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Norwegian is probably my favorite airline that I’ve yet to fly as its existence is a major thorn in the side of the legacy carriers…especially those carriers that carry passengers across the Atlantic. I like that.
I can’t think of a time when air travel was a cheap as it is right now (you can fly across the Atlantic for $99 if you’re flexible and can make do without most creature comforts) but the days of cheap flights depend on the survival of low-cost carriers and none is as important to cheap transatlantic fares as Norwegian.
Over the past few years Norwegian has come from nowhere to become a major player in the transatlantic airline business and it has done so by very aggressive means.
In a relatively short period of time Norwegian has built up a significant fleet of aircraft (787s and 737s) and has opened up new routes at a speed I don’t think anyone has seen before. All of this expansion has put the legacy carriers (BA/AA/UA/DL/LH etc…) on the back foot and forced them into a position where they can’t increase fares to the levels they’d like to see them at.
This has been great news for flyers but it has come at a price to Norwegian because the airline doesn’t seem to be able to make its business model work – Norwegian haemorrhages cash.
Things have been getting very tough for the airline of late as rumors of cash-flow issue refuse to go away and we’ve seen the airline forced into making moves to try to stem the outflow of cash.
This year alone we’ve seen the airline…
- cut lounge access for some premium cabin passengers
- cut free cocktails and premium spirits in its premium cabin
- refinance on of its 787 aircraft to release some free cash
…so there’s a lot of work going on behind the scenes to try to keep Norwegian afloat.
IAG (the parent company of British Airways and Iberia) has had at least two failed takeover bids for Norwegian and, just last week, it announced that it wouldn’t be making any more bids and that it would be selling its 4.61% stake in the airline.
This was seen as very negative news by the markets (the assumption being that IAG believed that Norwegian was beyond salvage) and Norwegian’s share priced dropped over 20%
Things really haven’t been looking great and, while the busy northern hemisphere summer months will probably be lucrative enough to keep Norwegian safe, a lot of people seem to be worried about Norwegian’s chances of surviving another winter.
Today, however, brought good news as Norwegian announced that it has secured 3 billion NOK (~$353m) of funding through a fully underwritten rights issue as it attempts to strengthen its cash position.
The airline has also reiterated that the days of exponential growth are over (for the time being) and there will be a series of initiatives put in place as it looks to shore up its balance sheet and attempt to head towards profitability.
Here’s what Norwegian’s CEO, Bjørn Kjos, has had to say:
Norwegian has been through a period of significant growth. Going forward, we will see an increased focus on cost savings and CAPEX reductions. We will now get in place a strengthened balance sheet that supports the further development of the company. We are very pleased to see that our main shareholders offer strong support in a time where the market is still challenging. With the strengthened balance sheet, the organization can now devote all its attention to further development of the company
The initiatives Norwegian is hoping will help put it on the road to recovery include:
- Aircraft divestments, including establishing a joint venture for aircraft ownership
- Postponement of aircraft deliveries
- The extensive cost reduction program, #Focus2019, will contribute to estimated reduction of minimum NOK 2 billion (~$235m) in 2019
- Optimization of the base structure and route network
- The agreement with Rolls-Royce related to compensation for the operational disruptions on its long-haul operations
Now we have to sit back and hope that these initiatives are enough to help Norwegian turn the corner.
Presumably the aircraft divestments will result in Norwegian having to withdraw from a number of routes on which its loads are lightest (good news for the legacies) and the postponement of aircraft deliveries pretty much guarantees that we won’t see many (or any) new routes from Norwegian for some time.
I have no idea how long it will take Norwegian to burn through the $350m+ that the rights issue is expected to raise but clearly the airline needs to take all measures at its disposal to get itself on the road to profitability – hopefully some of the cost cutting measures being taken will start to have a positive effect sooner rather than later.
It’s hard to overstate just how much the flying public needs airlines like Norwegian to survive if we’re to keep our access to cheap flights as they’re pretty much the only thing preventing the legacy carriers from hiking prices to whatever levels they think they can get away with.
With most transatlantic legacy carriers being members of joint ventures which allow airlines to profit share and, effectively, legally collude on pricing there is a lot less competition across the Atlantic than most people probably realise….and Norwegian is one of the few airlines that actually provides real competition.
For our part, as the traveling public, it’s probably time that we accept that $99 transatlantic fares are unsustainable and that it’s time to recalibrate our expectations.
It’s time to accept that we need to pay a little more for our fares from the likes of Norwegian if we’re to prevent a situation where the legacy carriers can run amuck and charge almost whatever they feel like charging.
The choice is actually a pretty simple one – pay a little more in airfare now and keep airlines like Norwegian afloat or pay a LOT more down the line when airlines like Norwegian no longer exist.