Norwegian Air Shuttle ASA owns 100% of the shares in Norwegian Air Shuttle Sweden AB, Norwegian Air Shuttle Polska Sp.zo.o, Call Norwegian AS and NAS Asset Management Norway AS. The Company holds 20% of the shares in Norwegian Finans Holding ASA and 99.9% of the shares in NAS Asset Management. The remaining shares in NAS Asset Management are owned by the fully owned company NAS Asset Management Norway AS.
The Group is headquartered at Fornebu outside Oslo. In addition, the Group has offices at Oslo Airport Gardermoen and in Tromsø. The technical department is located at Oslo Airport Gardermoen and Stavanger Airport Sola. Norwegian Air Shuttle Sweden AB has offices at Stockholm Airport Arlanda; Norwegian Air Shuttle Polska Sp.zo.o is based at Warsaw Airport Fredric Chopin, Poland. Call Norwegian AS and NAS Asset Management Norway AS have office addresses at Fornebu. Norwegian Finans Holding ASA has its offices in Oslo. NAS Asset Management has its office address in Dublin, Ireland.
Flight Safety
No incidents that represent significant risk were registered in 2009.
The Group has not registered any serious accidents or incidents to either passengers or crew involving aircraft operations since the Group was founded in 1993.
The Company’s flight safety office is integrated in the quality department, which reports directly to the Accountable Manager. The department’s main task is to work proactively to promote flight safety throughout the organization. Flight safety is covered in the crew’s training programs, together with training in security-related issues. The Civil Aviation Authority approves all programs, examinations and qualification requirements.
The Company continuously analyzes information from the Flight Data Recorders installed in the Company’s aircraft. The analyses are performed to ensure that the aircraft are handled and flown according to existing regulations and limitations.
Crew members, maintenance personnel and handling agents are also required to utilize a web-based reporting system where irregularities are logged. These reports are a valuable tool for statistical analysis and trend monitoring.
The aircraft are subject to a stringent maintenance program based on the manufacturers’ recommendations and existing rules and regulations.
Organization, Working Conditions and the Environment
At the end of 2009 the Group employed a total of 1,781 FTEs (full-time equivalents) including apprentices and temporary staff. The number of employees is expected to increase in 2010 in accordance with the Group’s planned expansion in Norway and abroad. Norwegian is in the process of establishing new bases abroad and is working closely with the Company’s unions regarding contracts and work guidelines to insure regulatory compliance.
The apprentice program in Norway will continue in 2010 with a projected increase in the number of participants. All candidates graduating in 2009 successfully completed and passed their exams which were carried out in conjunction with Akershus County Council. The labor unions involved with the departmental training programs are actively included in the planning of the apprentices’ syllabus.
Many graduates of the program have now secured positions within the Company. Some have chosen to become a part of the cabin crew team while others now work in areas such as marketing and customer care. Graduates of the program also visit schools and colleges and promote the program and help recruit new apprentices. This has been a focus area in 2009 and the program now provides a steady stream of candidates to fill permanent positions.
The important HES activities (Health, Environment and Safety) continue in compliance with labor law and the Group’s guidelines. A new personnel and salary management system has made HES activities more efficient and has helped the Company better manage its rapid growth and actively monitor and ultimately reduce sickness levels. The manager is responsible for HMS partners with the team leaders and management team to make sure that Norwegian’s working practices and conditions are fully up to speed in this area.
The Company’s new Human Resources Personnel management system simplifies much of the human resources back office work. The system provides a skills database for all employees, providing the Company with a tool to match jobs with qualifications. The system also allows employees to add information as well as logging attendance and vacations.
Absence due to sick leave in 2009 was 6.8%, approximately the same as in 2008. The Company will continue to focus on this issue in conjunction with the health service group Hjelp 24 and by hiring a new HES manager. Various activities have been implemented to help employees get back to work as quickly as possible.
In 2009 the Group employed 51.6% men and 48.4% women. The majority of pilots and technical personnel are men. The majority of cabin personnel are still women, but the number of men is increasing. Recruitment in 2009 led to an increase of women in different leadership roles compared to 2008.
Norwegian aims to be an attractive employer. Its human resources policy is intended to be equitable, neutral and non-discriminatory, regardless of ethnicity and/or national background, gender, religion or age.
Norwegian Air Shuttle ASA is a member of NHO Aviation, which is a member of NHO (Confederation of Norwegian Enterprise).
