Norwegian Air Shuttle ASA

Bjorn Kjos – Chief Executive Officer, President and MD Geir Karlsen – Chief Financial Officer

Preben Rasch-Olsen – Carnegie Kenneth Sivertsen – Pareto

Good morning, everybody. Welcome to the first quarter presentation.

As you can see we have successfully completed the private placement of NOK 1.3 billion. This year we added two engines, 800.

Our last engine order of 100 and we also put six Dreamliners into operation. A new first quarter, is course, the interline agreement with Widerøe.

As we have told before, Norwegian Air Argentina received an operating license first quarter. And we had EBITDA loss of 1,850 million compared to 1,233 million last year.

Of course, this quarter have been a quarter with very high growth. But despite of the high growth, over 36%, you see our RPK has increased to 37% and so we have been able to keep a good and stable load throughout also the last 12 months.

Look at the first quarter number of passenger. First quarter 7.5 million, up with 12%.

And on a yearly basis, we are now flying 34 million passengers. Looking at where do we fly those passengers.

We have a continued high growth at actually all key airports. Oslo, we increased close to 1.2 million passengers.

We have a market share of 43%, of course, the biggest operator at Oslo Airport. But we have grown the numbers all over as you see and especially also in Spain.

Where do our passengers come from and where the revenue generates? Actually 56% of revenues are generated outside the Nordics.

The growth, however, of course, coming from all sectors and Nordics is still very strong, 14% revenue growth in the Nordics. But if you see the most significant growth is actually U.S.

U.S. is now our biggest territory, next the biggest territory after Norway, 15%, the same as Spain.

And this is on a 12 month rolling basis. So we have definitely been able to attract the American passengers on our wide-body operation.

And what comes out of all this passengers flying in and out of Europe? Well, Menon have made report on this and Norwegian passengers contribute to creating 40,000 new jobs, so in Scandinavia.

And of course, these jobs are created on all the sectors and all where they actually either transport or accommodate or serve these passengers. So it's a huge number of jobs that we create.

Today, we have a network of 60 intercontinental routes. So we more or less are now actually set on U.S.

with the most of the destination. You would not see any, much more destinations coming out of U.S.

But you will, obviously see what's happening next that we are going to actually adding more and more frequencies on these routes. Some of these routes will, of course, will be seasonal in way they're taken up or as we lead them in winter season and users see newer destinations coming up in the winter season and then going back on into the summer season.

But majority of these routes will, obviously be flown year round. We added 25 new aircraft in operation, we will add 25 new aircraft in operation in 2018.

We will also redeliver some of the oldest airplanes that we took initially on lease. Four will go back this year and this is beside, as we'll calculate we have always have had a strategy of divesting old aircrafts that we will not use in the future or that's older aircraft.

So the fleet, by the end of this year, will be over 165 aircrafts. The majority of growth this year will, of course, be on the long-haul.

But by the summer, we will have set most of our capacity. Yes, financials and Geir, you're welcome to present the financials.

Thank you. If we start with the profit and loss, when we go back to March and we guided on the top line of NOK 7.1 billion.

We are slightly below that now. So we are at NOK 7 billion on the top line.

We also guided on NOK 2.6 billion loss on the EBIT. And if you adjust for this ownership in Bank Norwegian of NOK 1.9 billion, you will see that we are approximately NOK 100 million better than what we guided on EBIT as such.

I'll come back to the details on it. Ancillary is NOK 1.2 billion now and we are seeing a quite good growth in an Ancillary income.

Leasing expenses NOK 1 billion. As for today we have 83 aircrafts leased.

That consist approximately of 53%, 54% of the fleet when you just count aircrafts. We have other gains and losses of NOK 40 million loss.

We have a fuel hedge profit of approximately NOK 72 million. We have a slight loss on the TRSs due to the fact that the share price in Bank Norwegian has gone from – I think, it NOK 80 now NOK 92 to NOK 88.

It's now up again. But then we have these adjustments, as I will call it on the Bank Norwegian ownership.

It's included in the net financial items. And going forward, as a gain NOK 1.9 billion and going forward, the development in that ownership will only be taken directly into the balance sheet.

So, you will not see any effect on the change in that ownership going forward, except the TRSs which would still stay in the P&L. Takes us down to EBITDA of NOK 515 million and to our net loss of NOK 46 million.

Looking at the income side, we have the RASK down 1%. Adjusted for currency it's unchanged.

Flying distance compared to last, let's say the first quarter last year, up 17%. Ancillary revenue, as I said, nice increase, now NOK 1.2 billion.

And cargo revenue is now NOK 162 million for the quarter. Unit costs.

Unit cost compared to the same quarter last year is down 5%. We are helped by the currency, especially the U.S.

dollar, so constant currency its 3% down. If we include fuel, and as you all know the fuel prices has gone up quite a lot during the quarter.

