Norwegian annual report 2013

Board of Directors' report

Norwegian Air Shuttle ASA, commercially branded "Norwegian", is a public low-cost airline listed on the Oslo Stock Exchange. The Group operates both scheduled services and additional charter services. Norwegian is the second largest airline in Scandinavia, the third largest low-cost airline in Europe, and has a route portfolio stretching across Europe into North Africa and the Middle East, as well as Thailand and the US. With competitive prices and customer-friendly solutions and service, the Group has experienced significant growth in recent years.

The Group has its headquarters in Fornebu outside Oslo, as well as other offices at Oslo Gardemoen Airport and in Tromsø. Norwegian Air Shuttle Sweden AB has offices at Stockholm Arlanda Airport, and Norwegian Long Haul AS, Call Norwegian AS, NAS Asset Management Norway AS and Norwegian Finans Holding ASA have office addresses in Fornebu.

Norwegian Air Shuttle ASA has established aircraft bases in Norway, Sweden, Denmark, Finland, Spain and the United Kingdom.

In 2013 the Group initiated a restructuring of the organization. The background for the restructuring is to optimize the airline operation, and set a new corporate structure in order to position the company for further international growth. Two fully owned subsidiaries will be established, each with their own air operator's certificate (AOC) - one in Norway and one in the EU. In line with legal developments in Europe, fully owned country-specific resource companies will be established.Additionally, specific activities of the airline's commercial activities are further reorganized and established in separate new entities including, but not limited to, Norwegian Holiday, Norwegian Cargo as well as brand and marketing activities. A key consideration has been to build a structure which maintains Norwegian's flexibility and adaptability despite growing size and entry into new markets in Europe, and across continents. The restructuring has included the establishment of new legal entities, reorganizing and relocation of key personnel and decision making authority, rights and assets to the relevant entities at their respective legal locations.

Flight Safety
The Group has not registered any serious accidents or incidents to either passengers or crew involving the operation of aircraft since the Group was founded in 1993.

The Group’s flight safety office is integrated within the quality department, which reports directly to the respective accountable manager. The department’s primary objective is to work proactively to promote flight safety throughout the organisation. Flight safety is covered in the crew’s training programmes, together with training in security related issues.

The Group analyses information from Flight Data Recorders installed in Norwegian’s aircraft on an on-going basis. These analyses are carried out in order to ensure that the aircraft are handled and flown according to current regulations and limitations.

Crew members, maintenance personnel and handling agents are also required to use a web- based reporting system to log irregularities. These reports are a valuable tool for statistical analysis and trend monitoring.

The aircraft are subject to a stringent maintenance programme based on the manufacturers’ recommendations and existing rules and regulations

Social Responsibility Report
Norwegian’s corporate responsibility strategy is primarily based on how Norwegian as an airline can contribute to less pollution and emissions by flying new and fuel efficient aircraft, as described in more detail below. The single most important thing an airline can do in order to make aviation more environmentally friendly is investing in new aircraft.

Our Code of Ethics give directions for a sound working environment and highlights the Group’s guidelines for human rights, prevention of corruption, employee rights and safety for all – both our customers and employees – social conditions and external environment. Norwegian also has a dedicated corporate cooperation with UNICEF on account of the organisation’s overall focus on children’s rights.

Norwegian has for several years partnered with the humanitarian organisation UNICEF through a Signature Partnership.

  • A Signature Partnership is initiated through the administration of a company’s top-level management.

  • A Signature Partnership is the highest form of partnership UNICEF Norway offers corporate clients.

  • Norwegian is dedicated to working with UNICEF on account of its overall focus on children’s rights.

UNICEF is mandated by the United Nations General Assembly to advocate for the protection of children’s rights, to help meet their basic needs and to expand their opportunities to reach their full potential. UNICEF maintains that the survival, protection and development of children are universal development imperatives that are integral to human progress.

