Business & Investment

Throttling Back: Norwegian Changes Strategy

Norwegian Air Shuttle has come from nowhere to become Europe’s largest low-cost airline and a transatlantic carrier. Its balance sheet, however, is seriously overstretched.

This week the airline announced a fully underwritten NOK 3bn(£268m) rights issue, equivalent to just over half of the airline’s equity value, a sizeable sum and an admission of the cash-strapped airline’s predicament. This comes on top of news of a preliminary operating loss for last year of over £300m, and confirmation that British Airways’ owner International Airlines Group (AIG) has decided not to proceed with a takeover bid and that it wants to sell its 4% stake.

Norwegian’s shares have dropped by about 60% since last April as investors have become increasingly concerned about the company’s cash flow.

From its early days as a small Scandinavian airline in the early 1990s, Norwegian has expanded aggressively to become Europe’s third-largest no-frills carrier.  In 2012, it announced the largest orders of aircraft in European history and its plans to expand into transatlantic flights. It is perhaps these that have contributed most to its losses.

On flights across the North Sea, Norwegian has destroyed the cozy, pricey duopoly previously enjoyed by Scandinavian and British Airways. All its European flights offer free wi-fi and its fleet is young. I have to declare an interest – as a frequent passenger on this route, I for one would be sorry to see Norwegian go. But the chances of this appear to be becoming more likely.

Last year, Norwegian launched 35 new routes, primarily between Europe and the U.S., and took delivery of 25 new aircraft, taking the total fleet to around 160 and carrying over 37m passengers. It has the youngest and most fuel-efficient aircraft of any long-haul carrier.

Now Norwegian has said that it will alter its business strategy, moving its focus away from growth to profitability. CEO Bjørn Kjos, a former fighter pilot, said:

Norwegian has been through a period with significant growth. Focus going forward will increasingly be on cost savings and CAPEX reductions. We will now get in place a strengthened balance sheet that supports the further development of the company.

The company intends to divest aircraft and postpone deliveries of new aircraft and focus on optimizing its route network (i.e. stopping less efficient services) and cutting costs. It believes that it can save 2m in 2019 with these measures, helped by compensation from Rolls Royce for more frequent safety inspections last year on the engines on its Boeing 787 Dreamliner engines. “With the strengthened balance sheet, the organization can now devote all its attention to further development of the company,” says Kjos.

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