So, including fuel, we are 2% down and we are 2% up if you adjust for that currency. Just to comment on the few items on the cost side.

As you can see it's mainly the fuel that is increasing and the spot price has gone up 26% and the spot price now these days are close to $700. Forward curve, though, looks as it is going to come slightly down.

We have lower personnel costs. That is due to the fact that the growth pace is now reducing and we do expect that that will continue to go down.

Leasing costs is going up due to the fact that we have more aircraft leased. In the quarter, we have NOK 26 million of wet lease accounted for.

Leasing would also have to be seen in combination with depreciation, which is falling, and again, it's due to the fact that we have more leased aircrafts on average as part of the fleet. Balance sheet.

We have prepayment aircraft of NOK 6.2 billion divided into approximately 70% to Boeing, 30% to Airbus. We have investments of NOK 3.2 billion, NOK 2.7 billion of that is Bank Norwegian and we have approximately NOK 500 million of market-to-market gain on our fuel hedges.

Takes us down to NOK 3.2 billion in cash by the end of the quarter. This includes Tranche 1 or the equity raise we did in March, so it's NOK 450 million included and that means that the NOK 850 million in Tranche 2 will come in Q2 as well as NOK 200 million in repair equity raise that we are planning to do late May.

So from the equity raise, we have a little bit above NOK 1 billion coming into the balance sheet. On the other side of the balance, yes, you can see that air traffic settlement is now NOK 10.9 billion, which reflects kind of the bookings for the months to come.

Cash flow. Purchase, proceeds, meaning what we are paid to Boeing and Airbus is NOK 3.6 billion.

It's pretty much 50-50 divided into aircraft that we have taken delivery of and aircraft that we will take delivery of going forward. Financing cost looks a little bit high of NOK 400 million.

Approximately half of it is just pure interest cost and half of it is related to the guarantee premiums we are paying when we raise new debt and where we are paying it upfront on day 1. This is taken into the balance sheet and it's going to amortized over the life of the lease.

And as mentioned, we have NOK 450 million of the cash from the equity raise included in the balance sheet. If you look at cash and cash equivalent at end of period NOK 3.2 billion, as I said NOK 1 billion will come in from the equity raise and from the PDP financing that we released news about during the quarter, we also expect in the area of $112 million that will come in as a cash contribution during the next couple of months.

So in total, we are expecting NOK 2 billion approximately to come in to the balance sheet during the next quarter. This is kind of little bit old news now.

But Tranche 2 was kind of decided earlier this month and we are planning to do NOK 200 million raise late in May. CapEx for 2018, it's approximately $1.9 billion in CapEx, and $2.6 billion in 2019.

This doesn't include any sale of aircraft or any divestment of aircraft. As we are saying in the press release, we are in many processes where we are evaluating to divest or to take aircrafts or commitments, obligations out of our balance sheet and into potential leasing structure.

I'm sure we can share more news on that later in the quarter hopefully. PDP financing.

As you know, we did PDP financing with BOCA on the 787s earlier this year and that will cover the PDP payments for the Dreamliners until the end of 2019. We also did a tap on the bond and we still have NOK 300 million undrawn on the credit facility.

Long-term financing. We did the UKEF and JOLCO financing on the two 787s.

We closed two sale/leasebacks and we are in the process, I would say, to close the financing on the two next MAXs coming in now during the next couple of months. That will be done with an AFIC and the guarantee and I will see it is very attractive cost of capital between 2% and 3% all in.

Going forward, we will not do any more leases, at least not the traditional operating leases or at least that's not the preferred way to go. We will focus on ECAs, supported facilities where we have a very low cost of capital.

In case, we will do other type of financing or other type of leasing structures, as such, we will do it only with very attractive cost of capital. We will do it with longer repayment profiles and with some extent of optionality with regards either being able to refinance or to take them out as a whole.

Shortly on outlook. Bookings, except April, we are above last year on the coming months.

So as such it looks good. The markets, I would say the European market shortfall is very good with extensive growth we have on long-haul and wide-bodies.

We also find bookings on that side of the business acceptable. We guided on ASK in March, that's unchanged.

As for today, on fuel hedging, we have hedged 27% for 2018 at $500 a ton and just a minor portion of 2019 as per today. On cost guiding, it's also unchanged.

What we have done here compared to what we did in March, we have taken up the fuel price slightly, so that's a negative as such. But then we have a little bit of help on the currency on euros and dollars, but we're still maintaining the guiding.

I mean, obviously, going forward it will be a tremendous focus on the cost side of the business. And we hope to share good news on that side during the next two, three quarters.

With that, Bjorn?

Thank you. So we have this subsequent offering to existing shareholders, so NOK 200 million, of course, is very attractive for those shareholders that participated when they did it.

