A significant unit cost-reducing measure is large-scale operations and high asset utilization. Increasing size not only enables the Group to exploit economies of scale, but also increases bargaining power and the potential for bulk discounts from external parties such as handling agents, maintenance providers and aircraft manufacturers. The low-cost model promotes increased capacity per aircraft and high load factors which reduce both fixed and variable unit costs.
The Group has made large investments in advanced IT infrastructure which makes operations highly automated and reduces unit cost.
Cost per available seat kilometer is an industry-wide cost level indicator often referred to as “CASK”. CASK is usually represented as operating expenses before depreciation and amortization (EBITDA level) over produced seat kilometers (ASK), also known as cash operating cost.
The continuous cost focus has resulted in a lower unit cost. In 2012 the operating cost per ASK (CASK/ unit cost) was down two percent to NOK 0.45 (NOK 0.46 in 2011). The unit cost excluding fuel decreased four percent to NOK 0.31 (NOK 0.32 in 2011).
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).
For the above reason CASK excludes losses and gains from “other losses/ (gains)” to better reflect the actual cost development.
A large share of the Group´s costs is driven by fixed or interval-fixed production costs. Major cost drivers include leasing, fleet insurance, cabin crew and, increasingly, depreciation as the Group owns a constantly larger share of its fleet. The Group emphasizes increased utilization of crew and assets in order to reduce the share of fixed operating costs as much as possible.
An important element in the Group´s cost strategy is to focus on a uniform fleet of Boeing 737 aircraft. At the end of 2012 the Group had 68 such aircraft; 58 of these were 737-800’s. A uniform aircraft fleet results in lower costs due to less complex maintenance operations, lower crew training costs, reduced need for spares inventory, reduced variation in the type of tools, equipment and infrastructure needed, and a more streamlined and focused administration. The Group utilized every operational aircraft on average 10.9 hours per day (block hours) during the year, compared to 11.0 hours in 2011.
Staff Utilization and Efficiency
One of the largest single cost components of the Group is personnel costs. The Group is therefore focused on effective staff utilization and high efficiency. Optimization is to a large extent dependent on route- and crew-planning efforts as well as employee union agreements. Optimization is done well within the boundaries set forth by legislation applicable to civil aviation both within Norway and in Europe in general.
Efficiency can be measured either as the number of passengers per employee or the number of block hours per employee. There is evidence of a positive correlation between the number of passengers per employee and profitability. Staff utilization and efficiency levels are affected by growth which makes newly-hired employees inoperative for training purposes.
Assuming a constant average sector length, the Group expects an increase in staff efficiency along with the introduction of new aircraft and an increasing scale of operation. With increasing stage length, the number of rotations and therefore number of passengers is reduced in relative terms. This influences the efficiency ratio negatively without affecting profitability. Decreasing stage length has the opposite effect. The average stage length increased by 4 % to 1,048 kilometers in 2012.
In 2012 Norwegian transported 6 358 passengers per full-time employee which is an increase of 1 %. When measured by distance weighted passenger volume (Revenue Passenger Kilometers (RPK)) there was an increase of 5 % to 7.5 million RPKs per employee.
Adding international bases across Europe not only allows Norwegian to tap into new markets, be they provincial markets in the Nordic countries or entirely new markets such as the Mediterranean routes from London Gatwick. It also provides Norwegian with the edge with regards to cost in order to compete with the most cost-efficient airlines. To To remain competitive also outside Scandinavia, expansion into new markets must be on a level playing field with incumbent airlines. Recruitment for new bases takes place locally, offering competitive local conditions.
Variable Operating Costs
Frequency-Based Variable Operating Costs
Frequency-based aircraft operating costs, such as take-off fees, de-icing, maintenance* and ground handling are significantly reduced per ASK when stage length is increased. A longer stage length implies a lower unit cost as the same frequency-based cost base is divided over more ASKs.
Time-Based Variable Operating Costs
Typical time-based operating costs such as fuel and maintenance* also tend to be reduced per ASK with increasing stage length, however, not to the same extent as frequency-based operating costs. The reason for the reduction is particularly due to the fact that take-offs are fuel intensive, driving up fuel cost per ASK for short flights and increasing fuel efficiency for flights with a longer cruise distance.
Apart from increased stage length, bulk discounts, and bargaining power as identified above, new equipment is the most obvious cost-reducing measure. New equipment significantly reduces maintenance costs, fees at airports with a differentiated fee model based on emissions, and, most notably, fuel costs.
* Maintenance costs are in part frequency based and in part time based, depending on the aircraft component in question.
Overheads are to a large extent attributable to the administration. The Group makes widespread use of information technology in order to increase efficiency through automation and reduce the need for manpower and administration. Economies of scale drives down overhead cost per unit produced (ASK).
The airline industry is inherently affected by seasonal fluctuations. These variations are driven by demand, but significantly affect the cost base as production is adjusted to demand during the course of the year. During the seasonally weak winter months production typically drops as demand slows. The unit cost is higher during these months as utilization is lower and interval-fixed and overhead costs cannot be scaled down. To reduce these effects, heavy maintenance is planned for the slower months when possible.
External Cost Drivers
The most significant external cost drivers are fuel prices and foreign exchange rates. In 2012 the average spot price for Jet-A1 fuel increased by 2 percent compared to 2011 price levels. High fuel prices have a milder impact on low-cost airlines than legacy carriers due to higher passenger capacity on each aircraft and higher load factors. Norwegian is also replacing less efficient Boeing 737-300 aircraft with state-of-the-art Boeing 737-800 aircraft. The new aircraft reduce unit fuel consumption by around 20-25 percent compared to the 737-300 fleet. By year-end Norwegian had 58 Boeing 737-800 and 10 Boeing 737-300 in the fleet. The unit fuel consumption is down 3 percent from last year.
The most significant items in terms of foreign exchange exposure are aircraft leasing expenses, fuel expenses, technical maintenance expenses, air navigation fees, landing fees and handling charges.