An eventful year has passed. 2012 was a year of achievements and milestones: The largest European aircraft order in history for 222 new short-haul aircraft; the launch of 52 new routes, the delivery of 13 new aircraft and the launch of Norwegian’s eagerly awaited long-haul ticket sale.
We have no plans to slow down in 2013 – quite the opposite. 2012 enabled us to create an even better platform for profitable international expansion. In 2013 we will receive another 14 brand new 737-800 aircraft and our first three 787 Dreamliners. We are opening our London Gatwick and Alicante bases in April, our third and fourth non-Nordic bases, followed by a long-haul crew base in Bangkok. This is the first - but probably not the last – non-European base.
Overall financial performance
Net Profit was NOK 457 million, equivalent to a net profit margin of four percent. Although this is a significant improvement on 2011, we believe a streamlined Norwegian can do better in the future with more scale economies, brand-new aircraft and international expansion.The result for 2012 was a substantial improvement from the 2011 and 2010 financial years. The EBITDA margin was close to the 2009 record result despite an 87 percent increase in the price of jet fuel since then.
The unit cost (CASK) decreased four percent year-on-year excluding fuel and two percent including fuel. Unit cost thus decreased despite a two percent increase in the spot jet fuel price and four percent increase in USD/NOK. A larger proportion of cost-efficient Boeing 737-800s, overall larger scale, and longer average sector length were the primary drivers.
Several competitors either went bankrupt or experienced financial distress in 2012. This turmoil helped to balance capacity and normalize the pricing environment, adding to the topline.
At Norwegian we believe growth must be profitable, whether it be less, equal, or more than the market average. Capacity increase remained in double digits in 2012. Of the overall capacity increase of 18 percent, close to three quarter came from outside Norway, primarily from Sweden, Denmark and Finland. The establishment of bases in Malaga, Las Palmas and Alicante has enabled Norwegian to further tap into provincial markets from the Mediterranean to the Nordic region, destinations too small to sustain their own operating bases. About a fifth of Norwegian’s growth was outside the largest bases at capital airports. This gave more passengers the
convenient opportunity to fly non-stop, which in turn increases cost efficiency and reduces the environmental footprint.
Though Scandinavians are statistically among the most frequent travelers in the world, they are in limited supply. The small population of the Nordic countries is a natural barrier to continued double digit growth in the domestic and intra-Scandinavian markets. We are establishing bases in continental Europe and Asia to improve our edge with regard to cost and in order to position the company to take its share of what we believe will be an influx in traffic, particularly from Asia to Europe and beyond.
Global operations with a global cost structure
Establishing international bases across Europe not only enables us to tap into new markets, whether they are provincial markets in the Nordic countries or entirely new markets such as Mediterranean routes from London Gatwick. These bases also enable Norwegian to compete with the most cost-efficient airlines.
To maintain a competitive edge also outside Scandinavia, expansion into new markets must be on a level playing field with incumbent airlines. Recruitment for new bases takes place locally, at competitive local conditions.
Despite a salary level twice that of our European counterparts, Norwegian has managed to take second place in terms of cost efficiency at primary airports in Europe through efficient operations, automation, and a state-of-the-art aircraft fleet.
Our upcoming long-haul operations will follow the same strategy as the establishment of our new bases on the European continent. The Bangkok crew-base allows Norwegian to easily reach European destinations, ensuring access to a large catchment area. The combination of employing the best available asset - the Boeing 787 Dreamliner - and competing on a level playing field with our future Asian competitors, Norwegian will likely have a medium-term unit cost well below any airline currently operating flights from Asia to Europe.
A level field does not create cost efficiency by itself; tight cost control across all departments and in every decision remains paramount to survival.
A continuous fleet renewal effort has become an integral part of our business. By early 2012 Norwegian had placed the largest aircraft order in European history comprising 222 short-haul aircraft. By year-end the order total for aircraft on firm order was 279 aircraft: 71 Boeing 737-800, 100 Boeing 737 MAX8, 100 Airbus A320neo, and eight Boeing 787-8 Dreamliners.
Norwegian’s goal is to only operate the most cost-efficient and environmentally-progressive fleet of aircraft available. This will be achieved by replacing short-haul aircraft after 7-9 years of operation with brand-new aircraft. The recent order secures the continuous and long-term supply of both replacement and net growth aircraft.
In 2012 one older 737-800 and six 737-300s were retired while 13 brand-new 737-800s entered the fleet.