We have a lot of focus as we speak on the cost initiatives and I will be very disappointed, if we cannot reach a much better goal than what we have actually told today, the initiatives we are implementing, as we speak. And we are reviewing strategic opportunities for Norwegian Reward, especially, of course, we have set it up as an own entity and it's a huge value over in Norwegian Reward.

So we have to see what we are doing with that value. If you remember the numbers from NOK 700 to NOK 1,000 per, say, reward member, as a normally going rates.

Certainly this year we'll be close to nine million members, so you can imagine it's a lot of opportunities or lot of strategic opportunities in that company. Yes, we are in the process of divesting up to 140 aircrafts and this has been the strategy all along.

We will only fly new aircrafts. We will divest older aircraft and we will also divest the aircrafts that we are not going to use in the future.

Like we have started with Hong Kong Express. But, again now when we get the delivery at times out of Airbus also we will, of course, part of that together with Boeing aircrafts will be divested into either leasing company set by ourself or together with others, highly likely to be together with others.

We have, of course, approached – being approached actually by several interesting parties, so it's highly likely that you will see it being divested in the near future. You we will not – whether it will be up to 140, we haven't decided that upon, that's what the investors are actually offering.

So it would be our replacement of older aircraft, and yes, it will be a spin-off excess aircraft into our leasing structure. And the last things, that's up on the agenda today, IAG's acquisition of Norwegian shares.

As we have said, we are happy to have IAG as an investor. Needless to say, he is not the only actually interesting parties that have approached us.

We have – especially after that has become known, we have had several inquiries following IAG and we treat them as a very, very professional and very, very serious interesting parties. We have established a Steering Committee and hired financial and legal advisers to review the situation and as you say handle relevant inquiries and safeguard the interests of all the shareholders.

I'm only one of the shareholders so obviously, I'm not the one to decide what's going to happen in the future. This is the common interest of the shareholders that we have to take care of.

So that is Norwegian as we see it today. Going forward, as I told you, you will see that we are probably – I think we are the largest operator on most routes over the Transatlantic.

So it's needless to say we have 50% of passengers move on Norwegian airplanes. So we fly huge amount of passengers in and out of U.S.

and also starting Buenos Aires. I think it's very successful.

So we're starting this going forward now you will see us – you will see us setting up many, many more frequencies on the existing routes and we have just started on South America that seems very, very interesting. So that's from me.

Thank you.

Preben Rasch-Olsen, Carnegie. Two questions.

First on the revenues, seems a bit low considering the very high growth in cargo. Has anything changed in that part of the revenue?

Yes, we might add on to this guide. But first of all our cargo is actually going lot better than we had anticipated – lot better.

Yes, it's – you will see a huge growth on the cargo revenues.

I think the main explanation is the fact that [indiscernible].

And then to the Slide number 9, where you show the number of airlines in 2019 and 2020, is this how it will look if you start divesting airplanes or will there be changes to this outlook if you do divest some airplanes?

I can say that we have not – had been our agenda to fly with 225 aircraft in 2020. It's always been our intention to do divest some of the aircrafts.

And when we divested today it might be that some of them will be leased back to Norwegian – especially if we divest up to 140 aircrafts. But that is discussion that's going on with the different investors.

I don't know if you want to add something to that, Geir.

No. I mean, this one includes everything as we know, so in case we divest or when we divest or spin off, it will look different.

Kenneth Sivertsen from Pareto. Yes, if you look at their 140 aircrafts.

I guess you have mentioned previously the Airbus, you are looking to do transaction and also the older Boeing 787 engines. I guess, anyway you have a tremendous flexibility for the next three to four years in terms of capacity growth.

That's my first question. So if you could elaborate around that.

Secondly, with the fuel price you are lifting the total fuel cost, but I guess also that you have a fairly new aircraft fleet. How is the value – has you seen any changes for new aircraft over the last year-to-date or something?

And also, I guess, people – new aircraft 15% lower fuel burn, it has to do something with the demand side there. And thirdly, my last question is, you had a pre-booking around NOK 11 billion.

So how do you see this playing out in the ticket prices? Normally, I think that fuel price increases normally tend to end up at consumers, so I guess this is the same time this time?

Well, just to start with the first question of divesting our aircraft. So remember that in the next three years we will have around 70 aircraft – between 70 and 80 aircraft, I haven't exact number coming in.

So we're divesting 140. It's not that many we have to divest and use later on.

So it is the strategy, coming in divesting out. So it's obviously we can divest a lot of aircraft, including the Boeing, the Airbus, older if we are not going to fly, we are highly likely going to fly at least 30 of the Airbus older, but still it's 70 aircraft that can be the divested into such a company.

Some of them might – we might use some of them. And so it's actually no problem.

We will still have a normal growth on the short-haul. I know I'm talking about the short-haul.