This is how Norwegian supports UNICEF

  • Norwegian's support to UNICEF consists of travel funding and fundraisers. In addition, all Norwegian employees donate their company Christmas presents to UNICEF.
  • Norwegian's CEO Bjørn Kjos receives many requests to speak at events and give lectures. Neither Bjørn Kjos nor Norwegian charge for this, however, through our partnership with UNICEF, we ask organisations and businesses to transfer 20,000 NOK when Bjørn Kjos holds a lecture. We hope businesses see this as an opportunity to help support an international organisation that works for children's rights.
  • In 2013, Norwegian donated 1 NOK from each water bottle sold on board to UNICEF's important work. Our passengers bought 1.3 million water bottles throughout the year and therefore contributed 1.3 million NOK to the world's children.
  • Norwegian had its tenth anniversary on 1st September 2012 and marked the day with a grand jubilee concert at Fornebu. Concert proceeds of 1 million NOK were donated to UNICEF.
  • Norwegian encourages its employees to engage in UNICEF through internal activities on the company’s intranet. Norwegian also has two dedicated “Norwegian Inspirators” who take responsibility to spread the UNICEF story throughout the company.

Norwegian has a zero tolerance policy for corruption and every employee is responsible for reporting suspicious behaviour to his or her superior. The company has never had any reported or suspected occurrences of corruption.

Norwegian advocates diversity, something that reflects our growth in Europe, Asia and the United States. Norwegian employs people from several different countries, with a multitude of backgrounds. We believe that diversity creates a better working environment.

Norwegian’s main stakeholders include our passengers, employees, owners, authorities and the media.

Organisation, Working Conditions and the Environment
Norwegian has a long-term focus on creating an attractive workplace. An important success factor for Norwegian is maintaining a workforce of highly motivated and skilled employees and leaders. Our goal is to offer unique opportunities to our employees and a company culture that helps us to attract and retain the best people in the industry, regardless of who they are and where we do business. Creating effective arenas for learning and professional development at all levels of the organisation is a priority at Norwegian.

At the end of 2013 the Group employed a total of 3,965 FTEs (full-time equivalents) including apprentices and hired staff. The number of employees is expected to increase in 2014 in accordance with the Group’s planned expansion. The Group has established bases in London, Madrid, Barcelona, Tenerife, Alicante, Bangkok, New York, Fort Lauderdale and is currently in the process of opening additional new bases abroad.

The apprentice programme in Norway continued in 2013 and by the end of the year comprised 140 apprentices. During their training – which also included stays in Berlin, London and Las Palmas – the apprentices held internships while working abroad in countries where Norwegian operates. A further intake of apprentices is planned in 2014. All the candidates which graduated in 2013 successfully completed and passed their exams, which were conducted in conjunction with Akershus County Council. The labour unions are also actively included in planning of the apprentices’ curriculum.

Many graduates who passed the examination in 2013 have now attained positions in the Group. Graduates of the programme also visit schools and colleges to promote the programme and help recruit new apprentices. This has been a focus area in 2013 and the programme now provides a steady stream of candidates to fill permanent positions.

Norwegian’s human resources policy is intended to be equitable, neutral and non-discriminatory, regardless of ethnicity and national background, gender, religion, or age.

The Group has reviewed and updated its ethical guidelines, which emphasise the company’s personnel policies. The Group has described its Corporate Governance policies in a separate section of the Annual Report.

Important HES activities (Health, Environment and Safety) are conducted in compliance with labour laws and the Group’s guidelines. Illness absenteeism in 2013 was 7.4 per cent, a decrease compared to 2012. Actively monitoring HES, corporate health insurance policies and continuing cooperation with protective services will insure that illness absenteeism remains a priority.

Norwegian Air Shuttle ASA is a member of NHO Aviation, which is a member of NHO (Confederation of Norwegian Enterprise). The 2013 collective salary review was conducted through local collective bargaining with most unions. Moderate changes in wages and efficiency were achieved with these unions.

External Environment
Flight operations are inherently dependent on fossil fuels and also generate noise. However, the Group’s current aircraft fleet operates well within the levels and restrictions imposed by national and international regulations. During 2013 the Group consumed approximately 735,006 tonnes of Jet A-1 fuel which is equivalent to 87 grams of CO2 per passenger per kilometre or 67 grams of CO2 per seat per kilometre, a reduction of 2 per cent from last year.

The Group is in the process of renewing its short-haul aircraft fleet, replacing the Boeing 737- 300 aircraft with Boeing 737-800s which will further reduce emissions per passenger per kilometre.

