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UPDATE 3-Norwegian Air second-quarter earnings slump hits shares
July 13, 2017 / 6:44 AM / in 3 months

UPDATE 3-Norwegian Air second-quarter earnings slump hits shares

* Sees lower 2017 growth, higher unit costs

* Analyst says results “light-years” behind forecast

* Chief Financial Officer stepped down last week

* Shares fall as much as 11 percent (Updates with share, analyst, quotes)

By Ole Petter Skonnord and Terje Solsvik

OSLO, July 13 (Reuters) - Norwegian Air Shuttle, a budget carrier trying to grab a larger slice of transatlantic flights, reported a slump in earnings on Thursday and said the outlook for both growth and costs was worse than previously expected.

Shares in Europe’s third-largest budget airline behind Ryanair and EasyJet dropped as much as 11 percent to their lowest since October 2014, taking this year’s losses to 34 percent.

Norwegian Air’s strategy of taking on more established flag carriers comes with a number of risks such as buying or leasing larger, more expensive planes, and its plan has been hit by rising costs in recent months.

The airline said its second-quarter adjusted operating profit before leasing and depreciation (EBITDAR) dropped 21 percent to 1.19 billion crowns ($144 million), well below the average forecast in a Reuters poll of 1.51 billion crowns.

“Light years behind expectations,” Swedbank analyst Hans Ludvigsen, who has a “Neutral” rating on the stock, wrote in a note to clients.

Norwegian Air also said it now expected available seat kilometres (ASK), a measure of capacity growth, to increase by 25 percent in 2017, down from a previous estimate of 30 percent.

At the same time, it raised its forecast for unit costs (CASK) to 0.42 crowns from a range of 0.39-0.40 previously.

“We saw a clear risk for the guidance on both CASK and ASK to change, and both happened. But we did not expect the magnitude,” said Ludvigsen.

HIGHER COSTS

Norwegian Air, whose chief financial officer abruptly resigned after 15 years in the job last week, said the lower second-quarter results were due to significant additional costs for leasing aircraft.

“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 acquisition of more Boeing 787 Dreamliners.

Norwegian Air’s operating expenses jumped 45 percent, driven by a 56 percent increase in technical maintenance costs, which it put down to changes in its fleet, rising engine service costs and a fall in the Norwegian crown against the U.S. dollar.

Despite the cost problems, Norwegian Air said securing financing for new planes due to be delivered in 2018 would not be a problem.

“Anyone who believes we can’t pay for the aircraft will be disappointed,” Chief Executive Officer Bjoern Kjos told an earnings presentation.

The airline also said a new passenger tax levied on all commercial flights departing from Norwegian airports from June 2016 was another factor that had affected its earnings.

“The climate for European Airlines is this year probably the worst since the financial crisis. Brexit and terrorism in Europe plus passenger fees in Norway are making it difficult for all airlines,” said Karl-Johan Molnes, an analyst at Norne Securities, which has a “Sell” rating on the stock.

“However, the situation is particularly bad for Norwegian Air Shuttle because its unit costs numbers are also getting hit with increasing costs as pilot costs are rising at a time when it needs 25 pilots for each new Dreamliner,” Molnes said. ($1 = 8.2634 Norwegian crowns) (Writing by Terje Solsvik and Gwladys Fouche, editing by Jane Merriman and David Clarke)

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