Financial Analysis of Norwegian Air Shuttle ASA

Amanda Rintakoski

Degree Thesis Bachelor’s Degree in International Business 2018 DEGREE THESIS Arcada

Degree Programme: Bachelor’s Degree in International Business

Identification number: Author: Amanda Rintakoski Title: Financial Analysis of Norwegian Air Shuttle ASA

Supervisor (Arcada): Linda Puukko

Commissioned by:

Abstract: The aim of the study was to analyze the financial performance of Norwegian Air ASA Shuttle. The objective was to research the company’s finances from 2008 to 2017 and re- alize events that contributed to Norwegian’s financial success and failure. To understand the industry, an investigation into the airline industry was also made. To make the research more practical and establish relationships, comparison between Norwegian, Finnair and SAS Scandinavian was made. The research question was “What has Norwegian's financial performance been like 2008-2017 and why”. The research was conducted by calculating profitability, liquidity and solvency using different ratios and margins. The results were compared to two competitors, Finnair and SAS. The data was collected from secondary sources. The most significant sources of data for the research were the Annual Reports of Norwegian Air Shuttle ASA, the Annual Reports of SAS Group and Finnair, as well as the IATA’s Annual Reports. From the airlines Annual Reports, the financial statements from 2008-2017 were mostly used to collect the data and conduct the research. The research results showed that Norwegian’s financial performance was uncertain, compared to competing airlines. Although demand led to a decent gross profit, net profit was rather weak because of operational costs. Liquidity and solvency ratios proved that Nor- wegian has been heavily investing in its expanding business through debts, which has resulted in an unfavorable liquidity and solvency position. Factor’s such as oil prices, demand and global economic environments in addition to trends and financial management were determined as factors affecting airlines performance in general.

Keywords: Financial performance, profitability, liquidity, solvency, airline

Number of pages: 61 Language: English Date of acceptance:

EXAMENSARBETE Arcada

Utbildningsprogram: Bachelor’s Degree in International Business

Identifikationsnummer: Författare: Amanda Rintakoski Arbetets namn: Financial Analysis of Norwegian Air Shuttle ASA

Handledare (Arcada): Linda Puukko

Uppdragsgivare:

Sammandrag: Arbetets syfte var att undersöka Norwegian Air ASA Shuttles ekonomiska utveckling. Arbetet gjordes genom att undersöka Norwegians finansiella rapporter från 2008 till 2017. Målet var att konstatera hur företagets ekonomi har sett ut och hitta anledningar till dess utveckling. Dessutom undersöktes flygbolagsbranschen och Norwegians kon- kurrenter, Finnair och SAS, för att göra arbetet mer praktisk. Undersökningsfrågan var ”Hur har Norwegians ekonomiska utveckling sett ut från 2008 till 2017 och varför”. Undersökningens mål uppnåddes genom att räkna ut Norwegians lönsamhet, likviditet och soliditet. Undersökningen kom till slutsatsen att Norwegians finansiella utveckling har varit rela- tivt osäker, jämfört med konkurrerande flygbolag. Även om bruttovinsten var tillfred- ställande tack vare efterfrågan, var nettovinsten svag på grund av driftskostnader. Likvi- ditets- och soliditetsberäkningar bevisade att Norwegian har investerat mycket i det växande företaget med lån, vilket har lett till att företaget har svag likviditet och soliditet. Faktorer som bränslepris, efterfrågan och det globala ekonomiska klimatet, därtill trender och ekonomisk förvaltning fastställdes som orsaker till ett flygbolags finansiella utveckling.

Nyckelord: Finansiell utveckling, lönsamhet, likviditet, soliditet, flygbolag

Sidantal: 61 Språk: Engelska Datum för godkännande:

OPINNÄYTE Arcada

Koulutusohjelma: Bachelor’s Degree in International Business

Tunnistenumero: Tekijä: Amanda Rintakoski Työn nimi: Financial Analysis of Norwegian Air Shuttle ASA

Työn ohjaaja (Arcada): Linda Puukko

Toimeksiantaja:

Tiivistelmä: Opinnäytetyön tavoite oli tutkia Norwegian Air Shuttle ASA:n taloudellista tulosta ja tu- loksen syitä. Norwegianin taloudellista kehitystä tutkittiin laskemalla kannattavuus, maksuvalmius ja maksukyky yhtiön vuosien 2008-2017 julkaisemien talousraporttien avulla. Sen lisäksi tutkittiin lentoyhtiö-alaa sekä verrattiin Norwegianin tulosta Finnairin ja SAS Scandinavianin tuloksiin. Tutkimuskysymys oli ”Minkälainen Norwegianin taloudellinen kehitys on ollut vuosina 2008-2017 ja miksi”. Tutkimuksen tulos näytti että Norwegianin taloudellinen tulos oli tutkittuna aikana epäva- kaa, kilpailijoihin verrattuna. Vaikka bruttovoitto olikin tyydyttävä kysynnän takia, netto- voitto oli heikko käyttökustannuksien vuoksi. Maksuvalmiuden ja maksukyvyn laskelmat näyttivät että Norwegian on investoinut laajalti lainoilla kasvavaan yritykseensä, mikä on johtanut yrityksen heikkoon maksuvalmiuteen ja maksukykyyn. Muun muassa polttoai- neen hinta, kysyntä ja taloudellinen ympäristö sekä trendit ja taloushallinto määritettiin lentoyhtiön taloudelliseen tulokseen vaikuttaviin syihin.

Avainsanat: Taloudellinen tulos, kannattavuus, maksuvalmius, maksukyky, lentoyhtiö

Sivumäärä: 61 Kieli: Englanti Hyväksymispäivämäärä:

CONTENTS

1 Research topic ...... 8

1.1 Introduction ...... 8 1.2 Background ...... 9 1.3 Demarcations and limitations ...... 9 1.4 Definitions and abbreviations ...... 9

2 Theoretical framework ...... 10

2.1 Norwegian Air Shuttle ASA ...... 10 2.2 The airline industry ...... 12 2.2.1 Overview ...... 12 2.2.2 Airline business models ...... 13 2.2.3 In the Nordics ...... 15 2.2.4 SAS Scandinavian Airlines ...... 16 2.2.5 Finnair ...... 17 2.3 Financial measures ...... 18 2.3.1 Profitability ...... 18 2.3.2 Liquidity ...... 20 2.3.3 Solvency ...... 22 2.4 Airline industry performance ...... 23 2.5 Previous research...... 34

3 Methodology ...... 34

3.1 Research design ...... 34 3.1.1 Material ...... 34 3.1.2 Approach ...... 35 3.1.3 Data collection ...... 35 3.1.4 Data analysis ...... 35 3.1.5 Data interpretation ...... 36 3.1.6 Expected results ...... 36

4 Research results ...... 36

4.1 Performance measurements ...... 36 4.1.1 Profitability ratios ...... 36 4.1.2 Liquidity ratios ...... 41 4.1.3 Solvency ratios ...... 46 4.2 Discussion ...... 52

5 Conclusion ...... 53

References ...... 56

Appendices ...... 63

5.1.1 Appendix 1. Result of performance measurements: Norwegian ...... 63 5.1.2 Appendix 2. Result of performance measurements: Finnair ...... 63 5.1.3 Appendix 3. Result of performance measurements: SAS ...... 64

FIGURES

Figure 1. Aviation and airline relationships in the Nordics from 1986-2015 …………16

Figure 2. Net profit of commercial airlines worldwide from 2005 to 2018 (in billion U.S. dollars) …………………………………………………………………………………24

TABLES

Table 1. Norwegian Gross Profit Margin ………………………………………….……36 Table 2. SAS Gross Profit Margin ……………………………………………….……..37 Table 3. Finnair Gross Profit Margin …………………………………………….……..38 Table 4. Norwegian Net Profit Margin …………………………………………...…….39 Table 5. SAS Net Profit Margin ………………………………………………….…….39 Table 6. Finnair Net Profit Margin ……………………………………………….…….40 Table 7. Norwegian Current Ratio …………………………………………….….…….42 Table 8. SAS Current Ratio …………………………………………………………….42 Table 9. Finnair Current Ratio ………………………………………………………….43 Table 10. Norwegian Cash Ratio ……………………………………………………….44 Table 11. SAS Cash Ratio …………………………………………….………….…….44 Table 12. Finnair Cash Ratio ……………………………………….…………….…….45 Table 13. Norwegian Total Debt Ratio ………………………..…………………….….46 Table 14. SAS Total Debt Ratio ………………………………………………….…….46 Table 15. Finnair Total Debt Ratio ………………………………………………….….47 Table 16. Norwegian Debt-Equity Ratio ……………………………………………….48 Table 17. SAS Debt-Equity Ratio …………………………………………………...….48 Table 18. Finnair Debt-Equity Ratio …………………………………………………..49

Table 19. Norwegian Long-Term Debt Ratio ……………………………………….…50 Table 20. SAS Long-Term Debt Ratio …………………………………………...…….50 Table 21. Finnair Long-Term Debt Ratio ………………………………………………51

1 RESEARCH TOPIC

1.1 Introduction

Norwegian Air Shuttle has during the last decade become a household name in the Nor- dic airline business and is known to the Finnish public for its low-cost fares. Norwegian has quickly become a serious threat to competing Nordic airlines. Yet, most who are familiar with Norwegian, might be completely unfamiliar with the company’s financial journey. An analysis of Norwegian’s financials from 2008 to 2017 gives an understanding of the airline’s strategy and decisions, in addition to discovering how Norwegian has per- formed financially.

The aim of the research was to investigate financial performance and its underlying reasons. To make the research more practical, Norwegian Air Shuttle ASA (from 2008 to 2017) was chosen in order to make an analysis and calculations possible. The research of Norwegian’s financials was done by calculating profitability, liquidity and solvency ratios and analyzing what the company’s financial performance has been like. In addition, factors affecting financial performance were determined. It is important to recognize how finances of any kind are affected by management and also unavoidable external factors. When one understands how finances are influenced by external factors, financial management can be applied. Financial management concerns anyone with funds and is vital to understand in order to keep a company afloat. A better understanding into Norwegian’s financial circumstances from 2008 to 2017 allows any of Norwegian’s stakeholders, such as passengers, investors and employees of the company as well as other airline industry employees, to know what kind of company Norwegian is.

