Rising Aircraft Utilization And Cost Savings Will Support Long-Term Earnings Recovery

Catalysts

About Norse Atlantic

Norse Atlantic operates long haul low cost flights and charter services using a fleet of modern Dreamliner aircraft.

What are the underlying business or industry changes driving this perspective?

• Ramp up of currently idle fleet capacity toward a target of around 16 flying hours per aircraft per day should lift available seat kilometers without adding aircraft. This supports higher revenue and operating leverage on fixed costs, which should improve margins.
• Long term tight supply of wide body aircraft at Boeing and Airbus underpins strong demand and pricing power in the charter and ACMI market. Multi year contracts such as the IndiGo deal can lock in secured topline growth and more stable cash flows.
• Mix shift toward the most profitable own network routes and away from underperforming services, combined with world class load factors above 90 percent, is likely to enhance route level cash contribution and support a sustained recovery in earnings.
• Ongoing structural cost program, including optimizing crew bases to match the evolving network and cutting SG and A, is designed to deliver around 40 million dollars of like for like savings. This should directly support net margin expansion as revenues grow.
• In house revenue management and operations technology that is already lifting PRASK while reducing CASK positions Norse to capture more value from a long term trend of strong transatlantic and leisure travel demand. This supports higher revenue per passenger and improved profitability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Norse Atlantic's revenue will decrease by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.0% today to 8.2% in 3 years time.
• Analysts expect earnings to reach $54.5 million (and earnings per share of $0.37) by about December 2028, up from $-63.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.0x on those 2028 earnings, up from -1.4x today. This future PE is lower than the current PE for the NO Airlines industry at 7.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.39%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current tight global supply of long haul aircraft that supports profitable charter and ACMI deals could normalize over the long term as Boeing and Airbus recover delivery backlogs and competitors secure additional wide body capacity. This would erode Norse Atlantic's pricing power in wet lease contracts and pressure revenue and route level earnings.
• Persistent softness or cyclical weakness in transatlantic fares, combined with a high structural reliance on discretionary long haul leisure travel, exposes the business to demand shocks from economic downturns or geopolitical events. This would drag on passenger revenue and compress net margins despite strong load factors.
• The opportunistic dual model of own network and charter depends on sustaining world class utilization of about 16 flying hours per day and fully deploying currently idle capacity. Any operational disruption, regulatory constraint, or weaker than expected charter uptake would leave fixed aircraft and crew costs underabsorbed and weigh on operating earnings.
• The transformation program still requires realigning crew bases and completing around 40 million dollars of cost savings. Delays, labor constraints, or higher than expected wage and station costs on new routes could blunt the planned structural cost advantage and limit further improvement in CASK and net profit.
• Despite recent progress, the company remains loss making at the net level and is adding leverage through a 30 million dollar convertible bond. Any setback in the trajectory toward a full year 2025 profit or slower cash flow growth would heighten balance sheet risk and increase pressure on future earnings and equity value.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NOK16.01 for Norse Atlantic based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $662.9 million, earnings will come to $54.5 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of NOK5.67, the analyst price target of NOK16.01 is 64.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.