Norwegian Air Shuttle ASA (OTCPK:NWARF) Q4 2021 Earnings Conference Call February 18, 2022 2:30 AM ET
Company Participants
Jesper Hatletveit – Vice President, Investor Relations
Geir Karlsen – Chief Executive Officer and Chief Financial Officer
Conference Call Participants
Hans Jørgen Elnæs – Winair
Jesper Hatletveit
Welcome to the Fourth Quarter Presentation for Norwegian. My name is Jesper Hatletveit, and I am the new VP of Investor Relations here at Norwegian. Today’s presentation will be held by our CEO and CFO, Geir Karlsen. It will be followed by a Q&A from the audience and the web. Please go ahead, Geir.
Geir Karlsen
Thank you, Jesper and good to see you all. Welcome to this presentation of the fourth quarter results of 2021. I think I would like to say that it’s good to kind of close the chapter of 2021. That’s certainly been a special year. And I guess, we can all say a year for the memory books.
I think we came out of 2021 in a relatively good way. We are happy to report a profit for the quarter of NOK117 million. I think we have been through the pandemic pretty – we have been doing pretty well when it comes to preserving liquidity and we have done that in the fourth quarter as well. So we are actually able to generate cash in the fourth quarter, taking the cash balance up to NOK7.7 billion. We saw that. We had quite a few London Gatwick slots and there are quite a few of them we are not planning to use going forward. And there is a lot of talk about legacy here, but sometimes legacy is also a positive. And this is one example of it. So I am very happy that we were able to sell the slots that we are not planning to use.
We still have all the slots that we need going forward on London Gatwick. Also happy to see that we were rated as the best Nordic airline when it comes to punctuality for 2021, number three in Europe, this is something that we are working on every single day to improve and we will continue to do that through 2022 as well. Now we are in a kind of a challenging quarter, in the first quarter. So now it’s all about making sure that we are ready for the summer season and we are seeing very good signs when it comes to bookings into the summer season. So in the quarter, we brought 3.1 million passengers with us, and Norwegian today is approximately 3,600 employees. And we also increased the ASK or the capacity through the quarter with approximately 18%.
If we look at kind of the sales going on these days, I mean, we entered the quarter, the fourth quarter last year in a positive note. And we saw due to an ease-up of the restrictions into the fourth quarter that we saw a pretty solid ramp up in bookings, especially for October. So October – the October numbers for Norwegian were positive on the bottom line. So, that’s – so we made money in October. Then we went into November and the traditional low season, where you saw the sales coming down a bit as expected. And then we had the Omicron coming against us late November into December and we saw a dramatic drop as you can see on the graph on the right hand side there.
So what we did then? We were planning to fly Q4 with approximately 80% of the capacity that we had available and then we had to take decision then on how much we would need to cut and we cut an additional approximately 27% then going into January and February. And that is where we are at today. So, we are now running the company with – in the area of 60% to 65% of full capacity due to the demand picture. However, we are now seeing that we have an ease-up on the Omicron virus again and we are seeing now that the bookings are really coming our way. The red line here is the development in number of pax on the 7-day rolling sales, but even more positive is the revenue that is, in relative terms, increasing a lot more than the sale of the number of pax.
That shows us that the passengers are now booking more forward. So the booking curve is kind of going out a little bit. It shows that the passengers are starting to book for the summer season. And you could say at least indirectly that the yields are – it’s definitely going up. But as such, you can also say that the increase in fuel price is starting to be implemented into the ticket prices as well. We have taken a huge benefit of the power-by-the-hour solution that we negotiated last year.
For 2021 as a whole, we had a saving in lease costs in the area of $40 million to $45 million, and these savings will continue into the first quarter as well, as we have power-by-the-hour for the whole fleet for the whole quarter. So sales is looking very promising, and we are also seeing that if you compare the yield we are doing now on July for 2022 compared to the same yield we were looking at in 2029, the yield today for July, as it looks now, is more than 30% up.
