As most everyone knows, Norwegian had been in bad shape long before this coronavirus crisis began. Things have naturally only gone downhill in the last couple months. If the airline’s survival was in doubt previously, you’d think now it would be near impossible. You’d be wrong. Norwegian keeps pulling rabbits out of its hat and now, against all odds, it looks like the airline has a chance to make it now that bondholders, lessors, and shareholders have approved a new plan.
Norwegian’s survival plan relies on government assistance which was offered in three tranches totalling NOK 3 billion (~$300m), but the bulk of that assistance was predicated on all of the creditors participating as well. The airline already picked up NOK 300 million, but the next round of NOK 1.2 billion required creditors to agree to a waiver of interest payments and deferral of principal payments for three months. The last NOK 1.5 billion requires meeting some financial metrics as well as raising more money from anyone but the government.
To meet those requirements, Norwegian has to increase the amount of equity it has, reduce the amount of debt, or do both. That led Norwegian to request that bondholders turn the majority of debt into equity, and this was not an easy sell.
The existing shareholders get hosed, but then again, this is better than bankruptcy for them. They’ll only have 5.2 percent of the outstanding shares once the conversion is done with lessors getting 53.1 percent and bondholders getting 41.7 percent.
The biggest hurdle was getting the bondholders to agree. I imagine the pitch was, “good luck getting money back in a bankruptcy process in this environment. Why not work with us and have a better shot, maybe, at having equity that could be worth something?” Here’s a visual of how Norwegian presented this.
The first attempts failed, but word came down over the weekend that an agreement was reached.
Next, the CEO had to convince the lessors to agree, but that should have been a whole lot easier. I think this tweet sums up why:
So the lessors agreed, and so did the shareholders. Now it’s time to put the plan in place.
The Commercial Plan
Norwegian has spent the last year or more cleaning up the mess that the company’s founders created. The new CEO along with interim Chief Commercial Officer Marty St George have made some real progress, as I’ve written here previously. That being said, past progress means nothing in this new environment. So, a new plan is needed.
You can see the full presentation here starting on page 32, but let’s start with where things are now. At this point, Norwegian has a mere 7, yes SEVEN, airplanes flying. These airplanes are flying domestic Norway routes. It has laid off more than 7,500 employees and has only 200 still working. Since it hires its flight crews through a third party, it was able to just cut those off. That seems unfair, but it’s allowed.
In effect, Norwegian has gone, as it calls it, into hibernation. It believes it can stay there and lose $30 to $50 million in cash per month. It’s a shell of the airline it used to be, but it won’t grow until it sees proof of demand returning.
Norwegian, like many European airlines, does very poorly in the winter and then hopes for a strong summer to make it back. This summer is going to be a lost summer for international travel. Then if you hibernate through the summer, you might as well keep going through the winter until things pick up for next summer. That’s why the airline is plotting a return to service beyond the basics in April of 2021.
If that holds, it will burn through pretty much all of the financial assistance it will receive and it will need more. But if it flies before then, it might lose even more money.
Norwegian expects a slow addition of new flying in all markets through the end of 2021 when it will be back to normal. “Normal,” however, is different than where the airline is today. It has more than 160 airplanes now but expects 110-120 going forward.
It’s important to note that this is just the baseline plan. As Norwegian notes in the presentation, “The plan allows flexibility to restore operations earlier upon sufficient demand.” This is the opposite of the Field of Dreams plan. Instead, if they come, Norwegian will build it.
Norwegian seems focused on growing most in the Nordic region when demand returns. That has little low-cost competition and it has been hit less than places like Italy or Spain. It will also focus on large cities with a lot of demand for long-haul, giving London, New York, and Los Angeles as examples.
This upcoming winter will be incredibly difficult. It sounds like the stakeholders are willing to let it ride one more time. If demand comes back at all, Norwegian may have a shot. If not, well, then it’s probably all over. Then again, I’ve said that before.
DY is the cat with 9 lives, just refuses to die. Holding bond holders and leasors to hostage apparently worked.
I thought Norwegian had Chris Angel on retainer, or perhaps Lance Birtin?
Jude Bricker must read the comments here. This is what I said March 19: “The airlines should go to their creditors and stockholders and ask for a combination of repayment delay and additional capital. It’s not like the creditors want the planes back.”
Yes, congratulations, you were the single person in the world who had that insight.
I know. It does bolster my larger point that shoveling created-from-thin-air federal government money to anyone right now, much less airlines, might not be the best remedy for our serious health and financial issues.
No government right now is willing to allow high-profile businesses to fail but that won’t remain the case forever. Neither will leasing companies and banks agree incessantly to let airlines hold onto aircraft which are not being paid for; Airbus and Boeing cannot afford to allow the market to be flooded with aircraft but also can’t watch aircraft values fall.
Add in that this puts further pressure on SAS which is less publicly owned that NAS and the Norwegian government is in a very uncomfortable place regarding airline policy.
NAS gets a reprieve. At least AZ doesn’t have to compete with anyone else for the government’s attention.
It seems like there was a good chance Norwegian might not have made it to April 2021 had global aviation not collapsed the way it did. So in a sense, paradoxical as it is, you could even say the virus increased its odds of survival.
Is Norwegian still getting compensation from Boeing for grounded MAXes?
Oliver – They will if they haven’t already. Can’t recall if they had settled.
This is a beautiful illustration of the old quote, probably from Keynes, also from J Paul Getty:
Owe your banker £1,000 and you are at his mercy; owe him £1 million and the position is reversed.
I have never heard that quote before. It’s fantastic.
I have & it’s more true today than ever, but substitute billion for million to make it accurate.
The private-sector Alitalia.
Wow it’s amazing how low there getting the cash burn even with bankruptcy.
Is Norwegian coming back to New York’s Stewart International?
Wayne – I highly doubt it.