BscB(IM) 6. Semester
Author: Ida Fosso Jacobsen Supervisor: Sudarshan Kumar Pillalamarri
A Financial and Strategic Analysis of
Norwegian Air Shuttle ASA
Department of Business Studies
Aarhus School of Business
03.05.2010
Abstract
The purpose of this thesis is to analyse Norwegian Air Shuttle ASA, and their economic performance with help from both a financial and a strategic analysis. Norwegian will be benchmarked against their largest competitors in the Norwegian and European market, being SAS Scandinavian Airlines and Cimber Sterling, in order to conclude on how Norwegian really is performing. The thesis will be based on public available information such as annual reports in period 2005-2009, and newspaper articles.
Norwegian is the largest low cost airline company in Scandinavia, and the fourth largest in Europe. They are operating to 85 destinations and 27 countries within Europe, Dubai and Marrakech. From 2008 to 2009, Norwegian had a growth of 18% in passenger number which caused an increase of 17.4% in their revenues. This is investigated further in the financial analysis where Norwegian`s income statement, balance sheet, cash flow statement and key ratio calculations are being analysed with the purpose of examining their economic performance and to see if Norwegian has any liquidity problems. The fact that Norwegian in November 2009 issued shares giving them about 250 million in new capital, and the major investor HBK Holding (the owner is Norwegian`s CEO) sold some of their shares in the same period, caused concerns around their financial situation. Especially, since Norwegian is scheduled to receive 70 newly purchased and leased airplanes during 2008-2014. This is a step towards them meeting their goal to further decrease their unit costs that will enable them to continue to offer low prices, and still generate a profit. Both ROIC and Asset Turnover show that Norwegian could be more effective in utilizing its assets, and the liquidity analysis shows that Norwegian have problems paying both their current and non-current obligations, taxes and interest rates.
The strategic analysis focuses on external factors that influence the airline industry such as oil price and exchange rate. Both of these factors have fluctuated significantly over the last years, not in a beneficial way. A higher oil price increases unit costs, as fuel is one of the major costs in the budget, whereas a stronger dollar would not benefit as most of the suppliers trade in this currency. It is also focused on the fierce competition within the airline industry, which is why having as low unit costs as possible is important in order to be able to generate a profit.
Based on the financial and strategic analysis it can be concluded that Norwegian is a better investment possibility than their major competitors SAS and Cimber Sterling.
Table of contents
1: Introduction 5
1.1: Problem statement 5
1.2: Limitations 6
1.3: Structure 6
1.4 About Norwegian Air Shuttle ASA 7
2: Financial Statement Analysis 8
2.1: The European Airline Market 9
2.2: Income statement 12
2.2.1: Operating Profit (EBIT) 13
2.2.2: Profitability 15
2.2.3: Conclusion on the income statement 17
2.3: Balance sheet 18
2.3.1: General overview of the balance sheet 18
2.3.2: Net working capital 20
2.3.3: Liquidity analysis 21
2.3.4: The Share 23
2.3.4: Conclusion on the balance sheet 24
2.4: Cash Flow Statement 25
2.4.1: Cash Flow from operating activities 25
2.4.2: Cash Flow from investing activities 26
2.4.3: Cash Flow from financial activities 27
2.4.4: Change in cash 27
2.4.5: Cash flow ratios 28
2.4.6: Conclusion on the cash flow statement 30
2.5: Conclusion on the Financial Statement Analysis 31
3: Strategic Analysis 32
3.1: PESTEL analysis 32
3.1.1: Political Aspects 33
3.1.2: Economical Aspects 33
3.1.3: Socio-cultural Factors 34
3.1.4: Technological Factors...... 34
3.1.5: Environmental Aspects 34
3.1.6: Legal Aspects 35
3.1.7: Summary of the PESTEL analysis 36
3.2 Porters 5 forces 36
3.2.1: The threat of potential new entrants 37
3.2.2: The bargaining power of suppliers 37
3.2.3: The bargaining power of buyers 38
3.2.4: The threat of substitutes 38
3.2.5: The extent of competitive rivalry 39
3.2.6: Summary of Porters 5 forces analysis 39
3.3: Conclusion on the strategic analysis – SWOT analysis 40
3.3.1: Strengths 40
3.3.2: Weaknesses 41
3.3.3: Opportunities 41
3.3.4: Threats 42
4: Conclusion on the Strategic and Financial Analysis of Norwegian 43
5: Bibliography 45
6: Appendix 47
Appendix 1: Norwegian`s route network 47
Appendix 2: Norwegian`s revenue: domestic and international 48
Appendix 3: Norwegians fleet 2009-2014 48
Appendix 4: Overview oil price in period 2005-2009 49
Appendix 5: Overview exchange rate USD/NOK in period 2005-2009 49
Appendix 6: Overview of the share development for Norwegian in period 2005-2009 50
Appendix 7: Norwegian Air Shuttle ASA corporate structure 50
Appendix 8: Cimber Sterling corporate structure 51
Appendix 9: Scandinavian Airline Group corporate structure 2009 51
Appendix 10: Norwegian: Income Statement 2005-2009 52