New aircraft supercharge our cost efficiency and significantly enhance the passenger experience. However, the largest beneficiary of our fleet renewal efforts is the environment. In 2012, CO2 emissions per passenger per kilometer were only 88 grams, a four percent reduction from previous year. Norwegian is one of the most environmentally friendly airlines in Europe.
The reputation of air travel as an environmental “bad boy” is unmerited. There are few other sectors that can point to such comprehensive advances in energy efficiency. Since 2008 when our fleet renewal effort began, Norwegian’s fuel consumption per seat kilometer is down a staggering 15 percent. Today, emissions per airline passenger are approaching those per train passenger in many countries.
However, the choice of aircraft is pivotal when it comes to aviation and emissions. The environmentally progressive Boeing 737-800 significantly enhances Norwegian’s environmental contribution. By comparison, the Boeing 737-600 - also a “Next Generation” aircraft in the same family as the -800 and commonly seen at Scandinavian airports - is nowhere near as environmentally progressive.
The latter consumes 35 - 40% more fuel per seat, which makes it almost as fuel intensive as a 25-year-old MD-80, also frequently observed in Scandinavia. In this Annual Report, we have dedicated an entire section to the environmental effects of what we do and how we seek to minimize our environmental footprint. We have added a comprehensive benchmark between aircraft types as well as between alternative modes of transportation.
Although successful, 2012 was a year with quite a few unforeseen challenges. In particular, the second and third quarters were characterized by a number of instances of industrial action where Norwegian was an innocent third party in most cases.
In June, security staff across Norway went on strike and in July, Avinor -the state-owned airport operator - failed to sufficiently staff its air traffic control centers causing severe delays for thousands of passengers during the busiest month of the year. These events adversely affected profits by approximately NOK 110 million.
Fuel and hedging
We are less sensitive to spiking oil prices than before thanks to our fuel-efficient aircraft. Fuel consumption is down a further three percent per seat since last year alone. Our business model of promoting high load factors and space-efficient all-economy seating provides Norwegian with further fuel slack.
Our closest competitor consumed 34 percent more fuel per passenger per kilometer in 2012. From Norwegian’s point of view, that implies that relatively speaking, we have a USD 0.00 per ton fuel hedge covering 30 percent of what the consumption would otherwise have been. That is a better fuel hedge than any bank can offer.
While we do hedge jet fuel to increase predictability and reduce volatility in earnings, we do so modestly and at lower relative volumes compared to our primary competitors.
Norwegian hedges USD/NOK to counter foreign currency risk exposure on USD denominated borrowings translated to the prevailing currency rate at each balance sheet date. Hedge gains and losses are, according to IFRS, recognized under operating expenses (“other losses/ (gains)”) while foreign currency gains and losses from translation of USD denominated borrowings are recognized under financial items (“Net foreign exchange (loss) or gain”). Other losses recognized under operating expenses amounted to NOK 336 million in 2012.
By year-end, Norwegian had 267 undelivered direct-buy short-haul aircraft and three direct-buy long-haul aircraft on order. A total of 33 direct-buy 737-800s had already been delivered, with 23 on Norwegian’s own books financed with export credits and ten financed through sale and leaseback transactions.
In 2012 net debt increased by NOK 651 million while total investments were NOK 2.8 billion. Cash flow from financing activities was half of that at NOK 1.4 billion while the other half was financed from cash flow from operations which amounted to more than NOK 2.0 billion. In spite of covering half the investment requirement using internal sources, the cash position at year-end was NOK 626 million higher than last year.
Financing activities occur on a continuous basis for our future deliveries. In December we arranged and closed financing facilities of USD 500 million covering both pre-delivery payment (PDP) financing, long-term financing supported by the Export-Import Bank of the United States (EXIM), and sale and leaseback arrangements. The facilities cover financing for aircraft deliveries during the current 2013 - 2015 financial planning time frame.
For 2013 long-term external financing of approximately NOK 1,500 million of the NOK 2,200 million requirement was in place by year-end 2012. The net debt increase for 2013 is expected to be in the area of NOK 1,100 million, about half of the requirement due for the repayment of debt and off-balance sheet sale and leaseback transactions.
The past ten years have certainly been very exciting. Norwegian has gone from being a small regional airline with a relatively high cost structure to become a major European player at the primary airports with one of the sharpest cost structures.
A prerequisite for future growth is a continued ride down the cost curve. We believe that is an achievable goal with the most efficient fleet available and expansion taking place on a level playing field with our future competitors.
Bjørn Kjos // CEO