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

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.

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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.