2018 was a tough year for Norwegian and 2019 doesn’t seem to be off to a better start. Should we worry about the survival of the low-cost airline?
Norwegian, a UFO out of nowhere
Norwegian started out in 1993 as a very small regional airline. In 2001 it converted to low-cost and began to grow at a rather normal rate for a rapidly developing airline. And then in 2012 everything accelerates.
One after the other, the airline placed the largest order in history for a European airline (222 aircraft, Boeing 737s, 737 MAXs and Airbus A320 Neos), and in 2015 it placed the largest order for a Boeing 787 for a European airline. At the end of 2018 Norwegian operated 163 aircraft and had 124 on order. A growth never seen on the continent.
Et c’est un succès. The prices are attractive, the fleet is modern, and for a low cost company the comfort and service are good as shown in this study by Flight Report which ranks Norwegian at the top of the list of low-cost and hybrid airlines with scores that would make some traditional airlines pale in comparison (even if we know that we don’t rate a low-cost airline according to the same standards as a traditional one, even unconsciously).
And all of a sudden Norwegian invaded the European sky, started long-haul flights, all with a nice image and an interesting love rating among the general public.
And the Norwegian machine jammed
All of a sudden, the machine seemed to jam. The airline had to take on a lot of debt to finance its relentless growth and was struggling to keep up with the burden of repayments. It first started to sell aircraft that it had ordered and not yet delivered, and then announced the closure of bases in Italy, Spain and the United States. Surprisingly, the most successful low-cost airline of the moment, the most appreciated by passengers, is in trouble. Why is that?
The causes of Norwegian’s difficulties
Norwegian suffers from two ailments. One is common to all low-cost airlines, the other is specific to them.
The first problem is the one that caused the loss of some low cost airlines in the last few months (Primera…) and may cause other victims in the near future (Wow Air…). By developing their fleets at a rapid pace, low-cost companies have ended up creating overcapacity, a supply that is too large compared to demand. The logical consequence is a drop in prices that they can face, as they have little “fat” to remove, unlike traditional airlines, whose structure, ironically, if it penalizes them in periods of strong growth, allows them to deal more easily with this type of situation.
The second is its own: the increase in fuel prices. Of course it affects everyone, but Norwegian’s fuel hedging is much lower than that of its competitors. Airlines negotiate their fuel supply conditions with oil companies on a long-term basis, with guaranteed prices for part of their needs over a certain period of time: this is called hedging. If, in the meantime, prices go down the airline loses, if they go up it gains. Most European airlines have already covered between 60 and 80 percent of their annual needs, so only 20 percent are affected by a possible change in fuel prices, while only 27 percent of Norwegian’s needs are covered. Hence its exposure to “fuel risk” higher than its competitors.
Norwegian looking for partners
Logically, Norwegian is looking for partners and it must be admitted that despite a huge debt (we are talking about 2 billion euros), the prey is rather attractive.
IAG (owner of British Airways and Iberia among others) positioned itself by taking a 3.93% stake in Norwegian in April 2018 and giving itself time to think. And while many thought that IAG was going to take over the low-cost airline, the group announced last week that it was no longer interested and that it would soon sell its stake.
This is very bad news for Norwegian, whose share price has fallen by 21%.
It is said that other airlines would be interested, that Norwegian would have rejected other offers at the beginning of discussions with IAG, but for the moment the Scandinavian airline is alone and in a delicate situation.
The reasons for IAG’s withdrawal? No comments were made. Was the airline’s turnaround considered too difficult? Are they waiting for Norwegian to continue to decline so they can buy them out for a pittance? Has the prospect of a hard Brexit prompted them to refocus on more immediate issues?
Now one wonders who might come to Norwegian’s rescue. Lufthansa would have the means but could it lead the takeover of Alitalia’s medium-haul business, on which it is positioned, and that of Norgewian at the same time? It sounds complicated. Delta ? They have the funds but, like Lufthansa, they are also positioned on the Alitalia case (but on the long-haul routes). Etihad can no longer afford to do so and is probably reeling from its disastrous past equity investment strategy. Air France ? Not enough cash. Qatar ?
The list of potential suitors is not endless, and a wait-and-see strategy aimed at waiting for Norwegian to be drained before taking it over at a low price or even negotiating a settlement with creditors cannot be excluded.
In the meantime, Norwegian will have to find something else and, if not an alliance, at least a partnership.
In the meantime, the 353 million dollars raised at the beginning of the week will give it a little air but only enough to survive. An industrial solution remains essential.
Any reason to believe in Norwegian?
However, there are reasons to believe in it. The first is that the airline made tough decisions but had the courage to make them and to make them at the right time without procrastinating.
In addition to what has already been mentioned:
– Stopping unprofitable routes.
– Progressive price increase (courageous and risky for a low cost but vital).
– Extension of the payment terms of the indemnities due to the customer (less nice but vital for the cash flow).
– Possible sale of aircraft in the future.
The piloting of the airline is more like that of a start-up with tight turns and I have no doubt that at some point they will find the right carburation. In any case, making quick decisions without qualms is already a reassuring signal.
A second reason for optimism is the resilience of the business and its people. It seems that the staff really likes the airline and that the business has even gone so far as to consult them on decisions that directly impact them. This may seem anecdotal, but I don’t think RyanAir staff are willing to sacrifice much for their employer. And closer to us, we are used to categories of personnel ready to put an airline out of business.
And finally a real love affair with the public. Where some people suffer from the experience of some low-cost airlines, Norwegian’s experience in this segment seems to be rather sought after and the airline has a nice, modern image.
If all this may not save Norwegian, it may allow it to hold out until a rescuer arrives and will be proof, for the latter, that the airline is adaptable and reformable.
More in the next episode.
Photo : Norwegian by Nieuwland Photography via Shutterstock
