Norwegian Air Shuttle ASA - Investor Presentation 5 November 2019
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Norwegian Air Shuttle ASA Investor Presentation 5 November 2019
Contents
1 Investment Highlights and Term Sheets
2 Q3 Presentation
3 Risk Factors
2
Investment highlights and recent events
Contemplated private placement of up to 27,250,000 new shares and convertible bond
issue of up to USD 175 million
Norwegian is delivering on its strategic plan, and profits in Q3 were the highest in
Securing Norwegian’s history
required At the same time, several external factors have impacted the liquidity position
financing
Working capital negatively impacted by a reduction in credit card acquirer capacity
while
transforming Engine issues and the MAX grounding have resulted in extra wet-lease costs
the business Additional actions have been taken to cut costs, free up liquidity and reduce capital
commitments
Norwegian will be fully funded through 2020 and beyond following the transactions based
on the current business plan
Sale of additional 7 aircraft with net proceeds of USD 70 million as part of fleet renewal
Further Completed sale of Bank Norwegian (NOFI) shares
delivering on
strategy after Norwegian Reward launches credit card in the U.S.
Q3 reporting Strong bookings ahead of winter season with capacity-adjusted volume above last year
on higher yield
3
Equity private placement highlight of terms
Summary of Terms for Equity Private Placement (Please see Term Sheet for further details)
Issuer / Ticker: Norwegian Air Shuttle ASA / OSE: NAS
Private placement of up to 27,250,000 new shares (corresponding to approximately 19.9% of outstanding shares)
(the “New Offer Shares”) and up to 12,500,000 existing shares (which is to be lent to certain investors in the
convertible bond issue) related to hedging in connection with the Convertible Bond (the “Hedging Shares”, together
Transaction: with the New Offer Shares, the “Offer Shares”)
All investors who are allocated Offer Shares will as far as possible receive the same proportion of New Offer
Shares and Hedging Shares
Offer price: Offer price will be set through an accelerated book building process and will be denominated in NOK
Minimum subscription: The NOK equivalent of EUR 100,000
Start of bookbuilding: 16:30 CET on 5 November 2019
Bookbuilding:
End of bookbuilding: 08:00 CET on 6 November 2019
Allocation: Expected on 6 November 2019
EGM: Expected on or about 27 November 2019 (the settlement of the Hedging Shares is not subject to EGM approval)
Payment: Expected on or about 29 November 2019 (the settlement of the Hedging Shares is not subject to EGM approval)
Registration: Expected on or about 2 December 2019 (the New Offer Shares)
Delivery: Expected on or about 3 December 2019 (the settlement of the Hedging Shares is not subject to EGM approval)
Subsequent offering: The Board of Directors intends to propose a subsequent offering of new shares
The proceeds from sales of New Offer Shares in the Private Placement and the Convertible Bond will secure
Use of proceeds: required financing of working capital during the winter season and create headroom to financial covenants while
completing the strategic transformation of the Company
Bookrunners: Arctic Securities, DNB Markets, a part of DNB Bank ASA, and Pareto Securities
Convertible bond: The private placement is subject to completion of the concurrent convertible bond of up to USD 175 million
Conditions: Please see the Term Sheet
4
Convertible bond issue highlight of terms
Summary of Terms for Convertible Bond (Please see Term Sheet for further details)
Issuer / Ticker: Norwegian Air Shuttle ASA / OSE: NAS
Guarantor: Arctic Aviation Assets DAC, a wholly owned direct subsidiary of the Issuer
Transaction: Convertible Notes due 2024
Offering type: Reg S, Category 1
Principal amount: USD 150 million + 25 million upsize option
Ranking: Senior, unsubordinated, unsecured obligations of the Issuer and guaranteed by the Guarantor on a senior
basis
Maturity: Expected on or about 15 November 2024 (5 years)
Amortization: Bullet
Indicative interest: 6.00 – 6.75 % per annum
Indicative conversion premium: 22.5% – 27.5% above the Reference Share Price
Reference share price (for initial Equity Private Placement price (concurrent placement of deltas)
conversion price):
Dividend protection: Full dividend adjustment (for any distribution in cash or in kind) through adjustment to the Conversion Price
Uses of proceeds: The proceeds from sales of New Offer Shares in the Private Placement and the Convertible Bond will secure
required financing of working capital during the winter season and create headroom to financial covenants
while completing the strategic transformation of the Company
Bookrunner: Clarksons Platou Securities AS
Pricing date: Expected on or about 5 November 2019
Settlement date: Expected on or about 15 November 2019
5
Q3 2019 Presentation
New strategy starting to show results
Delivering above target on #Focus2019, our cost reduction program
Continuing Optimization of route network and organizational structure
the process of
moving from
Reducing capital expenditures through restructuring of aircraft orders, JV
growth to
profitability establishment and deferring deliveries
Sale of aircraft as part of our fleet renewal program and to free up liquidity
7
Highlights Q3 2019 and subsequent events
8 % revenue growth driven by improved unit revenue and growth in ancillary revenue
