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How Norwegian Air could go from Survival to Profit

Updated

Norwegian Air has chosen to enter a holding pattern as its strategy to go from survival to profit. Analyzing the airline’s long-term strategy, it appears that this could be the solution to the airline leaving the holding pattern poised for success.

A slow and methodical pace to recovery, resuming operations slowly could be the key to the new Norwegian’s road to eventual profit.

When the dust settles from the coronavirus crisis and the economic crisis a new and leaner Norwegian Air should emerge, as long as the airline can avoid bankruptcy, dissolution, or even an unwanted merger in the process.

Update: Boeing aircraft cancellation and Boeing Company compensation claim

Norwegian news-organization NTB has revealed that Norwegian Air has canceled 97 Boeing aircraft orders. This as part of the airline’s carefully designed survival to profit strategy. The cancellation includes orders for 5 787 Dreamliners and a whopping 92 737 MAX aircraft.

Claims against Boeing

Norwegian has been negotiating with Boeing asking for compensation for the loss of revenue the 737 MAX and the 787 has caused the airline. So far a satisfactory agreement has not been achieved between Norwegian and Boeing.

737 MAX claims

The airline is stepping up its claims against Boeing for compensation from loss of revenue from the MAX grounding. The airline also wants a refund of the downpayment for the planes, since the orders are now being canceled.

787 claims

Norwegian also wants compensation for the unreliability (revenue loss) the 787 Rolls Royce engines have provided, resulting in lots of mechanical delays and even cancellations of flights since the 787s were new.

Norwegian Air coronavirus crisis traffic stats

The airline carried 73,401 passengers in May of 2020. That’s a 97.8% reduction in passengers from May of 2019 when 3.36 million passengers flew Norwegian.

In April of 2020 the count was down to 41,311 passengers.

Norwegian air survival to profit recovery, flight attendant
Norwegian Air flight attendant. Photo: Norwegian.

Norwegian Air’s coronavirus crisis 3-phase recovery plan of action

The airline’s plan has been designed for flexibility. Should sufficient demand occur sooner than anticipated the operations can be restored earlier.

Norwegian is closely monitoring the changing demand, capacity, and coronavirus country-restrictions, which vary from country to country.

1st Recovery Phase, from Now until April 2021

  • Only 8 airplanes (B737s) are currently being operated and used for short-haul domestic operations within Norway. On June 17 Norwegian announced the restart of European flying for the summer.
  • All other aircraft in the fleet (B737s and B787s) have been parked, with some 737s being returned to the lessors for a new, leaner Norwegian to appear after the crisis has passed.
  • All long-haul B787 flying has been suspended, subject to COVID-19 travel restrictions imposed by different countries.
  • The main focus is to minimize cash burn.
  • Maintenance and tech support are being kept (at a minimum level) to allow for a speedy recovery when demand normalizes.

2nd Recovery Phase, April 2021 to January 2022

  • This phase allows for a gradual normalization and ramp-up of core short-haul routes (B737s) in Norway and Europe, with traffic expected to peak in the summer of 2021.
  • Most profitable long-haul routes (B787) will reopen upon sufficient demand. The peak of the long-haul traffic is expected to occur during the summer of 2021.
  • Initiation of marketing activities.

3rd Recovery Phase, starting January 2022

  • Normal operations, short-haul, and long-haul (international flying).
  • Fully recover from the coronavirus crisis and eventually become profitable.
787 cabin NAI
A Norwegian B787 Dreamliner cabin with mood-lighting. Photo: Norwegian.

Key reasons why Norwegian air could go from survival to profit

Operating cost or cash burn will be largely reduced by following the recovery plan.

Immediate measures to preserve cash

To avoid cash burn, airplanes have been parked, most of the workforce has been laid off, thus reducing payroll, and only eight planes are flying domestically in Norway. Furthermore, four subsidiaries of Norwegian have filed for bankruptcy to help the airline recover.

Aircraft leasing companies becoming owners

Leasing companies have invested in Norwegian planes, becoming stockholders. The stake is simply too high to allow Norwegian to go out of business. The leasing companies would have a hard time finding airlines to take over the Norwegian planes during the coronavirus crisis.

Also, With China now as a major stakeholder of Norwegian the Chinese would most likely not sit idle watching its investment disappear should Norwegian not survive.

Fuel hedging

Many European airlines are locked into contracts for fuel hedging at an average of a high US$65 a barrel. Norwegian Air is the least hedged of European airlines, according to Bloomberg Intelligence. That favors Norwegian’s overhead greatly for now and the future. Fuel cost accounts for any airline’s largest operating expenses, along with labor-cost.

Cheap labor

The cheaper labor cost at Norwegian, compared to most other airlines, will help the new Norwegian Air recover from the crisis.

Norwegian always had a fairly low labor cost for all its workers. For example, its pilots and flight attendants are among the lowest paid in the industry, compared to other major airlines.