All the local labor unions in the Group are members of central unions which negotiate directly with NHO Aviation and NHO. As part of the salary review in 2009, negotiations with the central and local unions were successfully concluded and moderate agreements were reached with all parties.
External Environment
Flight operations are inherently dependent on fossil fuels and also generate noise. However, the Group’s current aircraft fleet operates within the levels and limitations imposed by national and international regulations. During 2009 the Group consumed approximately 345,700 tons of Jet A-1 fuel.
The Company is in the process of renewing the aircraft fleet, replacing Boeing 737-300 aircraft with Boeing 737-800s. The last fuel-intensive MD-80 aircraft left the fleet during the fourth quarter of 2009.
The Boeing 737-800 is among the most environmentally friendly aircraft available; the 737-300s which are being replaced emit approximately 23% more CO2 per seat. By year-end 2014 Norwegian will have a total of 70 Boeing 737-800s in its fleet. By year-end 2009, 17 of these were already delivered.
The Company’s business model promotes high load factors and higher capacity per flight, which makes Norwegian’s operations more environmentally sustainable as emissions per passenger are lower.
The Board believes the Group has complied with all requirements and recommendations with respect to the influence of the external environment, and that the Group takes all possible steps to minimize emissions and other negative effects on the environment.
Aircraft Maintenance
The Group runs its maintenance operation from the technical base at Oslo Airport Gardermoen.
Line maintenance is performed at Oslo Airport Gardermoen, Stavanger Airport Sola, Bergen Airport Flesland, Trondheim Airport Værnes, Moss Airport Rygge, Stockholm Airport Arlanda, Copenhagen Airport Kastrup and at Warsaw Airport Fredric Chopin.
Major airframe as well as workshop maintenance is performed by external sources subject to approval by the European Aviation Safety Agency (EASA).
Airframe maintenance is currently done by ATC Lasham in the U.K. and Priority Aero Maintenance at Arlanda. These contracts are due for a tender renewal process. Engine and component workshop maintenance is undertaken by Lufthansa Technik, MTU or Boeing.
All maintenance and follow-up activities, both internal and external, are performed in accordance with both manufacturers’ and additional internal requirements, and in full compliance with international authority regulations. The Company performs both initial quality approval as well as continuous monitoring of all maintenance suppliers.
All supplier contracts are subject to approval and monitoring by the national aviation authorities.
Significant Changes in Accounting principles
There have been no changes in the adopted accounting principles. The IFRS accounting principles, as adopted by the EU, have been followed in preparing the financial statements for 2009.
Comments to the Income Statement
The Group had total operating revenue of MNOK 7,309.2 (6,226.4) in 2009. Compared to last year the Group’s total growth in revenue was 17%. MNOK 6,389 (5,642) of the revenues is related to ticket revenues, MNOK 789 (463) is other passenger-related revenue, while the remaining MNOK 131 (121) is related to other freight, fees and third-party products. The increase in sales is mainly related to the 18% growth in production from 2008 to 2009. The load factor is reduced by 1 p.p. compared to the same period last year. The ticket revenue per available seat kilometer (RASK) for 2009 was NOK 0.47, compared to NOK 0.49 last year. Ancillary revenue was NOK 73.4 per PAX (50.7) in 2009, an increase of 45% from 2008.
Operating costs (including leasing and excluding depreciation and write-downs) were MNOK 6,588 (6,434) in 2009. Operating expenses for 2009 are in line with last year despite a production increase of 18% (ASK).
The unit cost was NOK 0.49 in 2009 compared to NOK 0.56 last year. The main factor contributing to the decreased cost level was a 45% reduction in fuel costs.
The unit cost excluding fuel was NOK 0.38 in 2009 compared to NOK 0.37 last year. During 2009 the Group’s operations were challenged by a weakening of NOK (mainly against USD) compared to last year. Costs affected by the weakened NOK are mainly fuel, leasing and maintenance. The increased unit cost excluding fuel is mainly due to the increased unit cost for leasing. In addition to the weakening of NOK against USD the unit cost for leasing was influenced by a larger share of B737-800s in our leasing fleet.
Included in total operating expenses are unrealized fuel hedge gains which as of 31 December amounted to MNOK 24.
Net profit before depreciation and write-down (EBITDA) for the Group was MNOK 720 (-208) in 2009, resulting in an EBITDA margin of 9.9%.
