JETS - Norwegian Air Shuttle Stock: A Turnaround Buy

Summary

• Norwegian Air Shuttle stock is most definitely not the best performing airline stock.
• The company, however, is working on a promising turnaround.
• The airline came through the low-demand winter quite well.
• For those interested in an airline investment turnaround with risk-appetite, Norwegian Air Shuttle might be interesting.

Norwegian Air Shuttle ( NWARF ) is one of the companies that seemed to have made its final journey during the pandemic. The pandemic could have pushed the company over the edge, but the reality was that the company was badly managed for years and it kept growing without creating economies of scale or as Ryanair’s CEO: If you have to sell aircraft to pay the fuel bill for your next flight, you don’t have a sustainable business.

So, the company grew and it failed to generate value while compounding debt. It actually reminds me a lot of Bombardier ( BDRAF ). Bombardier put itself in significant debt for the development of the C Series, but was never able to benefit but the company is thriving now. In some way, the pandemic was an unfortunate eyeopener for Norwegian Air Shuttle that it had to do things differently. In this report, I will analyze the full year results and comment on the stock performance.

Norwegian Air Shuttle Stock: Still An Underperformer

While I would like to say that Norwegian Air Shuttle is doing so well in the turnaround that it is a superior investment in the airline industry, that is not the case. In my previous report , I compared the stock to the broader market, the U.S. Global Jets ETF ( JETS ) as well as peers and it was the weakest performer of all. In our updated overview looking at the stock performance since November 2022, Norwegian Air Shuttle remains less desirable but it does outperform the markets as well as the Jets ETF. What that does tell you is that an appreciable turnaround does not necessarily make for a superior investment.

Seasonality Hits Results

The challenging part when assessing Norwegian Air Shuttle is the fact that year-over-year, we are comparing two different airlines and two different demand environments. So, while revenues went up from 5.1 NOK billion to 18.9 NOK billion, it really doesn’t tell us much and the same can be said about the EBITDAR or EBIT. They are significantly better year-over-year, but it reflects both the turnaround and a significantly better execution.

Even quarter-over-quarter, we don’t get a lot of information due to seasonality. The winter tends to be slow for Norwegian and the airline adjusts for that by cutting capacity. The company cut capacity 22% sequentially, but saw a sequential drop of 30% in revenues highlighting a weaker pricing environment for the winter. On cost basis, the business was impacted by a weak NOK. What I found mostly interesting is that Norwegian continuously has emphasized its power by the hour contracts which would allow the company to take out capacity without paying the leases for that. So, let’s have a look at that.

What I found is that the reduction in aircraft hours was around 20%, which was expected and is in line with the capacity reduction. The lease expense, however, did only decline by 9%. This was driven by lease expenses of 34 NOK million for wet leases. Unfortunately, for Q3 2022 Norwegian did not provide wet lease expenses, but if we take out the figure from the Q4 lease expense, we do see that the power-by-the-hour contracts are indeed helping Norwegian to reduce costs.

Norwegian Debt Reduction Leaves To Be Desired

What hurt Norwegian was growing without creating value and compounding the debt for that growth. With that in mind, what I would like to see is debt reduction. Reality is that I am not seeing that debt decreasing. In fact, it increased from 9.4 NOK billion to 10.1 NOK billion. Is that a problem? No, not really. If we exclude the aircraft financing and lease liabilities, the latter is required to be added to debt per accounting rules, we get to a debt of 3.4 billion NOK which is only 83.2 NOK million higher compared to last year while its cash position increased by 64.2 million NOK leading to a more or less stable net debt position excluding aircraft financing and leases. Moreover, with its cash position, the company can already cover its lease liabilities or its regular debt and the big difference between now and the growth-hungry Norwegian is that value is being created now. So, the company should be able to service its debt. What I would like to see is for the company to reduce its debt prematurely saving on interest costs.

Norwegian Air Shuttle Positions For The Future

With the financials not telling you much, the big question is what should you actually look for and what are the bright spots for the turnaround. One thing to look at is the CASK, which despite inflationary pressures is expected to come down by 5 to 10 percent in 2023. Furthermore, the company is putting in leased 737 MAX capacity to offset delivery delays from Boeing aircraft directly to Norwegian. Having that allows the company to track well on its targets. February numbers are also strong and New Year’s sales saw average fares 18% higher compared to 2020 and 23% higher compared to 2022.

Norwegian is not just focusing on the Nordic markets with beach destinations, but it has also significantly increased its corporate share of ticket revenues which increased 52% compared to 2019. So, that is also a big plus and Norwegian is increasing the benefits of its frequent flyer program with. That is a clear aim to bind customers and generate value in all directions and is something that we see becoming more and more important with airlines: the ability of offering customers rewards for returning business.

Conclusion: Norwegian Air Shuttle Stock, Not The Best, Still Good

Norwegian Air Shuttle stock most definitely has not been the best. There are better airlines to invest in, but if you want to remain diverse and have exposure to a business that is turning itself around, Norwegian Air Shuttle might be for you. The company has a strong liquidity position, something it previously did not have and its debt seems manageable. The company is also better able to generate value driven by a better approach towards costs, but also towards value generation for customers which should eventually help the company become more efficient as it grows and generate more value resulting in better shareholder returns.

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