Research question:  What has Norwegian's financial performance been like 2008-2017 and why?

1.2 Background

Norwegian is a relatively new airline, founded in the early 1990’s. The company slowly developed into a low-cost airline, which aimed to sell cheap fares, be punctual and trans- parent while maintaining a standard of service. After some 15 years in the industry, Nor- wegian shifted to a more aggressive strategy and started expanding in every direction, in order to grow and expand its business. (Norwegian, 2018)

1.3 Demarcations and limitations

Profitability, liquidity and solvency ratios with explanations and motivations are included in the thesis. Norwegian’s internal reviews, reviews into Norwegian by reliable institutions, reviews into the aviation industry and reviews of Finnair and SAS, as well as an analysis on Norwegian’s financial performance during the last decade are included. In addition, theoretical information on Norwegian Air, airline industry standards and previous research is also included.

Many financial ratios could be considered when analyzing a company, but because company performance wanted to be measured in profitability, liquidity and solvency, common ratios from these categories were chosen. It is debatable if the ratios in the research were the most efficient ones, but since they are considerably used within financial analysis and also recommended by sources including Ross et al. (1998, pp. 54-55, 65), it was decided that the chosen basic, universal and straight-forward ratios would be the best fit for the research. Norwegians internal information was not used in the research. Instead the research relied on published reports and information.

1.4 Definitions and abbreviations

ATAG: Air Transport Action Group CGS: Cost of goods sold EBIT: Earnings before interest and tax EBITDAR: Earnings before interest, taxes, depreciation, amortization and restructuring EBT: Earnings before tax

EPS: Earnings per share FSNC: Full service network carrier or full service network airlines GDP: Gross domestic product IATA: International Aviation Transport Association LCC: Low-cost carriers or low-cost airlines ROIC: Return on invested capital

2 THEORETICAL FRAMEWORK

2.1 Norwegian Air Shuttle ASA

Norwegian took off in 1993, in collaboration with Braathens S.A.F.E., an aviation company, with Norwegian regional routes. During the next nine years, Norwegian limited its operation to a small aircraft that seated up to 56 passengers (Fokker 50, Fly Fokker), only flying over the Norwegian west coast. In 2002, the company started its first domestic flights and a year later, Norwegian listed on the Oslo Stock Exchange. Until 2009, Nor- wegian was expanding its fleet with Boeing aircrafts and European bases, in for example Poland, Sweden and Denmark. The same year, Norwegian made a historic profit and started winning aviation industry awards. In the early 2010’s, the company launched its Tail Fin Heroes-design and expanded to Helsinki, Finland. Norwegian continued expanding, both its aircraft fleet, hubs and destinations, and started its long-haul flights to Asia and North America in 2013. The last 10 years have been marked by aviation industry awards and growth for Norwegian. (Norwegian, 2018)

Norwegian’s visions, mindset and goals could be argued to reflect a Scandinavian mindset. Directness, relevance and simplicity as well as safety and service, are listed as values and priorities. Norwegians vision states “affordable fares for all” and the company goal is “to be the preferred airline in select markets and generate profitability and return to its shareholders”. These visions and goals are to be accomplished by low fares and operating costs, maximizing revenues and monitor and improve costs. (Norwegian, 2018)

In 2018, Norwegian has 150 destinations from the Americas to Asia, with 500 routes to take passengers all around the world. Low fares and a green, young fleet could attribute to the company’s competitive advantage. (Norwegian, 2018)

Since Norwegians listing, the airline has focused heavily on expansion and growth. In 2018, Norwegian is expanding its aircraft fleet with 12 aircrafts. By 2019, the fleet is expected to consist of more than 190 aircrafts. With an aircraft fleet expansion strategy, Norwegian is trying to meet its demand as Scandinavia’s biggest airline by passenger numbers and the 3rd largest low-cost carrier in Europe (Our Story, Norwegian). The rapid fleet acquisitions have led to Norwegian having the youngest aircraft fleet in the world. Aircraft engineering and technology focuses increasingly on manufacturing greener and more sustainable aircraft, in consideration of the polluted ozone layer. Norwegian claims its aircrafts are 50% more fuel-efficient on long-haul flights than other airlines. (Farm- brough, 2018)

Norwegian’s most famous competitive advantage is familiar to most who recognize their brand; low-cost fares. With Norwegian being the most flown airline by Scandinavians, a fair profit might be expected. However, Norwegian has proved this wrong; it announced to expect a 2.6 billion NOK (approximately 268 million €) loss before taxes in the 1st quarter in 2018. Compared to the 1st quarter in 2017, this is approximately a 45% increase in loss. Norwegians expansion and acquisition strategy in addition to its low-cost fares have resulted in a growth in debt, which was 22 billion NOK (approximately 2.2 billion €) in 2017. In March 2018, Norwegians low profitability and debt position culminated to its shares dropping to a five-year low. This prompted Norwegian to state that it would be raising a new round of funding of up to 1.5 billion NOK (approximately 155 million €). (Farmbrough, 2018)

2.2 The airline industry

2.2.1 Overview

The aviation industry today instills much of what defines our era at its best; globalization, community and efficiency. From a financial perspective, the industry is nonetheless rec- ognized for its high fixed cost structure, indebtedness, strict labor unions, unpredictable fuel prices and the fact that the entire business is almost completely dependent on macroeconomics, to name a few characteristics. Aviation is highly sensitive to changes in both micro- and macroeconomics. Major developments in technology and travel trends, as well as climate are only a few examples of what influences airlines daily. (O’Connell 2011 p. 87)

Historically speaking, the airline industry lives in cycles and is highly affected by all global events. The industry is very young, since the first airlines were founded in the early 20th century. While the airline industry was still recovering from the 1990’s recession, an event that changed both world and airline history occurred in New York on the 11th of September 2011. The terror attacks of 9/11 put the airline industry in a challenging financial position, with the whole industry losing passengers. In the very late 1990’s a jet fuel crisis was also brewing. Jet fuel prices had previously hit a record high in 1981, when fuel expenses grew to almost 30% of operating costs. There had been developments in fuel efficiency, which softened the fuel price rise in 2000 but prices still jumped to 12% of operating costs. The rise of the fuel price repeated itself during the decade, which in turn weakened airline operating profit repeatedly. Other events, such as labor union disputes, the Asian financial crisis of 1997-1998 and the SARS epidemic, had more regional effects on various airlines (Morrell, 2007, pp. 1-2). Towards the end of the 2010’s, the airline industry was still recovering from events going years back, proving that full financial recovery is difficult to measure. In 2008, the IATA reported (2010, pp. 13) that the airline industry was yet again suffering from record high fuel prices. Due to high fuel price, profitability was very weak across the entire industry in 2008 (Demydyuk, 2011, p 2).

The Air Transport Action Group (2018) reported that 3.57 billion passengers traveled by airline in 2015. The same quote was 2.3 billion in 2009 and 1.1 billion in 1991. The ATAG claims that by 2018, the aviation industry is generating 539 billion € of the world GDP per year. The massive industry growth has many explanations. Many industries are strongly linked with each other, like aviation and tourism. In any industry with growth and development, it serves as a ripple effect into linked industries. Industry deregulation, low enter barriers, falling fares and a rise in low-cost carriers keeps the aviation industry growing. Globalization, which has prompted business travel, should also be attributed for the growth. Airlines all over the world responded to demand by expanding their aircraft fleets. (O’Connell 2011 pp. 87-88)

2.2.2 Airline business models

Airlines can be divided into different business models, according to foundation and operating model, to name a few differences. Generally airlines can be divided into four different categories: full service network airlines, low-cost airlines, regional airlines and charter airlines. (O’Connell 2011 pp. 87)

A full service network airline usually has a history of being founded by governments in the 20th century and provides several passenger classes. Full service network carriers are typically part of an airline alliance or a network and provides its passengers with most or all amenities and services one could ask for, as the name suggests. These airlines generally transport both air cargo and passengers, to maximize profit. Such airlines are for example Emirates Airlines (The Emirates Group, 2018) and British Airways (British Air- ways, 2018). Finnair could also be included in this category, since it provides several passenger classes, amenities and is a member of the Oneworld Alliance, which includes for example British Airways (Oneworld Alliance, LLC 2018). However, Finnair stands out, since it was privately founded and owned until 1946, when the Finnish government bought the majority of Finnair’s shares (Finnair 2018). Airlines do not however have to fill all the criteria to be one particular airline business model, for example Emirates Air- lines is not a member of any alliance but does have many partners, which is quite typical (The Emirates Group, 2018). The full service network airlines have become increasingly vulnerable since the low-cost airlines entered the market, giving passengers options. To

remain competitive, full service network airlines have had to cut costs whilst trying to sustain the high level of service. All while trying to maximize profit in a high-fixed-cost, low-return industry. Due to severe industry competition, it is critical for the full service network carrier business model to evolve, in order to survive (O’Connell 2011 pp. 88- 89).

