Norwegian Air’s Disruptive Days Look Numbered
The latest company to champion low-cost trans-Atlantic flights either needs to rein in its ambition or sell out

April 26, 2018 10:20 a.m. ET

Cheap trans-Atlantic flights may become harder to come by, whether or not Norwegian Air Shuttle NAS -0.46% gets taken over.

Norwegian shares took flight Thursday after the company said, alongside its first-quarter results, that it had “received several inquiries” following IAG’s expression of interest.

The parent company of British Airways ICAGY 1.20% announced earlier in April that it had bought a 4.6% stake in the trans-Atlantic disrupter, with a view to exploring an offer. Norwegian has established a steering committee and hired advisers to review the situation.

Norwegian also said it would sell up to 140 aircraft. Although this figure amounts to the vast majority of its current fleet, the company expects to take delivery of a further 60 aircraft in 2019 and 2020 and will likely lease back enough of the planes it sells not to disrupt operations. Crucially, however, disposals release cash.

The airline has grown rapidly by piling on debt to buy new jets and offering cheap trans-Atlantic flights. But now it desperately needs to shore up its balance sheet. Even after a roughly $165 million private placement in March, Norwegian finished the first quarter with just $260 million of equity, supporting total assets of $6.3 billion. If equity falls below roughly $190 million, the company is in breach of its bond covenants.

Selling planes eases the pain, but the only long-term cure is to improve margins. Rising fuel prices are a headwind. The company’s first-quarter unit costs fell 2% on the year, but only because of the weak dollar: At constant currencies, they would have risen. Norwegian’s focus on new, fuel-efficient planes should eventually put it at a competitive advantage if fuel costs continue to rise—but only if it survives the short-term margin squeeze.

Little wonder vultures are circling. German flag-carrier Lufthansa and low-cost leader Ryanair also have the heft to contemplate buying Norwegian, even if IAG is probably the most natural acquirer, given its experience with Iberia and Aer Lingus, and holding company structure.

One question concerns antitrust scrutiny: Adding Norwegian’s base at London Gatwick Airport to IAG’s home at Heathrow could be seen as an attempt to quell competition on the busy and lucrative London-New York route.

However this plays out, Norwegian looks set to be a less disruptive force.

Write to Stephen Wilmot at [email protected]

LGW-JFK is a shot at IAG. I expect British Airways to cut London to New York ticket prices this summer in response and the same done on every other route that IAG overlaps with Norwegian.

Those numbers can be found:

On page 6, fourth paragraph:
https://www.norwegian.com/globalasse...018-report.pdf
Equity at the end of the first quarter was NOK 2,070 million compared to NOK 2,098 million at the end of last year.

For bond covenants, on page 19:
https://www.norwegian.com/globalasse...nuary-2018.pdf
Covenants: ‒ Minimum equity (NOK 1,500 mill)
‒ Minimum liquidity (NOK 500 mill)
‒ Dividend payments less than 35% of net profit



1 USD ~8.1 NOK (Norwegian Krone)

The problem that Norwegian has with selling assets is that if they're selling them for less than they're valued on Norwegian's books, that reduces Norwegian's equity. The way to increase equity is to do a secondary stock offering. Norwegian's already done two private placement stock offerings this year - offering current shareholders the opportunity to buy more shares of stock. That gave Norwegian enough equity to get through Q1, but they'll need to do another secondary offering to keep from breaching bond covenants.

More trouble coming soon. FAA/EASA have issued ADs for the Rolls Royce engines, making some planes non ETOPS. Some planes could be grounded for engine changes (no spares available).
New trouble lands on Norwegian?s fleet

On the good side the spanish and italian pilots have signed a cla.
Norwegian and Spanish pilot union SEPLA sign collective agreement - Aviation24.be

You folks know that they have several companies looking into investing and not just IAG right?

... according to Norwegian's CEO. And the Norwegian CEO never stated that others are looking at investing in Norwegian, merely that other airlines have shown interest in Norwegian. He coyly avoided stated if they were just looking to buy assets or invest in the airline.

Meanwhile, Ryanair's CEO stated months ago that it's no secret in the aviation community that Norwegian is in financial trouble. Ryanair CEO claims Norwegian is running out of cash and ?will not survive the winter? - Business Insider Nordic
Note that Monarch did, in fact, go out of business.

Willy Walsh is probably just playing games with Kjos - tying Kjos's hands to make it difficult to do another secondary stock offering which Norwegian desperately needs to do to prevent breaching bond covenants.

A reduction in ETOPS does not mean grounded. It adds about 1.5 hours to a transatlantic flight. No one seems to know what financial agreement has been reached with RR on this. I’m sure they at least carry part of the burden.

Fuel up again today. Bad for airlines in general, but especially for Norwegian. More cash they can't afford to burn.

That post says more about you than it does Norwegian.

What are you expecting us to cheer your company on? GMAFB. Did you expect anything different when you took the job?