Norwegian Air Shares Surge On Airbus Fleet Deal, Earnings Top Forecast
Shares in Norwegian Air surged more than 20% on Thursday October 24 after it said that China's CCB Leasing will come in as a joint owner of 27 Airbus aircraft it has on order to help cut debt and reported earnings above expectations.
The carrier, which has shaken up the long-haul market with cut-price transatlantic fares, also announced a two-year plan of fresh cost cuts and capacity reductions to help earnings, after its rapid expansion had led to hefty losses.
For months, the cash-strapped carrier has said that it aims to find a partner to help take ownership of the Airbus fleet, allowing Norwegian to cut its debt and increase its equity.
CCB Leasing Corp DAC (CCBLI), a wholly owned subsidiary of China Construction Bank Corp, will own 70% of the venture, with the rest held by Norwegian Air's Arctic Aviation.
The venture will purchase an initial 27 Airbus A320 NEO aircraft from Arctic to be delivered from 2020 to 2023.
"This agreement will contribute significantly to reducing our current and future capital expenditure," acting Norwegian Air CEO Geir Karlsen said in a statement.
The company said that the venture would reduce Norwegian's capital expenditure by approximately $1.5 billion, based on the 27 aircraft on order.
Norwegian Air's net profit for the third-quarter came in at 1.67 billion crowns ($183 million), beating the average analyst forecast in a Refinitiv poll for a profit of 1.47 billion crowns and up from a profit of 1.30 billion crowns a year ago.
"Pulling Out All The Stops"
"This company is pulling out all the stops to get better," analysts at Bernstein wrote in a research note, adding that Norwegian should profit from each aircraft sold to the venture.
"With a potential gain of up to $10 million per aircraft, it could remove some of the pressure on the equity covenant," they wrote.
Capital Expenditure Guidance
Norwegian cut its 2019 capital expenditure guidance by $200 million this year to $1.0 billion, while raising it by $100 million to $1.4 billion for next year.
Prioritising Profits Over Growth
Norwegian, which was forced to raise cash from shareholders and postpone debt payments this year, has switched in 2019 to prioritising profits over growth. It said its 2019 cost cuts would save 2.3 billion crowns, more than its original 2 billion crowns target.
It also narrowed its 2019 guidance for earnings before interest, taxes, depreciation, amortisation, and restructuring (EBITDAR), excluding other losses or gains, to 6.1 billion-6.5 billion crowns from billion-7 billion crowns.
In its new plan of cost cuts, Norwegian said that it aims to improve its annual EBITDAR run-rate by another 4 billion crowns by the end of 2021.
The airline expects to offer 10% less capacity, known as available seat kilometres (ASK), as it cuts unprofitable routes.
Abandoned Profit Target
Norwegian abandoned a target this year of turning profitable in 2019, after the grounding of Boeing 737 MAX aircraft and technical problems with Rolls Royce engines on Boeing 787s.
Bondholders in September accepted Norwegian's request to postpone repayment of $380 million by up to two years, providing some financial relief.