Norwegian burning cash!
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So providing the punters keep turning up in droves but also keep increasing in numbers and there are no nasty fuel price hikes and rinky-dink employment contracts continue to be allowed in Europe then of course nothing will go wrong.
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I’m not an accountant but isn’t most of Ryanair’s debt held off the balance sheet... held by leasing companies but Ryanair need to provide the cash to keep the plates all spinning... I’m assuming many airlines are the same? Interrupt that cash flow and it gets hugely expensive.... for example when you can’t fly ac due Crew shortages!
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The banks that have lent Norwegian the capital will have studied Norwegian's business case very closely, to ensure that they receive return of both the capital and interest on it. It will not have been easy to secure these loans but the fact that they have, should demonstrate that Norwegian is pursuing a strategy that is likely to produce good results and has the backing of the financial lenders.
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While it many not be a major drama while it's being routinely serviced, that is still a massive debt ratio in anyone's book. I have seen more than one aviation analyst struggle with the logic. In this game, big players fail and 
does happen so it's not something to be ignored but at least nobody's panicking at the minute.
does happen so it's not something to be ignored but at least nobody's panicking at the minute.
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If Norwegian gets caught by an unforeseen, unplanned for and therefore catastrophic rise in interest rates on their large debt, or indeed a rise (connected?) in the value of the repayment currency vs their primary income currency, they wouldn't be the first expansionist low-cost airline to be brought down in flames by that, just when it was all going so well.
Would they, Sir Freddie?
Would they, Sir Freddie?
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If Norwegian gets caught by an unforeseen, unplanned for and therefore catastrophic rise in interest rates on their large debt, or indeed a rise (connected?) in the value of the repayment currency vs their primary income currency, they wouldn't be the first expansionist low-cost airline to be brought down in flames by that, just when it was all going so well.
Would they, Sir Freddie?
Would they, Sir Freddie?
The demise of Laker had more to do with BA on this side of the Atlantic and the large airlines in the US on that side of the Atlantic conspiring to dump seat prices on the routes that Laker competed on. Their express aim was to drive Laker out of business. You remember those massive US airlines: Pan Am and TWA - Oh wait, they went bust too!
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So far the Gods have by and large been kind to Bjørn and his airline.
Norwegian could very easily address its cost by stopping expansion, they will have added well over 2000 staff to the payroll this year alone.
Itis well known that long haul is now profitable in its own right especially out of LGW where it's short haul operation is struggling with scale against easyJet and access to slots.
For those not familiar with the scale of their operation at LGW the every growing list of LH destinations is impressive and frequency is increasing with LA due to go doubly daily soon building on the success of double daily JFK
So long as they can service the debt, then I don't see any major obstacles that they can't over come, they are currently ramping up the number of pilots in Scandinavia with internal bidding opening today for a 120 positions between Feb & June 2017.
What they must avoid is a re run of this years wet lease, from the recruitment I'm seeing going into the winter I think they will avoid much of this years problems.
2018 will be an interesting year for the industry and it will favour the strong for sure with interest rates on the rise maybe a war in Korea ?
Norwegian could very easily address its cost by stopping expansion, they will have added well over 2000 staff to the payroll this year alone.
Itis well known that long haul is now profitable in its own right especially out of LGW where it's short haul operation is struggling with scale against easyJet and access to slots.
For those not familiar with the scale of their operation at LGW the every growing list of LH destinations is impressive and frequency is increasing with LA due to go doubly daily soon building on the success of double daily JFK
So long as they can service the debt, then I don't see any major obstacles that they can't over come, they are currently ramping up the number of pilots in Scandinavia with internal bidding opening today for a 120 positions between Feb & June 2017.
What they must avoid is a re run of this years wet lease, from the recruitment I'm seeing going into the winter I think they will avoid much of this years problems.
2018 will be an interesting year for the industry and it will favour the strong for sure with interest rates on the rise maybe a war in Korea ?
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I’m not an accountant but isn’t most of Ryanair’s debt held off the balance sheet... held by leasing companies but Ryanair need to provide the cash to keep the plates all spinning... I’m assuming many airlines are the same? Interrupt that cash flow and it gets hugely expensive.... for example when you can’t fly ac due Crew shortages!
Low Fare Airlines and even the established airlines hold aircraft off balance sheet. This changes ratios of debt and the like, but the money is still required to be paid.
Low Fare Airlines are not really low cost, that is code for low wage. In not owning an asset a low fare airline has less depreciation and thus more profit.
The problem for low fare airlines and indeed airlines like's Australia's Qantas subsidiary Jetstar is that accounting rules are a little opaque and that is going to change.
