Capacity in terms of available seat kilometers increased by 18%, and we operated 49 new routes in the three Scandinavian countries: 26 in Denmark, 10 in Sweden and 15 in Norway. In total Norwegian started the sales of 63 new routes in 2009, some with operating start in 2010. Revenues rose by 17% to MNOK 7,300 and approximately 10.8 million passengers chose to travel with Norwegian, up 18% from last year. Combined with a 13% reduction of the unit cost, we managed to deliver a pre-tax profit of MNOK 623. Return on equity (ROE) came in at 36%.
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Cost focus and competition
A strong cost focus has enabled the company to persistently reduce its unit cost, from NOK 0.85 in 2003 to NOK 0.49 in 2009, down from 0.56 in 2008. Despite the positive performance, 2009 was a year of substantial expansion, which is both costly and challenging. However, expansion creates greater potential for economies of scale, enabling us to allocate our fixed costs to more passengers.
The attention to the cost base has made Norwegian the cost leader in its primary markets. A streamlined cost structure is imperative for posting positive results given the stiff competition in the industry.
The partially state-owned head-on competitor with close to twice the cost level has proved willing to price their tickets at unsustainable levels to match Norwegian, financed by the largesse of the taxpayer. Surviving such government-funded distortion of competition requires a substantial cost advantage.
There are more efficient players in the European short- to medium-haul market which we eventually will meet head-on, either following our own expansion or their entry into our markets. We must reduce our unit costs even further, and fast. The isolated effect of new aircraft will be a 20% reduction in unit costs from today’s level, expectedly making Norwegian Europe’s most cost-efficient operator out of primary airports, in the not too distant future.
Demand and revenues
Worldwide air traffic slumped in 2009. IATA anticipates accumulated losses in the area of MUSD 11,000 for the industry. Norwegian went in the opposite direction, growing 18% and delivering record profits. Much of this growth was fuelled by our Copenhagen base which started full production in April, but we also increased the number of passengers at Oslo Airport, our largest base, by 15%, compared to a decline of 6% for the airport as a whole.
The revenue per available seat kilometer (RASK), a measure of how much ticket revenue one single seat generates on average per kilometer flown, decreased by 4% in 2009. A large proportion of the decline can be attributed to changes in the route portfolio, larger and more cost efficient aircraft that can sustain lower RASK levels and the removal of a fuel surcharge which covered the record high fuel prices in 2008.
The RASK has been decreasing continuously since we started our low-fare operation. In line with our cost reductions, passengers have been enjoying lower fares. This means higher volume, which brings in more revenue in absolute terms.
Ancillary revenues are becoming an increasingly important item in Norwegian’s revenue generation. Ancillary revenues are income from the sale of products and services to passengers other than the ticket itself, such as extra baggage, seating and Internet connectivity. Ancillary revenues per passenger increased by 45% in 2009.
Norwegian’s customers benefit from freedom of choice when traveling with us. While there are no compulsory fees or charges in addition to the announced ticket price, the ticket price itself does not subsidize the added cost of individual choices made by fellow passengers. Passengers who choose to send baggage, drink coffee, surf the Internet, or enjoy other services not directly related to flying the aircraft from A to B, are individually charged for these extra services. Simple and fair.
We have re-launched the loyalty program Norwegian Reward. The program is now also available without an integrated credit card solution which makes the program more attractive and accessible to even more customers.
Fleet Renewal
One of the major milestones achieved last year was the arrival in August of the first of our 48 direct-buy, fully-owned Boeing 737-800s. Though our passengers are already well accustomed with the -800 since the aircraft type has been leased by Norwegian since January 2008, the delivery of the first owned aircraft was a milestone in terms of product enhancement and operating efficiency. The leased -800s also provide a cost advantage over the -300s, but the owned aircraft will accelerate cost cutting significantly.
In addition to the 48 committed aircraft, Norwegian has uncalled options for 42 aircraft. This gives us flexibility in that we can accelerate growth simply by calling on our options.
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The environment
The environment will be the largest beneficiary of our fleet renewal efforts. Nothing affects aviation-related emissions more than the choice of aircraft. The environmentally friendly Boeing 737-800 aircraft significantly enhances Norwegian’s environmental contribution. The MD-80, a common sight at Scandinavian airports, emits 33% more CO2 and 42% more NOx per seat compared to our new aircraft.
In this Annual Report we have dedicated an entire section to the environmental effects of what we do and how we are seeking to minimize our environmental footprint.
Capital increase and strengthening of cash position
It is said that “cash is king”- and never more so than now. The harsh competitive environment combined with the current recession will accelerate the trend of capacity reductions, discontinued routes, closures and consolidations among less efficient competitors. This opens opportunities for well-funded, cost-efficient airlines with a sound business model.
In November we raised MNOK 251 in a private placement, followed by a bond issue of MNOK 400. The two cash-raising initiatives were taken to strengthen Norwegian’s financial position and flexibility even further, positioning the Company for future opportunities and endeavors. By year-end we had an equity ratio of 32% and cash and cash equivalents of MNOK 1,400.
Aircraft financing
In August the US lender Private Export Funding Corporation (PEFCO) was mandated to provide long-term loan financing for the first seven direct-buy Boeing 737-800 aircraft delivered in the period 2009-2010 with the Export-Import Bank of the United States (Ex-Im) acting as guarantor. Ex-Im has also made a preliminary commitment for further support of 20 additional aircraft deliveries in the period 2011 to 2012.
Direct term financing from Ex-Im, or financing guaranteed by Ex-Im, covers up to 85% of the purchase price. The remaining 15% is financed by equity already at the pre-delivery financing stage, which means that equity for deliveries scheduled throughout the second quarter of 2011 have been paid already. In 2008 the company secured pre-delivery financing from Natixis Transport Finance for all deliveries until the end of the first quarter of 2011.
Hedging
While we do hedge both jet fuel and currency to increase predictability and reduce volatility in earnings, we do so modestly and at lower relative volumes compared to our primary competitors. The result is that Norwegian’s hedging gains are smaller in times of increasing commodity prices. But it also means that our hedging losses, if any, will be much smaller than those of our more adventurous competitors when commodity prices go down.
In sum, the hedge-related losses can be partially offset against the budget price for unhedged volumes, and vice versa. The underlying rationale is simple: Our core competence is to run a lean airline.
Going Forward
We think that 2010 will turn out somewhat better than 2009 for most industries, but there is still a lot of uncertainty in the market. We do not expect a full recovery to pre-recession market conditions to occur in 2010. Norwegian has a well-proven business model and a constant focus on reducing costs. With new modern aircraft and efficient operations we believe that we have a product with a high value-for-money ratio, which we are confident is a winning formula under any market conditions.
Bjørn Kjos // CEO
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Photos: Sara Johannesen (Scanpix), Hans Olav Nyborg & Atle Straume