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.