Norwegian Gets Religion On the Eve Of Releasing 2018 Earnings, Tries to Right the Ship Before Its Too Late


I’ve written about Norwegian’s aggressive over-expansion many times. The theme each time has been that it is simply not building something sustainable. Through a complicated business structure, the airline has done its best to obscure its weak financials, but through all of it the airline has just kept growing recklessly. Now it is finally putting on the brakes, though it’s hard to see how that’s going to fix things. There’s only one good outcome for Norwegian, and that’s getting acquired. While the airline has changed its tune regarding growth, it’s still not interested in seriously entertaining a merger.

For many highly-seasonal European airlines, summer is when the money gets made. Then the airlines just hope that they won’t give it all back in the winter. Norwegian shouldn’t be much different, but it doesn’t even make money in the summer, once you peel away the misdirection in the releases. Norwegian, like most airlines, is ultimately a cash business. It may not make money, but as long as it has the cash, it’ll be able to keep flying. The problem is, the airline was running out of cash going into this year’s thin winter season.

IAG, parent of British Airways and others, smelled blood in the water and acquired nearly 5 percent of the company, hoping to acquire it outright. But after two rejected offers, IAG has given up and will sell off its shares. Why would it do so? It’s pretty safe to assume that Norwegian thought far too highly of itself and wouldn’t come down to a price that made sense. Or as Norwegian puts it, the offers were “rejected by the Company on the basis that they undervalued the Company and its prospects.”

That’s all well and good, but Norwegian still needs cash. It was running low enough that there was a likelihood it would have breached its financial covenants around the turn of the new year, and that could have been disastrous. So what is it doing?

To shore up its cash position, Norwegian is moving forward with a rights issue worth NOK 3 billion (~US$354 million). What this means is Norwegian has gone out to its existing shareholders and offered them the right to buy additional stock at a discounted price. Those who don’t participate will see their holdings diluted, but they don’t have to join in if they don’t want. A fair bit of this was already committed to as it was announced, so it’s unlikely this won’t go through in short order. That solves the cash problem in the short term, but it doesn’t solve the problem of Norwegian losing a bunch of money with its current strategy.

To fix that, the airline is “changing its strategic focus from growth to profitability.” Gee, what a concept. Here’s what that seems to mean in practice.

  • Sell off some aircraft
  • Postpone some aircraft deliveries
  • Implement a cost reduction program worth NOK 2 billion. (It has its own hashtag #Focus2019 but details aren’t yet released.)
  • Close some crew bases including Stewart and Providence along with others in Europe.
  • Revisit the route network. It has already cut back on much of the 737 flying it did in the Northeast. It has switched from flights from alternative airports (like Oakland) to primary airports (like SFO), and it has pared a few underperforming routes.

These changes are long overdue, and we’ll get an update on how things are progressing this Thursday when it releases its 2018 results. That being said I don’t expect it to fix the problem, rather it’ll just moderate the magnitude of the airline’s losses. You may be wondering why I’m writing about this before Norwegian publishes financials instead of just waiting a couple more days. And the reason is… it just doesn’t matter.

Norwegian lost a ton of money last year. Surprise! I’m sure we’ll hear more about what kind of progress Norwegian is making on #Focus2019 and other initiatives, but it’s unlikely that we’ll hear any news that’s going to change the way I look at this airline. (If I do, then you’ll get another post.)

The reality is that Norwegian overextended itself and created one tangled web of a corporate structure. It has a lot of airplanes with a lot of seats and that is valuable to someone. It appears, however, that Norwegian’s management team has delusions of grandeur. They think that Norwegian is going to become this highly-profitable, wildly-successful entity, and I just don’t see it. If I were Norwegian, I’d be looking to sell.

IAG has said it is walking away for now, but Lufthansa Group has also sniffed around. There are buyers for this airline, and the owners would be wise to find the best available deal and take it. That’s only possible, however, if those owners value it properly. That just doesn’t seem to be in the cards in the near future, so my guess is Norwegian will keep plodding along until it gets smart or runs out of opportunities to raise more cash.