It's unlikely that we will divest wide-body. The second question about the value of the aircrafts, needless to say there is a shortage of narrowbodies today.

So the prices are keeping up very well. And that you will see in the next two years, not at least will all the engine problems that's popping up – that popped up for the last two years.

So it will be actually a shortage of aircrafts. So we have a lot of interesting parties.

And of course, we have deliveries in years where the big airlines always have deliveries because they come after – all this after the aircraft the airlines. So we have very attractive delivery positions.

Besides so also the engine is keeping up very well in value. And the third question, what about the prices.

We have affordable fares for everybody, of course. But needless to say with the fuel prices coming up to more than $70, it's unlikely, I would say, that you can be profitable on some of the aircraft flying out there with the four engines.

And if you think about it, just one trip over the Atlantic, the difference in the fuel burn from a Dreamliner to some of the four engine aircraft, it's the same – the difference is the same as they consume over 50 cars in a year – 50 cars in a year. So you can see is it possible to earn money with such high fuel burn.

And then you can – that is – you can think about it for yourself that it's around – up to 8 tonnes different an hour. So you have around 30 tonnes difference only in one trip.

So how can you earn money on all the aircraft with such high oil prices on these fares today. You cannot.

You have to raise the fares. And most of – as you've seen most of the airlines, they have old cash to say drive straight up.

They shouldn't be allowed to fly with them. So that's my meaning.

No, we will not increase the leasing of aircraft. So as I said, we have 206 aircraft coming in.

So even if we have divested 140 it's still huge craft for us.

It's difficult to say, I would say, because it depends on how much we divest.

Exactly that's difficult to say.

But it definite – it should definitely be lower.

But will definitely be lower than the figures that we showed here.

We have very good bookings, as we have always said, except for the Easter and it's not coming this time in the April, but after April. It looks very good, very strong bookings going forward.

They are compared and adjusted for the capacity. This is always capacity adjusted.

Because where we go in – very high frequency. The more frequencies you add on, the more profitable it will be.

Needless to say, we will have 12 Dreamliners in London this summer – from the summer on and needless to say with high frequencies, you will see us adding more and more frequencies on the existing route. Then the yield will come up, that's always – that's what we always see.

We are low flying twice daily between London and New York. We could easily fly three and four.

Into Nordics, you have to remember that in the long-haul from Nordics is a very strong market. It's a small market, a slightly less than the London itself – big London.

So the Nordic market is not a huge market. The huge market are out of Paris, out of London, to some extent out of Barcelona, Madrid and Rome, except for, of course, parts of Germany.

But it's not the Nordics. That's a fairly – it's a very strong market and we should never underestimate it.

But it's a small market. We're only – we are not that many people living here.

Well, if you look at the traffic in the – if you look at the other side of the balance sheet and – but it reflects that there are higher bookings that it has taken during this quarter and over the next months to come and for the summer. We all know we are going into a period now which would usually is best quarters and so the trend just reflects that the bookings have – are looking good for the summer really, which will also then increase the receivables.

Yes, of course, everybody is affected by the problems that the new entrants have. So – but, I'll also say that, we are not the ones that are building the engines and we are not the ones for building new airplanes, so why should we pay for it.

It's normal that if you sell a car – a new car and something problem, you have to fix it. It's not for the owner to fix it.

So this have to be the same in the airline industry as well. And yes, we will see – we will need direct leases for a certain time period.

The time period it takes to change and to do the inspections of the engines, because this is a lot of inspections. This is not on our new Dash 9s and with Dash 10 engines is not affected.

It's some of the older probably what we call taxi engines that are affected.

[Indiscernible] I just wonder, something I'm not sure if you mentioned it. But the plane passenger tax, [indiscernible] just a quick calculation tells me that you should have got like NOK 600 million from the tax.

Where is that in the figures here? And I also wonder if there is now talks of changing that tax into smaller amounts and shorter routes and higher amounts and longer routes differentiated and what would that mean for your traffic and what's your view upon that?

I can answer the last question and I can answer the first question. I can also last question first.

Obviously, needless to say we fly – we create 40,000 jobs. It's a huge.

We have 50% Americans on board. Obviously, that higher taxes will affect it, because then it will be a more expensive to fly into Oslo.

So people who find to other places in Europe – that is the plan. So the jobs will be created elsewhere that.

That is the simple answer to it.

And on the first part of the question, this is netted off. It will fly through the balance sheet, but we receive it in and then we just pay it out, so it doesn't really show in the books.

And do you have any idea how much...

NOK 600 million...

We haven't disclosed the numbers, so we haven't disclosed the figures. But it's – it by the end of the year like in Sweden it's a huge figure.

It will obviously affect jobs and people flying into Sweden. Needless to say, and they closed off – you should remember they closed off Rega.

We will...

We will do it after – we will do it one on one. So you will have time with that.

Okay. Thank you.