In his 2018 end-of-year letter to Norwegian Air shareholders, co-founder and then-CEO Bjørn Kjos made some bold predictions for his low-cost, long-haul airline. “This past year has marked a peak in the company’s growth,” he wrote. “We are now entering a new phase where there will be a clear return from our investments. The key priority for the entire organization is returning to profitability.”
Eight months on, that “new phase” looks more remote than ever. Since the start of 2019, the airline has hit a near-constant spell of turbulence, including the surprise resignation of its CEO, the axing of key transatlantic routes, and multiple analyst downgrades. Norwegian’s rapid expansion since 2013 has stalled, while costs are piling up.
With the company’s share price now down more than 75% from a year earlier, shareholders may be eyeing up the emergency exits. What went so wrong for the carrier—and is there any blue sky to be found?
An airtight strategy?
It is exceptionally difficult for low-cost carriers to be profitable. Between 1992 and 2012, more than 40 budget airlines launched in Europe—within a decade, all but 10 had failed. Short-haul carriers that have succeeded, such as easyJet and Ryanair, do so by keeping their planes in the air as much as they possibly can. Legacy carriers such as British Airways might get nine “block hours” a day from their aircraft. Successful low-cost competitors may squeeze out as many as 11.
The flight-after-flight model simply doesn’t work for long haul operations: Norwegian’s plane usage, according to analyst firm Bernstein, is comparable to British Airways. Then, of course, there’s the simple fact that passengers aren’t always convinced of the value of sacrificing comfort for eight hours at a time. In January 2019, for instance, Ryanair managed to sell more than 90% of its tickets; Norwegian limped behind, with only three-quarters of its seats filled.
Around the world, long-haul, low-cost airlines are barely getting by. In May, AirAsia X made a narrow return to profitability after a year of losses. To lift Eurowings out of the red, parent Lufthansa was forced to slash many of its long-haul routes. And in March, Iceland-based WoW air was forced to hang up its flying goggles for good after being declared bankrupt. Late last month, Ryanair CEO Michael O’Leary predicted “more failures” in the low-cost sector by the end of the year. In an interview with the Financial Times, he mentioned Norwegian’s demise as “a distinct possibility” come October or November.
Then there’s the debt—including a $320-million bond payment due in December. Norwegian’s debt to assets ratio currently exceeds 60%, with total liabilities of more than 62 billion NOK ($6.9 billion). “The company is levered to the hilt,” Bernstein analyst Daniel Roeska told the FT. “We haven’t seen any major airline walk away from that mountain of debt without a bankruptcy.”
To shore up some cash, the airline raised nearly $350 million in a rights issue in January. On Aug. 19, it sold its stake in Norwegian Finans Holding, owner of Bank Norwegian, for $234 million, edging its share price back up again. Yet these small measures barely dent what it needs to accomplish.
Bad luck and Boeing
At least on paper, Norwegian Air’s fleet should be the least of its problems. Its planes, with an average age of less than four years, are among the most fuel-efficient and modern in the world.
However, the company’s preference for Boeing aircraft has lent it more than its fair share of misfortune. More than 10% of its fleet, of around 160 aircraft, are Boeing 737 MAX jets. The planes have been indefinitely grounded, forcing the airline to lease other planes to cover the shortfall, at a cost of NKr500m ($58 million) in the first quarter of 2019 alone. They have also been prevented from selling some of their older models.
Boeing’s 787 Dreamliner jets have also caused Norwegian grief. Turbine-blade troubles led to around 40 jets being grounded in the first quarter of 2019, down from around 50 in late 2018. Earlier this month, a Norwegian 787 flying between Rome and Los Angeles had to return to Rome after it sent shards of red-hot engine raining down on a small Italian town.
To avoid cancelling flights, Norwegian initially took the expensive step of leasing four planes. But the planes came complete with pilots and crew, taking work that would ordinarily be done by its 300 Gatwick-based pilots. In May, it announced talks with the pilots’ union, with pilots offered a year’s unpaid “leave of absence” in an effort to stave off redundancies. About 100 pilots and cabin crew had already been let go, after the airline closed its base on the Spanish island of Mallorca early this year.
Falling jet fuel prices, which should have helped to grease the wheels, actually had the opposite effect: In 2018, Norwegian adopted a fuel-hedging policy that fixed jet fuel prices for a third of 2019. The cost of fuel began to tumble only after it had set its price.
Holding out for a hero
For investors, a best-case scenario might involve someone new—anyone!—taking the reins. But a bevy of potential buyers have backed off: first Lufthansa, in June last year, then British Airways owner IAG, which bought 4.6% of Norwegian in April 2018. Within months, however, IAG announced its intention to let go of its stake. “We bought that small stake to initiate a conversation,” said CEO Willie Walsh. “If that conversation is not going anywhere, as it’s not, we’re not going to hold on to those shares.” In January of this year, IAG confirmed that it had indeed walked away, sending Norwegian shares sliding 21%.
Though investors are likely keeping their fingers crossed for a knight in shining armor, airline executives show no sign of budging. After confirming that IAG had indeed bowed out in January, Norwegian board chair Bjørn Kise said: “Norwegian’s plans and strategy remain unchanged . . .The company’s goal is to continue building a sustainable business to the benefit of its customers, employees and shareholders.”
Six months on, Norwegian is still in the red, as unsustainable as it ever was, and now down a permanent CEO. If it can’t find a buyer, downsizing may be its only option. Either way, now seems like a good time to change tack—though whether the companies once beating down its door can be lured back is another matter.
Correction: A paragraph in an earlier version of this article that incorrectly calculated per flight revenue has been removed.