per passenger
Improved
results #Focus2019: On track with NOK 827 million cost reduction in Q3 (NOK 1,848 million YTD)
EBITDAR excl other losses/(gains) improved by 49 % yoy to NOK 4.4 billion
Sale of all shares in NOFI for gross proceeds of NOK 2.2 billion with final settlement in
Q4
Successfully amended and extended NAS07 and NAS08 bonds for two years
Actions to
increase Agreement with CCB Leasing (International) for the establishment of a joint venture
financial comprising an initial 27 aircraft and reducing capex by approximately USD 1.5 billion
headroom
Capex for FY 2019 reduced further by USD 200 million (to a total of USD 1.0 billion)
Agreement to sell five aircraft with delivery in Q4 2019 and Q1 2020 with net liquidity
effect of approximately USD 50 million
8
Strategy of lower growth resulting in higher
load factor and increased yield
3 % growth in production (ASK), compared to 33 % in Q3 2018
4 % growth in traffic (RPK), compared to 32 % in Q3 2018
35,000 ASK (million) Load Factor 100%
90.7 % 91.3 % 91.7 % 90.5 % 91.2 %
90%
84.4 % 84.6 %
30,000 82.6 % 81.4 %
80.5 %
80%
25,000
70%
60%
20,000
50%
15,000
40%
Available Seat KM (ASK)
30%
10,000
Load Factor
20%
5,000
10%
0 0%
Q3 10 Q3 11 Q3 12 Q3 13 Q3 14 Q3 15 Q3 16 Q3 17 Q3 18 Q3 19
ASK (m illion) 5,331 6,480 7,780 10,223 13,905 14,143 16,486 20,658 27,534 28,482
Load Factor 80.5 % 84.4 % 82.6 % 81.4 % 84.6 % 90.7 % 91.3 % 91.7 % 90.5 % 91.2 %
9Long-haul continues to improve – mainly
driven by US passenger demand
Revenue growth yoy in Q3 2019: Revenue split by origin in Q3 2019:
21 % growth in revenue from the US Revenue from the US is the largest share of the
Continued high growth in the key European markets company’s revenue in Q3 and YTD
on transatlantic routes (France, Italy and Spain)
US 21 % US
Argentina 236 % Norway
Spain 7% Spain
Italy 21 % UK
Norway 4% Sweden
Other 4% Denmark
Denmark 7% France
France 9% Italy
Finland -9 % Finland
UK -2 % Argentina
Sweden -7 % Other
-150 -50 50 150 250 350 450 0% 5% 10% 15% 20%
NOK (million) Q3 2019 Q3 2018
10Largest foreign carrier in New York
and largest European carrier in Los Angeles
11Largest foreign carrier in New York
and largest European carrier in Los Angeles
Connecting networks
to feed long haul
12Financials
Income statement
NOK million Q3 2019 Q3 2018
Passenger revenue 11,837 11,062
Ancillary passenger revenue 2,067 1,919
Other revenue 500 406
8 % revenue growth driven by higher unit revenue
Total operating revenue 14,404 13,387 and ancillary passenger revenue
Personnel expenses 1,700 1,692
Aviation fuel 3,601 3,681
Airport and ATC charges 1,197 1,266
Handling charges 1,580 1,432
Technical maintenance expenses 748 1,068
Other operating expenses 1,170 1,289
Other losses/(gains) -250 -398
Highest quarterly EBITDAR excl other
EBITDAR 4,660 3,358 losses/(gains) in the company’s history
Aircraft lease, depreciation and amortization 1,690 1,543
Operating profit (EBIT) 2,970 1,815
Net financial items -800 -233
Profit (loss) from associated companies 33 18
NOK 285 million negative impact from IFRS 16 on
Profit (loss) before tax (EBT) 2,203 1,600 EBT (EBT of NOK 2,487 million excl IFRS 16)
Income tax expense (income) 532 297
Net profit (loss) 1,670 1,304
14Income statement YTD
NOK million YTD 2019 YTD 2018
Passenger revenue 28,037 24,867
Ancillary passenger revenue 5,276 4,743
Other revenue 1,265 998
13 % revenue growth mainly driven by improving
Total operating revenue 34,577 30,608 RASK
Personnel expenses 5,122 4,899
Aviation fuel 9,885 9,142
Airport and ATC charges 3,199 3,346
Handling charges 4,142 3,704
Technical maintenance expenses 2,570 2,578
Other operating expenses 3,627 3,656
Other losses/(gains) -925 -813
EBITDAR excl other losses/(gains) up to
EBITDAR 6,957 4,096 NOK 6.0 billion (NOK 3.3 billion)
Aircraft lease, depreciation and amortization 4,823 4,354
Operating profit (EBIT) 2,134 -257
Net financial items for 2018 include a gain related
Net financial items -1,870 1,621 to fair value adj. of NOFI of NOK 1,940 million
Profit (loss) from associated companies 72 91
Negative impact from IFRS 16 adjustments on EBT
Profit (loss) before tax (EBT) 337 1,455 of NOK 643 million (EBT excl IFRS 16 NOK 979
million)
Income tax expense (income) 73 -103
Net profit (loss) 264 1,558
15Increased unit revenue (RASK) by 3 %
Q3 unit revenue (RASK) +3 % to 0.42 (+1 % in constant currency)
3 % increased average sector length
Ancillary revenue per passenger increased by 11 % to NOK 196 (177)
23 % growth in other revenue (Cargo and Reward)
16,000
16,000
+ +8 8%%
14,000
14,000
12,000
12,000
10,000
10,000
Other
Other
8,000
8,000 Ancillary
Ancillary
Passenger
Passenger
Total
Totalrevenue
revenue
6,000
6,000
4,000
4,000
million
NOKmillion
2,000
2,000
NOK
0
0
Q3 15 Q3 16 Q3 17 Q3 18 Q3 19
Q3 15 Q3 16 Q3 17 Q3 18 Q3 19
Total revenue 7,277 8,331 10,074 13,387 14,404
Total revenue 7,277 8,331 10,074 13,387 14,404
Passenger 6,130 6,916 8,263 11,062 11,837
Passenger 6,130 6,916 8,263 11,062 11,837
% y/y chg 15% 13% 19% 34% 7%
% y/y chg 15% 13% 19% 34% 7%
Ancillary 967 1,191 1,498 1,919 2,067
Ancillary 967 1,191 1,498 1,919 2,067
% y/y chg 13% 23% 26% 28% 8%
% y/y chg 13% 23% 26% 28% 8%
Other 179 224 313 406 500
Other
% y/y chg
179
19%
224
25%
313
39%
406
30%
500
23%
16
% y/y chg 19% 25% 39% 30% 23%#Focus2019: Delivering strong cost
reductions of NOK 827 million in Q3
Actual
Actual Q3
Cost area Completed cost initiatives YTD Q3
(NOK m)
(NOK m)
Airport, handling
