Norwegian Seals JV with Chinese Lessor for 27 A320neos

Following protracted efforts to form a leasing joint venture with a “very strong Asian company” to divest part or all of its Airbus order book, Norwegian Air Shuttle on Thursday said it reached a deal with China Leasing International Corporation for an initial 27 Airbus narrowbodies, giving the Oslo-based low-cost carrier group financial breathing room to pursue its restructuring. “We finally got an agreement on this joint venture,” said Norwegian acting CEO and CFO Geir Karlsen. The joint venture with CLIC will contribute “significantly” to reducing the company ‘s current and future capital expenditure, he noted, and “is one of many important initiatives that need to be realized to deliver on [a] strategy of moving from growth to profitability.”

The arrangement calls for CLIC, a 100-percent-owned subsidiary of China Construction Bank Corporation, to become the majority owner of the joint venture with a 70 percent share, while Norwegian, through wholly-owned Irish leasing subsidiary Arctic Aviation Assets, holds the rest.  The new company, which will be based in Ireland, will purchase the aircraft from Norwegian upon delivery. CLIC will provide aircraft financing for aircraft within the JV.

Speaking during a third-quarter earnings presentation with analysts, Karlsen confirmed the leasing joint venture will launch with just 27 A320neo aircraft—scheduled for delivery from 2020 to 2023— though he indicated Norwegian might sell more units into the new company. “I think this is a start of a long-lasting strategic relationship with CCB,” he said. “We created a vehicle that gives us flexibility. We can even lease aircraft from this company to Norwegian, which is not Plan A but it gives us flexibility.”  At the end of September, Airbus held unfulfilled firm orders from Norwegian for 58 A320neo and 30 A321neo jets, according to the OEM’s latest orders and deliveries overview. Norwegian placed the order with Airbus in 2012 as part of a $21 billion spending spree on 222 new aircraft that also consisted of an agreement with Boeing to buy 122 737 Max jets. Norwegian operates only Boeing aircraft, a mix of 787s and 737s.

According to Karlsen, Norwegian will make a profit on each of the aircraft it will sell to the new venture. Both partners will carry marketing responsibility and jointly place the aircraft in the market. “The aircraft could go to the Chinese market but also to the international market,” he said.

The deal for the 27 aircraft will reduce Norwegian’s committed capital expenditure by approximately $1.5 billion and adds to parallel efforts to raise cash, including selling some of its 737NGs. Earlier his month, it sold five examples to China Aircraft Leasing Group Holdings Limited (CALC).

Norwegian has committed to a cautious approach to selling off more 737s due to the Max grounding, Karlsen said. “Ideally, we would like to sell more NGs but we have to be careful with the Max situation,” he said. Norwegian has not incorporated its 18 grounded 737 Max 8s in its winter schedule and does expect the aircraft to return to service in late March 2020 “at the earliest.” The grounding of its Max fleet has cost the airline 800 million Norwegian kroners ($87 million) so far, a figure expected to increase to NOK1 billion for the full financial year.

In spite of the higher costs related to the Max and the ongoing issues with the Rolls-Royce Trent 1000 engines powering its Dreamliner fleet, Norwegian reported what it called “its best-ever quarterly result” with a profit before tax of NOK2.2 billion, up 38 percent on the same period a year ago. Norwegian plans to reduce capacity expressed in available seat kilometer (ASK) by 10 percent next year and is preparing a new cost-cutting program dubbed NEXT. The company expects to achieve a cost-reduction of NOK2.3 billion for the year through its current cost reduction program, #Focus2019.