In terms of business models within the aviation industry, the so-called low-cost carriers (LCC’s) are the new kids on the block. Introduced in the 1970’s in United States by Southwest Airlines, the low-cost carrier model has rewritten the aviation industry by becoming a serious competitor to the full service airline. The low-cost carrier’s entrance into business has also contributed to industry growth, since low fares has made air travel accessible to more people than before. The low-cost carrier business strategy is straight- forward; everything should be ‘low-cost’ or as cost efficient as possible for the airline. The simple idea seemed to have found a market; the demand for low-cost carriers grew, LCC airlines expanded. In 2009 the growth and demand created a situation where low- cost carriers increased their capacity, thus dropping earnings from fares. Demand for low- cost carriers in the 2000’s is explained by new demand due to low fares and full service network airline’s passengers switching to low-cost carriers. Demand also made airports accommodate their facilities, such as terminals, to low-cost carriers in Europe and the United States. Until 2009, low-cost carriers were booming in Europe, with a 41% market share. Low-cost carriers had a reported market share of 27% in North America, 18% in Asia Pacific, 8% in South America and 1% in the Middle East. Many full service airlines in Asia responded to the demand for low-cost carriers by founding cost effective versions of their own airlines as subsidiaries, for example Singapore Airline founding Tiger Air- ways and Qantas founding Jetstar. Almost all earlier similar attempts had failed in Europe and the United States. (O’Connell 2011 pp. 89-90) The low-cost carrier business model turned profitable and it was reported that several of the low-cost carrier leaders had an operating margin three times higher than full service airlines, which does prove efficiency and profitability in the business model. High returns attracted investors, which enabled low-cost carriers to invest and expand their fleets. It is safe to say that the entrance of the low-cost carrier business model reshaped the aviation industry and increased competition exponentially. Norwegian Air could be classified as a low-cost carrier business model airline. (O’Connell 2011 pp. 91-92) 14

The third airline business model is called regional airline, which is how Norwegian Air got its start. Regional airlines are typically defined by the small sized aircrafts they operate, usually carrying less than 90 passengers. Typically, regional airlines serve their purpose by flying routes that are unprofitable for full service airlines or low-cost airlines, generally because of a remote location and low passenger numbers. In other words, regional airlines are the physical link between the passengers and full service network or low-cost airlines, which in turn serves their own purpose. Because full service airlines and low-cost airlines profit of regional airlines, they tend to enter alliances. Partnerships vary, but the core idea is that full service airlines support regional airlines financially, for example by covering large operating costs like fuel and maintenance, in order to secure the passenger flow from regional airlines. (O’Connell 2011 pp. 92)

The last airline business model, the charter airline, is outdated and is therefore losing its market. Charter airlines usually offer package holiday deals, with flights, hotel accom- modation and transfers included. Charter airlines are typically part of a bigger group, which include for example tour operators, which makes the model rather unprofitable. In addition, low-cost airlines have rapidly taken over profitable and popular charter routes and are forcing charter airlines to more specified and unprofitable routes. Results show charter airlines are year after year losing passengers, proving that the business model is in weakening and there has been discussion in the industry that the model might evolve into a kind of low-cost carrier. (O’Connell 2011 pp. 92)

2.2.3 In the Nordics

Like many industries, the Nordic aviation industry has developed somewhat parallel with leading airlines timewise. In relation to its population, Nordics fly double the amount than the rest of Europeans, especially short-haul. This could be explained by the simple fact that other forms of transportation can be very inconvenient. On the other hand, for example air travel for leisure is becoming increasingly popular (SAS Group, 2018). By the International Air Transportation Associations (2016) estimates, the aviation industry has grown rapidly during the last 30 years. Figure 1 shows that in 2016, aviation provided

around a half a million jobs in Finland, Denmark, Sweden and Norway. Passenger numbers have also been growing in the Nordics since the 1980’s. SAS, Finnair and Icelandair were the biggest Nordic airlines by fleet size in 1986. 30 years later, SAS is still leading as the biggest Nordic airline, with newcomer Norwegian second and Finnair third. Ice- landair has remained rather unchanged since and Nextjet, a Swedish combined regional and charter airline (Nextjet, 2018), has entered the field.

Figure 1. Aviation and airline relationships in the Nordics from 1986-2015. (International Air Transport Association, 2016. 30 Years Serving Air Passengers in the Nordic. Available from: http://www.iata.org/pressroom/pr/Pages/2016- 10-05-02.aspx Accessed 15.4.2018)

2.2.4 SAS Scandinavian Airlines

Scandinavian Airlines System, known as SAS, is the biggest airline in the Nordics. SAS considers itself a network airline, since it belongs to an alliance (the Star Alliance) and provides several passenger classes and service. It can be argued that the level of service

and low fares should make SAS a low-cost carrier, but officially SAS is a full service network airline. SAS’s start is different from traditional full service network airlines, which are typically government founded. Instead, SAS was started by a Danish airline, Det Danske Luftfarts- selskab A/S, a Swedish airline, AB Aerotransport, and a Norwegian airline, Det Norske Luftfartselskap A/S in 1946. All parent airlines were founded in the late 1910’s and 1920’s. In the following decades, SAS expanded its routes all over the world and developed its fleet, as well as getting into the hotel business by opening SAS hotels. In 1997 one of the three major global airline alliances, Star Alliance, was started by SAS among others. Along the way, SAS has gone public and had several subsidiaries. In financial terms, SAS has clear goals; return on invested capital should exceed 12%, EBITDAR should be a multiple of less than three (3x) and cash, cash equivalents and other short-term assets should exceed 25% of SAS’s annual fixed costs. This conveys SAS’s target of being profitable, liquid and financially stable. (SAS Group, 2018)

2.2.5 Finnair

Finnair was founded privately in 1923 as Aero, began flights the following years. The company’s first decade was defined by small scale operation, because there were no airports in Finland until 1936. Instead aircrafts landed on bodies of water and Aero cooper- ated with ABA, the Swedish airline that would eventually co-fund SAS Scandinavian. During the Winter and Continuation War (1939-1940 and 1941-1945), Finnair’s commercial flights were for the most part under the command of the Finnish military in war efforts. After World War II ended, Finnair’s ownership was placed with the Finnish state and the name was gradually changed from Aero to Finnish Air Lines to Finnair, even though the name was officially Aero until the late 1960’s. The years after World War II until the turn of the century were marked by growth and expansion. Finnair became a Oneworld-alliance member in 1999. Airlines worldwide were affected by the 9/11 attack with a drop in passengers, which forced Finnair and other airlines into an economic low. The financial situation for Finnair forced the company to do cutbacks and reorganizations. 2015 was the first profitable year for Finnair since the early 2000’s and the airline started investing in company growth and development again. Finnair has focused on connecting Europe with the Asia, with Finnair’s hub Helsinki airport often being the layover between

the two continents. With a history and networks, Finnair has built its brand on trustwor- thiness. In recent years, Finnair has made an effort in creating a greener and more modern airline. (Finnair, 2018)

2.3 Financial measures

A tool for analyzing a company’s performance is financial ratios or margins. Financial ratios translate mere numbers into comparable figures. Therefore, Norwegian’s financial ratios can be compared with industry competitor’s and relationships can be established. By using financial ratios, year-to-year comparison within the company is possible. There are many financial ratios to choose from but this research focuses on profitability, liquidity and solvency. The reasoning for the use of these financial measures are that as a com- bination, they can determine a company’s operating profitability, performance efficiency and financial structure. (Stittle and Wearing, 2008, p. 81)

With financial ratios, there are some points to be considered. Even though financial ratios can be effective when comparing company performance, the possibilities and therefore the risks are endless. Not only are there many ratios to choose from, but ratios serve and suit different purposes. Ratios may also be calculated in different ways. (Ross et al. 1998, pp. 54-55).

2.3.1 Profitability

To measure if a company is turning a profit with its operation, profitability should be calculated. Profitability is essentially the difference between income and expenses and can therefore be measured on both sales and investments. (Ramagopal, 2008, p. 59) In this thesis, profitability was measured by gross profit margin and net profit margin.

The gross profit margin indicates the efficiency of sales, cost of goods sold and income as well as putting them into perspective with each other. The ratio enables the company to calculate how low sales prices can drop without affecting its sales volume (Ramagopal, 2008, pp. 59-61). Because revenue is the single most important aim a company has, the gross profit margin is one of the most crucial ratios when measuring profitability. Further

reasoning for this claim is that the gross profit margin defines a company’s operational health by stating the amount of funds left over from revenues after cost of goods sold. Hence, gross profit margin is the source for determining if there are any additional profits or losses that could be used. A company’s benefits of a high gross profit is profitability and without a satisfactory gross profit, a company will not be able to pay its operational and additional expenses, leading a company to default (Goel, S, 2016, p. 9-10). Gross profit ratio can be calculated by different formulas, demonstrated below. However, in this research gross profit margin was calculated by revenue minus cost of goods sold divided by revenue, to better recognize and take cost of goods sold into consideration during the calculations.

Gross profit margin = Sales (Revenue) – Cost of Goods

Sales (Revenue)

Or:

Gross profit margin = Gross Profit

Sales (Revenue)

The margin indicates gross profit for every Euro earned on sales or revenue. Therefore, a high gross profit margin indicates a high levels of sales. Usually sales good enough to turn a profit for a company, requires a sales strategy. While the sales management’s task is to maximize sales, the financial management is responsible for controlling spending’s and income for the aim of making a business as profitable as possible. Profit is therefore dependent on both departments and it could be argued that a high gross profit margin is also the result of efficient sales and financial management. However, like most ratios, the gross profit margin ratio should not be solely relied on. For example, high sales prices and stable a CGS, a low CGS and stable sales prices or a quan- tity change in a higher-priced product, might give an indication of a false high gross profit margin. On the other hand, inefficient operations or high competition, which will make a company sell at lower prices, might drop the gross profit margin. In the research, the gross profit ratio measures the efficiency of Norwegians sales to its cost of goods sold, which the management is responsible for determining. Therefore, the gross profit margin also measures the efficiency of Norwegian’s management. (Rama- gopal, 2008, pp. 59-61)

In turn, net profit ratio or net profit margin, is the final profit a company makes. The ratio tells us how much of each Euro earned from sales was turned into profit and is available to shareholders. Therefore, a low profit net profit margin is an indicator of a company with declining sales, which translates into low profitability. A high net profit margin is an indicator of a company’s efficiency of converting its revenue to profit. Net profit margin is most efficient as a performance indicator when compared with a company’s result over a period of time. Comparing net profit margin between companies can however give an inaccurate picture of a company’s performance. A company can for example have taken a loan to increase its production, which will lead to a lower net profit margin even though the company might not be any less efficient than its competitor. Furthermore, net profit margin indicates how in control of its costs a company is. (Goel, S, 2016, p. 11)

Net profit margin = Profit after tax (Net profit)

Sales (Revenue)

2.3.2 Liquidity

Liquidity is a measure that reflects the company’s ability to turn its assets to cash. More specifically, the effortlessness and speed of asset conversion tells of the company’s financial structure as well as financial planning and preparedness. Another feature for liquidity is that any asset can be called liquid if the price is lowered. The point lays in turning an asset into cash without losing its value. This is why loss of value and ease of conversion are essential to prioritize in order to qualify an asset as liquid. Therefore, a liquid asset can be quickly turned into cash, without loss in value. An illiquid asset can be turned into cash quick but loses some of its value in the process. Current assets can be converted into cash in the next 12 months and are usually considered liquid. For example shares, gold and accounts receivable (default risk should be considered) are liquid assets.

