Norwegian Air Uses 737 Crisis to Wring New Deal From Boeing
(Bloomberg) -- Cash-strapped Norwegian Air Shuttle ASA secured a deal to delay deliveries of Boeing Co. 737 Max jets, aided by the bargaining power granted by the model’s global grounding after two fatal crashes.
Boeing agreed to postpone the handover of 14 Max 8s due in 2020 and 2021, which together with an outline accord to restructure Airbus SE deliveries will reduce capital spending by $2.1 billion, Norwegian Air said ahead of its first-quarter results on Thursday.
The Scandinavian discounter has the greatest exposure in Europe to the crisis surrounding the 737 Max, with 18 planes currently idled. At the same time, the company has been re-evaluating a mammoth order book amid industry overcapacity and falling prices, with the grounding presenting it with an opportunity to revisit fleet requirements.
“We have had some productive meetings with Boeing where we have discussed how we can maneuver through the difficulties the Max situation is causing Norwegian,” Chief Executive Officer Bjorn Kjos said a statement. He added that the financial impact of the grounding may be close to $60 million.
Shares of Norwegian Air advanced as much as 5 percent and were trading 3.9 percent higher at 40 kroner as of 9:39 a.m. in Oslo. The stock is still down 60 percent for the year after tumbling in January when British Airways parent IAG SA dropped a takeover approach.
The delivery delays at Fornebu-based Norwegian, which will now keep older 737-800 planes in its fleet for longer, may help Boeing meet the needs of other customers once the Max resumes flights. Kjos said he doesn’t expect that to happen until August at least.
The re-engined 737 was grounded by regulators worldwide following an Ethiopian Airlines crash on March 10 that’s been blamed on a malfunctioning anti-stall system, forcing Boeing to halt handovers and slow production lines.
The Chicago-based manufacturer said Wednesday that it’s working with customers to minimize the impact and bring the fleet back into service.
“We are in daily, multiple times a day conversations with our customers,” CEO Dennis Muilenburg said on a conference call. “We regret the impact this has had to their operations.”
Norwegian was among the earliest adopters of the upgraded Max, using its extra range to launch services on Europe-U.S. routes traditionally dominated by twin-aisle planes. But after the Ethiopia crash it has scrapped some flights and switched others to bigger jets, increasing costs and reducing competitiveness.
The Max crisis hit when Norwegian could least afford disruption after being forced to raise funds in a rights issue. While the carrier has yet to determine the full impact, the cost of the grounding may be as much as 500 million kroner ($57 million), assuming flights restart in the third quarter, it said.
Norwegian didn’t say how much it expects to receive in compensation or whether the estimate includes savings from reduced maintenance work.
The delivery deferrals will save $500 million in the first year and $1.6 billion in 2020. Included in those figures is an outline deal with Airbus that may help Norwegian offload aircraft from an order for A320neo-series aircraft -- the main global competitor to the 737 Max -- that it doesn’t plan to operate.
Chief Financial Officer Geir Karlsen, recently appointed deputy CEO, said the accord amounts to a “complete restructuring” that pushes back deliveries so that only five jets are due in the next two years, with those destined to operate for Hong Kong Express.
The breakthrough was achieved as production delays with the Neo gave Norwegian a “strong hand,” Karlsen said on a analyst call, adding that it will help the carrier implement plans announced last year for a venture with an unnamed partner that would take over cash obligations on the order backlog.
The Boeing and Airbus agreements cap a series of more piecemeal fleet delays as the carrier has worked to preserve cash.
“We feel that the order book is finalized now,” Karlsen said. “We don’t expect any further rescheduling.”
Norwegian’s first-quarter loss shrank by more than one-third as the carrier cut costs and scrapped under-performing routes.
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