Monday, April 02, 2012

Norwegian Air to Lease Planes as Fleet Expands

The Wall Street Journal

STOCKHOLM—Norwegian Air Shuttle ASA, the budget carrier that surprised the industry with Europe's biggest order for passenger jets this year, intends to enter the aircraft-leasing market as part of plans to fly the most fuel-efficient fleet possible to meet growing demand for cheaper travel.

"To sell-off aircraft is a new activity for us and if we want to sublease our own aircraft that will be a new activity as well," Chief Financial Officer Frode Foss said in a recent interview. "We have to look at how to structure that in a good way."

The Oslo-based airline, Europe's third-largest budget carrier by passengers, operates 63 Boeing Co. BA +1.08% jetliners, a mixture of 737-800s and 737-300s, having started out in 2002 with a fleet of just seven aircraft.

In January, it ordered 222 aircraft from Boeing and Airbus, worth 127 billion Norwegian kroner ($21.54 billion) at list price, adding to an existing order for 63 aircraft from Boeing. The latest order calls for deliveries from 2016 through 2022.

The size of that order raised eyebrows. Norwegian, a young airline with a market capitalization of 3.7 billion kroner, is operating in tough conditions that have laid low much of Europe's airline industry in the past year. As fuel prices have soared amid slack European growth, several smaller airlines like Hungary's Malev and Spain's Spanair have gone out of business while the region's flag carriers, including Norwegian's rivals SAS AB and Finnair Oyj are stepping up wide-ranging cost-cutting plans after heavy losses in 2011.

But as Europe's leading budget airlines Ryanair Holdings PLC and easyJet PLC have shown, airlines with low cost bases are well placed to take market share from less efficient rivals as underlying demand for air travel continues to grow steadily. Norwegian flew 15.7 million passengers last year, up 20% from 2010. In comparison, Ryanair flew 76.4 million passengers in 2011, up 5.1 % from the year before, while easyJet flew 55.5 million passenger, up 12%.

Mr. Foss says Norwegian—with more aircraft on order than SAS has in its entire fleet—is focused squarely on running the most efficient fleet it can. He expects Norwegian Air's fleet will reach about 100 aircraft in a few years as the company takes aircraft out of operation after seven to eight years, selling or leasing them to other airlines as part of its fleet-renewal and financing plans.

"It is important to remember that the fleet we are taking in today, which we will sell at a later time, are the most fuel-efficient aircraft there are today and that they will still be very attractive on the market in four, five or six years' time," he said.

Mr. Foss already plans to renew the existing Boeing order for 63 aircraft made back in 2007, "which in 2016-18 will already be old and less fuel-efficient."

Norwegian's fuel bill rose 48% to 3.06 billion kroner in 2011, making up 34% of its operating costs, ahead of SAS's fuel bill which amounted to 23% of total operating expenses that year, reflecting how much more sensitive leaner budget carriers are to fuel prices that other airlines carrying with higher non-fuel overheads.

In the giant order placed in January, Norwegian signed up for 22 737-800s, which Boeing says burn 20% less fuel than the predecessor 737-300 model the airline is phasing out. Norwegian wants to replace the 737-800s in turn with the next generation 737 MAX which comes into service around 2017, ordering 100 and hoping to save another 10% to 12% in fuel costs. Norwegian also ordered 100 A320neo jetliners from Airbus, the aircraft-making unit of European Aeronautic Space & Defence Co., a version of the existing A320 that is 15% more fuel efficient.

The company won't have to secure funding from banks until 2015 when down-payments for the new order are due. Norwegian is likely to have loan guarantees from export credit agencies in the U.S. and Europe.

"Of course, part of this will be financed with retained earnings, but how much that will fit into each category is something we'll have to look at when we get closer to delivery as markets might have changed," Mr. Foss said.

He said there is no shortage of funding available for an airline like Norwegian but finding suitably attractive terms remains a challenge.

"I would not say financing is easy, but the company is in a good spot to attract reasonably priced financing. Of course, banks are out there also, according to my experience, eager to tie up relations with us because of our track record."

Norwegian last Friday refinanced part of its debt, redeeming old bonds and issuing new ones worth 600 million kroner with a coupon of 5.50% over the Norwegian interbank borrowed rate, compared with 5.75% for the redeemed bonds.

Norwegian's fleet expansion is similar to the earlier path of Ryanair and easyJet, said Kenneth Sivertsen, an analyst at Arctic Securities ASA, which helped arrange Friday's bond issue. Norwegian's total investment for its outstanding orders for 277 planes is about $12.2 billion to be paid over 10 years, of which $1.8 billion is expected to be equity, according to Arctic Securities' calculations.

"It is always a challenge to get the best possible deal, but to secure funding will not be a problem," Mr. Sivertsen said.

Norwegian in February said earnings before interest, taxes, depreciation, and amortization rose 79% to 709.9 million kroner in 2011 though net profit fell 29% on a sharp rise in interest charges. Net debt rose to 3.1 billion kroner at Dec. 31 from 1.3 billion kroner a year earlier.

The company's shares, which traded up 4% at 112 on Monday, have nearly doubled in value this year.

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