• High effect of airport- and handling-related cost initiatives during peak season
and technical
• Progressing on several items with key technical suppliers
408 924
costs
• Lower personnel costs due to improved planning and efficiency measures
Operating • Standardizing operational tools and consumables
efficiency • Improving disruption handling
237 582
• Processes to close operational bases announced
Procurement, • Stronger effects from renegotiated volume-driven agreements
administration • Consolidating office locations in Norway and Spain 68 177
and IT • Implemented new flight planning system
Commercial,
• Product offering optimization
marketing and
• Working with partners to release synergies
114 165
product offering
Total 827 1,848
176 % lower unit costs despite currency
headwind
6 % lower unit cost yoy
Unit cost excl fuel decreased by 9 % in constant currency
Unit cost incl fuel decreased by 10 % in constant currency
CASK excl leasing, depeciation and fuel
0.50 Leasing and depreciation
Fuel
0.45
0.10 0.11
0.40 0.10 0.11
0.15 0.12
0.13 0.13 0.13
Operating cost EBIT level per ASK
0.35 0.13
0.13
0.07 0.07
0.07 0.07
0.30 0.07
0.07
0.06 0.06 0.06
0.06
0.25 0.06
0.20
0.15 0.29
0.28 0.29 0.28
0.26 0.25 0.25 0.24 0.25
0.23 0.22
0.10
0.05
0.00
Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19
Q2 2018 adjusted for settlement regarding engines of NOK 447 million (NOK 0.02 per ASK)
18Positive underlying cost performance
Lower fuel cost (-5 % per ASK) driven by lower fuel 0.16
spot price (-11 %), stronger USD vs NOK (+8 %)
and reductions in ETS cost
0.14
Lower personnel cost (-3 % per ASK) despite
currency headwind and lower utilization following Fuel
0.12
the 737 MAX grounding
Higher lease and depreciation (+6 % per ASK) due
0.10
to currency effects. In constant currency, unit cost
was down by 2 % yoy
0.08
Higher handling cost (+7 % per ASK) due to
currency headwind, higher share of long-haul flights
Personnel
and increased compensation costs (EU261) 0.06 Leasing and
depreciation
Lower other operating expenses (-11 % per ASK) Handling
despite currency headwind 0.04
Airport/ATC
Other
Lower technical cost (-32 % per ASK) due to
renegotiation of contracts and reduced number of Technical
Cost per ASK
0.02
aircraft
Lower airport/ATC cost (-9 % per ASK) due to 0.00
renegotiations with suppliers and increased average Q3 14 Q3 15 Q3 16 Q3 17 Q3 18 Q3 19
sector length
19Balance sheet
30 SEP 30 JUNE
NOK million
2019 2019
Intangible assets 2,821 3,313
Tangible fixed assets 71,937 69,408
Fixed asset investments 1,410 1,303
Total non-current assets 76,168 74,023
Inventory 189 162
Investments reduced by NOK 1,266 million related
Investments 958 2,043
to sale of 9.97 % share in NOFI
Receivables 11,297 12,683
Cash and cash equivalents 2,934 1,688
Total current assets 15,377 16,576
ASSETS 91,545 90,600
Equity 5,249 2,892
Non-current debt 56,485 51,389
Other non-current liabilities 4,741 4,425
Total non-current liabilities 61,226 55,814
Air traffic settlement liabilities 6,759 11,373
Current debt 8,165 11,303 Reduced current debt by NOK 2,339 million related
to bond extension (NAS07)
Other current liabilities 10,146 9,217
Total current liabilities 25,070 31,893
Liabilities 86,296 87,707
EQUITY AND LIABILITIES 91,545 90,600
20Cash flow
NOK million Q3 2019 Q3 2018
Profit before tax 2,203 1,600
Paid taxes -8 -1
Depreciation, amortization and impairment 1,660 451
Changes in air traffic settlement liabilities -4,613 -3,912
Changes in receivables 1,386 1,740
Other adjustments 1,512 368
Net cash flows from operating activities 2,139 245
Purchases, proceeds and prepayment of tangible assets 1,017 -3,377
Other investing activities 1,760 18
Net cash flows from investing activities 2,776 -3,359 Positive net investment related to sale of aircraft
and NOFI
Loan proceeds 0 3,380
Principal repayments -2,788 -504 Debt reduced due to scheduled repayments (NOK
593 million), repaid credit facility (NOK 300 million)
Financing costs paid -894 -260
and sale of aircraft
Proceeds from issuing new shares - -2
Net cash flows from financing activities -3,682 2,615
Foreign exchange effect on cash 12 -3
Net change in cash and cash equivalents 1,246 -502
Cash and cash equivalents at beginning of period 1,688 3,714
Cash and cash equivalents at end of period 2,934 3,211
21Outlook
Guidance on fleet plan and capital
expenditure
Capital commitments* Deliveries B737 MAX8 Deliveries B787-9
2019: USD 1.0 billion (previous estimate USD 1.2 billion) 0 5
2020: USD 1.4 billion (previous estimate USD 1.3 billion) 16 4
180
164 165 164
160
156
10 15 16
144 11 B787-8/B787-9 owned
140 7 22
26 26
14 26
B787-8/B787-9 leased
120
116 6
14
3 4
14 30
99 9
95 4 40 B737 MAX8 owned
100 3
Number of aircraft (year-end)
85 2
5 5 53 4
52
1
2 B737 MAX8 leased
80 40 4
68 64 37
35 46 51
60 37 B737 owned
28
40
B737 leased
64 62 61
47 53
20 40 42 40 40 41
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
23
* Total contractual commitments (all aircraft incl PDP)Our business model is one of the most
carbon efficient in the world
Status Q3 Ongoing projects
~20 % more fuel-efficient than world average for SkyBreathe
airlines
Potential to reduce entire fleet fuel consumption by
World’s most fuel-efficient transatlantic airline, ~2 % p.a., equaling 44,000 tons JetA1
33 % better than industry average (ICCT, 2018)
CO2-emission reduction of approx. 140,000 tons
Our low-cost business model and new fleet are p.a., equaling more than 10 % of CO2-emissions