IFRS 16 will address the way that airlines can have an operating lease (where the aircraft is rented for a fixed term, a monthly payment made and at the end of the term handed back to the lessor) but somehow record the value of the asset, implying some ownership. Trucking and many transport companies have the same problem.
In assessing an airline it is often of use to look also at 'free' cash flow (net) to see whether the business generates enough cash to conduct operations and there are a few conventions as to how long companies ought burn cash, Oil (shale) producing companies are really interesting when looking at cash flow.
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I hear one of the big beast on the block has ac off balance sheet for depreciation purposes but somehow miraculously shifts the depreciated asset onto the books and bags a profit on the sale of the old frame.... open to correction. Is this common too?
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Is it the possible that an airline can make a huge multi-frame order and secure a knock-down price; then take delivery and sell the a/c to subsidiary leasing company at full book and thus show an instant profit, and then lease the airframe back on a 7-10 year program.
Or purchase the airframe at a knockdown price; show it at full book value as an asset thus realising an instant paper profit; and then amortise it over 20 years on the books. Each year the 'asset' is revalued slightly less, but still above the original purchase price, so the after 7-10 years it is valued at the original purchase price and sold to the 2nd hand market for that price having cost very little.
Just a thought as there seem to be some creative constructions out there, and not just in aviation.
A question: how can a capital cost item not be included in a balance sheet? Is it an asset or not? But then again, if the airline doesn't own the airframe it's not an asset, but is rented. However, who bought it originally?
I was told at the time that BAF, as was, didn't own anything: even the office furniture was leased from outside BAF's accounts. Every engine & airframe was owned by an outside concern.
I hope some of our creative accountants can enlighten us.
Or purchase the airframe at a knockdown price; show it at full book value as an asset thus realising an instant paper profit; and then amortise it over 20 years on the books. Each year the 'asset' is revalued slightly less, but still above the original purchase price, so the after 7-10 years it is valued at the original purchase price and sold to the 2nd hand market for that price having cost very little.
Just a thought as there seem to be some creative constructions out there, and not just in aviation.
A question: how can a capital cost item not be included in a balance sheet? Is it an asset or not? But then again, if the airline doesn't own the airframe it's not an asset, but is rented. However, who bought it originally?
I was told at the time that BAF, as was, didn't own anything: even the office furniture was leased from outside BAF's accounts. Every engine & airframe was owned by an outside concern.
I hope some of our creative accountants can enlighten us.
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I'm no creative accountant but I've had a glace at a few balance sheets and result reports. What is possible (at least in my part of Europe) is that an airline may put leased aircraft in the balance sheet as an asset whilst at the same time, the lease agreement would go as a debt. Meaning, the balance sheet would look a lot bigger than it would've if you had not chose to do so. Assuming that the asset=debt this means equity ratio would fall. However, if the asset would be valued higher than the lease agreement, or dept, the equity would increase. This would especially be true should the depreciation of the asset be lower than the amortization of the lease/debt. It would introduce a cash flow problem however, but it would be possible to add on further debt to sort the cash flow. I've seen this happen in airlines where the owners interests of having and airline is blinding to the actual airline's possibility to generate any profit.
As for Norwegian, owned aircraft are considered an asset whilst leased aircraft are not. The depreciation plan is quite interesting as the residual value seem quite high whilst the depreciation plan is longer than most. From the FY16 report the residual value of the aircraft is 7 bn NOK whilst acquisition value is less than 27 (the report doesn't give exact acquisition value of the aircraft as a/c parts and installations made on leased aircraft are all put together). The depreciation plan is 25 years.
Having a look at the Q2 report it can be noted that Norwegian signed a LOI (realized during September) to sell 11 B738 and than lease them back immediately. This was taken into account in the balance sheet and results for Q2. The value of these aircraft in the balance sheet before the LOI was signed was 2,475 MNOK. However, the LOI only generated 1,899 MNOK, resulting in a loss of 576 MNOK for the 11 aircraft. Most of these aircraft were delivered in 2010. Of course, in Q3 the cash flow will show a significant increase.
My conclusion being that aircraft assets in Norwegian might not be worth the amount they hold in the balance sheet, meaning the company's equity is in reality lower than what is shown in the books. The aircraft value does not correspond to market value. Seven years after delivery, market value of these aircraft seem to be only ~75% of book value in the balance sheet.
How airlines should depreciate aircraft seem to be a topic for discussion among experts. A company with a new fleet holding on to their aircraft will in reality not be affected if the depreciation plan is flaw short term, but long term the effects will of course catch up. In the case of Norwegian, a 576 MNOK loss was not a problem given that NOFI shares were added to the balance sheet (and results) at fair value at the same time, adding 2 bn NOK to the balance sheet, but obviously not as much cash.