The Boeing 737-800 is among the most environmentally-friendly aircraft in production today; the 737-300s which are being replaced emit approximately 23 per cent more CO2 per seat. The Group had a total of 72 Boeing 737-800 in operation by year-end with another 60 on firm order.

Norwegian has firm orders for an additional 200 single-aisle aircraft, 100 Boeing 737 MAX8 and 100 Airbus A320neo, both of which reduce CO2 emissions by 30 per cent compared to the 737- 300. The order will secure Norwegian the most environmentally-friendly aircraft fleet in the world.

The Group operates the Boeing 787-8 Dreamliner for its long-haul operations, which is the most fuel and noise efficient long-haul equipment available. By year-end the Group had three such aircraft in operation and another 11 on firm order; five 787-8 and six of the stretched 787-9. The aircraft type combines a revolutionary composite material design with new engines, which together reduce consumption and emissions by 20 per cent compared to the most efficient comparable aircraft type in operation today.

The Group’s business model promotes high load factors and higher capacity per flight, which makes Norwegian’s operations more environmentally sustainable as emissions per passenger are lower. The company’s emissions per passenger kilometre are well below the industry average and less than many forms of land and sea-based transportation.

The Board believes the Group has complied with all requirements and recommendations with regard to its impact on the external environment, and that the Group takes all possible steps to minimise emissions and other negative effects on the environment.

Aircraft Maintenance
The Boeing 737 fleet is operated by the parent company (NAS) and its fully-owned subsidiary Norwegian Air Norway (NAN). The Boeing 787 fleet was operated by the fully-owned subsidiary Norwegian Long Haul (NLH) in 2013, whose operations will be transferred to the fully-owned company Norwegian Air International (NAI) during 2014. Each individual operator has its own Air Operator Certificate (AOC), each with individual civil aviation authority oversight and approval. Each AOC must have a civil aviation authority approved maintenance organisation and maintenance programme.

NAS and NAN manage their maintenance operations from their technical bases at Oslo Gardermoen Airport. NLH manages its maintenance operations from its technical base in Fornebu, Norway.

Line maintenance is performed by NAS for both NAN and NAS at Oslo Gardemoen Airport, Stavanger Sola Airport, Bergen Flesland Airport, Trondheim Værnes Airport, Stockholm Arlanda Airport and Copenhagen Kastrup Airport. Line maintenance for NAN and NAS are contracted to other external suppliers outside Scandinavia.

Continuing airworthiness activities for NLH are sub-contracted to Boeing Fleet Technical Management (Boeing FTM). Control and oversight of the activities is performed by Norwegian Long Haul Maintenance operations in addition to the civil aviation authorities.

Major airframe as well as workshop maintenance is performed by external sources subject to approval by the European Aviation Safety Agency (EASA) and by the national aviation authorities (“Luftfartstilsynet”)

Airframe maintenance for NAN and NAS is currently carried out by ATC Lasham in the UK and Lufthansa Technik in Budapest, Hungary. Engine and component workshop maintenance is undertaken by Lufthansa Technik, MTU and Boeing. Airframe maintenance for NLH is currently carried out by Nayak, KLM and Mack II.

Engine maintenance is currently carried out by Rolls Royce UK.

All maintenance, planning and follow-up activities, both internal and external, are performed in accordance with both the manufacturers’ requirements and additional internal requirements, and are in full compliance with international authority regulations. The company carries out initial quality approval and also continuously monitors all maintenance suppliers.

All supplier contracts are subject to approval and monitoring by the national aviation authorities.

Significant Changes in Accounting Principles
The IFRS accounting principles, as adopted by the EU, have been followed in preparing the financial statements for 2013. The Group has implemented new or amended/revised IFRS approved by EU and which took effect at the start of the 2013 financial year. The changes have not had any material impact on the Group.

Comments to the Consolidated Income Statement
The Group had a total operating revenue and income of NOK 15,580 million (12,859) in 2013. Compared to last year, the Group’s total revenue growth was 21 per cent. NOK 13,381 million (11,201) of the revenues was related to ticket revenues, NOK 1,758 million (1,405) to other passenger-related revenues, while NOK 372 million (235) was relatedto freight, third-party products and other income. Other income includes gains from the sale of tangible assets. The increase of sales is primarily related to the 32 per cent growth in production from 2012 to 2013. The load factor remained stable compared to the same period last year. The ticket revenue per available seat kilometre (RASK) for 2013 was NOK 0.39, compared to NOK 0.43 last year, a decrease of 10 per cent. Ancillary revenues rose by 6 per cent to NOK 87 per PAX (82) in 2013 compared to 2012.

