The process of returning to profitability for Norwegian Air Shuttle requires many steps. The latest is a move to divest its Argentinian operation. The domestic LCC known as Norwegian Air Argentina (NAA) will be sold to JetSMART with immediate effect. Among other factors, Norwegian acting CEO Geir Karlsen cites high fixed costs denominated in dollars and revenues generated in pesos, as well as a sharp f/x decline, as driving the decision.
Over the past few months we have made important changes to our route network to ensure long-term profitability. Attaining satisfactory profitability for a relatively small domestic operation has proved difficult to achieve, given the overall situation in the country. While most of NAA’s costs are denominated in dollars, revenue is obtained in pesos only, and the sharp depreciation of the peso against the dollar has created a significant gap between costs and revenue.– Norwegian Acting CEO and CFO Geir Karlsen
The move sees Norwegian exiting the market just 14 months after launching flights in October 2018. The carrier currently operates a trio of 737-800 aircraft in Argentina. These planes will transition to A320 family jets owned by JetSMART over the next six month, with the 737s returning to Europe to fly for the parent organization. The existing flight schedule will operate and all issued tickets will be honored. For most ticketed passengers nothing will change as a result of this move.
Entering a newly established LCC market was a risky move for Norwegian, especially as a relatively small component of the larger operation. Between the cost concerns and the need to refocus on core operations the move could be seen as overdue, even coming so soon.
The divestment comes after Norwegian announced plans to axe long-haul services from Copenhagen and Stockholm early in 2020. The company also announced it was “fully funded” for 2020 operations. Presumably cutting many services helps reduce some of the cash required for that funding. Norwegian also recently secured a cash infusion from Chinese investors to help finance new aircraft deliveries.
In a separate move Norwegian announced that Marty St. George, most recently Chief Commercial Officer at JetBlue, will take on the CCO position for the carrier in an interim role. He replaces Helga Bollmann Leknes who is leaving the company after two years. Leknes was offered another position in the company following senior management changes and chose to leave Norwegian instead.
A win for JetSMART
The combined JetSMART operation will control approximately 10% of the domestic Argentinian market and eliminate a major competitor. This bodes well for the potential of JetSMART in gaining the necessary traction to capture market share and potentially realize profitability as well. It also opens up additional route options for JetSMART. While it launched service from the El Palomar airport to the west of downtown Buenos Aires Norwegian Air Argentina operated at the downtown Aeroparque airport. The combined company will keep services at both locations, at least initially. Moreover, JetSMART is committed to the South American market overall.
We are very excited about the opportunity to combine Norwegian Argentina with our current JetSMART operations. JetSMART has a long-term commitment to Argentina as well as of our vision of becoming the leading ultra low-cost airline in South America. With this transaction we will continue providing affordable air travel to our customers both from Aeroparque and El Palomar airports.– Estuardo Ortiz, CEO of JetSMART
JetSMART is controlled by US private equity fund Indigo Partners. The company also holds a controlling interest in Frontier Airlines. It holds additional positions in WizzAir and Volaris, using its buying power to realize cost efficiencies across the operations.
The deal will not affect Norwegian’s long-haul flights from London to Argentina; those routes are operated by the Norwegian Air UK subsidiary. Additionally, all NAA employees will be transferred to JetSMART, save for the call center staff. That team will remain Norwegian employees, providing service to the JetSMART domestic Argentina operation as well as customers on the Europe-South America routes.
Financial terms on the deal are not being disclosed.