In return, fixed assets are usually not liquid. For example, inventory and real estate could not be expected to sell quickly while holding its value, thus it is not a liquid asset. Tangi- ble assets qualify as fixed assets in terms of liquidity, as they are not usually considered liquid. Intangible assets are also mostly considered illiquid, since it’s almost impossible to put a price tag on a brand for example, even though they don’t physically exist. First and foremost, liquidity is a security against incapability of paying bills or default, which would force a company out of business. To ensure a company has assets to operate with, it needs to have good liquidity. Therefore, liquidity is essential for any company. It is not however usually profitable to hold liquid assets, like cash, which do not always seem lucrative for companies. (Ross et al. 1998, pp. 22-23)

Probably one of the most used ratios in financial management is the current ratio, or current assets divided by current liabilities. The current ratio is a measure of short-term liquidity, since both current assets and current liabilities are expected to cash in within the next 12 months. Usually, a decent current ratio is 1 or more than 1, since it means that a company can cover its current liabilities with its current assets once or more. When the current ratio is less than 1, it usually means the current assets are less than the current liabilities. A high current ratio can translate to high liquidity, but it can also tell about inefficient use of short-term assets. The current ratio as well as many other ratios, are also affected by different elements such as transactions or reserves, since ratios are mere snap- shots of a company’s financial situation.

Current ratio = Current assets

Current liabilities

(Ross et al. 1998, pp. 55-56)

The cash ratio, or quick ratio, is an indicator of short-term solvency, as are all liquidity ratios. The ratio explains how many times a company can pay its liabilities with its current cash holdings. This can tell a lot about a company’s liquidity strategy, if they are risk- takers or more conservative with their financial preparedness. On the other hand, the cash ratio might indicate wrong if a company has recently done a transaction like for example an acquisition. In the case of an acquisition of any kind, a company has spent cash to eventually make more, which would result in a low cash ratio. As a rule of thumb, when

interpreting the quick ratio, 1:2 would be considered acceptable. This means it is considered satisfactory to be able to cover half of the liabilities with cash.

Cash ratio = Cash

Current liabilities

(Ross et al. 1998, p. 48, 57)

2.3.3 Solvency

Although similar, solvency, or long-term leverage, should not be confused with liquidity. Liquidity measures short-term assets whilst solvency measures a company’s ability to meet its long-term liabilities, mostly debts. It could be argued that solvency measures a company’s control over its finances, since long-term debt require management and planning (Ross et al. 1998, p. 58). Debt is almost unavoidable for any company and is borrowed money that has to be paid back within a certain time frame. Debt is categorized by time. Short-term, or current debt is to be paid back full within the following 12 months to the creditor, who can really be anyone with enough funds and willingness to lend it. Long-term debt is characteristically lent for over 12 months. Creditors for long term debt are usually banks or other bigger institutions. All debt ratios ultimately express a company’s financing strategy and how much of its financing comes from debt, both short- and long-term. It can however be argued that a company’s long-term debt is more important to analyze than its short-term debt, because long-term debt will probably have a bigger financial impact on a company than short-term debt (Keown et al. 2002, pp. 33, 71).

The total debt ratio expresses how much of a firms assets are financed by debt. The debt ratio is expressed as a percentage. As a guideline, most companies are financed approximately 40% by debt, depending on the field in which the company operates. For example, companies with more physical assets, such as real estate, are generally financed by more debt than companies with less physical assets, such as technological companies. The reason being that loans are more easily available for companies with collateral but this theory is also highly dependent on the company’s stand on risk management, as well as previous profitability (Keown et al. 2002, pp. 72).

Total debt ratio = Total assets – Total equity

Total assets

(Ross et al. 1998, pp. 58)

The debt-equity ratio is essentially an extension of the total debt ratio, since the result is the same but expressed from a different angle. The debt-equity ratio expresses the degree of debt a company has taken to finance its business, in other words, it is the debt-equity relationship. Interpreting the debt-equity ratio varies between industries, because the na- ture of business and financial policy a company has varies their wishes and needs in financing through debts. Generally, a debt-equity level of 1:1 (total debt to net worth) is considered adequate, although 2:1 or higher may be considered satisfactory to say a con- tractor, who will be able to cover their debts when the contract has been fulfilled.

Debt-equity ratio = Total debt / Total equity

(Ross et al. 1998, pp. 52, 58)

Because long-term debt is a financial commitment for an extended period of time that will impact a company for years to come, managing and controlling long-term debts should be of interest for anyone involved with a company that has them. The long-term debt ratio can also be an indication of a company’s payables and thus, its trade policy.

Long-term debt ratio = Long-term debt

Long-term debt + Total equity

(Ross et al. 1998, pp. 58)

2.4 Airline industry performance

According to Demydyuk’s (p. 3, 2011) study on the airline industry, full service network airlines and low-cost carriers provided respectively 58% and 34% of seat on European flights in 2008, leaving charter and regional airlines with under 5 percentage of seat share each. When it comes down to sales, full service network airlines and low-cost carriers

have held a strong hold on the European market. However, this does not necessarily mean that charter or regional airlines do not turn a profit.

Figure 2 expresses commercial airlines (including full service network airline, low-cost carrier, regional and charter airlines) net profit worldwide from 2005 to 2018, reported by the IATA. From Figure 2, we can conclude that 2005 was an unprofitable start for an unstable future. Profit began stabilizing since 2005, only to dramatically drop in 2008. Up until 2014, the market was still recovering from a very unprofitable year in 2008 and from 2015 on, stable and strong profits had returned.

Figure 2. Net profit of commercial airlines worldwide from 2005 to 2018 (in billion U.S. dollars). Statista, 2018. Transportation & Logistics, Aviation, Net profit of airlines worldwide 2005-2018. Available from: https://www.statista.com/statistics/232513/net-profit-of-commercial-airlines-worldwide/ Accessed: 8.8.2018

The IATA (Annual Report 2009) reported that the airline industry had a historically bad profitability in 2008. Negative profits were driven by extremely fluctuating oil prices and impacts from the recession 2007-2008 which led to a strong decrease in passenger demand. 2008 virtually re-shaped the industry, since many companies had to figure out how

to get back up on their feet or find cutbacks, which has evolved many airlines into what they are today. In 2008, Finnair reported that turnover rose with 3.8% from the previous year but that the adjusted EBIT (excluding changes in the fair value of derivatives, non-recurring items and capital gains) fell to 6.6 million Euros from the previous year’s 96.6 million. Finnair also reported that net cash flow from operations fell by roughly two thirds and earnings per share fell by roughly 130% (Finnair, 2009). SAS Group reported a 5% rise in turnover in 2008 since the previous year but similarly to Finnair, reported an adjusted EBIT of -395 million SEK, compared to previous years 1,234 million SEK. Similarly to Finnair, SAS Group reported a steep fall in net cash flow from operations, from 2,177 million SEK in 2007 to -1,849 million SEK in 2008, and earnings per share fell approximately 1000%. However, SAS Group stated that roughly 50% of the increase in cash flow was from discontinued operations and 50% from continued operations, which should be taken into consideration when investigating a company’s cash flow (SAS Group, 2009). Discontinued operations can leave a dramatic mark on the financial statement, but it should be remembered that net cash flow is always a very temporary measure of a company’s financials. Both airlines reported that high fuel prices increased operational expenses significantly and a drop in passenger demand. Fin- nair tried to save the situation by raising its fares but this backfired quickly.

In 2009 the industry was still recovering from the financial disaster that was year 2008. The global economy continued to perform poorly. The IATA reported the year as worst in passenger demand since the end of World War II (2010). Finnair reported a 19% drop in turnover and EBIT fell to -180 million Euros in 2009. Similarly, net cash flow from operational activities dropped by approximately 200% and earnings per share from the 2008 result of -0.36 Euros to -0.81 Euros in 2009. Finnair had to fight its low revenue by re-structuring the business and found cut-backs in letting personnel go (Finnair, 2010). SAS Group reported a roughly 15% drop in turnover and EBT fell to -1,754 million SEK in 2009. Net cash flow from operating activities continued to fall by roughly 25% and earnings per share had a rose to -1.19 SEK from the previous year’s 1000% drop. In 2009, SAS Group also started taking actions in cost savings, by launching Core SAS savings program. (SAS Group, 2010). Both Finnair and SAS reported that low profitability was 25

an effect of decrease in demand, tough industry competition and low revenues in general, prompted by the weak economy. Especially full service network airlines, such as Finnair, suffered by the decrease in demand, because premium passengers were choosing more cost-friendly airlines. The IATA (2010) reported that in 2009 industry revenues dropped on average by 15%.

The IATA (2010) reported that 2010 was a year of recovery for airlines, that were still facing challenges such as continuously moving fuel prices, weak economic performance in Europe and North America, stiff industry competition prompting cut-backs and only a slight growth in demand since 2009. In the spring of 2010, the Icelandic volcano Ey- jafjallajökull erupted, causing chaos for airlines. The eruption had an estimated cost of 1.6 billion Euros in six days, which affected European airlines. Still, 2010 represented a slow recovery from the recession of 2007-2008. The IATA reported that the aviation industry turned a profit of 18 billion USD in 2010, compared to previous year’s result of a 9.9 billion USD loss (IATA, 2011). In 2010, Finnair reported that passengers were returning and revenues were rising, almost reaching profitability. Turnover grew by 10% and EBIT experienced a long-awaited, though slight, positive swing (Finnair, 2011). Earnings per share rose to -0,24 Euro and cash flow from operating activities grew from -120 million Euros to 61 million Euros, generally thanks to cut-backs (Finnair Group, 2011). To survive the financial blows, SAS Group had to cut back and reduce its capacity in 2010. Turnover dropped by roughly 9% and the EBT margin grew with a couple of per- centages to roughly -1%. Cash flow from operating activities grew by over 3000% and earnings per share increased by roughly 10%, although still remaining in the negatives (SAS Group, 2011). Compared to Finnair, it might look as if SAS Group had a much worse year in 2010, with SAS realizing very slow recovery, whilst Finnair seemed to attain quicker success. The difference between these two companies in 2010 was their approach to cut-backs and savings. SAS Group started the SAS Core savings program in 2009 and further made cut- backs on personnel in 2010. SAS Group took steps to find sustainable solutions in cut- backs and savings. Building a sustainable savings program and making cut-backs can reflect negatively in the financials, since even savings programs and cut-backs will requires investment. Therefore, divesting in a business will stand out in the cash flow, but 26

staying with a sinking business would eventually take a bigger financial strain on the investing company. Keeping that in mind, a cut-back made one year, may save the business another year. The SAS Group chose to tackle a poorly performing economy with a sustainable approach. It would seem that Finnair bounced back from non-profitable years rather quickly. In 2010, Finnair reported to have laid off 450 people of its 7578 working personnel. Ever since the recession, Finnair had been reducing its personnel and the decline from 2009 to 2010 was approximately 14%. Cut-backs were also achieved by low- ering personnel expenses. Thanks to the cut-backs, Finnair stated having a satisfactory level of profitability in 2010.