Operating costs (including leasing and excluding depreciation and write-downs) amounted to NOK 14,080 million (12,070) in 2013. The unit cost was NOK 0.42 in 2013 compared to NOK 0.45 last year. The unit cost for fuel decreased by 7 per cent while the unit cost excluding fuel decreased by 7 per cent. The unit cost excluding fuel was NOK 0.29 in 2013 compared to NOK 0.31 last year. Net profit before depreciation and write-downs (EBITDA) for the Group was NOK 1,500 million (789) in 2013, resulting in an EBITDA margin of 9.6 per cent.

Financial items in 2013 resulted in a loss of NOK 578 million, compared to a gain of NOK 187 million in 2012. NOK 473 million in net foreign exchange losses (gain of 273) is offset by gains on financial instruments included in operating profits. With regard to accounting for the prepayments on purchase contracts with aircraft manufacturers, NOK 86.0 million (73.5) in interest costs were capitalised in 2013.

In 2007 the Group started Bank Norwegian, which is 100 per cent owned by Norwegian Finans Holding ASA, in which the Group has a 20 per cent stake. The Group’s share of the bank’s net profit resulted in a net gain of NOK 46.6 million (32.8) in the consolidated profit and loss.

Earnings before tax in 2013 were NOK 437 million (623) and earnings after tax were NOK 322 million (457). Earnings per share amounted to NOK 9.15 per share (NOK 13.08).

Comments to the Consolidated Balance Sheet and Cash Flow Statement
The Group’s total assets had increased by NOK 2,843 million to NOK 14,762 million at year-end 2013. The book value of aircraft increased by NOK 1,947 million during the year; while prepayments and capitalised interests on the Boeing purchase contract was reduced by NOK 329 million compared to 2012. Trade and other receivables increased by NOK 527 million on 2012.

At the balance sheet date, the Group had a cash balance of NOK 2,166 million (1,731).

Total borrowings increased by NOK 985 million to NOK 6,512 million (5,527), mainly related to the purchase of new aircraft.

The Group’s cash flow from operations was NOK 2,379 million (2,022) in 2013. The net cash flow from operating activities consists of the profits before tax of NOK 437 million; add back of depreciation and other expenses without cash effects of NOK 604 million with add back of interests on borrowings NOK 296 million included in financial activities. Changes in working capital mainly due to traffic growth amounted to NOK 1,042 million. During 2013 the Group paid NOK 0 million in taxes.

The net cash flow used for investment activities was NOK -2,128 million (-2,765), of which the prepayments to aircraft manufacturers constituted NOK -1,460 million. Purchases of new Boeing 737-800s and a 787-8 Dreamliner and intangible assets amounted to NOK -586 million.

The net cash flow from financial activities in 2013 was NOK 184 million (1,369). Proceeds from long-term debt of NOK 2,310 million are related to the financing of new aircraft and PDP financing.

The Group focusses heavily on liquidity planning and the Board is confident in the Group’s financial position at the beginning of 2014.

Capital structures
The Group’s total equity was NOK 2,750 million (2,421) at 31 December and its equity ratio was 19 per cent (20 per cent). Equity increased by NOK 326 million due to profits for the period of NOK 322 million and a share issue of NOK 9 million related to the employees’ option programmes. Other changes in equity amounted to NOK 1.8 million.

All issued shares in the parent company are fully paid with a par value of NOK 0.1 per share. There is only one class of shares, and all shares have equal rights. The Group’s articles of association have no limitations regarding the trading of Norwegian Air Shuttle ASA’s shares on the stock exchange.

The Group’s aggregated net interest-bearing debt was NOK 4,346 million at 31 December 2013, compared to NOK 3,796 million in 2012. The Group’s gross interest-bearing liabilities of NOK 6,512 million (5,527) mainly consisted of financing for our aircraft amounting to NOK 5,761 million, a bond loan with a net book value of NOK 594 million, and a Pre-Delivery Payment syndicated credit facility of NOK 147 million. Other long-term interest-bearing liabilities including financial lease liabilities amounted to NOK 11 million.

