Norwegian Airlines Faces Key December Dates

The fate of low cost airlines Norwegian will be influenced strongly by two key December dates. On December 7th the airline will hear whether it can gain full protection from creditors under Irish examinership legislation for its subsidiaries Norwegian Air International and Arctic Aircraft Assets. Parent company Norwegian Air Shuttle would also gain protection. Initial approval was granted in November and if the hearing is successful, the period could run for five months. The airline had received a cash injection from the Norwegian Government but was recently informed that it would not receive more funding, leading to it furloughing the vast majority of its staff and reducing operations to only six aircraft out of a fleet of 140. It was this that led it to seek protection under Irish examinership. 

Norwegian faces key dates in December (Photo by Robert Alexander/Getty Images)

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On 15th December, the airline faces a court case with Boeing, from whom it is claiming $1bn in damages, including revenue losses from 18 737 Max aircraft which were not delivered as planned due to the grounding of that type. Success for Norwegian would add much needed liquidity. Boeing is seeking for the case to be dismissed.

Long Struggle

Even before the airline industry was hit by the covid-19 crisis, Norwegian had been struggling to strengthen its finances. Over the last couple of years the airline has been turning every stone to reduce costs and raise liquidity. Routes have been cut, aircraft sold, deliveries and leases cancelled. There have been negotiations with suppliers, debt has been converted to equity, payment of bond holders postponed and additional equity raised. Much progress had been made and prior to the covid-19 crisis, the airline was hopeful of returning to a sounder financial footing and profitability from 2021.  

Misfortune

There is no disputing that Norwegian has faced misfortune from external factors over the last few years. Firstly, the airline suffered extended groundings of Boeing 787 Dreamliner aircraft due to problems with the type’s Rolls Royce engines. The role out of Norwegian’s long haul low cost network was predicated on the efficiency and cost economics of the 787. With the need to ground a proportion of the fleet for a period extending to around two years, flights had to be cancelled causing lost revenues or the renting in of less efficient aircraft at considerable expense.

On top of this challenge came the world wide grounding of the Boeing 737 Max. Norwegian had planned to use this aircraft to expand services including extending long haul operations to markets for which the 787 was too big. Delivered aircraft were grounded and planned deliveries halted.  As both of these aircraft issues played out, the covid-19 crisis hit and the airline was almost entirely grounded for most of the summer period which is normally the time for peak revenue generation.

Massive expansion

Norwegian’s challenges do however go back before any of these external factors intervened. Over the last decade the airline expanded massively and in particular with the arrival of Boeing 787’s in 2014, moved into the long haul low cost market. 

This model has proved popular with customers but has proved elusive in delivering sustainable long term profitability for practitioners around the world. Air Asia X, an early adopter, has incurred heavy losses for much of its existence, Norwegian too has seen a mixture of losses and marginal profitability and several other airlines have failed completely.  

There are numerous challenges with the model, including a reliance on price sensitive low fare traffic, seasonality in demand and lack of connecting traffic to top up in off peak times. As Ryanair’s Michael O’Leary acknowledged in a recent interview with me, many elements that are critical to the success of short haul low cost, cannot be migrated to the long haul context. 

In Norwegian’s case it has also attempted a geographically diverse application of the model, operating out of several European bases to North and South America as well as Asia. This has added to costs, weakened market presence and created operational and reliability challenges. Added to this, Norwegian looked to the reduced operating costs and efficiency offered by the Boeing 787 to support viability, yet it had to commit to the high capital cost of investing in these new aircraft. As it has wrestled to shed costs and improve liquidity, long haul operations have been wound down to zero and many 787’s already in the fleet are being divested.

If the airline succeeds in generating enough liquidity to stay in business, I would be extremely surprised if it were to return to any long haul operations.

Pressure ratchets up in home market

Even in its home market it now faces intense new competitive pressure. Leading low cost carrer Wizzair is in the process of establishing bases in Norway both in Oslo and Trondheim. Its initial focus is on domestic routes which have been historically profitable for Norwegian.

As if this wasn’t enough, a new start up airline is planned led by Eric Braathen of the famous Norwegian aviation family and including former executives of Norwegian in the start up team.

Options appear to be diminishing for Norwegian to find a level of sustainable business. With the winter season normally being challenging and even more so this year due to the covid-19 crisis, the ability of Norwegian to achieve full examinership protection and to raise significant additioanl liquidity is going to be critical to its future.