Just when the aviation industry started turning a profit, it was reminded of what a sensitive industry it is. The Arab Spring of 2011 saw many countries in Northern Africa and the Middle East in political turmoil, which in turn decreased demand. Because of political insecurity, oil prices went up 45% from the previous year. Additionally, there was the disastrous earthquake and tsunami in Japan as well as stiffened industry competition, which also reduced demand (IATA, 2011). In 2011, Finnair revealed the launching of a structural reform, in other words a savings program, to sustainably reduce expenses. To attract demand, Finnair also reduced fares and started focusing on the Asian market. Finnair’s turnover grew by 11% from the previous year and adjusted EBIT from operational activities fell from -4.7 million Euros to - 60.9 million Euros. Net cash flow decreased by a third from the previous year and earnings per share went down to -0,75 Euros from -0,24 Euros. Finnair noted that decreasing demand and high oil prices were some of their biggest challenges in reaching profitability in 2011 (Finnair, 2012). The SAS Group’s SAS Core savings program continued to reach its savings target in 2011. In 2011, SAS also launched a new program, 4Excellence, which strives to better SAS Group’s sustainable profitability and provide quality flights for passengers. Offi- cially the 4Excellence program promotes quality in all areas, operational, financial, sales and staff. In reality, 4Excellence is a savings program, designed to cut costs while striving for excellence. Despite the challenges in demand in 2011, SAS Group successfully grew their passenger numbers along with passenger satisfaction. Furthermore, airlines such as Spanair and Malev went bankrupt in 2012. SAS Group had holdings in Spanair, which

sunk its profitability in 2011. SAS’s revenue grew by almost 1% and adjusted EBT increased by over 500%. Cash flow from operational activities fell by over 300% and earnings per share grew by roughly 3%. SAS Group noted that thanks to the success of SAS Core, they would have had a profitable year, would it not have been for airline bankrupt- cies (SAS Group, 2012).

2012 was marked by high oil prices and continuous weak economic performance in in- dustrialized countries, especially the Eurozone. The aviation industry turned a net profit margin of roughly 1%. Airline expansion declined, as it had been doing since 2011, although passenger traffic grew. Globalization within aviation continued, which in turn strengthened profitability, mostly due to traffic within or linked to developing markets. On a whole, the IATA reported that profitability was better than expected, taking the difficult economic circumstances into consideration (IATA, 2013). Finnair’s cost savings program began showing results and reported a satisfying profitability for 2012. The airline continued to focus and expand its operations in Asia. Turnover grew by some 8% and EBIT from operating activities grew to approximately 2% (in relation to the turnover), which were the first positive operational earnings before interest and taxes since 2008. Net cash flow tripled from the previous year and earnings per share grew to 0.02 Euros, which was the first time the EPS had been on the green (Finnair, 2013). SAS launched a new savings program in 2012, the 4Excellence Next Generation. The group saw a need to make its airline model more competitive and its regional routes (Scandinavian and European) more profitable. This meant cutting back on personnel costs and letting many employees go, which was described by SAS Group as a dramatic time for all involved. The 4Excellence Next Generation program also included divesting in assets, such as Wideroe, a regional Norwegian airline which had turned profits for the SAS Group some years before. SAS Group’s operational revenue remained practically the same as in 2011 and the EBIT margin fell from 2.9 in 2011 to -0.8 in 2012. Cash flow from operational activities grew to 2,562 million SEK and earnings per share fell to -2.99 SEK (SAS Group, 2013).

2013 continued the trend of weak economic performance and high oil prices. Airline profitability remained virtually the same as the previous year, much due to industry restructuring to achieve cost competitiveness. The global GDP was slowly and steadily growing, which increased confidence in the airline industry. More scheduled flights took off and more aircrafts were produced in 2013 than the previous year (IATA, 2014). Even tough Finnair continued to focus on its cost savings program’s and Asian strategy, profitability was unsatisfactory in 2013. The cost savings program successfully hit its goal but Finnair’s turnover dropped by 2% from 2012. Finnair reported that the results were partially due to lack of demand, particularly in the Nordics, but also because of depreciation of the Japanese yen. Because of Finnair’s substantial investment in Asia, a decline in the Japanese affected Finnair more than the typical airline, that does not have an Asian strategy. Finnair’s choice to invest heavily in the Asian market is really putting all its eggs in one basket. Focusing on an Asian strategy has it’s obvious advantages if the Asian market is performing well, however some diversification might have helped Finnair avoid a loss in profits because one single currency depreciated. Moreover, Finnair reported high fuel prices, intensified competition and labor action, which led to cancelled flights, as financial challenges in 2013. EBIT from operational activities and earnings per share remained practically the same as in 2012. Cash flow from operating activities fell by a third form 2012, largely impacted by Finnair’s negative income in 2013 (Finnair, 2014). The SAS Group reported a satisfactory profit in 2013, which was reportedly thanks to the cost savings programs. However, a lack of demand in the Nordics, stiff competition and price pressure were challenges for the SAS Group in 2013. Due to divestments in 2012, liquidity was improved in 2013. Turnover remained practically the same as the previous year’s and the EBIT margin tripled since 2012. Cash flow from operating activities fell by some 40% and earnings per share came in to 0.54 SEK from last year’s negative result (SAS Group, 2014).

In 2014, commercial aviation celebrated 100 years of business. Aviation provided 58 million jobs around the world and over a third of value of goods traded was transported by air. The same year the airline industry made a circa 2% margin profit, which means an average 4.13 USD profit per passenger. The IATA also reported that 2014 was a successful year for aviation, safety-wise. The issue of security in commercial aviation affects

profit more than one might think. Psychology and mass psychology, plays a part in aviation trends, which directly affect airline profits. It is commonly known that air travel is a relatively safe way to travel (BBC, 2018) and 2014 was stated to be historically safe. However, 2014 was also the year when the infamous Malaysia Airlines flight 370 van- ished into the Indian Ocean and none of its crew or passengers were ever heard from again. With one accident per 4.4 million flights, one should consider how relatively safe air travel is. The IATA reported a strengthening performance in aviation in 2014, though the industry was still recovering from the disastrous fiscal years of 2008-2009. Positive industry performance was due to an improving global economy and lower fuel prices. (IATA, 2015) Megatrends affecting airlines financials should always be considered when results are published. For an industry as sensitive as commercial aviation, external factors will in- fluence financial performance and profitability. In 2014, factors influencing airlines were economic and political power shifting to Asia, technological development, responsibility (financial, ethical, social and environmental) and urbanization. Airlines are also affected by indirect factors, such as determinants of operational cost. Fuel prices directly affect airlines results. In turn, fuel prices are influenced by a number of factors, such as political environments and exchange rates. Natural disasters, pandemics and other external natural shocks cannot be foreseen, which is why airlines have to be financially prepared in order to last past inevitable event. Changes in consumer preferences, expectations, purchasing patterns and demographics require airlines to be flexible, competitive and adapt to urbanization and globalization. Global economic cycles will dictate airlines result to some degree. Seasonal leisure and business travel are directly affected by many of the factors stated above and can be difficult to predict. All factors present different risk and oppor- tunities and how airlines choose to tackle them financially is up to each company’s financial department. All airline’s financial goal should be to present a positive performance and profitability. (Finnair, 2015) In 2014, Finnair was focused on reclaiming profitability, much through re-structuring and cut-backs. Savings programs and cut-backs exceeded expectations in 2014. Nonetheless, profitability was disappointing, with a roughly 5% decrease in turnover compared to the previous year and an operational result of -36.5 million Euros. Lack of demand, a decrease in Finnair’s Aurinkomatkat–Suntours sales and divestments contributed to Finnair’s negative result. Net cash flow from operating activities was 24.2 million Euros, which was a 30

decline from the previous year. Earnings per share fell into the negatives, from last year’s positive result. (Finnair, 2015) In 2014, the SAS Group continued to focus on its existing restructuring programs but also implementing new savings strategies and continuing negotiations with trade unions, to strengthen competitiveness. In financial year 2014 (November 2013 – October 2014), turnover fell by approximately 10% and the EBIT margin fell some 93% from the previous year. Cash flow from operating activities grew by some 6% and earnings per common share decreased to the negatives, making a roughly -180% fall. SAS Group saw positive earnings before taxes and non-recurring items and continued long-term sustainable profitability, much thanks to recent restructurings. Price pressure and intense competition in the field however challenged SAS. A major focus for 2014 was also strengthening SAS’s position in the Scandinavian market, which was somewhat threatened by low-cost carriers. In 2014, SAS held about 33% of Scandinavia’s market share, while Norwegian’s share was around 23%. Other airlines shares of the Scandinavian market were each less than 7%. Increasingly, low-cost carriers had stabilized in the market and were threatening network airlines. Some network airlines found the solution in outsourcing short-haul routes to low-cost carriers, which improved network airlines profitability and competitiveness. (SAS Group, 2015)