The airline has always used mostly low-cost third-party companies to handle its flights outside of Europe, using third-party contractors to handle everything from customer service (ie gate agents) to airplane mechanics.

The 737 Max dilemma

Norwegian Air has a vested interest in Max-orders, in the total order amount of 100. Fortunately, only seven had been delivered when the entire world’s Max-fleet was parked as a result of two crashes and safety-issues. Norwegian is currently negotiating with Boeing on a financial settlement from Boeing. Should that happen Norwegian should receive additional equity.

Ryanair versus Norwegian

Ryanair, Norwegian’s fierce budget-airline competitor in Europe, is in a much better position than Norwegian when it comes to its finances. Both airlines can “fee-you-to-death” when it comes to extra charges for cheap tickets.

However, Norwegian appears to have a much better reputation as a preferred airline to fly in Europe, and aren’t perceived as a “cattle-run” airline like some have expressed Ryanair to be. That should give Norwegian an edge in recovery, as well.

Selling tickets for questionable flights

Norwegian has continued selling tickets for flights that may never happen. For instance, the airline is still selling flights between the U.S. and Europe for the summer of 2020!

Business-wise, this is a smart move, since it creates cash flow for the airline. However, that necessitates a mandatory refund for passengers who purchased non-existant flights.

Lasse Sandaker Nielsen, Norwegian’s Information Officer, defended the practice. He said,

“As soon as flights are canceled, affected customers will get a message from us.”

However, refunds are taking longer than usual, as it does with most airlines nowadays. In spite of currently being sued by a group of US flyers who have not yet been issued refunds, the airline has said it intends to fully refund all canceled flights.

Pia Cecilie Høst of the Norwegian government consumer council pointed out that it remains risky to pay for any flights now. Passengers should expect delayed and canceled departures. She cautioned: If Norwegian’s survival plans should result in bankruptcy the paid tickets would be lumped together with other creditors of the airline.

In other words, passengers may never see their refund if Norwegian’s survival plan fails.

Chief Executive Jacob Schram

Jacob Schram Norwegian Air government help
Norwegian Air Chief Executive Jacob Schram. Photo: Norwegian.

The airline is in the best position right now under the sound recovery strategy of Jacob Schram. Schram is known as a mover & shaker. The Chief Executive said,

“There is no doubt that leisure traffic will rebound before business travel and we will be perfectly placed to strategically and geographically take advantage of this.”

Norwegian Government cash infusion could happen if needed

Bloomberg’s take on European airlines’ government rescue prospects. YouTube.

Some people in the government are already talking about a government cash infusion down the line if needed. One government official in favor of looking into such is the leader for the Center Part (Senterpartiet, also known as “Sp”) Trygve Slagsvold Veum, among others.

However, hovering above survivability the airline has always had a silent ally in the Norwegian government monitoring where things were going.

There is a uniform consensus among many Norwegians, as well as the elected officials running the country:

  • The oil-rich Norwegian government would not allow SAS to become the only airline to control the airline market of Norway. With no competitors, SAS would most likely jack up its ticket prices to uncontrolled levels. The only other Norwegian-registered airline operating is Widerøe Airlines, a smaller regional airline of Norway, operating in the Nordic countries.

A great deal of Norwegian’s domestic traffic is secured through Norwegian government personnel and military personnel contracts. Many of these people constantly commute between the far-stretched southern to the northern parts of the country to the south, mainly to Oslo, as well as between the west coast cities and Oslo, separated by mountains.

Scandinavian Airlines (SAS)

The Norwegian government sold its remaining stake in SAS in 2018. The Norwegian government invested in several rescues of SAS over the years. Only Sweden and Denmark now have a stake in the airline.

Norwegian Stocks (NWARF)

On April 4, 2020, Norwegian Air shareholders backed the airline’s survival plan:

95% of voters supported the conversion of about 12.7 billion Norwegian Kroner (NKR) in debt (about 1.36 billion US dollars) into equity, issued as new shares.

NWARF 1
NWARF stock past 5 years, as of June 12. 2020

With NWARF shares currently at an all-time low, should the airline avoid future bankruptcy, the new (risky) shares could be a goldmine in a few years. However, the market is extremely volatile right now, so many financial experts consider NWARF shares a high-risk investment.

Are more NWARF-shares being issued?

A few days ago the airline was seeking approval from shareholders to potentially issue more shares at short notice as part of its recovery plan.

Government loan guarantee

The airline also secured loans of 3 billion NKR, backed by Norwegian government loan guarantees. The loan guarantee was secured after Norwegian Air raised the 8% equity requirement which was required of the loan guarantee. The 8% equity requirement was met through the successful debt into equity move.

Do you think Norwegian Air will go from survival to profit? If so, how long do you think it will take? You can contact us here.

Featured Image: Norwegian Air B787 parked at OSL. Photo: Norwegian.

Disclaimer: This article represents the author’s opinion and must not be considered investment or trading advice from CaptainJetson.com. The author holds no investment position in the above-mentioned company and/or companies.

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