Financial items in 2009 ended up with a gain of MNOK 48 (351).
In relation to accounting for the prepayment on the purchase contract with Boeing, MNOK 33.5 in interest costs were capitalized in 2009.
In 2007 the Group started Bank Norwegian, which is 100% owned by Norwegian Finans Holding ASA in which the Group has a 20% stake. The Group’s estimated share of the bank’s net profit resulted in a net a gain of MNOK 3.2 in the consolidated profit and loss.
Earnings before tax in 2009 were MNOK 623 (5) and earnings after tax were MNOK 446 (4). Earnings per share were NOK 13.73 per share (NOK 0.15).
Comments to the Balance Sheet and Cash Flow Statement
The Group’s total assets increased by MNOK 1,843 to MNOK 5,022 by the end of 2009. Book value of aircraft increased by MNOK 451 during the year, while prepayments and capitalized interests on the Boeing purchase contract contributed MNOK 706 to the asset increase.
At the balance sheet date, the Group had a cash balance of MNOK 1,408 (607).
The Group had a cash flow from operations of MNOK 914 (-234) in 2009. The net cash flow from operating activities consists of the profit before tax of MNOK 623, and the increase in net working capital, taxes paid, add back of depreciation and changes in other accruals of MNOK 291. The reduction in networking capital is due to increased air traffic settlement liabilities due to traffic growth. Despite the traffic growth trade receivables were reduced mainly due to altered settlement procedures for credit card transactions.
Net cash flow used for investment purposes was MNOK -1,300 (-254), of which the prepayments for the Boeing contract constitute MNOK 684. An upgrade of leased aircraft, purchase of aircraft, investments in the Group’s IT systems and de-icing equipment amounted to MNOK 586 (427).
Net cash flow from financing activities in 2009 was MNOK 1,188 (687). During 2009 Norwegian issued a MNOK 400 senior unsecured bond issue with expected maturity date on 17 December 2012. In connection with the new bond issue, Norwegian bought back NOK 137 million worth of bond issues with maturity date of 19 April 2010. On 5 November, Norwegian issued 1,620,000 new shares through a private placement. The agreed subscription price was NOK 155 per share. Gross proceeds from the new share issue amounted to MNOK 251. During 2009 Norwegian increased its interest-bearing liability relating to financing of two Boeing 737-800HGW and prepayments to Boeing.
The Group has a strong focus on liquidity planning and the Board is confident in the Group’s financial position at the beginning of 2010.
Capital structure
The Group had total equity of MNOK 1,602 (897) at 31 December and an equity ratio of 32% (28%). Equity increased by MNOK 705 due to profit for the period of MNOK 446 and a share issue of NOK 253. Other changes in equity amounted to MNOK 6.
The Group's net interest-bearing debt aggregated MNOK 174 at 31 December 2009, compared to MNOK 91 a year earlier. The Group's gross interest-bearing liabilities mainly consist of two bond loans with a net book value of MNOK 561 and a PDP syndicated credit facility of MNOK 624. Other long-term interest-bearing liabilities including PEFCO financing for the first two Boeing 737-800s amounted to MNOK 369. Financial lease liability amounted to MNOK 29.
Risk
Changes in consumer and business confidence in our key markets can influence demand and immediately reduce revenue streams faster than adjustments can be made to production and cost levels. The current macroeconomic outlook is characterized by uncertainty with respect to the level of economic growth and consumer spending both globally and within Norwegian’s markets. During 2009 traffic volume decreased in markets in which Norwegian operates. However, Norwegian’s low-cost basis has allowed for adequate revenue management to meet the reduced purchasing power of business and leisure travelers. Demand and ticket prices are also affected by the overall level of competitive pressure in the industry where the primary drivers are capacity and demand.
Airlines may alter their business strategy and business models in order to adapt to market changes. As a result, the industry may experience major structural changes as airlines may be forced to enter into new markets or engage in merger and acquisition activities. Failure of traditional airlines with a higher cost basis may give way to airlines with a more efficient and aggressive low-cost business model.
The Group’s activities are exposed to several financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.
Risk management is carried out by a central treasury department (Group Treasury) under policies approved by the Board of Directors. Group Treasury identifies, evaluates and hedges financial risk. The Board provides principles for overall risk management such as foreign currency risk, interest rate risk, credit risk, use of derivative financial instruments and investment of excess liquidity. Hedging activities cannot be undertaken without approval from the CEO and CFO.