key sustainability advantages, and it is starting from domestic flights in Norway in 2017
to matter commercially
Costs savings of approx. USD 27 million p.a.
140
131
130 127
121 122
118
120
110 104 104
CO2/RPK (g)
103 101
100 99
100 97 96 96
95
90
88
90 86 88
81 Ga p:
80 76 27 %
74 73 72
70
70
60
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 H1'19
Norwegian Main competitor World average (2018)
Source: Pareto Equity Research, Norwegian Air Shuttle, Quarterly Preview, 9 Oct 2019 Source: SkyBreathe MyFuelCoach, example of smart saving computation from our pilot app
24Established joint venture comprising
27 aircraft
Agreed to establish a joint venture (JV) with China Construction Bank Leasing
(International) Corporation DAC ("CCBLI"), the leasing arm of the world’s second largest bank
CCBLI to become the majority owner of the JV with 70 % share with Norwegian holding the
remaining 30 %
Comprises an initial 27 Airbus A320 NEO aircraft to be delivered from 2020 to 2023
CCBLI to provide aircraft financing for aircraft within the JV
The JV will reduce Norwegian’s committed capital expenditure by approximately USD 1.5 billion in
addition to a positive equity effect
25Reduced growth in line with strategy
Estimated production growth (ASK)
0 % ASK growth in 2019 (previous estimate 0 % to 5 %)
Unit cost estimates 2019
Approximately NOK 0.310 incl depreciation excl fuel (unchanged)
on currency headwind and lower production
Approximately NOK 0.435 incl depreciation and fuel (previous estimate:
0.43)
Assumptions: Fuel price of USD 629/mt (618), USD/NOK 8.80 (8.58),
EUR/NOK 9.81 (9.77). Based on the current route portfolio and planned
production
Guidance for 2019
#Focus2019 on track to reduce costs by NOK 2.3 billion for 2019, of which
NOK 2.0 billion is recurring
EBITDAR excl other losses/(gains) range narrowed to NOK 6.1 - 6.5 billion
26Our actions are working…
#Focus2019 Sale of NOFI Partnership Joint Venture
Target achieved Completed sale of Letter of intent for Established joint
through continuous shares with final partnership with venture with CCBLI
cost focus and settlement in Q4 and JetBlue reducing capex by
revised target to cash release of NOK NOK 13.7 billion
NOK 2.3 billion 0.9 billion
Deferring Bond maturity Sale of aircraft
deliveries NOK 3.4 billion Concluded 17 AC for
Restructuring of aircraft extended with approx. 2019 and 2020 with
orders reducing capex 2 years compared to net liquidity effect of
by NOK 22.0 billion for original maturity dates NOK 1.6 billion
2019 and 2020
Ongoing August September October
… and more to come
27
Based on exchange rate USD/NOK of 9.10.The Way Forward
Looking forward to 2020 & beyond
Need bold actions to continue our return to profitability
Systematically assessed operating model throughout
Q3
Found significant opportunities across the business
Scoped the impact and created a plan – Program NEXT
NEXT is a 2-3 year transformational journey
Management will drive NEXT with full support from the
Board
We are committed to change and taking immediate
action
29NEXT builds on our journey from growth to
profitability
Program NEXT
A transformative cross-functional
journey to increased value creation
Make bold Continue
Drive best in
moves on CASK
class RASK
network improvement
Return to profitability
Growth
2015 2016 2017 2018 2019 2020 2021 Beyond
30Our ambition over the next two years
Program NEXT has potential to generate
significant impact
NOK Impact will come on top of already realized
#Focus19 effects
4 billion
Run-rate EBITDAR Impact will combine both top line and cost
improvements at the efficiencies to drive profitability
end of 2021
We will share specific targets in February
2020 (Q4)
31Near term focus spans core parts of our
business
Continue to re-assess, optimize
and fortify our network
Planned 10 % ASK reductions in 2020
Implement new digital tools and capabilities
to improve revenue Continue to
Take near term actions on pricing, inventory and product
increase
profitability
Improve reliability and reduce operating costs while
Drive on-time performance through collaboration between strengthening
Commercial & Ops liquidity
position
Right-size our cost base through procurement
Professionalize vendor management and improve internal
collaboration
32We fully believe in the potential of this plan
We are committed to change and
deliver value to our stakeholders
This is the beginning of a multi-year
journey
We look forward to updating you on
our overall program, its structure
and targets at our Q4 reporting
33Risk Factors
Risk factors (1/6)
1. Financial risks
• The Company has, and will continue to have, a significant amount of indebtedness, including substantial fixed obligations under aircraft leases and financings. The ability of the
Company to make scheduled payments under its indebtedness and to comply with financial covenants in its financing agreements will depend on, among other things, its future
operating performance and its ability to refinance its indebtedness, if necessary. Each of these factors is, to a large extent, subject to economic, financial, competitive, regulatory,
operational and other factors, many of which are beyond the Group's control. There can be no assurance that the Company will be able to generate sufficient cash from its
operations to pay its debts and lease obligations in the future, to comply with financial covenants in its financing agreements or to refinance its indebtedness.