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32 comments on “Norwegian Gets Religion On the Eve Of Releasing 2018 Earnings, Tries to Right the Ship Before Its Too Late

  1. The number of airline companies which would have both the regulatory rights and the financial resources to acquire Norwegian are very few. Besides IAG and Lufthansa, I can think of only Easyjet or Ryanair – and I am dubious as to whether either of the 2 LCCs really have the appetite to take on an airline making such large losses.

    Europe doesn’t really have the equivalent of Chapter 11, so I’m concerned that Norwegian is suddenly going to find itself having to shut down sooner rather than later…

  2. According to newspapers here in Norway, management was just about to agree to sell in November, but then worries due to Brexit stopped.

    As far as overvaluing their own company, CEO Bjørn Kjos is an old fighter pilot. So lack of ego will never be a problem for him.

  3. Ryanair just warned about pricing weakness in Europe which does not help any Euro airline. Lack of clarity regarding Brexit including pricing and economic strength compounds an already very complicated Euro airline industry.

    Norwegian’s business is only valuable up to the value of the unencumbered assets and the profit generation of the airline. Given that both of those are very weak, any offers to buy Norwegian are nothing more than an attempt to put an end to an airline that thought it could succeed at longhaul ultra low cost international travel, esp. across the Atlantic, where no other airline has succeeded in doing so on a consistently profitable basis.

    The European airline industry is still highly fragmented compared to other parts of the world and is also far less profitable than in the US as a result. Norwegian is no different from other Euro airlines that have failed to demonstrate a sustainable and profitable business model. The natural consequences of a failed business model are no different for Norwegian than for any other business.

  4. Is it that ULCC’s cannot make money flying Trans-Atlantic? Or is it that both Norwegian and WOW had bad management? Although to me it would seem if a ULCC is going to succeed several “crazy” ideas would have to be implemented and then pan out.

      1. Which makes me wonder how all of these ULLC’s that are going to start flying TPAC with longer flights and lower ticket prices than TATL already are going to work.

        1. I suspect they won’t, but lower labor costs in parts of Asia compared to Europe and North America could help control one of the big cost areas.

    1. Airline Weekly made a good point on this a couple of weeks ago: The low cost model as pioneered by WN, FR, etc. delivers the greatest cost advantages over legacies within a certain range of route length Go above that length and start changing too many timezones and you lose a lot of the cost advantage that would come from high utilization.

      1. …and conversely, global/full-service airlines are able to gain higher and higher proportions of premium revenue with longer haul flights.

    2. Nick – Well, no ULCC has shown it CAN make money flying over the Atlantic yet. The thing is, it works in the summer when demand is high, but the rest of the year, fares are already low and there’s not as much demand. So it’s tough for them to work. And as someone else mentioned, there is no low cost fuel. There is also no low cost tax, so the amount to the consumer where you can actually make a difference is far less than domestically. That’s not to say someone won’t figure this out, but nobody has figured it out yet.

      1. Today’s newer single aisle planes have enough range to go from Europe to the US East Coast. 15 or 20 years from now, when they are presumably cheap to buy/lease, it will be interesting to see how viable the same planes will be to run lower utilization (or highly seasonal) trans-Atlantic runs.

        I wish someone would find a way to fly planes trans-Atlantic in the (northern hemisphere) summer and down to South America in the (northern hemisphere) winter, as from what little I’ve seen fares to South America seem awfully high by comparison, but I can’t see Americans really wanting to go/pay to go much farther than the Caribbean or Florida in the winter.

      2. I think the above people who commented on fuel and plane utilization, as well as your comment on taxes really won’t allow for ULCC’s to work going TATL or TPAC barring some enormous technological advancement.