Risk management in the Group is based on the principle that risk evaluation is an integral part of all business activities. Policies and procedures have been established to manage risks. The Group’s Board of Directors regularly reviews and evaluates the overall risk management systems and environment within the Group. The Group faces many risks and uncertainties within the global marketplace. We are facing challenging economic and market conditions and we may not succeed in reducing the unit cost sufficiently to compensate for weakening consumer and business confidence in our key markets. Price volatility may have a significant impact on the Group’s reported and operating results. Deterioration in the Group’s financial position could increase our borrowing costs and cost of capital. We face an ongoing risk of counterparty default. The Group’s reported results and debts denominated in foreign currencies are influenced by developments in currency exchange rates and in particular the US dollar and Euro.

The Group’s main strategy for mitigating risks related to volatility in cash flows is to maintain a solid financial position and strong credit rating.

Credit risks are managed on a Group basis. Credit risks arise from deposits with banks and financial institutions, as well as credit exposure to commercial customers. The Group’s policy is to maintain credit sales at a minimum level. Sales to private customers are settled by using credit card companies. The risks arising from receivables on credit card companies or credit card acquirers are monitored closely.

The management monitors rolling forecasts of the Group’s liquidity reserves, cash and cash equivalents on the basis of expected cash flows. In addition, the Group’s liquidity management policy involves projecting cash flows in major currencies and evaluating the level of liquid assets required to monitor balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.

Following the acquisition of aircraft with future deliveries, the Group will have ongoing financing activities. The Group’s strategy is to diversify the financing of aircraft through sale-and- leaseback transactions and term loan financing supported by the export credit agencies in the United States and EU.

In order to protect margins against fluctuations in the price of fuel, our expected fuel consumption is hedged to some extent. The Group also uses derivatives to reduce its overall financial and commercial risk exposures. Forward US dollar currency contracts have been used to hedge USD exposures.

Prospects for 2014
The demand for travelling with Norwegian and advance bookings have been satisfactory entering the first quarter of 2014. Norwegian will continue to take advantage of its increasing competitive power realised through continuous cost efficiency, and from introducing larger aircraft with a lower operating cost. Going forward, the company expects increased competitive pressure in the Nordic market place.

In addition to its bases in the Nordic countries, Norwegian currently operates short-haul sectors from four operational bases in Spain (Malaga, Alicante, Las Palmas and Tenerife) and one base in London. New bases in Madrid and Barcelona are planned to become operational during the spring.

Norwegian is predicting production growth (ASK) of 40 per cent for 2014, including the long haul production. The growth in short haul production is mainly from increasing the fleet by adding 737-800s and through increasing the average sector length. Norwegian may decide to adjust capacity in order to optimise the route portfolio depending on the development in the overall economy and in the marketplace.

Assuming a fuel price of USD 950 per tonne and USD/NOK 6.00 for the year 2014 (excluding hedged volumes) and with the currently planned route portfolio, the company is targeting a unit cost (CASK) in the region of NOK 0.40 for 2014.

Despite technical and operational issues related to the start-up of the long haul operation, the establishment of the long haul operation has developed according to plan. The introduction of routes for the summer season of 2014 has been well received by the market. Long-haul production will grow in accordance with the phasing in of aircraft and the company will have seven Boeing 787 by the end of 2014.

Norwegian has established and prepared for an organisational structure which secures cost- efficient international expansion and necessary traffic rights for the future.

The Board confirms that the going concern assumption is valid and the financial statements have been prepared on a going concern basis.

Allocation of the Year’s Result
The net profit for the Group was NOK 322 million. The net profit for the Parent Company Norwegian Air Shuttle ASA was NOK 635 million, which the Board proposes be transferred to retained earnings. The Board recommends no dividend distribution for the 2013 operating year in accordance with the company’s corporate governance policies.


Fornebu, 26 March 2014

Bjørn H. Kise Ola Krohn-Fagervoll
(Chairman of the Board) (Deputy Chairman)
Liv Berstad Marianne Wergeland Jenssen
(Board Member) (Board Member)
Thor Espen Bråten Kenneth Utsikt
(Employee Representative) (Employee Representative)
Linda Olsen Bjørn Kjos
(Employee Representative) (Chief Executive Officer)