Norwegian burning cash!
 

How long will Norwegian last with all this cash being burned!?
2 BN € in debt now!
Anybody?

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.

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!

This is how businesses grow. It's called investment and debt is the vehicle of this growth. Servicing debt, particularly at the moment due to the low interest rate environment that we have,is very cheap (even if rates increase from here) so while a 2BN euro debt may sound high to those without business expertise, it is almost 'free' money.

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.

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 :mad: does happen so it's not something to be ignored but at least nobody's panicking at the minute.

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?

Ask Tower Air as well.
They were expanding and doing really well, until something changed and they were not.:sad:

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!

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 ?

Correct.
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.

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?

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.

Skyloone.........absolute comedy gold!

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.

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.

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.

I don't doubt that there was a conspiracy to dump seats to drive Laker out. But TWA and Pan Am actually did survive in one aspect, those routes went to Delta, American and United thorough acquisition of assets.

Such doom and gloom! There are many airlines that expanded, gained market share and survived to tell the tale. Ryanair and easyJet to name just two. I remember the same things were said when these two airlines embarked on their aggressive expansion plans 15 years ago. But the strategy worked. In that time we had 9/11, SARS and a Financial Crisis which all took their toll on the economies of the world. Granted, nothing is guaranteed. And they survived. Your tales of doom and gloom are rehashed arguments that were directed at what have now become the giants of the industry!

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.

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.

Heard of Laker Airways? Or too young?

Picked up a book about the subject from the library when I was about 10, does that count?

I understand the parallels (albeit in very basic terms) but we do live in an age of super complex financing deals that have one goal in mind...to mitigate direct financial risk. Combine that with group structures and offshore entities (all things that didn't exist back in the 1970s), does anyone here truly understand Norwegian's financial status considering they own 20% of a bank?

I really admire your enthusiasm 7e7 but comparing Norwegian to RYR and EZY is an invalid comparison. For one thing, both have expanded their business focusing on core competences and the business model is largely unchanged. The Norwegian biz model changes by the hour, the latest manifestation of which is this Argentinian fiasco.

Consult business studies 101 to learn that such radical change of business model is a high risk, usually forced strategy, because the pooch has been screwed elsewhere. I really wish Norwegian success, in all its weirdo manifestations, but to paraphrase the FT..."the fact that MOL hasn't launched his attempt at low cost long haul yet is proof enough that it can't as yet be profitably done." Nuf said, but consider this. RYR et all will often charge for a 40 minute ride in an owned B738/A319 what Norwegian charge for a ten hour ride in a brand new B787. Hard to imagine that boding well for NOS. The bubble will soon burst, Wells Fargo bank is about to go bang and Warren Buffet is cashed up and waiting. Buy on the cannon, sell on the trumpet. Good luck though.

No I mean the poor buggers who can't get onto the housing ladder because the average cost of a home is now £250k compared to the £50k it was when you were perhaps younger? I mean those who are earning less than what you did when you were perhaps younger? (in real terms). I mean the ones who have to service a massive pension black hole. I mean the ones who have to pay through their noses to correct the mistakes of criminal bankers and their lackeys in government. I mean the ones who have become conditioned to accept that there's no point in being loyal because the politicians and establishment figures will screw you over in any case. Those Millennials. Yes.

Don't forget also having to deal with the effects of global warming, the oncoming antibiotic apocalypse, and the rise of nazis (again). Cheers, older generations!

But no, we're all lazy and self entitled :ok:

As one non millennial to another. From the replies above, I think you've been right royally told!

Well, if you're past a certain age, you won't have to worry about it....

Ok, so how do we fix it? We’re already working all hours on crap contracts for employers that would drop us as soon as we become a liability, not earning enough to save for a mortgage (rendering your point about 15% interest rates a bit academic), with a massive pension debt to pay for the previous generation, and slim to nil chance of ever enjoying our twilight years.

Any suggestions?

Yes - Start a new thread!

What a load of bitter individuals on here. All the past generations fault. Well of course everything is caused by something in the past. I just cannot wait to see what a remarkable success the next generation will make. Laughing my tits off already.

Don't worry employeers like Rishworth and OSM ( I'd say Norwegian but they are not an employer of pilots) are helping clear the pension back log, by either not offering a pension (Rishworth) or one of the poorest pensions in today's industry (OSM).

Also you just need to speak to the pilots down route to hear many a tragic story of pilots going sick down route, getting no assistance from the company, and left fighting with the insurance company as to who is to pay what....
Then an income protection scheme that's not paid out to a single pilot, who has tried to cliam on it, due to legitimate long term sickness.

Norwegian today reported its third quarter results for 2017. The net result was 1 billion NOK, an improvement of 4 percent compared to the same quarter previous year. The load factor increased to 92 percent. The passenger development has been positive in all of Norwegian’s key markets, with a significant growth in the U.S. and Spain.

Well this won’t please the anti Norwegian brigade, but still winter is ahead and controlling loses in winter is key to making a full year profit.

RYRis a very highly geared company with a gearing ratio I would guess very nearly 100%

There is a person who understands European aviation :ok:

RYR is one of the best capitalised airlines that has ever existed. EZY is another. Their respective cash positions and strong balance sheets make them all but impregnable to weaker competitors.

Put simply, in EZY case. It could fly around for at least three months with no income whatsoever and it wouldn’t even blink.

It’s the legacies that have the gearing issues.

You don’t need to “imagine” their gearing A28161 look at their freely available accounts.

https://www.google.nl/amp/www.telegraph.co.uk/travel/news/norwegian-axe-spain-routes-from-birmingham/amp/

[QUOTE=

Also you just need to speak to the pilots down route to hear many a tragic story of pilots going sick down route, getting no assistance from the company, and left fighting with the insurance company as to who is to pay what....
Then an income protection scheme that's not paid out to a single pilot, who has tried to cliam on it, due to legitimate long term sickness.[/QUOTE]

Yep, the policy provided does not cover you for the US rip off medical charges. I'm pretty sure a "UK" company has a duty of care for it's employees when on company business ?

OK then...
 

Do you want to fly for an airline run by greedy ***** that is very cash rich...

Or one run by people who care about employee sustainability but is cash poor?

Quality of life/renumeration not knowing if you'll still have a job in 5 years Vs. a job for life as a slave whilst being kicked in the teeth?

Answers on a postcard.

FR and U2 utilised those assets for circa 16-18 hrs a day with multiple flights........ now Norwegian may be getting good revenue for LH but is it really financially better than flying 8 sectors a day ?

FR and U2 are are 90% capacity so 8 a day puts you circa 1500 pax plus all their spend v 2 a day of circa 600 with significantly higher costs.

1 aircaft goes tech for FR and U2 they can cope, going tech in LAX is kind of harder.

Yeah and how is Lehman Brothers doing with those NINJA Mortgages.

Bottom line in any business is cash is king, run out of it and you are dead.

Supercomplex financial deals don't mitigate risk to the borrower, only to the lender.