So what we have also been doing, this is a very high focus area for Norwegian these days is that we have managed to get into a cooperationship with Neste, which – and we have made a kind of a product where the corporate travelers of Norwegian will be able to buy sustainable aviation fuel, SAF. This will be done by them then covering the difference between SAF and fossil jet fuel. And by that, they can take that into their own accounts and to measure it against their own target. So by that, you could say that they can take the benefit of actually buying SAF, while we will put more of the SAF into the wing, and thereby, we will also take down the emissions for the airline. This is, as I said, a high-focus area and this is something that we will continue to work on going forward. As per today, this is meant, firstly, to the corporate travelers, and then we will take it from there going in – go further in – through 2022 and see how we can develop this further. We’ve also taken a decision internally where all admin flights that we are doing in Norwegian will be treated the same way, meaning that we will also buy the SAF and thereby take down the emissions. SAF is reducing the emissions with more than 80% compared to normal fossil jet fuel.
So to the financials, the yields are increasing to NOK0.57. Obviously, this is not something that we are happy with, but at the same time, it’s developing the right way. RASK is going up 12%, 13% to NOK0.44. Ancillary NOK144 per pax, not happy with that either. Ancillary per pax is normally coming down during the seasonality into Q4 and especially Q1. The target on ancillary is close to NOK200 a pax and we hope to be able to see that when we are now entering into more of the high season.
On profits, as I said, happy to report a profit also on EBITDAR, on CASK, we are coming down if you compare it to last quarter, meaning the third quarter of 2021 from NOK0.51 to NOK0.49. Obviously, the CASK is too high, but that’s also a result of the fact that we are flying with, as I said, 60% to 70% of the capacity. And I think if you take the – if you’re looking from the second quarter of 2022 and towards the end of the year and you use only 1 decimal on CASK, you should definitely see something saying NOK0.4, and then you would have to figure out on what side of NOK0.4 we will end up. But we have an aggressive target on CASK and time will show whether we can meet that. And as I said, the power-by-the-hour solution is giving us some help in Q1.
I am estimating the savings in Q1 to be in the area of NOK100 million to NOK120 million, and then – and that’s very helpful when we have the demand picture, especially in January and the part of February that we have behind us. We are continuing to strengthen the balance sheet. The book equity is up more than NOK700 million for the quarter, which is good. And I have already mentioned the cash balance.
So what you’re seeing here is a quarter where the top line is going up with 32% to NOK2.5 billion. If you look at the cost side on all the elements there and you look at the big picture, it’s up approximately 18%. That is exactly the way the ASK is going up for the quarter. And you could say that outside fuel, a few of the items is going up less than 18%, while the fuel is in real terms capacity adjusted increased by approximately 32%. That takes us down to the EBITDAR, and we have other losses/gains NOK201 million is positive. That includes the sale of the London Gatwick slots, which takes us down to a positive EBITDAR of NOK114 million.
Then we have net financial items. That includes, I would say, the last parts of the restructuring effects, and we have spent the last 6 months also cleaning up the corporate structure in the company. We have taken out, I would say, taken out, liquidated, closed more than 50 companies. So I would say the balance sheet as such is now really cleaned up and ready for the quarters to come. And thereby, we’re happy that we can come down to NOK117 million in profit for the quarter and close to NOK1.9 billion as profit for the full year.
Balance sheet. Just a few comments, the intangible assets is the deferred tax assets, the carry forward loss. This is hopefully going to be a huge asset for us that we are going to use and spend well when we are now starting to very soon make seriously money. And tangible assets, it’s obviously the fleet. So in this quarter, we have added 8 aircraft into the balance sheet, both on the asset side and on the liability side. This is aircraft that we have taken delivery of. We have not started to fly them yet. They are all on power-by-the-hour. And this is aircraft we are now – that we are now making ready for the summer season, and it’s part of that 19 to 20 aircraft that we are bringing into the fleet now to the season – to the top season, to the summer season.
On receivables, I think we could say that we are not – still not happy with the situation with the credit card companies. So out of the NOK2.153 billion, approximately NOK1.45 billion is holdbacks towards the credit card companies. And if you look at that compared to the air traffic settlement liabilities of NOK1.3 billion, you can figure out the holdback. So the holdback as per year-end is still above 100%, approximately 109%. The holdback today, however, I mean, today, it’s in the area of 90%. So we are finally starting to see good results from all the work that we have been doing towards these credit card holders lately. And not to promise too much, but I think in a couple of months from now, we should be back to more normal levels.
And we are then talking about the holdback in the area of, let’s say, 40% to 55%. So all the signs we are seeing with the dialogues that we have with these guys is positive, and they are now in the process of easing up. We finalized, just a few weeks back, a new agreement with one of the guys and – which took the holdback down to 45%. So it’s already in motion. And then on other current liabilities, it is a huge portion of that is cash points that we owe our dear customers, and that is in the area of NOK2.4 billion.
