Norwegian Air's shares in tailspin as its costs soar
Norwegian Air has reported a slump in earnings and said the outlook for both growth and costs was worse than had previously been expected.
Shares in Europe's third-largest budget airline, behind Ryanair and EasyJet, dropped as much as 11pc to their lowest since October 2014, taking this year's losses to 34pc.
The company has recently launched low-cost transatlantic flights from Dublin, Cork, Belfast and Shannon.
This strategy of taking on more established flag carriers comes with a number of risks, such as buying or leasing larger, more expensive planes, and its plan has been hit by rising costs in recent months.
The airline said its second-quarter adjusted operating profit before leasing and depreciation dropped 21pc to 1.19 billion crowns (€126m), well below the average forecast in a Reuters poll of 1.51 billion crowns (€160m).
"Light years behind expectations," Swedbank analyst Hans Ludvigsen, who has a "neutral" rating on the stock, wrote in a note to clients.
Norwegian Air also said it now expected available seat kilometres (ASK), a measure of capacity growth, to increase by 25pc in 2017, down from a previous estimate of 30pc.
At the same time, it raised its forecast for unit costs (CASK) to 0.42 crowns from a range of 0.39-0.40 previously. Norwegian Air, whose chief financial officer abruptly resigned after 15 years in the job last week, said the lower second-quarter results were due to significant additional costs for leasing aircraft.
"A larger share of leased aircraft in the fleet, and a larger share of 787 aircraft, led to increased unit costs," the company said, referring to its acquisition of more Boeing 787 Dreamliners.
Operating expenses jumped 45pc, driven by a 56pc increase in technical-maintenance costs, which it put down to changes in its fleet, rising engine service costs and a fall in the Norwegian crown against the US dollar.
Despite the cost problems, the airline said securing financing for new planes due to be delivered in 2018 would not be a problem. "Anyone who believes we can't pay for the aircraft will be disappointed," CEO Bjorn Kjos said.
It also said a new passenger tax levied on all commercial flights departing from Norwegian airports from June 2016 had affected its earnings.
"The climate for European airlines is probably the worst since the financial crisis. Brexit and terrorism, plus passenger fees in Norway, are making it difficult," said Karl-Johan Molnes at Norne Securities, which has a "sell" rating on the stock.
"However, the situation is particularly bad for Norwegian Air Shuttle because its unit costs numbers are also getting hit with increasing costs as pilot costs are rising when it needs 25 pilots for each new Dreamliner," he said. (Reuters)