• The implementation of the postponements of the maturity of the Company's bond issues NAS07 and NAS08 requires the provision of collateral to the bondholders. The Company's
ability to provide such collateral and, thereby, secure the implementation of postponement of the maturity of the bond issues is dependent on certain conditions precedent. Although
there can be no assurance that the Company will satisfy the conditions for implementing the postponement of the maturity of the bond issues, the Company is not aware of any
situation, provided completion of the capital raise, that it will not be able to fulfill the conditions precedent.
• The growth of the Group may lead to periods with further liquidity needs. There can be no assurance that the Group will continue to obtain, on a timely basis, sufficient funds on
terms acceptable to the Group in order to maintain adequate liquidity and to finance the operating and capital expenditures necessary to support its business strategy if cash flow
from operations and cash on hands are insufficient. Failure to generate additional funds, whether from operations or additional debt or equity financings, may require the Group to
delay or abandon some or all of its anticipated expenditures or to modify its growth strategy. Adverse developments in respect of negotiations with Boeing and tax rulings may also
significantly impact the further liquidity requirements and the profit and loss statement (See “Risks relating to the Group’s business and operations”).
• As of the date of this Presentation, the Group's firm aircraft orders totaled 190 aircraft with corresponding payment obligations. In accordance with airline industry market practice the
total order is not fully financed. Debt financing of aircraft acquisitions will be secured on a periodic basis, the size and timing depending on the schedule of aircraft delivery. A failure
to secure financing or to meet payment obligations under aircraft acquisition contracts may have a material adverse effect on the Group's business, financial condition, results of
operations and future prospects.
• Increased hold-back from credit card acquirers have had a negative impact on the Company’s cash flow over the past quarters. Although the Company believes that it is now at a
trough level, there is still a downward risk that the Credit card acquirers may increase their holdback further which could have an adverse effect on the Company’s liquidity.
• The Company has due to the nature of the industry always certain trade payables, but has due to the increase of hold-backs a more significant amount of trade payables which are
expected to be normalized into 2020. It is a risk that these trade payables may be accelerated, which could have a material negative impact on the liquidity of the Company.
• The Group is subject to the effects of interest rate fluctuations on its floating rate financing arrangements and aircraft leases. Floating interest rate borrowings consist of unsecured
bond issue, revolving credit facility, bank aircraft financing, loan facility and financial lease liabilities. As a result of these variable rate borrowings, an increase in interest rates would
cause an increase in the amount of the Company's interest payments and could have a material adverse effect on the results of operations of the Group.
• The Company is subject to fair value interest rate risk on its fixed interest rate financing arrangements. Long-term borrowings are denominated in USD, EUR, SEK and NOK.
• The Group is exposed to the residual value risk and also to the impairment of the value of the aircraft it owns during the ownership period. As previously announced, the Group is in
the process of selling aircraft in order to strengthen its balance sheet and is, therefore, exposed to fluctuations in the second-hand aircraft market.
• The Group prepares its financial statements in accordance with International Financial Reporting Standards (the "IFRS") as adopted by the EU. Future changes in the IFRS
accounting standards may lead to significant changes in the reported financial statements of the Group, which again could affect the Company's position in existing leasing and debt
arrangements and the position when renewing or acquiring further financing. The occurrence of any such events could have a material adverse effect on the Company's business,
financial condition and results of operations.
• The Company is seeking to reduce growth and focusing on profitability and will through these activities incur short term negative effects through e.g. increased restructuring costs
which may adversely affect the liquidity and the profit and loss statement.
35Risk factors (2/6)
2. Risks relating to macroeconomic conditions
• The Group is exposed to general developments in the global economy and the capital markets. Uncertain global economic and financial market conditions and geopolitical
tension could adversely affect the Group's business, results of operations, financial condition, liquidity and capital resources.
3. Risks relating to the airline industry
• The airline industry is cyclical by nature and vulnerable to general economic conditions. General economic and industry conditions significantly affect the Company's business,
financial condition and results of operations. An economic downturn in the airline industry generally result in a lower overall number of passengers which, in turn, leads to
excess capacity (or increased existing excess capacity) and price pressure in the affected markets.
