Why Norwegian Air fails? – Quartz

In his 2018 end-of-year letter to Norwegian Air's shareholders, the co-founder and CEO of the time, Bjørn Kjos, made bold predictions for his low-cost, long-haul airline. "The past year has marked a peak in the growth of society," he wrote. "We are now entering a new phase where our investments will generate clear returns. The main priority for the entire organization is to return to profitability. "

Eight months later, this "new phase" seems more distant than ever. Since the beginning of 2019, the airline has experienced a period of constant turbulence, including the surprise resignation of its CEO, the removal of key transatlantic routes and the degradation of several analysts. Norwegian's rapid expansion since 2013 has stalled as costs accumulate.

With the company's stock price down more than 75% from the previous year, shareholders could watch for emergency exits. What has gone wrong for the carrier – and is there a blue sky to find?

A hermetic strategy?

It is extremely difficult for low cost carriers to be profitable. Between 1992 and 2012, more than 40 low cost airlines were launched in Europe – in the space of a decade, all but 10 had failed. Successful short-haul carriers, such as easyJet and Ryanair, do so by keeping their planes as clean as possible. Conventional airlines such as British Airways could get nine hours-block of their planes a day. Successful low-cost competitors can withdraw 11.

The flight-by-flight model simply does not work for long-haul flights: the Norwegian plane, according to the Bernstein analysis company, is comparable to British Airways. Then, of course, there is the simple fact that passengers are not always convinced of the value of sacrificing comfort for eight hours at a time. In January 2019, for example, Ryanair managed to sell more than 90% of its tickets. The Norwegian stayed behind, with only three-quarters of his seats filled.

Around the world, long-haul and low-cost airlines are barely managing. In May, AirAsia X returned to very low profitability after a year of losses. To get Eurowings out of the red, the Lufthansa parent company was forced to remove many long-haul routes. And in March, WoW Air, based in Iceland, was forced to permanently suspend his safety glasses after being declared bankrupt. At the end of last month, Ryanair's director, Michael O'Leary, predicted "more failures" in the low-cost segment by the end of the year. In an interview with the Financial Times, he mentioned the disappearance of Norwegian as a "distinct possibility" in October or November.

Then there is the debt, including a bond payment of $ 320 million due in December. Norway's debt-to-asset ratio currently exceeds 60%, with total liabilities of more than $ 62 billion. "The company is stretched to the limit," said Daniel Roeska, an analyst at Bernstein, Financial Times. "We have not seen any major airline moving away from this mountain of debt without bankruptcy."

To increase its liquidity, the airline raised nearly 350 million dollars in a rights issue in January. On August 19, he sold his stake in the Norwegian company Finans Holding, owner of the Norwegian bank, for $ 234 million, which allowed a further rise in its share price. Yet these small steps barely taint what she has to accomplish.

Bad luck and Boeing

At least on paper, Norwegian Air's fleet should be the least of its problems. Its aircraft, whose average age is less than four years, are among the most energy efficient and the most modern in the world.

However, the company's preference for Boeing aircraft has lent him more than his fair share of misfortunes. More than 10% of its fleet, about 160 aircraft, are Boeing 737 MAX. The aircraft were immobilized indefinitely, forcing the airline to lease additional aircraft to cover the shortfall, at a cost of 500 million Swedish kronor ($ 58 million) in the first quarter of 2019. They were also prevented from selling some of their old models.

The 787 Boeing Dreamliner jets also caused a lot of grief to Norway. Turbine blade problems resulted in the grounding of about 40 aircraft in the first quarter of 2019, compared to about 50 in late 2018. Earlier this month, a Norwegian 787 flying between Rome and Los Angeles had to return to Rome after sending bursts of motor -hot raining on a small Italian town.

To avoid canceling flights, Norwegian first made the expensive decision to lease four planes. But the planes came with their pilots and crew, performing tasks that would normally be performed by his 300 pilots based in Gatwick. In May, he announced talks with the Pilots' Union, during which pilots offered a "unpaid leave" of one year to try to avoid layoffs. About 100 pilots and cabin crew members had already been released, after the airline had closed its base on the Spanish island of Mallorca earlier this year.

The fall in jet fuel prices, which should have helped to lubricate the wheels, had the opposite effect: in 2018, Norway adopted a policy of covering the price of fuel fixing the prices of jet fuel for one third of 2019. The cost of fuel began to fall only after he had set his price.

Hold for a hero

For investors, the best of scenarios could involve a new person – no matter who! – who would take the reins. But a crowd of potential buyers fell back: first Lufthansa, in June of last year, then the owner of British Airways, IAG, who had bought 4.6% stake in Norwegian in April 2018. However, a few months later, IAG announced its intention to separate from its stake. "We bought this small stake to start a conversation," said CEO Willie Walsh. "If this conversation is not successful, we will not keep these actions." In January of this year, IAG confirmed that it had indeed moved away from Norwegian equities, with Norwegian equities sliding 21%.

Although investors probably believe fingers crossed for a knight in shining armor, airline executives show no signs of blocking. Bjørn Kise, chairman of the Norwegian board, confirmed: "Norway's plans and strategy remain unchanged. . The company's goal is to continue to build a sustainable business for the benefit of its customers, employees and shareholders. "

Six months later, Norwegian is still in the red, as unsustainable as it is, and has now become a permanent CEO. If she can not find a buyer, downsizing may be her only option. Be that as it may, the time has come to change tactics, but it is entirely different to know if businesses that are knocking out can be attracted.

Correction: A paragraph from an earlier version of this article, incorrectly calculated by product flights, has been removed.