So the book equity is up NOK744 million, and it also takes the equity percentage up to 17.4%. So on the net debt side, the net debt is increasing, as you can see on the right-hand side over there. That is mainly due to the fact that we are taking in more capacity, eight aircraft into the fleet. Cash flow, not very exciting. But you can see at least the NOK237 million includes the London Gatwick slots. And then on the finance activities, it’s repayment of debt, NOK23 million, NOK24 million on the own aircraft and the rest on the leased ones.
So on the way forward, I mean, we have – we have a very strong position in the markets that we are flying. That applies to Norway, Sweden, Denmark and Finland. Back in 2019, we were either number one or number two when it comes to ASK in the different markets. Then 2022, when we are moving forward now will show the position we are taking there. We have been following the brand metrics very closely, the last 6 months. There is no doubt that during the reconstruction of the company, we took a hit and the brand value as such came down. But we have been working very hard over the last 6 months in order to improve that.
And looking at the metrics as per today, we have a massive improvement, and we are almost back where we should be. And we have also come up to a level where we are competing with the other guys the way we should do. And this is a really important measure we are working on going forward as well. But we have seen a massive improvement from the third quarter to the fourth quarter, and we are seeing the same tendency now. Obviously, it helps with the punctuality that we have been seeing lately, again, ranked number one in the Nordics for 2021. And we have had very few cancellations through the pandemic. And I think we have been doing quite well and also compared to the competitors. So building the brand is very important. I mean you can spend a lot of money on marketing, but the real building of the brand is coming from giving the customers a good experience when traveling with Norwegian.
We have a very strong reward program, 4.2 million members in the Nordics. We know that the members are the most frequent travelers, obviously. They are also giving us a higher value than the passengers that are not members. We also know that for each cash point used, we have more than NOK4 of increased new revenue coming towards us. And this is definitely something that we will take very well care of. And we are looking continuously to how we are setting up the reward program and how we could also potentially improve it going forward. So for this summer, we have 270 routes for sale. And the routes you’re seeing there that is the routes that we are planning to fly. So when booking a ticket for the summer with Norwegian today, you will be taken care of and brought to your destination.
On the fleet, this is a new way of presenting the fleet, by the way. So we have 51 aircraft in operation, you could say. In Q4, we operated, I guess, between 40 and 45 of them. And then we are now bringing in 19 new aircraft. They are not new, but they are new to our fleet. So it’s going to be a mix with majority of NGs and then we have the 2 MAXs that is already with us ready to operate.
Again, we have a saving estimated to approximately NOK120 million for Q1 on power-by-the-hour. On all these 19 aircraft, we do also have power-by-the-hour next winter. So we have the flexibility that we need also for the coming winter. That is very important. And it also takes care of the kind of issues that we have been telling you guys about when it comes to the fact that we would like to kind of be more flexible on capacity and thereby be able to take out the capacity in low season and also be able to take out the cost associated with that capacity in the same season.
We have already started the planning for 2023, and we have come quite far in that planning. So the target now is to continue the growth in the company. And we are estimating that we will, next summer, 2023, have a fleet between 80 and 85 aircraft. So we’re still planning for growth. And all the growth we are bringing in from now on will be with what we call new technologies. So it will be brand-new aircraft, and we are already in the market trying to source these aircraft.
And we feel that the market for aircraft today is tightening, meaning the prices are going up, but we still feel there is a window to come for the next at least month or 2 where you can secure capacity for – let’s say, from 2021 onwards. So next year, I think you will see us flying 80 to 85 aircraft, and we have already specified the network that we are going to fly with this extra capacity. The network we will most likely select is routes that we have been flying before. We know them. And then a small portion of them will be, I guess, a bet on new destinations. And time will then show and – where we will end up as such. So that is the fleet.
So just to summarize, I think the bookings, as I went through, is looking very promising. The first quarter, meaning the current quarter, will be a challenge, which it will be for most of the guys around. We are still working on preserving the liquidity. We have done a good job so far. I think we will do a good job on that in the first quarter as well. We are seeing that for the bookings, passengers are starting to book more forward. The yields are going up, and we have a very clear plan now on how we are going to kind of do this towards the summer.