• The Group's competitive environment may be disrupted as new entrants and/or alliances expand, airlines consolidate, or alliances and/or joint businesses gain competitive
advantage over the Group's business. Airlines also face competition from other sources of transportation, such as trains, buses, ferries and cars. Failure to successfully
respond to these competitive pressures could have a material adverse effect on the Group's business, financial condition, results of operation and future prospects.
• Demand for airline travel and the Group's business is subject to strong seasonal variations. Should fluctuations be greater than expected or should the Group not adapt its
network in accordance with the changed demand around holidays, this could have a material adverse effect on the Group's business, financial condition and results of
operations.
• The capacity of airlines is a decisive factor to their profitability. Due to the long delivery time, aircraft orders are based on long-term forecasts. The Group's profitability depends
on accurately estimating capacity development. If the assumptions and estimates prove to be incorrect, it may have a material adverse effect on the Group's business, financial
condition and results of operations.
• High fixed costs mean that the airline industry is vulnerable to relatively small changes in the number of passengers and/or the fares paid.
• The airline industry is exposed to increases in airport, transit and landing fees, as well as changes in air security policies and air traffic security costs affecting the airline
industry. If the Group is unable to pass onto customers the costs resulting from such policies or fees, then this could have a material adverse effect on the Group's business,
financial condition and results of operations.
• The airline industry is subject to extensive taxes, aviation and license fees, charges and surcharges, which can affect demand. New taxes, fees or charges may be introduced
and if the Group is unable to pass any increases in charges, fees or other costs onto its customers, these increases could have a material adverse effect on the Group's cash
flows, financial condition and result of operations.
• The Group's financial results are affected by the evolution of the market price of jet fuel, as fuel costs are the single largest cost item for the Group. Jet fuel costs represented
30 per cent of the Group's operating costs (before depreciation) in 2018. The residual impact of jet fuel price fluctuations is determined by the hedges in use at a point in time,
and fuel purchases are hedged to some extent. Despite such hedging, the operating results of the Group can be materially affected by changes in the price and availability of
jet fuel.
• Fluctuations in exchange rates, particularly between NOK and the U.S. dollar ("USD") and between NOK and the Euro ("EUR"), may have a material adverse effect on the
Group. The Group's foreign exchange risk mainly arises from fuel and aircraft purchases, aircraft maintenance, aircraft leasing payments and sales revenue denominated in
foreign currencies.
• Company seeks to mitigate the effects of market fluctuations in currency, interest rate and jet fuel positions through the use of derivative instruments. The aim of the hedging
policy is to mitigate the volatility of the Group's financial results caused by market price fluctuations. However, in certain circumstances the market price of the derivatives may
change substantially, and the Group may suffer substantial hedging losses.
36Risk factors (3/6)
• Company seeks to mitigate the effects of market fluctuations in currency, interest rate and jet fuel positions through the use of derivative instruments. The aim of the hedging
policy is to mitigate the volatility of the Group's financial results caused by market price fluctuations. However, in certain circumstances the market price of the derivatives may
change substantially, and the Group may suffer substantial hedging losses.
• Outbreaks of epidemics or pandemics can adversely affect the demand for air travel and have a significant impact on the Group's operations.
• The Group is exposed to the risk of significant losses from aviation accidents involving its operations, including plane crashes, and other disasters, and the Group's insurance
coverage may not be adequate in such circumstances.
• The Group's insure assets and employees to reduce the risk of major economic damage. The insurance covers a range of risks, hereunder all risk coverage for damage to the
Group's aircraft fleet, spare parts and other technical equipment as well as liability exposure associated with airline operations. However, if the Group's insurance coverage
should prove to be insufficient, this could have a material adverse effect on the Group's business, financial condition, results of operations and future prospects.
• Terrorist attacks and armed conflicts, as well as their aftermath, may have a material adverse effect on the Group's business. Future occurrences or risks thereof of terrorist
attacks, uprisings or conflicts in the markets in which the Group operates may have a material adverse effect on the Group's business, financial condition and results of
operations.
• Macroeconomic decisions or policy changes may have an impact on taxes, duties or other charges to which the Group is subject. This is particularly relevant in the current
economic climate where the focus is on reducing government deficits, including by raising taxes.
• The airline industry is exposed to risks associated with the limitation of greenhouse gas emissions and related trading schemes or allowances and any changes in
environmental regulation. The consequences of increased attention to the environmental impact of the aviation industry are uncertain but may negatively impact the
development of the Group.
4. Risks relating to the group’s business and operations
• Operational difficulties may have a negative effect on the Company's operations. The Company's flights can be negatively affected by several factors, many of which are
outside the Company's control, such as technical problems, problems with information technology systems, third party service providers failing to deliver services in a
satisfactory manner etc. Such issues can result in delays or cancellations of flights or a failure to deliver satisfactory services to the Group's customers. This can have various
negative effects, such as loss of income, the incurrence of additional costs, reputational damage and liability to pay compensation to customers. Materialization of any of the
above risks may have a material adverse effect on the Group's business, financial condition, results of operations and future prospects.
• During recent years, cyber-attacks have been increasing. Although the Company believes that it has a prudent security management, such attacks may not be avoided and
could seriously affect the business of the Group.
• The Company has experienced several issues with its engines on the Boeing 787. The Company is expecting these issues to be resolved and compensated by Rolls Royce in
full or in part. However, there is no guarantee that future problems may not arise on the 787 engine and similar issues will have a material impact on the Company’s operation.
