Broken business models?

victoria@aviationnews-online.com
By victoria@aviationnews-online.com April 25, 2019 13:13

Broken business models?

Jet Airways has gone under — does that mean we all start running around panicking about 737s, A330s and ATRs coming onto the market? The short answer is no. The lessors that have their ex-Jet equipment stuck in India and are not able to put the same straight into Spice or the like should be worried, very worried, and I am sure we all wish those lessors the best of luck. But back to the point of aircraft coming onto the market: everyone wants a 737 at the moment so no problem there; the ATRs will find homes at speed (ATR will ensure that happens); but the A330s is another matter — those aircraft, although still sought after, may be harder to place on long-term lessees right away.

Meanwhile, Norwegian reported its first quarter results today: Q1 2019 revenue was up 14% year on year at NOK 8 billion, an increase of 14%. Passenger growth was 9% up year on year while load factor was at 81%. Unit cost excluding fuel, fell by 8% year on year while utilisation was static at 98.7%. 

Those numbers are not terrible by any means: utilisation is good, but load factors for a low-cost carrier are on the low side with 80% being the traditional baseline. All this lead to a posted loss for Q1 2019 of NOK1,489m (US$171.4m).

If an airline running at 81% load factor with utilisation at 97.8% while reducing costs at an impressive rate, is still making a loss of $171m for the quarter with a stressed financial situation then the business model must be broken. I last saw figures like this with high utilisation and decent load factors at Kingfisher where it too was just not able to charge the fares required to stop red ink from flowing through the books. Far from the those figures being good, they highlight the problems.

Norwegian investors were spooked when management sold down their shares after promising not to and another round of fund raising will not be an easy task, but carry on like this and the airline will require a further cash injection. I am astounded that Norwegian is continuing to run a full schedule. The punctuality is very impressive and the management team at the airline is obviously at the top of their game, but why has the airline not paired back heavily to concentrate on core routes? From what I can see, forward bookings are open and running and frequency has not been cut back heavily. Of course, this strategy is a double edged sword as Jet found out – cutting frequencies and route maps on forward bookings and near term cashflow is cut, which for a company with cash problems anyway, will force a resolution at an even faster rate. I wonder if Norwegian has looked at the cash situation and seen this very same warning. It is a catch-22 situation. The airline should be using the Boeing shambles to throw aircraft on order back at them. With regard to the MAX and 787 problems, Boeing will likely have agreed to stump-up cash or other incentives (I wonder if their deal will ever match that gained by LOT or Virgin).  For Norwegian, operating older aircraft to continue schedules did not seem to harm the brand but running older aircraft across the Atlantic certainly did not enhance its reputation. Indeed, opting for Boeing over Airbus aircraft, may well have been the undoing of Norwegian in so many ways. Low-cost transatlantic flight just does not work – look at WOW air – because there are already low-cost transatlantic flights every 30 minutes from OneWorld, SkyTeam and Star Alliance.

Investors should take note of one highlighting fact: If low-cost transatlantic flights could work well then the cash-rich, lean mean money machine that is Ryanair would have done so already using Dublin as a hub. That airline could not make the numbers work; only IAG with Aer Lingus via Manchester and BA with American and a myriad of codeshares have made it work. But this is where it gets interesting – If Norwegian does continue then how long will they survive once JetBlue enters the market? The JetBlue model is very well suited to extending across the Atlantic, so long as it is able to keep its JV arrangements with Etihad and Emirates intact as JetBlue will act as the conduit for repairing the Etihad/Emirates schedule frequency gaps to the USA. That is a real win/win for JetBlue and Emirates/Etihad and I would (If I were allowed) certainly throw my money behind a successful JetBlue venture so long as unions do not come in and ruin the party. The JetBlue business model is not so much low-cost, it is hybrid; the low costs start and finish with the business structure and not the passenger experience, for the most part.

victoria@aviationnews-online.com
By victoria@aviationnews-online.com April 25, 2019 13:13