at the plans that we have for next year and the measures that we will be put in place, I think what you will call the block hours, meaning the number of hours that the aircraft, the crew and the pilots are flying through a year, will come up. I think it will come up significantly during 2022 compared to what we have seen in the last years. I think as I said on the fixed cost base, it is as per today too high. But it's also lined up for a bigger production, meaning higher production. The higher production will come in next year. And I think we can take in, as I said, the 20 aircraft without increasing the fixed cost base. I think that's probably the main items. And on the aircraft side, as we have said many times, the aircraft's cost, meaning the cost to leasing the aircraft, is down by close to 40% compared to 2019. So that's why I've also said that we are probably more competitive, more stronger now competitive -- competition-wise than what we have been in many years.

[Tore Ostby]

You have a question on that topic as well. On the 13 aircraft announced yesterday on the lease rates, is it possible for Norwegian to get even better rates than the average you had on the existing fleet?

[Geir Magne Karlsen, Chief Executive Officer]

As I said, on all -- I think on all the 13 that we have now, that we are in the process of taking in, they have all lower lease rates than the average of the 51. That's -- so by that, I can say -- I think I can share that the lease rates on the 13 aircraft is in the -- let's say, in the window between NOK 130,000 and NOK 190,000 a month.

[Tore Ostby]

And the final question, what is the situation with Boeing? And how does the lease agreements impact your discussions?

[Geir Magne Karlsen, Chief Executive Officer]

Well, as you know, we don't have any 737 MAXs in the fleet today. If we are going to continue to fly Boeing, obviously, we will end up with a MAX at some point due to the fact that the so-called NGs, the aircraft we are flying today, are no longer produced. We have a litigation case with Boeing ongoing, as we know. And I think it's -- we could also say that we are currently, as we speak, also in discussions with Boeing to see if we can find a commercial solution. That's what we can say.

[Tore Ostby]

I think we don't have any more questions, so thank you all for coming.

[Geir Magne Karlsen, Chief Executive Officer]

Thank you.