• Deliveries of Airbus 320/321 aircrafts to the Company have been delayed mainly due to limited capacity in Airbus. Due to the delay, the payment schedule for these aircrafts
have been extended correspondingly. The delay has little impact on the Group's operations other than a corresponding reduction in the number of aircrafts to be leased out by
Arctic Aviation Assets DAC ("AAA").
• The Company is assessing the financial impact of the grounding of Boeing 737 MAX, and although it expects that it can start taking delivery of the Boeing 737 Max aircraft from
Q1/Q2 2020, there is a risk that the delivery may be postponed further, or that delivery does not happen at all. The Company expects to be compensated by Boeing, however
no such compensation has been agreed and material delays will impact the liquidity position and the profit and loss statement of the Group (see “Financial Risk”).
37Risk factors (4/6)
• As part of the Company’s fleet renewal strategy, the Company expects to sell aircrafts. There is a risk that the sale of aircrafts does not materialize as planned, that the sales
process takes longer time, that fewer aircraft are sold and/or that the aircrafts are sold at a lower price. The occurrence of any of these events could have an adverse effect on
the Company’s liquidity.
• The operations and development of the Group is dependent on traffic rights. Under the laws and regulations which govern the aviation business, the Group requires traffic
rights to operate its flights. Today there is a single aviation market within the EU, meaning any carrier from a member state (incl. EEC) can depart and arrive anywhere within
the region. However, the right to fly from a member state to a non-member state, is regulated by bilateral agreements that typically restrict access to carriers and aircraft based
on the agreement parties' nationality. The EU has negotiated certain agreements on behalf of its member states, such as with Canada and Brazil, but these do not apply to a
Norwegian carrier as Norway is only part in the Open Skies agreement between EU and US. Even flying above foreign territory can be restricted, such as over Russia. The
same bilateral system applies anywhere else in the world. In order for the Group to continue to grow outside Scandinavia and combine low-cost short haul in Europe with low-
cost long-haul from Europe to the rest of the world, the Group needed traffic rights. The solution to this obstacle is a multiple airline model within the same Group, where each
airline holds a national 'Air Operating Certificate' (AOC). This allows for optimization of the location of each AOC to get access to needed traffic and overflying rights. However,
to the extent the Group should wish to expand its operations outside the scope of its existing AOCs or the any of the existing AOCs should for any reason be revoked or fall
away, this may limit the Group's ability to operate certain flights. This could have a material adverse effect on the Company's results of operations, financial condition or
prospects.
• The core of the Group's strategy is to become the preferred supplier of air travel in its selected markets, through attracting customers and stimulating markets by offering
competitive low fares and a quality travel experience based on low operating costs, operational excellence and a helpful and friendly service. The Group's strategy to become
the preferred supplier of air travel is based on its ability to offer competitive low fares, primarily through a young fleet with a low operational cost. A failure by the Group to
implement its strategy may have a material adverse effect on its business, financial condition, results of operations and future prospects.
• The Group's business, financial condition and results of operations may be affected by ability to secure new efficient aircraft deliveries in the future. There can be no assurance
that the Group will be able to secure the ordering of the most cost efficient aircraft at the right time or in the right number, and this might have a material adverse effect on the
Group's business, financial condition and results of operations and future prospects.
• Large Existing Shareholders may have the ability to exert influence over the Company, even if it does not have decisive influence or formally exercises negative control. Such
Existing Shareholders might in certain situations, depending on the participation of the General Meeting of the Company, be able to exert significant influence over matters to
be voted on by the Existing Shareholders, including, among other things, approval of annual financial statements and dividends (which require support by a majority of the
votes cast), the election and removal of directors (where the person receiving the most votes is elected), and even in decisions such as capital increases and amendments to
the Company's Articles of Association (which require the support of Existing Shareholders holding at least two-thirds of the votes cast and the shares represented).
• Air traffic is limited by the infrastructure of airports and the number of slots available for aircraft arrivals and departures. The Group's growth is dependent on access to the right
airports in the geographical markets the Group has chosen and with a level of costs in accordance with the Group's low-cost strategy. Capacity constraints at airports or an
inability to acquire and maintain airport slots or overflight rights may have a material adverse effect on the Group's business, financial condition or results of operations
• The Group's dependence on third-party suppliers has increased in recent years in line with the growth of the Group, exposing it to the risk that quality and availability issues
and/or unexpected costs associated with third-party suppliers have a material adverse effect on the Group
• Most of the Group's employees are unionized. While the Group was able to negotiate a new collective labor agreement with the Norwegian Pilot Union in November 2017 and
has collective labor agreements in place with all employee groups, there can be no assurance that the Group's future agreements with labor unions can be negotiated to the
long-term benefit of the Group or that the outcome of new negotiations, mediations or arbitrations will be on terms consistent with the Group's expectations or comparable to
agreements entered into by other airlines.
• The Group is exposed to tax related risks. The Group conducts its business, including transactions between Group Companies, in Scandinavia and a number of other countries
in accordance with applicable tax laws and treaties, and the requirements of tax authorities in such countries. However, there will always be a risk that the tax authorities in
Norway and other relevant countries could have conflicting views on the application of tax rules by the Group.
38Risk factors (5/6)
• The Group’s deferred tax assets, and in particular the Group’s unused tax losses, are substantial both in nominal terms and in relation to total equity. If the Group is unable to
utilize its deferred tax assets, this will have a significant adverse effect on the Group's financial position.