Appendix 11: Norwegian: Balance Sheet 53
Appendix 12: Norwegian: Cash Flow Statement 54
Appendix 13: Norwegian: Traffic Figures 54
Appendix 14: Norwegian: Calculations 55
Appendix 15: Norwegian: Share 55
Appendix 16: Norwegian: Key ratios 56
Appendix 17: SAS: Income statement 2005-2009 57
Appendix 18: SAS: Balance Sheet 58
Appendix 19: SAS: Cash Flow Statement 59
Appendix 20: SAS: Traffic numbers 59
Appendix 21: SAS: Calculations 60
Appendix 22: SAS: Cash Flow ratios 60
Appendix 23: SAS: Share 61
Appendix 24: Cimber Sterling: Income Statement 2004/2005-2008/2009 61
Appendix 25: Cimber Sterling: Balance Sheet 62
Appendix 26: Cimber Sterling: Cash Flow Statement 63
Appendix 27: Cimber Sterling: Calculations 63
Appendix 28: Cimber Sterling: Key ratios 64
1: Introduction
The financial crisis has hit the air traffic industry hard. The International Air Traffic Association write in their report that 2009 has been the worst year for the industry since the second world war, with a decline in overall passenger demand of 3.5%. This will lead to a total loss of 11 billion US Dollars for the industry (IATA, 2010).
However, the market can see a clear change in buying behaviour where people tend to be more cost oriented. Low cost companies such as Norwegian Air Shuttle ASA, from now referred to as Norwegian, are experiencing growth and an increase in market share compared to companies such as SAS, known for having higher prices, which are having huge economic problems. This can clearly be seen in Norway where SAS has lost a substantial part of their domestic market share to Norwegian over the last years.
In November 2009, Norwegian`s board decided to issue up to 1620000 new shares, which will give them around NOK 250 million kroner in new capital. At the same time, HBK Holding AS, the major investor in Norwegian, announced that they are selling 970000 shares in the company. Norwegian`s CEO, Bjørn Kjos which also is the main owner of HBK Holding AS, says that this is done because the company wants to strengthen their equity and be prepared for new growth possibilities in the future[1].
1.1: Problem statement
The purpose of this thesis is to look at the economic performance of Norwegian Air Shuttle ASA and external factors that might influence the air shuttle industry. Norwegian and the board’s decision on issuing new shares will be the focus of this report, to see if the company have liquidity problems. When a company is issuing new shares and insiders within Norwegian are selling shares at the same time, it can make potential investors nervous and be a sign that something significant is about to happen.
This will be investigated with help from these questions:
- Analyse the financial situation for Norwegian Air Shuttle ASA by looking at the income statement, balance sheet and the cash flow statement in years 2005-2009.
- Calculate and analyse key ratios to look at the economic performance of Norwegian.
- Which external factors are affecting Norwegian?
1.2: Limitations
The thesis will only focus on the European air shuttle market, which is the market where Norwegian mainly is operating. The thesis will compare Norwegian against their two largest competitors in the Scandinavian and European market, Cimber Sterling ASA and Scandinavian Airlines AS (SAS). It is important to be aware of that SAS is not a low cost airline company, but are included as this is Norwegian`s biggest competitor in the Scandinavian market.
All the information about Norwegian, SAS and Cimber Sterling has been collected from their annual reports in years 2005-2009, and for Norwegian interim report 2009 as their annual report for 2009 not yet has been published. Information is also collected from Norwegian newspaper articles, since there has been no contact with the companies. No information has been collected after April 5, 2010. In the financial analysis SAS`s numbers are in billions, while Norwegian and Cimber Sterling`s numbers are in million.
1.3: Structure
Section 2: Financial Statement Analysis
In the economic part of the thesis, numbers from the annual report over the five past years (2005–2009) and interim reports (2008-2009) will be used. First the income statement, balance sheet and the cash flow will be analysed to see if there are any large changes that we should be concerned about. Further on the most relevant key ratios for the paper will be calculated and used when analysing Norwegian`s performance and liquid situation. Even though the accounts look good, they may in some cases show a misleading picture of the actual situation, and therefore analysing key ratios are important as it gives a more accurate analysis and gives a clearer picture of the actual situation. Therefore measuring the profitability and liquid situation of Norwegian and its competitors will be the focus in this paper. In the profitability analysis, the DuPont method will be used to measure ratios as ROIC and ROE. Liquidity analysis is in focus in this thesis, as it looks at if a company is able to pay its short term debt.