Market risk is the risk that changes in market prices, such as foreign exchange rates, jet-fuel prices and interest rates will affect the Group’s income or value of its holdings of financial instruments.
A substantial part of the Group’s income and expenses are denominated in foreign currency. The Group’s leases, aircraft purchases, and related expenses are mainly denominated in USD, and a portion of the sales and airplane operation expenses are denominated in EUR. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. In order to reduce currency risk, the Group has a mandate to hedge up to 100% of its currency exposure over the next 12 months. The hedging consists of forward currency contracts and flexible forwards.
As the Group has net significant interest-bearing assets debt, other than cash and cash equivalents, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from cash and cash equivalents and floating interest rate long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings consist of unsecured bond issues, financing of two Boeing 737-800s delivered in 2009 and a revolving credit facility. Bonds and the credit facility have floating interest rates while aircraft financing has a fixed interest rate. The Group’s leasing contracts have a fixed interest rate.
Expenses for jet fuel represent a substantial part of the Group’s operating costs, and fluctuations in jet fuel prices influence projected cash flows. The objective of the jet fuel price risk management policy is to provide protection against significant and sudden increases in jet fuel prices while retaining access to price reductions. The Group manages jet fuel price risk using fuel derivatives. Management has a mandate to hedge up to 100% of its expected consumption over the next 12 months with financial instruments.
Credit risk is managed on a group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to travel agencies and commercial customers, including outstanding receivables and committed transactions. The utilization of credit limits is regularly monitored. The Group’s policy is to maintain credit sales at a minimum level. Sales to private customers are settled in cash or using major credit cards.
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, as well as the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions.
Management monitors rolling forecasts of the Group’s liquidity reserve and cash and cash equivalents (see note 24) on the basis of expected cash flow. In addition, the Group’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet them, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.
Financing activities generally take more time to accomplish and are more expensive in times of financial turmoil and uncertain economic outlook. The Company has pre-delivery financing committed to the 10 first aircraft acquired from Boeing.
Following the acquisition of 42 Boeing 737-800s in 2007 and 6 additional aircraft in October 2009, the Group will have ongoing financing activities until the last delivery in 2014. The transaction is supported by the Ex-Im Bank of the United States, which at the time the contract was signed issued a Letter of Enthusiasm backing the transaction. The Company currently has a final commitment on 7 aircraft (2009 and 2010 deliveries) guaranteed by or subject to direct loans from the Ex-Im Bank of the United States. Furthermore, pre-commitment has been received for the next 20 aircraft (2011 and 2012 deliveries).
The banking industry’s ability to offer aircraft financing is influenced by the current state of the economy. Last year’s distress in the banking sector and economy resulted in intervention from government and central banks, initiating fiscal and monetary policies to counteract the negative economic development. Changes in monetary policy normally affect the economy with a lag of between three quarters and two years. The lag between a change in fiscal policy and its effect on output tends to be shorter than the lag for monetary policy.
Prospects for 2010
The demand for travelling with Norwegian and advanced bookings have been satisfactory at the start of the first quarter of 2010. Norwegian has executed several sales and marketing campaigns that have been well received by the market, and continues to attract customers to the continuously growing route portfolio. The current macroeconomic outlook is uncertain. Norwegian will closely monitor the traffic development and make adjustments to the route portfolio in order to accommodate for changes in demand.
The newly established Danish operation has a total fleet of 6 aircraft at the beginning of Q1. So far, the routes have been well received in the market, and are experiencing pressure on RASK from increased competition.
Norwegian anticipates a production growth (ASK) of up to 30% in 2010, mainly from replacing Boeing 737-300s with 737-800s. Norwegian may decide to adjust capacity deployment depending on the development of the overall economy and in the marketplace.
Assuming a fuel price of USD 850 per ton and USD/NOK 6.00, the Company is targeting a unit cost (CASK) in the area of NOK 0.49 – 0.50 for the full year 2010.
The Board confirms that the going concern assumption is valid and the financial statements have been prepared on a going concern basis.
Allocation of the year’s result
Net profit for Norwegian Air Shuttle ASA was MNOK 243, which the Board proposes be transferred to retained earnings.
The Board recommends no dividend distribution for the 2009 operating year in accordance with the Company’s corporate governance policies.
As of 31 December 2009, the Company had MNOK 493.9 of free equity.
Fornebu, 24 March 2010
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