Norwegian Secures New Funding, But Plans “Extensive Cost Reductions” And Aircraft Deferrals

Filed Under: Norwegian

Times are changing, that’s for sure!

Norwegian’s journey up until now

For the past several years, Norwegian has grown like crazy, bringing low fares and an innovative product to the transatlantic market, as well as to intra-Europe markets. The problem is that the airline hasn’t actually been able to make any money.

Last year we saw several European airlines liquidate, and for a while it looked like Norwegian was in financial trouble, and was running out of cash. At the end of 2018 they assured the public they were in a good position, though with summer still several months away, many doubted that.

Then just last week Norwegian received some more bad news.

Last April, IAG acquired a 4.61% stake in Norwegian, and was considering a full takeover. IAG is the parent company of British Airways, Iberia, Aer Lingus, and LEVEL.

Over the months that followed, IAG made two takeover bids for Norwegian, both of which were rejected.

Last week IAG not only announced that they wouldn’t make a third bid for Norwegian, but also announced that they’ll be selling their existing shares in Norwegian.

More big changes are coming to Norwegian

Today Norwegian has announced a fully underwritten rights issue of NOK 3 billion (~353 million USD). This investment comes from a company controlled by John Fredriksen, who is Norway’s richest man.

It looks like it won’t at all be business as usual going forward. Norwegian’s CEO, Bjørn Kjos, had the following to say:

“Norwegian has been through a period with significant growth. Focus going forward will increasingly be on cost savings and CAPEX reductions. We will now get in place a strengthened balance sheet that supports the further development of the company. With the strengthened balance sheet, the organization can now devote all its attention to further development of the company.”

So we can expect to see Norwegian shift from a high growth period to instead being focused on cost savings and CAPEX reductions. They’re basically making a 180 here as a company.

Here’s a more detailed explanation of where the cost savings will come from:

The Company is changing its strategic focus from growth to profitability. The Company intends to capitalize on the market position and scale built up over the last years. As a consequence of the changed focus, the capital expenditures will be reduced, which is expected to be achieved by a combination of (i) aircraft divestment, including JV, and (ii) postponement of aircraft deliveries. Further, the Company is working on several operational improvements, including (i) the extensive cost reduction program, #Focus2019, which will contribute to estimated reduction of minimum NOK 2 billion in 2019, (ii) optimization of the base structure and the route network and (iii) the agreement with Rolls-Royce related to compensation for the operational disruptions on its long-haul operations which was entered into in December 2018.

That’s pretty significant. Norwegian will be postponing some aircraft deliveries, and will engage in an “extensive cost reduction program.”

The press release states that Norwegian thinks they can increase their competitiveness and stand-alone financial strength. However, the board also says that they are willing to engage in consolidation discussions that can develop shareholder value in Norwegian (d’oh!).

Bottom line

It’s about time that Norwegian changes their focus from growth to profitability. I’m going to be very curious to see what this transition looks like over the coming months, and just how much cost cutting and aircraft deferrals Norwegian is planning.

  1. They also announced that they lost 330m usd in 2018 even before any interest payments (adjusted EBIT). It looks like the net loss margin excluding any extraordinary gains is around 10 percent of revenue, a huge number. Flybe’s was just around 1 percent if I remember correctly.

    Given these numbers, the cash infusion will just last one year UNLESS they make drastic cutbacks VERY QUICKLY.

  2. Yeah this isn’t the optimistic news it’s being made to sound like – John Frederickson drives a hard bargain, and will gain a lot of influence over the board, on terms that will be almost certainly worse than whatever IAG was offering, from a shareholder’s perspective. This basically gets them through the winter without breaching their debt covenants, but as @Chris K points out, thy will have to make ruthless cuts to their network quickly to survive. I’d imagine any route that is not already profitable (which I imagine means a good deal of their longhaul flying) will prob need to be cut…

  3. I wonder what this means for the BOS-FCO and MAD routes that start soon? Premium Econ seats direct to Rome for ~$1350 are a steal and they seem to be giving away seats in Economy. Alitalia charges around $7K for trips without a Saturday night stay. It will be a while before these routes are profitable, if ever.

  4. “The problem is that the airline hasn’t actually been able to make any money.”

    Well, a five second google search told me that they made a profit in 2005, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2015 and 2016. The main reason why I (and seemingly very few others!) think they’re a fundamentally strong airline that’s merely expanded too quickly, and therefore has a good chance of getting through this and making a come back. Granted I’m no aviation analyst though.

    Chris K/Kerry – See my caveat above, but how on Earth can you use those numbers to make any predictions whatsoever? The rapid expansion has cost them a huge sum of money – this isn’t just their normal operating costs. Simply stopping the expansion will cut out a huge amount of expense. Perhaps not enough to make it profitable, but I really have no inclination to start analyzing financial reports to find out!

  5. Added to the above, I do agree the long haul flying has been a huge problem though. They shouldn’t have pushed that so hard, and it wouldn’t surprise me if they have to drastically cut down those routes (or even stop long haul altogether).

  6. Have an SFO-FCO trip booked for July. Any thoughts on what happens if they cancel that route or if they file for bankruptcy?

  7. IAG could make a final offer before selling their stakes to buy the airline which is worth around 35% less than it was two weeks ago

  8. I can’t speak to the financial status, but as a customer…I just got smacked across the face, with their cost-cutting model. Purchased a Premium Ticket to FCO this May (our 2nd trip to Italy). My wife and I were so impressed with the service, the plane (787), the Lounge and the drinks…that we started planning our next trip (while we were on our first trip).

    Today, as the same Premium-Class ticket holder, I was greeted with:
    1) Flight changes 3 weeks after purchase (enough to disrupt our hotel schedules)
    2) No lounge Access (only Premium Flex tickets)
    3) No free drinks (wine and beer…yes….but a cocktail or two is nice?)
    4) ????

    I understand cost savings…but these cuts were not communicated very well (if at all).
    I want them to stay in business, but they have certainly taken the “cool” out of flying with them. We are cattle, now.

  9. @Callum

    The thing is…the amount they lost in the 3 years they lost money is as much as they made in profit in all the other years. And in many of those years, it was a fairly small airline. Now things are much more complicated. If they cut long haul, they’ll become another Ryanair ou Easyjet. Can they compete with them? I don’t know.

Leave a Reply

If you'd like to participate in the discussion, please adhere to our commenting guidelines. Your email address will not be published. Required fields are marked *