A comparison between Norwegian and Cimber Sterling and SAS will be created by using key ratios, because then we can see how Norwegian is performing compared to their competitors.
Section 3: Strategic Analysis
The thesis will continue with a strategic analysis of the external factors influencing Norwegian. Methods as the PESTEL analysis and Porter`s 5 Forces will be used to look at the environment surrounding the organisation. The PESTEL analysis will be created as a list of the political, economical, socio-cultural, technological, environmental and legal aspects of the environment the companies are in. Porter`s 5 forces will be used to look at the competitive environment surrounding Norwegian. The internal part of the strategic analysis is excluded as there has been no personal contact with Norwegian, but instead strengths and weaknesses are being included in the SWOT analysis.
1.4: About Norwegian Air Shuttle ASA
Norwegian Air Shuttle ASA was established January 22, 1993 as a company supposed to continue “Busy Bee of Norway AS” air traffic on the west coast of Norway in cooperation with Braathens S.A.F.E. In 2002, Norwegian decided to expand and to establish themselves as a strong player in the domestic air travel industry within Norway, dominated at that time by Scandinavian Airlines (SAS). Norway is an attractive market due to the large geographical distances, and the routes between Oslo-Trondheim and Oslo-Bergen is on the list of busiest routes within Europe. Norwegian decided to establish themselves as a low cost carrier and started operating on the four busiest routes from Oslo to Trondheim, Bergen, Stavanger and Tromsø with leased Boeing 737300 airplanes. The beginning of 2000 was affected by a recession and travellers were therefore interested in the increased competition and the lower prices offered by Norwegian[2].
Norwegian are following a low cost strategy, where they seek to offer their broad target group of customers the lowest possible price. This is said to be their competitive advantage. Their business idea turned out to be successful and had the perfect timing during the financial hard times, and only after a few months their market share was between 10%-15%. In 2003 they were listed on the Oslo Stock Exchange, and have since then expanded with both new domestic and international routes, operating out of new places such as Warsaw in Poland, Stockholm in Sweden and Copenhagen in Denmark. The company has also used their brand name to start up other companies as can be seen from their corporate structure (appendix 7). Bank Norwegian is an internet bank they own 20% of, and Call Norwegian AS that offers cheap phone and broadband subscriptions, is 100% owned.
In 2007 they entered into an agreement with Boeing to purchase and lease total of 70 (48 owned, 22 leased) new aircrafts of type 737800 aircraft in the period 2008 to 2014 (Appendix 3). The new planes will fit into their new strategy of a lower cost base since the new airplanes have lower maintenance costs and fuel consumption. The plan is to deliver back the leased airplanes when the rest of the new fleet are delivered by 2014.
Today (April 2010) Norwegian is the biggest low cost airline company in Scandinavia and the fourth largest in Europe. Their business idea is to give everyone the possibility to travel by air which is why they follow the low ticket prices strategy. Their goal is to establish themselves as the preferred supplier of air travelling in selected markets (Annual report 2008; p8). Norwegian is constantly opening new routes and by end 2009 they has 238 routes to 93 destinations across Europe, North Africa (Marrakech) and Middle East (Dubai) (Appendix 1) with total of 10.8 million passengers in 2009, a growth of 18% from previous year.
2: Financial Statements Analysis
When analysing financial statements, historical data from the last five years are included to get an overview of a company’s economical performance. The purpose of this is to discover the financial value drivers that give the company economic value, and calculating key ratios will help us find these factors. It is important to get an overview of the statements and to calculate key ratios, because in some situations a company can make financial statements look better than the actual situation is (Sørensen; 2009).
Financial statements are divided into income statement, balance sheet and cash flow statement and they all give us economic information from different aspects. Calculating financial ratios is important in order to measure the performance of a company, either how productive or how profitable it is and their liquidity situation. Key ratios are however useless, if not benchmarked to either a company’s performance over several years, the overall industry, or another company within the same industry. Such data can create a useful insight of the company’s performance and find strengths, opportunities, threats and weaknesses. Norwegian will be compared against two of their biggest competitors, SAS and Cimber Sterling, where numbers from past five years are used. There are many ratios that can be used to analyse a company’s performance, and I have chosen to calculate ratios important to this company that will explain the economic situation and answer the problem statement (Møller 1991).