After many difficult years, airlines finally caught a break in 2015. The aviation industry celebrated a typical level of profitability for any field, around 5% or 35,5 billion USD in profits on 718 billion USD in revenue. Interestingly, two-thirds of the profit generated by airlines were Northern American airlines. The IATA reported that profitability was achieved largely due to low oil prices and that the forecast for airlines finances was looking good although challenges remained, severe industry competition being one of them. Fuel prices were 27% of airlines operational costs in 2015. However, due to different hedging practices in the industry, fuel prices were delayed for different airlines and re- gions. Additionally, exchange rates dropped against the USD, making fuel prices cheaper in the US and partially explaining the high profitability for airlines based in North Amer- ica. For example, the Russian ruble and Brazilian real dropped 30-40% against the USD. Passengers were returning to airlines, Asian traffic grew and particularly domestic Chi- nese air travel grew. Although the IATA stated that 2015 was a strong year for airline profitability, it should be noted that compared to other industries, the airline industry is 31

infamous for its low profit margins and only a handful of airlines are rated by rating agen- cies. (IATA, 2016) Finnair’s revenue grew by some 2% and had a record amount of passengers, over 10 million in 2015. Because of positive outlooks, Finnair was able to expand its operation and set a new strategic objective, to double Asian traffic by 2020 from the 2010 level. EBIT and net cash flow from operating activities grew by over 200% and earnings per share grew from almost -1 Euro to 0.57 Euros. (Finnair, 2016) SAS’s revenue grew by some 4%, with the EBIT margin increasing to some 6%. Cash flow from operational activities increased around 175% and earnings per common share rose from -3.03 SEK to 1.84 SEK. Profitability was achieved as an effort of low fuel prices, commercial success and cost savings. Like Finnair, SAS also expanded its business operations in 2015. (SAS Group, 2016)

2016 continued to prove that restructuring in airlines was paying off and turning a profit for some airlines. Because the industry is highly sensitive, an airline would not be a safe choice of investment. For a second year in a row, airlines paid its investors a typical return for the field. After 2015, the regional differences in airline profitability also became stronger. In 2016, North American airlines were the most profitable, compared to airlines in Asia-Pacific and Europe, which were also profitable. South American and Middle East- ern airlines broke even, whilst African airlines were unable to turn a profit. The global economy was also stabilizing from the 2000’s and the future was looking positive. 2016 was however marked by a trend and hysteria, directly affecting airlines and passengers, terrorist activity and attacks. The IATA noted that the global political situation saw trends in nationalism, populism and protectionism. Nonetheless, passenger demand grew once again in 2016 and the industry’s center continued to shift to Asia. Domestic Chinese air travel continued to increased vastly. (IATA, 2017) In 2016, Finnair continued its internal reforms and expansion to achieve profitability, among other objectives. Revenue increased by almost 3%, comparable EBIT was approximately 2% of the revenue, operational cash flow increased some 9% (in relation to revenue) and earnings per share remained positive from the previous year. (Finnair, 2017) SAS had roughly the same revenue as in 2015, EBIT decreased some 15%, operating cash flow increased some 20% and earnings per share grew some 60%. (SAS Group, 2017)

2017 was the third profitable year in a row for airlines, according to the IATA. With global economic conditions improving, demand grew again. Most of the growth was generated by the domestic Chinese market. Oil prices were low at the start of the year but ended up rising towards the end of the year, which affected airlines unevenly. Despite the weak USD, half of the 2017 profits were generated by airlines based in North America. Labor disputes took a toll on some airlines. In 2017, the industry-wide breakeven load factor had risen to 64% and due to increase in demand, the achieved load factor rose to 69%. The gap between breakeven and achieved load factors increased profitability in 2017. Airline business models were also evolving, with low-cost carriers and full service network airlines influencing each other. A new airline model, a long-haul, low-cost carrier also entered the market. The profitable years 2015-2017 was the first time since the 1960’s airlines across the industry experienced such a high operating profit margin. (IATA, 2018) As for Finnair, 2017 was a year of growth, record number of passengers and good financial performance. Revenue increased some 8%, operational net cash flow increased almost 50% and EBITDAR increased some 60% from 2016. Earnings per share grew by over 100%. (Finnair, 2018) SAS Group’s revenue increased some 8%, EBIT margin increased some 6% and operational cash flow decreased a third from 2016. Earnings per common share dropped some 17%. (SAS Group, 2018)

After examining two airlines performance over a decade, we can conclude that the global economic climate is one of the most important factors affecting airlines sales and finances. Factors affecting the global economic climate, such as for example the political climate or natural disasters, also directly affect airlines operating activities. Fuel price, passenger trends and evolving technology are some of the other factors directly affecting airlines finances and profitability. Generally speaking, we can conclude that any airlines financials and profitability is not the result of one factor, but many moving parts. For example, the IATA reported that the 9/11 attacks in 2001 left the industry with a 7% drop in revenue on the aviation industry in the early 2000’s. However, the 9/11 attack was only one of many factor’s taken into consideration when examining how macroeconomics af-

fected airlines profitability in the early 2000’s. Alongside with the global economic climate, financial management can be concluded as one of the biggest factors and opportu- nities in achieving profitability.

Figure 2 visualizes airlines financial performance worldwide from 2005 to 2018 (IATA). Both Finnair and SAS reported low or negative profitability in 2008 and 2009. The early 2010’s were marked by re-strategizing and re-structuring in the airline industry and slow but steady profitability. The industry experienced a turning point in 2015, with both Fin- nair and SAS turning a profit, that would be considered typical profitability in any other industry.

2.5 Previous research

Studies by the International Air Transport Association (2010) prove that airline size and profitability are not linked, proving that no airline business model guarantees profitability. Results from 2008 reveal, that bigger airlines were prone to carry bigger financial losses or gains but also that previously profitable low-cost carriers were performing weaker. In fact, the top 30 most profitable airlines in 2008 were of all different airline business models; large and small full service network carriers, regional airlines, cargo airlines and low cost carriers. (Demydyuk, 2011, p 2)

3 METHODOLOGY

3.1 Research design

This chapter discusses what material was used for the research, how the research was approached and how data was collected, analyzed and interpreted.

3.1.1 Material

The primary sources of data was qualitative data, which consisted of annual reports, and quantitative data, which consisted of financial ratios, which were retrieved directly from

Norwegian’s, Finnair’s and SAS’s web sites. No material published for Norwegian’s, Finnair’s or SAS’s internal use were used in the research. Secondary data sources included reports, literature, web sites and articles.

3.1.2 Approach

After the research proposal was done, work on the theoretical framework began. After the theoretical framework part was written, the research was started. The research included calculations, done based on information provided by Norwegian’s, Finnair’s and SAS’s annual reports. The analysis was divided into three parts; profitability, liquidity and solvency. To increase variety and creditability, each financial concept was calculated by more than one ratio. The calculations answered the “what” in the research question, “what has Norwegian's financial performance been like 2008-2017 and why”. When the calculations for the research and analysis were done, the discussion was written. The discussion established the relationship between quantitative and qualitative data. The discussion part answered the “why” in the research question.

3.1.3 Data collection

The data was collected from Norwegian’s annual reports, which were available on Nor- wegian’s website. Collected data included reported revenue, assets and liabilities, to name a few. The collected data was used for calculations, in order to conduct a proper and original analysis. Because the thesis’s focus on investigating the financial performance of Norwegian from 2008 to 2017, the studied time was ten years and the data was collected from ten annual reports.

3.1.4 Data analysis

By calculating financial ratios and analyzing them with the help of literature available on the subject, previous research and comparison of other industry standards, research va- lidity and triangulation was achieved. If there were errors in the calculations, the final result was not affected because of variance in calculations.

3.1.5 Data interpretation

The data collected from annual reports was used in calculations of profitability, liquidity and solvency. The calculations were expressed in tables, in order to visualize the performance over the studied time and for comparison between companies. The data was interpreted by comparing Norwegian’s results to two competitors, Finnair’s and SAS Scandi- navian’s, results.

3.1.6 Expected results

It was expected to discover a financial growth story to match Norwegian’s company story of expansion and development during the research.

4 RESEARCH RESULTS

In this chapter, the research results are explained and discussed. The research focused on measuring performance and profitability. The data was collected from Norwegian’s annual reports. The time period considered was 2008-2017 or the last decade at the time of conducting the research. The objective was to determine how Norwegian’s performance (including liquidity and solvency) and profitability had been during this period of time, which was achieved by comparing Norwegian’s results with two Nordic industry competitors, Finnair and SAS Scandinavian Airlines. Another objective was to determine factors contributing to Norwegian’s performance and profitability during the time studied.

4.1 Performance measurements

This chapter presents the calculated profitability, liquidity and solvency ratios for Nor- wegian, Finnair and SAS. The calculations are explained, compared and analyzed.

4.1.1 Profitability ratios

As discussed earlier, the gross profit margin is an indicator of gross profit for every Euro earned. In the period 2008-2017, Norwegian’s gross profit margin has experienced in-

tense movement. Only from 2010 to 2012 was the gross profit margin ever steady, fol- lowed by years of sharp rises and falls. The gross profit margin fell into the negatives three years during the decade, one of which was in 2008, one of the most difficult years for airlines due to the worldwide recession, resulting in high fuel prices and lack of demand. The result of 2014 presented the least profitable year for Norwegian with a gross profit margin of -0.072. The highest gross profit margins were experienced in 2009, with a value of 0.078.

Norwegian Gross Profit Margin 2008-2017

0,130

0,080

0,030

-0,0202007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-0,070

-0,120

Table 1. Norwegian Gross Profit Margin

Compared to SAS’s and Finnair’s gross profit margins, Norwegian’s gross profit margin has been quite volatile. Both SAS and Finnair have had setbacks but generally profitability has been steadily climbing since 2008. Interestingly, when Norwegian had its most profitable year in 2009, both SAS and Finnair suffered major financial blows. The global recession 2007-2008 changed demand in airline models and the results can be seen in 2009. Norwegian reported high demand while full service network airlines, like Finnair and SAS, were losing passengers, which proves that passengers were preferring low-cost airlines after years of weak economic performance. This demand switch affected the gross profit margin (Norwegian Air Shuttle ASA, 2009). Performance in 2014 was different for all three airlines. All airlines stated that intensified competition pressured to lower cost of goods sold, which Finnair claimed and somewhat proves to have accomplished. Norwegian did have adequate sales in 2014 but operational 37

expenses in addition to higher other expenses meant that the gross profit margin fell into the red. Cost of goods sold could have been high due to for example fleet renewal in 2014. Norwegian’s gross profit margin in 2014 naturally also reflects the airline’s net profit margin the same year. In addition, Norwegian increased its capacity and operational growth in 2014, which meant new routes and aircrafts. In fact, Norwegian increased its Available Seat Kilometer (number of available seats multiplied by the distance flown) by 35% compared to the previous year (Norwegian Air Shuttle ASA, 2014). With all of this taken into account, high sales could have been the reason for Norwegian’s high gross profit margin.