As for Norwegian, owned aircraft are considered an asset whilst leased aircraft are not. The depreciation plan is quite interesting as the residual value seem quite high whilst the depreciation plan is longer than most. From the FY16 report the residual value of the aircraft is 7 bn NOK whilst acquisition value is less than 27 (the report doesn't give exact acquisition value of the aircraft as a/c parts and installations made on leased aircraft are all put together). The depreciation plan is 25 years.
Having a look at the Q2 report it can be noted that Norwegian signed a LOI (realized during September) to sell 11 B738 and than lease them back immediately. This was taken into account in the balance sheet and results for Q2. The value of these aircraft in the balance sheet before the LOI was signed was 2,475 MNOK. However, the LOI only generated 1,899 MNOK, resulting in a loss of 576 MNOK for the 11 aircraft. Most of these aircraft were delivered in 2010. Of course, in Q3 the cash flow will show a significant increase.
My conclusion being that aircraft assets in Norwegian might not be worth the amount they hold in the balance sheet, meaning the company's equity is in reality lower than what is shown in the books. The aircraft value does not correspond to market value. Seven years after delivery, market value of these aircraft seem to be only ~75% of book value in the balance sheet.
How airlines should depreciate aircraft seem to be a topic for discussion among experts. A company with a new fleet holding on to their aircraft will in reality not be affected if the depreciation plan is flaw short term, but long term the effects will of course catch up. In the case of Norwegian, a 576 MNOK loss was not a problem given that NOFI shares were added to the balance sheet (and results) at fair value at the same time, adding 2 bn NOK to the balance sheet, but obviously not as much cash.
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By that logic, maybe we should just stay at home and do nothing. Just in case something (bad) happens!
The demise of Laker had more to do with BA on this side of the Atlantic and the large airlines in the US on that side of the Atlantic conspiring to dump seat prices on the routes that Laker competed on. Their express aim was to drive Laker out of business. You remember those massive US airlines: Pan Am and TWA - Oh wait, they went bust too!
The demise of Laker had more to do with BA on this side of the Atlantic and the large airlines in the US on that side of the Atlantic conspiring to dump seat prices on the routes that Laker competed on. Their express aim was to drive Laker out of business. You remember those massive US airlines: Pan Am and TWA - Oh wait, they went bust too!
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I think about that every time I taxi out to 13R at JFK. I remember Tower Air. It's really hard to make money with just 747s. That plane almost sunk us at America West, and we only had 3 of them.
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By that logic, maybe we should just stay at home and do nothing. Just in case something (bad) happens!
The demise of Laker had more to do with BA on this side of the Atlantic and the large airlines in the US on that side of the Atlantic conspiring to dump seat prices on the routes that Laker competed on. Their express aim was to drive Laker out of business. You remember those massive US airlines: Pan Am and TWA - Oh wait, they went bust too!
The demise of Laker had more to do with BA on this side of the Atlantic and the large airlines in the US on that side of the Atlantic conspiring to dump seat prices on the routes that Laker competed on. Their express aim was to drive Laker out of business. You remember those massive US airlines: Pan Am and TWA - Oh wait, they went bust too!
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It's funny to read all the Norpilots reassuring themselves that everything is ok. You seem to think they have a tracker loan, or fixed rate one? Nope. As the American market rises, one of two things will happen. Either the Trumpian aneurism in the market bursts, or interest rates rise. Let's all hope for Norwegian's sake, the former happens first. Lockerbie did for PanAm and TWA800 did for "try walking across". It won't take a crash to finish Norwegian. Bjørn Kjos will see to that.
Last edited by Boeing 7E7; 19th Oct 2017 at 14:34.
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Norwegian are doing long haul in a way that is geared for the future. It is quite a substantial product as far as millennials are concerned and that's why it will work going forward (to serve the future population of Europe, not us expired relics from the past). Millennials are not looking for a silver service and fine cuisine. All they're interested in is flying in comfort in a clean cabin with FREE Wi-Fi at a cost that means they might be able to pay the rent at the end of the month. Despite NAS's lack of advertising, the 787 is marketed brilliantly in this regard. Easy and Ryanair expanded their operating models with aircraft types that were already 2 decades old. All they had going for them was cheap cost. Here we have much more. As the route network grows we will all accept this is the ugly future we didn't want because by then a few of the long haul legacy carriers will have bit the dust too. Low cost long haul is here to stay and these guys are pioneers in that regard whilst Ryanair has been asleep.
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I think the sociological comment by smoothoperator is correct, but assumes a continuation of the largely benign world economic environment of low interest and low oil costs.
Unexpected world events are largely what will trip these new LH loco's up.
Unexpected world events are largely what will trip these new LH loco's up.