        Most of the ULCC domestic (or inter European) advantages are lost flying TATL. Other than some labor cost/rules, but that cost advantage isn’t enough to overcome the hurdles…especially since people are far more likely to suck it up and fly Spirit or Ryanair on a 2 hour flight for their vacation, than even a 6 hour flight from New England to Old England.

      3. Can they just switch some of their fleet to a winter-seasonal market instead? SE Asia comes to mind but I’m sure there are other areas as well, perhaps the Middle East. Many (almost all?) other large carriers move aircraft and destinations around seasonally.

        1. The ME3 (Emirates, Etihad and Qatar) plus Turkish have massive amounts of capacity between Europe and SE Asia via intermediate hubs forcing fares down even as the Euro big boys are trying to hold onto every passenger they can.

          As for S. America, there really is no comparison between the United States and S. America. S. America is great for those who want to go there for holiday but European airlines already fly extensively to the Caribbean where crime is generally lower than in much of S. America.

          And there are plenty of Norwegian passengers that fly from the US to Europe or vice versa because of family or business reasons. In the winter, US and Euro legacies can keep more than enough capacity in the market to soak up as much of the low fare demand as possible – and still carry the business passengers that pay the bills. No airline is going to be successful if it is outclassed by much larger competitors that have enough capacity they can deploy.

          And let’s not forget that the US legacy carriers were very vocal in their displeasure about Norwegian’s labor model; even if it has little impact on their current position, there are plenty of airlines that would be happy to see the possibility of flag of convenience airlines cut down before it ever has a chance to be a threat.

        2. I would say the bigger problem with the idea is they have a few 787’s but mostly have 737-800’s with a few 737MAX. They don’t have the fleet to shift to a mostly TPAC operation.

        3. Jason – They’ve tried that in limited doses. They’ve opened the (likely ill-fated) Argentina operation. And they fly 737s from the US to the French Caribbean. But that’s not much capacity. SE Asia, as others have mentioned, is already a pit of low fares with all the Gulf carriers flooding capacity. There really isn’t anyway to hide with those widebodies.

  5. The problem is that they aren’t REALLY putting on the brakes. Sure, they’re slowing from 95 to 85, but that is still well above the speed limit. They will still expand and take new aircraft this year, just not as much as before. Without a WOW type paring-to-the-bone, they will still be making their situation worse. They plan on taking 5 Dreamliners this spring, and 5 more next year, then expansion will be finished.

  6. How is switching from OAK to SFO a good thing?

    Increased cost, delays, and airport congestion are all issues the SFO has over OAK.

    1. Jeremy – From the European perspective, it makes sense. People don’t look for flights to Oakland. They want to fly to San Francisco. But it’s still leaving from Gatwick, so it’ll still appeal to the leisure traveler. I’m not convinced Norwegian will make enough money to cover the additional costs. But it sounds like Oakland wasn’t working, so it was try this or fail.

        1. And yet a simple rebranding (Oakland (SF)) for us thickie Brits, plus clear marketing of how easy BART is to use, would make it far more palatable.

          But I’ll still fly UA in to SFO.

          1. They’ve always marketed the flight as San Francisco-Oakland. I think the problem they cited with the LGW move was 3rd party sites didn’t reflect that and only showed the option when the user knew to type Oak…

      1. I wonder if BA will pull their OAK flight now.

        Also, pretty sure the flight was branded “San Francisco / Oakland “ when it was at OAK.

    1. Tina – I don’t think I’d worry too much. Assuming the right issue closes as expected Norwegian shouldn’t have any trouble making it through the summer.

  7. Norwegian’s longhaul strategy always reminded me of that Far Side cartoon…step 1) fly all over the place in no meaningful way that will ever attract any critical mass, step 2) and then a miracle occurs, and step 3) profit! I’d honestly like to know where Norwegian thought they’d start making money on longhaul–sufficient brand awareness such that people pay a premium to fly them? Or they put enough competitors out of business? Or they thought a significant number of corporate contracts would jump ship from the majors over to Norwegian? It just never made any sense.

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