SAS Gross Profit Margin 2008-2017

0,130

0,080

0,030

-0,0202007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-0,070

-0,120

Table 2. SAS Gross Profit Margin

Finnair Gross Profit Margin 2008-2017

0,130

0,080

0,030

-0,0202007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-0,070

-0,120

Table 3. Finnair Gross Profit Margin

The net profit margin copies the gross profit margin and should ideally be high and steady, since it is the earning per Euro to the shareholder. Norwegian’s net profit margin has had dramatic movement during the decade 2008-2017. The highest net profit margin value was in 2009 of 0.061. 2017 had the lowest net profit value of -0.058. Norwegian and Finnair both turned a weak but steady net profit margin which, as discov- ered before, is can be expected of an airline. SAS however broke this mold a few years, going from roughly 0 or negative net profit to nearly 1. SAS’s high net profit margins in 2011, 2013 and 2014 could be attributed to rises in demand and successful savings programs, such as Core SAS strategy and 4Excellence, which tell us of the airline’s efficient management (SAS Group, 2011 - SAS Group, 2014).

Norwegian Net Profit Margin 2008-2017 1,200

1,000

0,800

0,600

0,400

0,200

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -0,200

Table 4. Norwegian Net Profit Margin

SAS Net Profit Margin 2008-2017 1,200

1,000

0,800

0,600

0,400

0,200

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -0,200

Table 5. SAS Net Profit Margin

Finnair Net Profit Margin 2008-2017 1,200

1,000

0,800

0,600

0,400

0,200

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -0,200

Table 6. Finnair Net Profit Margin

4.1.2 Liquidity ratios

The current ratio measures a company’s ability to meet its short-term liabilities with its short-term assets. A value less than 1 usually means a company has difficulty meeting its short-term liabilities and any value over 1 indicates how many times the short-term assets can be met. Norwegian’s current ratio has steadily been dropping since 2008. In 2008 and 2009, Norwegian was able to cover its short-term liabilities with its short-term assets respectively 0.951 and 0.990. The current ratio has since been falling, with the exception of 2013. The lowest value of 0.432 was in 2016. After meeting 95% of its short-term liabilities with its short-term assets in 2008, Norwegian could eventually cover 56% of its short-term liabilities with its short-term assets in 2017. Like Norwegian, Finnair’s current ratio has moved conservatively. However, when Nor- wegian’s liquidity was weakening, Finnair’s liquidity was getting stronger. SAS’s liquidity was also weakening, however much more dramatically than Norwegian’s. In addition, SAS’s current ratio experienced some growth in 2014-2015, although it did not last. Norwegian’s current ratio indicates that while its current assets have fallen, current liabilities have risen. The majority of Norwegian’s current assets have during the studied been mostly made up of trade and other receivables in addition to cash and cash equivalents. Although current assets have steadily been growing during 2008-2017, current liabilities have grown more aggressively. Up until 2008, current liabilities were mostly made

up of trade and other payables in addition to air traffic settlement liabilities, which is part of the revenue recognition process for airlines. Airlines recognize air traffic settlement liabilities as revenue when the service has been provided. Since 2009, short term part of borrowings has grown immensely, which resulted in Norwegian’s current liabilities being almost double its current assets in 2017. While both trade and other payables and air traffic settlement liabilities have grown steadily, short term part of borrowings have grown more. In 2011, 2014 and 2016, short term part of borrowings made up more than any other current liability, which proves that Norwegian’s current ratio has been steadily declining because the airline has steadily been taking more short-term loans (Norwegian Air Shuttle ASA, 2009 - Norwegian Air Shuttle ASA, 2017). SAS’s drop in 2010-2011 can also be explained by a big increase in the current portion of long-term loans. Additionally, cash and cash equivalents dropped in 2011. It could mean SAS took loans and paid interests, dividends or operational expenses (SAS Group, 2011). Unlike Norwegian’s steadily declining and SAS’s volatile current ratio, Finnair’s current ratio has been steadily rising. It could be argued that most companies want a stable and growing financial position, which would make Finnair’s position the most desirable out of all three airlines. Though Finnair has not always been able to meet its current liabilities with its current assets, both Finnair’s current assets and current liabilities are structured differently from the other two airlines. For most of the time studied, current assets were mostly made up of other financial assets, such as money market funds and commercial papers and certificates. This differs from the other two airlines that had trade and other receivables as majorities in current assets. This could indicate that Norwegian and SAS have stronger sales than Finnair. Trade payables and other liabilities (accrued liabilities) and deferred income and advances received mostly making up Finnair’s current liabilities. Although Finnair has borrowings, they are proportionally smaller than the other two airline’s (Finnair, 2010 – Finnair, 2017). This could indicate that Finnair doesn’t finance a big part of its operation with loans, as do Norwegian and SAS.

Norwegian Current Ratio 2008-2017

3,200

2,700

2,200

1,700

1,200

0,700

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 7. Norwegian Current Ratio

SAS Current Ratio 2008-2017

3,200

2,700

2,200

1,700

1,200

0,700

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 8. SAS Current Ratio

Finnair Current Ratio 2008-2017

3,200

2,700

2,200

1,700

1,200

0,700

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 9. Finnair Current Ratio

The cash or quick ratio, explores how much of Norwegian’s current liabilities can be covered with its cash. In general, the decade 2008-2017 was a steady fall in this value. In 2009, the cash ratio peaked at 0.605 or 60,5%. Until 2011, the value had dropped to 54%. The value rose to 0.410 or 41% in 2013 and continued to fall to 0.173 or 17.3% in 2016, which was the lowest cash ratio during the decade. The cash ratio increased by 42% from 2016 to 2017. Norwegian’s cash ratio speaks of a weakening liquidity. The slumps in cash in 2009-2011 can be explained by aggressive investing activities. Particularly prepayments in aircraft purchases and purchase of tangible assets weakened Norwegian’s cash flow position throughout the time studied. Financing activities, especially payment of long-term debt however rose throughout the time studied. In addition, Norwegian’s profit, or loss, before tax has not been stable, as the gross profit margin proved. Expansion and increasing capacity, more specifically acquiring aircrafts, hubs and financing a growing business with loans, without a stable profit has led to Norwegian’s weakening cash position (Norwe- gian, 2009 – Norwegian, 2017). SAS’s cash position has gotten stronger due to many reasons. SAS has managed to keep its investing activities, such as aircraft acquisitions, from affecting the overall cash flow too negatively due to divestments. During years of strong operating activities, such as 2012-2015, the overall cash flow has grown. SAS has also managed to grow its cash flow

due to financing activities, more specifically proceeds from borrowings and from time to time rights issue. A common occurrence during years of weakening cash flow was repayment of loans (SAS Group, 2009 - SAS Group, 2017). Compared to Norwegian and SAS, Finnair has had a weaker cash position. Finnair had a strong cash position during years when operational activities were positive. Repayment of loans and investments in assets weakened the cash position (Finnair, 2009 – Finnair, 2017).

Norwegian Cash Ratio 2008-2017 0,700

0,600

0,500

0,400

0,300

0,200

0,100

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 10. Norwegian Cash Ratio

SAS Cash Ratio 2008-2017 0,700

0,600

0,500

0,400

0,300

0,200

0,100

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 11. SAS Cash Ratio

Finnair Cash Ratio 2008-2017 0,700

0,600

0,500

0,400

0,300

0,200

0,100

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 12. Finnair Cash Ratio

4.1.3 Solvency ratios

The total debt ratio measures how indebted a company is. Since companies with more tangible goods tend to have a higher debt ratio, it could be expected of Norwegian, since airlines own or lease aircrafts, jets or carriers to run their businesses. Since the relatively low values in 2008 and 2009, the total debt ratio has been steadily climbing. The peak was experienced in 2017, with a value of 0.952, indicating that Norwegian is 95% financed by debt. While Norwegian has steadily been growing its total debt ratio, both SAS and Finnair have tried to keep theirs at the same level during the decade, with SAS’s slumping a little during 2009-2013. All three airlines had roughly the same total debt ratio up until 2013. While SAS and Finnair maintained their total debt ratios at the same levels as before, Norwegian kept increasing its debt. Norwegian’s rising total debt ratio is supported by the liquidity ratios, which prove the airline has been strongly financing itself through loans, more so than SAS and Finnair (Norwegian, 2009 – Norwegian, 2017).

Norwegian Total Debt Ratio 2008-2017 1,000

0,900

0,800

0,700

0,600

0,500

0,400

0,300

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 13. Norwegian Total Debt Ratio

SAS Total Debt Ratio 2008-2017 1,000

0,900

0,800

0,700

0,600

0,500

0,400

0,300

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 14. SAS Total Debt Ratio

Finnair Total Debt Ratio 2008-2017 1,000

0,900

0,800

0,700

0,600

0,500

0,400

0,300

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 15. Finnair Total Debt Ratio

The debt-equity ratio explores Norwegian’s relationship between what it owes to what it owns. There was a steady but rather minor growth from 2008 to 2013. The debt-equity ratio jumped in 2014 to the value of 9.770, which was an increase of 123% from the previous year. In 2017, the debt-equity ratio increased by 137%, coming up to a value of 19.741. All three airlines debt-equity ratio was comparable until the early 2010’s. Finnair and SAS continued with their conservative lines, while Norwegian’s increased intensely. Nor- wegian’s equity has remained rather steady throughout the time studied. Although Nor- wegian does not have a big shareholder’s equity compared to SAS’s, it does exceeds Fin- nair’s. The rises in Norwegian’s debt-equity ratio 2013-2014 and 2016-2017 can be explained by rather big increases in long-term borrowings. This means that the shareholder’s capital is vastly exceeded by creditor’s capital and proves that Norwegian could not fulfill its obligation to its creditor’s, in case of for example liquidation (Norwegian, 2009 – Nor- wegian, 2017). Both Finnair’s total equity and liabilities have been steady, as the table confirms (Finnair, 2009 – Finnair, 2017). SAS’s total liabilities have been decreasing throughout the studied time, while shareholder’s equity has had some increases and decreases (SAS Group, 2009 - SAS Group, 2017).