PBH, as mentioned, is still with us. And I think we could also say that with the PBH next summer, we have secured the flexibility on the fleet side. And I’m very happy to say that we have actually now also secured the same situation on the crew side. So, meaning that we already know as per today that we will be able to take out the cost both on the fleet and on the crew side during the coming winter. So that is exactly the flexibility that we would like to have. And the work has already now started to make sure that we can have the same solution when we are talking about the winter ‘23 to ‘24.
So by that, you can say that we have the plan already for this year. And the focus going forward now will be for 2023 and into 2024. So – and we know that as per today, looking at the cost level in the company, we are not happy with it. But it’s a little bit of a challenge when you are running the business with 60% to 65% capacity to be able to take out – to take the cost down as well. But I think you will see the result of the work that we have been doing when we are getting into the high season.
And then we will make sure that we do whatever we can to be – to come into an even better position when we are having the fleet we need and running into 2023. I think that part of this business will be – it is a cost game. I think we are – we need to be as competitive as we can. We need to be prepared to meet whoever decides to come into the markets that we are flying. We are not there yet, but we are not very far away either. And then time will show how aggressive it can be. And at what level we will end up when we are back with kind of a normal market.
I think that was it from me, Jesper. So if maybe we have some questions, I guess?
Jesper Hatletveit
Thank you, Geir. We will then open up for Q&A. We will start with Q&A from the audience and then we will follow-up with some questions from the web.
Question-and-Answer Session
A – Jesper Hatletveit
[Operator Instructions] Hans Jørgen
Hans Jørgen Elnæs
Hans Jørgen Elnæs, Winair. You’re talking about cost cuts and the fuel bill is creeping up. The fleet is increasing. Hedging now is maybe not the best time to do it. Will you look into that going forward? And secondly, we know that some airlines in Europe, they are also starting hedging on CO2 emission. Is that something that we can see Norwegian do, as your fleet is growing and the emission of CO2 is going up, and the cost, too?
Geir Karlsen
Hans Jørgen, please repeat your second one.
Hans Jørgen Elnæs
We see that in – some airlines in Europe, they are hedging on CO2 emission and my question to you is will Norwegian look into that kind of instruments as you grow and the emissions increase and the cost for the emissions are going sky high?
Geir Karlsen
Understand. I think when it comes to hedging, I think it’s fair to say that when we came out of the reconstruction, it was – we needed some time in order to secure credit lines to do hedging. Happy to say and I actually didn’t say it during the presentation that we have now finally secured the credit lines that we need. And we can – I think we can now hedge up to 70%, 80% of the total consumption that we have for 2022 or at least for the next 12 months. And this is something that we will look into. Obviously, at an oil price of $92, $93, should we hedge now, should we wait. That is a question, as you are also saying. And – but normally, in a normal situation, we have been hedged, let’s say, between 20%, 30% and 50% of the consumption 12 months forward. And then we will just see how we play it now. Right now, we are not hedged, as we have said. I would say, looking at the closest competitors, they are in the same situation, and that is, at a high oil price, a good thing, obviously. Then we will just have to see. When it comes to CO2 emissions and hedging that, we haven’t really spent a lot of time looking into that for now. What we have spent time doing, however, is to see should we take a more active role in actually making agreements with producers of sustainable aviation fuel. There are quite a few players out there now in the beginning, starting to build facilities in order to produce SAF. They are at very early stages. And we would have to see whether we can either invest in that type of companies, give them off-take when they are ready. But I think realistically, with the newcomers at least, we don’t see it realistic that they will be able to deliver any significant amounts until, I don’t know, 2025, 2026. So, it’s kind of a – it’s a pretty long investment horizon. But we are, I would say, in a pretty detailed dialogue with a couple of these type of companies. The problem with SAF today is that the volume produced is way too low. And even if we are blending it into the jet fuel today, it’s at way too low volumes. So, we are looking into whether we should take a more active role and then invest horizontally as such.
Jesper Hatletveit
Okay. We will then go ahead with questions from the web. First question is from Ole Martin Westgaard at DNB Markets. Can you update us on the situation with Boeing?
Geir Karlsen
I wish I had a lot of good news to tell you about Boeing, but it’s not really moving fast. We have still a litigation case ongoing. Not much have happened lately. But we – I would say we have a dialogue with them and then – but not much news to share, to be honest.