• The Group is dependent on qualified airline personnel, in particular pilots, cabin crew and employees with qualifications in aircraft maintenance, information technology and
sales. The implementation of the Group's growth strategy will require hiring of new personnel and there can be no assurance that the Group will be able to retain employees in
key positions or recruit a sufficient number of new employees with appropriate technical qualifications at a cost which enables the Group to remain competitive.
• The Group has become increasingly dependent on information technology systems to reduce costs and to enhance customer service in order to compete in the current
business environment. Thus, the performance and the reliability of information technology are critical to the Group's ability to attract and retain customers and for the Group's
ability to compete effectively and implement its commercial strategy.
• Any deterioration in brand image or consumer confidence in the Norwegian brand may adversely affect the Group's ability to market its services and attract and retain
customers.
• The Group is or may, from time to time, be involved in litigation and arbitration proceedings. Many of these disputes relate to claims arising in the ordinary course of business
including, but not limited to, litigation relating to service interruption, flight delays, lost or damaged luggage, flight accidents and personal injury claims. The Company has
earlier disclosed information relating to a re-assessment made by the Central Tax Office for Large Enterprises in respect of 2013 and 2014. The Company, together with its
legal advisor, has taken the view that the reassessment is without merit and has thus not made any provisions for any potential tax claim in its Interim Financial Statements for
the third quarter and first nine months of 2019. There can be no assurance as to the outcome of these proceedings, and the Group's reputation could be harmed even if a
favorable judgment is received. If an unfavorable judgment against the Group would be made in either of these claims, it may have a material adverse effect on the Group's
business, liquidity, financial condition, results of operations and future prospects.
• The cash that the Company obtains from its subsidiaries is the principal source of funds necessary to meet its obligations. Contractual provisions or laws, including laws or
regulations related to the repatriation of foreign earnings, as well as the Company's subsidiaries' financial condition and, operating requirements, potential restrictive covenants
in future debt arrangements and debt requirements, may limit the Company's ability to obtain cash from subsidiaries or joint ventures that it requires to pay its expenses or meet
its current or future debt service obligations. While the Company is not currently subject to any restrictions materially limiting its ability to transfer cash from its subsidiaries, the
Company may become subject to such restrictions in the future.
5. Regulatory risks
• The Group is dependent on several public authorizations, hereunder relating to the operations of its aircraft and routes, and any cancellation of such authorizations might have
a material adverse effect on the Group's business, financial condition and results of operations
• Future application of restrictions in regard to noise pollution, greenhouse gas emissions and other environmental laws and regulations may have a material adverse effect on
airline companies
• Laws and regulations, as well as international bilateral and multilateral treaties, regulate airlines. These regulations relate to, among other things, security, safety, licensing,
bonus programs and competition. While the impact of such regulations decreased with de-regulation of the airline industry in the European market, the Group cannot predict
what laws, regulations and treaties will be adopted or amended, if any, and how this will impact its business, financial condition and results of operations.
• The contemplated exit of the United Kingdom from the European Union might have a material adverse effect on the Group's business, financial condition and results of
operations. Even though the Group has operating licenses in other EU states such as Ireland and Sweden, Brexit might impair the Group's ability to grow as anticipated from its
UK base.
• The Group is subject to an increasing body of data protection regulations, infringements of which could result in fines and reputation damage.
39Risk factors (6/6)
6. Risks related to the Shares
• The share price may experience substantial volatility. The trading price of the Shares could fluctuate significantly in response to, inter alia, the financial situation of the Group,
variations in operating results, response to quarterly and annual reports issued by the Group, changes in earnings estimates by analysts, adverse business developments,
changing conditions in the oil and gas industry at large, changes in general market or economic outlook, interest rate changes, foreign exchange rate movements, matters
announced in respect of major competitors or changes to the regulatory environment in which the Group operates or rumors and speculation in the market.
• Substantial future sales of Shares by its current or future holders or any future share issuances by the Company could cause its share price to decline.
• The Company may in the future see the need of additional equity investment in relation to financing capital intensive projects, or related to unanticipated expenses or liabilities.
This may lead to a future need of additional issuance of Shares in the Company. The Company cannot guarantee that the current ownership of the Existing Shareholders will
not be diluted.
• Dividends may only be declared to the extent that the Company has distributable funds and in compliance with requirements for an adequate equity and a liquidity, and subject
to the Board of Directors finding such declaration to be in compliance with the said requirements and to be prudent in consideration of the size, nature, scope and risks
associated with the Company's operations.
• Holders of the Shares that are registered in a nominee account may not be able to exercise voting rights as readily as shareholders whose shares are registered in their own
names with the VPS.
• Investors in the United States may have difficulty enforcing any judgment obtained in the United States against the Company or its directors or executive officers in Norway.
• The Shares have not been, and will not be, registered under the U.S. Securities Act or under the securities laws of any state or other jurisdiction of the United States or any
other jurisdiction outside of Norway, and there are no plans to file for such registration. As such, the Shares (including the Offer Shares and Subscription Rights) may not be
offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act and otherwise in compliance
with any applicable securities laws of any state or other jurisdiction of the United States.
7. Risks related to the libility relating to the Convertible Bond
• When determining the amount of its liability relating to the Convertible Bond, the Company will be required to mark-to-market the option element of the Convertible Bond. This
means that the size of the liability going forward will depend i.a. on the development of the price of the Company's shares. In case of a significant increase in the Company's
share price this may result in the Company breaching the equity covenant in its outstanding bond issues.
40Fly Norwegian
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