Norwegian Debt-Equity Ratio 2008-2017 25,000

20,000

15,000

10,000

5,000

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 16. Norwegian Debt-Equity Ratio

SAS Debt-Equity Ratio 2008-2017 25,000

20,000

15,000

10,000

5,000

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 17. SAS Debt-Equity Ratio

Finnair Debt-Equity Ratio 2008-2017 25,000

20,000

15,000

10,000

5,000

0,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 18. Finnair Debt-Equity Ratio

The long-term debt ratio determines how much of a company’s assets are financed by loans and other financial obligations, due in more than a year. Norwegian has had a strong increase in the long-term debt ratio from 2008 to 2017. 2008 started the decade with the lowest value of 0.411 and 2017 ended the decade with the highest value of 0.923. Only from 2008 to 2009 and 2015 to 2016 did the value fall, however only for respectively 1% and 2%. All three airlines have had some movement in the long-term debt ratio, none however compare to Norwegian’s. Neither SAS nor Finnair seem to have a trend of growing their long-term debt but instead trying to keep it stable or falling. It should be noted that Nor- wegian’s long-term debt was roughly comparable to SAS’s until 2010. Since 2010, Nor- wegian has exceedingly increased its long-term debt. As a result, Norwegian financed over 90% of its assets with long-term debt in 2017. Finnair has always had less long-term debt than any of the other two airlines.

Norwegian Long-Term Debt Ratio 2008-2017 1,000

0,900

0,800

0,700

0,600

0,500

0,400

0,300

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 19. Norwegian Long-Term Debt Ratio

SAS Long-Term Debt Ratio 2008-2017 1,000

0,900

0,800

0,700

0,600

0,500

0,400

0,300

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 20. SAS Long-Term Debt Ratio

Finnair Long-Term Debt Ratio 2008-2017 1,000

0,900

0,800

0,700

0,600

0,500

0,400

0,300

0,200 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Table 21. Finnair Long-Term Debt Ratio

4.2 Discussion

Norwegian, Finnair and SAS are all airlines based in the Nordic countries, with different business strategies and approaches to financial management, which leads to different results. As a low-cost carrier, Norwegian is focused on cost-cutting where ever possible, to keep fares low. Finnair and SAS on the other hand are full service network carriers, which tend to focus on quality service and standard fares. The differences between the two business models, low-cost carriers and full service network carriers, are many. Full service network carriers are usually older, more conservative and sometimes partially government owned airlines. Low-cost carriers were established as rivals to the network airlines. In order for low-cost carriers, such as Norwegian, to make a profit, they need to be flexible and seize opportunity, where full service network carriers cannot. An example of this was when business travel in full service network carriers declined because of the global economic recession 2007-2008, Norwegian experienced a rise in demand, due to business passengers needs at that time. Because of this, demand has driven low-cost carriers sales in different directions than full service airline carriers. (Norwegian, 2008)

Unlike Finnair’s and SAS’s growing gross profit margin, Norwegian’s gross profit ratio has been quite volatile. However, Norwegian has had a stable net profit margin, much

like Finnair’s. As mentioned earlier, low-cost carriers may due to their cost competitiveness and flexibility be able to profit when full service network airlines cannot, which could explain the uneven gross profit margins between the airlines in the beginning of the studied time. Norwegian’s profitability ratios seem to correlate and reflect the company’s earnings relative to its related costs. In addition, profitability for Norwegian was affected by growth and increasing capacity while for example SAS’s savings policies seem to have saved the airline’s position during times of weak economic performance.

The liquidity ratios indicate that Norwegian has had a quite weak liquid position. While Finnair and SAS could meet their short-term liabilities with their short-term assets the majority of the time studied, Norwegian could only meet its short-term liabilities for a minority of the time studied. Compared to the competitors, Norwegian had a weak current ratio, which is not desirable. The current ratio tells us that Norwegian has increasingly been taking loans during the time studied. SAS has also been financing itself with loans while Finnair’s current ratio indicated that the airline has less loans and sales than the other two airlines. The cash ratio indicates that Norwegian and SAS had the same levels of funds available, however at different times. Norwegian’s cash ratio has weakened in the time that Fin- nair’s and SAS’s have gotten stronger. Norwegian’s cash position can be attributed to heavy investing activities and borrowings. SAS’s cash position was more positive because of divestments and proceeds from financing activities.

The solvency ratios confirm that Norwegian has increasingly taking out debt. Compared to Finnair and SAS, which both have tried to keep their debts going down during the time, Norwegian has steadily taken on more. Norwegian’s total debt proved to have grown while shareholder’s equity remained steady throughout the years. Norwegian’s long-term debt has been increased, while the competitors have made some much minor increases or decreases.

5 CONCLUSION

The results indicate that Norwegian’s overall financial performance has been somewhat unstable 2008-2017. Compared to competitors, it could be determined that Norwegian’s 53

gross profit has been strong due to demand which was prompted by high sales. The airline industry generally has low profit margins. However, the industry’s operational expenses left Norwegian with a rather weak net profit. Operational expenses have been one of the greatest challenges for airlines, fuel prices being one of the biggest and unpredictable expenses. Depending on the company’s business model, airlines seem to battle high operational costs differently. Full service network airlines structure savings programs, while cost-cutting was part of low-cost carrier’s strategy. When it comes to profitability, the global recession 2007-2008 had a quite the impact on the industry. Due to weak economic performance, customers changed companies within the industry, abandoning standard fares and quality for low-cost fares. This led to higher sales for Norwegian, which is known for its low-cost fares.

Norwegian increased both its long- and short-term debt during the decade. The liquidity ratios prove that Norwegian’s liquidity position has gotten increasingly weak due to heavy investing and financing activities. The competitors had, for the most part, better liquidity positions than Norwegian. Reasons for the competitor’s better liquidity were divestments, proceeds in financing activities and proportionally less loans. It was discov- ered that Norwegian has steadily been increasing its debt to finance its growing business. Norwegian’s aggressive investing and financing strategy are necessary for growing a business. It should be noted that Norwegian was not an established company like SAS and Finnair and it could be debated whether the background and history of the company matters when it comes to expanding an airline. On the other hand, the strategy has left the company in an unstable financial position, which increases the risk for default. This is supported by the results of the solvency ratios, which determine that total debt has increased while shareholder’s equity has remained rather unchanged during the decade.

Ultimately all airlines face mostly the same megatrends, such as sustainability, technological development and new emerging markets. However, based on the comparison and results of the three airlines, it could be argued that how finances are managed is a determining factor when it comes to running a well performing company.

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APPENDICES

5.1.1 Appendix 1. Result of performance measurements: Norwegian

Financial measurements Profitability Liquidity Solvency Gross pro- Net profit Current ra- Cash ra- Total- Debt- Long-term fit margin margin tio tio debt ratio equity ra- debt ratio tio

2008 -0,054 0,001 0,951 0,367 0,718 2,542 0,411 2009 0,078 0,061 0,990 0,605 0,681 2,136 0,406 2010 0,024 0,020 0,834 0,461 0,729 2,686 0,558 2011 0,039 0,012 0,627 0,277 0,784 3,628 0,612 2012 0,039 0,036 0,600 0,357 0,797 3,924 0,658 2013 0,062 0,021 0,740 0,410 0,814 4,369 0,710 2014 -0,072 -0,055 0,452 0,213 0,907 9,770 0,841 2015 0,015 0,011 0,476 0,229 0,906 9,668 0,858 2016 0,070 0,044 0,432 0,173 0,893 8,326 0,834 2017 -0,065 -0,058 0,561 0,246 0,952 19,741 0,923

5.1.2 Appendix 2. Result of performance measurements: Finnair

Financial measurements Profitability Liquidity Solvency Gross pro- Net profit Current ra- Cash ratio Total-debt Debt- Long-term fit margin margin tio ratio equity ra- debt ratio tio

2008 -0,039 -0,020 0,697 0,019 0,640 1,775 0,341 2009 -0,096 -0,055 0,982 0,011 0,651 1,865 0,463 2010 -0,021 -0,011 1,178 0,060 0,646 1,828 0,501 2011 -0,045 -0,039 0,815 0,055 0,681 2,131 0,482 2012 0,008 0,004 0,810 0,078 0,653 1,879 0,433 2013 -0,011 0,005 0,805 0,130 0,686 2,181 0,449 2014 0,070 -0,036 0,856 0,100 0,727 2,667 0,460 2015 0,093 0,039 1,111 0,288 0,645 1,817 0,323

2016 0,084 0,037 1,304 0,075 0,661 1,951 0,467 2017 0,139 0,066 1,280 0,135 0,648 1,842 0,424

5.1.3 Appendix 3. Result of performance measurements: SAS

Financial measurements Profitability Liquidity Solvency Gross pro- Net profit Current ra- Cash ratio Total-debt Debt- Long-term fit margin margin tio ratio equity ra- debt ratio tio

2008 -0,014 -0,119 2,567 0,342 0,800 3,995 0,672 2009 -0,069 -0,066 2,356 0,232 0,732 2,731 0,534 2010 -0,048 -0,054 3,109 0,375 0,655 1,897 0,491 2011 0,016 0,984 0,723 0,296 0,683 2,152 0,528 2012 -0,008 -0,027 0,524 0,207 0,696 2,295 0,521 2013 0,033 0,967 0,612 0,354 0,688 2,209 0,500 2014 0,021 0,979 1,488 0,529 0,833 2,116 0,679 2015 0,056 0,024 1,434 0,600 0,791 1,621 0,618 2016 0,048 0,033 0,782 0,526 0,810 4,269 0,620 2017 0,051 0,027 0,813 0,584 0,752 3,040 0,537