Jesper Hatletveit
Okay. Thank you. What is the optimal fleet level for Norwegian?
Geir Karlsen
Well, as I said today, we will have 70 aircraft in the air this summer. We have set a target to – between 80 and 85 next year. I think I have said a couple of times at least that we need to come up to a fleet of, let’s call it, between 80 and 95, 100 as soon as possible. Most likely that will be in ‘24, I guess. I think looking at the network – the history on the network that Norwegian has been flying, that is a level that we are very comfortable with and meaning that it will be profitable. And then I think that is also a good level to have as a target when it comes to getting the cost level down and to get the real CASK – to reel scale effects into your cost side of the business. So, that is 80 to 85 next year, maybe then move over 90 in 2024. But all based on demand, the market coming away and so on.
Jesper Hatletveit
Okay. One last question from Ole Martin, are you able to compensate the higher fuel prices in your tickets?
Geir Karlsen
That’s a good question. As I said, when we are looking at the yields now, let’s say, for this summer and compare that to the same situation back in 2019, the yields are in the area of 30% up. So, you could say that it’s on its way to build into the ticket prices, but we will just have to see. I mean if this high oil price will continue, well, we will see.
Jesper Hatletveit
Okay. We then have questions from Petter Nyström, ABG Sundal Collier. Again, you are able to positively surprise on the cash balance. What should we think about cash burn in Q1? Is the cash burn of NOK150 million to NOK300 million a month, still valid?
Geir Karlsen
I don’t know where that is coming from.
Jesper Hatletveit
I don’t know it either.
Geir Karlsen
I don’t know it’s good or so. So, we are not guiding on cash burn this quarter. We had a challenging quarter as everyone else. And we will be burning some cash in this quarter, but we are not going out with any specific amount. Part of the cash burn is also – will also be a result of the kind of new agreements we will reach with the credit card acquirers. And as I said, we have more than 100% holdback coming into 2022, and then we will see how this is developing. I don’t think you will see a lot of results from that in this first quarter, but I think you will definitely see it coming from the second quarter. And as we have shown, we have a quite comfortable cash balance now. So, we are not concerned at all on that side of this. So, it is all about making sure that we play it well over the next, let’s say, one month to two months, and then we have Easter and then we have – then we are getting into the exciting stuff.
Jesper Hatletveit
Okay. Another question from Petter, you highlight improved bookings for the summer, but how are bookings for the Easter and spring holiday is looking?
Geir Karlsen
Easter is looking good. It seems like we had been expecting when we opened up in especially Norway that you will have kind of a catch-up effect. We haven’t really seen that. We have seen a steadily, let’s say, push upwards on the bookings. I think we came out of January with close – approximately 70% load. We have already way past that for February. And then we are definitely also seeing now the effects on March. And Easter is definitely looking good. But the booking curve is still relatively short, even if it’s – we are seeing more bookings during the summer. So, I think March will be okay. But then from Easter, April onwards, is looking very promising.
Jesper Hatletveit
Okay. One final question from Petter, regarding CASK ex-fuel, do you expect this below NOK0.40 for Q3 of 2022?
Geir Karlsen
For Q3?
Jesper Hatletveit
Yes.
Geir Karlsen
I said, if you use one decimal, it will be NOK0.4, and then we will see whether it’s on what side of it, we will end up for that specific quarter, as you mentioned.
Jesper Hatletveit
Okay. And one final question from Jaakko Tyrvainen at SEB. Regarding fair prices looking forward, how do you see the picture of pricing versus load factors? Are the airlines preferring high load or high prices?
Geir Karlsen
That’s a wide question. I mean it’s – if you look at the ultra-low carriers, they are definitely load players. And we are, to some extent, that as well. So, I don’t have a precise answer on it. But I think going back in the years, I guess you can say, our strategy has been that you are kind of – you are selling a lot of tickets over the winter to kind of fund or, let’s say, finance the low season and then you are paying it back in the summer season. Now we are at a position where we have the Omicron, of course, but we are also in a position where we have a very comfortable cash balance and we can have the luxury of kind of playing it maybe a little bit differently. And I think that’s also what you are seeing us doing these days. And I think that is also part of the reason that we are actually seeing a pretty nice increase in yields for the bookings going forward.
Jesper Hatletveit
Okay. That was the final question. So, we then conclude the session. Thank you.
Geir Karlsen
Thank you. Thank you, guys.
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