Trouble in low-cost paradise: Norwegian might not make it through this winter!
A few weeks ago I wrote about the challenges that I expected airlines in Europe were facing coming winter. Right after I published the article; quite some developments took place: PrimeraAir went bankrupt, Wowair’s expected merger with Icelandair failed (and we now see Wowair dropping more and more routes & planes to cut costs) and today there is a new player in town who might not make it to the end of the winter of season 2018/2019: Norwegian.
From regional to transatlantic
Norwegian was founded in the ’90s as a regional airline and was flying regional routes in Scandinavia with small planes. In 2007, a $3billion order was placed for 737’s at Boeing. From this moment onwards; Norwegian profiled itself as a European Low-Cost airline, flying from all kinds of airports, providing point to point routes.
First only based in Scandinavia but later, bases were opened everywhere around Europe, often only with a small number of planes to capture only the most interesting (profitable) routes. A strategy where they differentiate themselves from Ryanair or easyJet who often decide to go “all in” in their bases.
In 2010, an order for leased Boeing 787’s was announced and plans were unveiled to start operating long-haul low-cost flights in the lucrative transatlantic market. CEO Bjorn Kjos had some big plans and he actively sought capital to support his megalomaniac expansion plans. I wrote before about transatlantic low-cost flying and my thoughts about this.
From 2012 and onwards, Norwegian kept opening new bases and announcing new routes, from Amsterdam to New York, flying from Gatwick to all kinds of destinations and a weird plan to open transatlantic flights from Cork in Ireland. Their weirdest move was the opening of operations within Argentina and flying to Buenos Aires from several points in Europa and the USA.
All appeared to go pretty well until last spring, various media outlets began reporting on the cracks that started appearing in the Norwegian organisation. All of this was being denied by Kjos, stating “this is a blatant attack on Norwegian from our competitors“. Things didn’t help when it was revealed Kjos was making money on the losses of his airline by going short on the shares.
Although I believe that the European network is moving along quite well and I don’t see trouble ahead on those operations. The flagship product of Bjorn is his long-haul division. With such an aggressive growth strategy comes a price tag and more and more analysts see signs of trouble ahead. And so do I. Reasons why Norwegian is in trouble:
Their fleet is leased: Leasing planes is expensive and requires continuous cash flow.
Utilisation is too low: The Norwegian 787’s are not flying enough, every minute a plane is parked costs money.
Fuel prices are going up: Fuel prices are on the rise and airlines are already feeling the pain
Lack of network: Norwegian is not able to offer connections on both sides of the ocean to fill up their planes sufficiently.
Legacy’s are pushing: We’ve seen very low fares offered by the legacy airlines on both sides of the Atlantic, pushing margins at Norwegian down.
And its not only me
It was Ryanair’s Michael O’Leary who said he was “shocked it’s still flying as it loses heroic sums of money“. He predicted Norwegian will “go bust this winter“. An article in NewsinEnglish, a Norwegian newspaper reports that Norwegian is going bust in January 2019 because they will be out of money by then. These rumours are also confirmed on various industry media outlets.
They need money, so much is clear. So we have seen Norwegian selling off planes they own to lease them back; a fast way of getting cash on hand (but increasing monthly costs). A report from Danske Bank also shows the request to shareholders to inject extra cash into the airline to increase the liquidity.
So what's up with the future?
Its obvious and clear that the Norwegian Long Haul operations are not moving forward in the sense that Kjos had foreseen. An obvious but desperate move to raise more cash by selling planes, selling shares and asking shareholders for more money clearly shows they are in trouble.
Although real cracks in the operations have to appear yet (unpaid leases, fuel bills and other mayhem) I don’t think that things will go in the right direction for them. The rising fuel prices (and estimates) won’t help with that either!
I hope things will move in the right direction but I’m afraid they won’t! What are your thoughts? Leave them in the comments!
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Ingmar Bruinsma is an entrepreneur in the travel industry. He also provides consultancy services in the field of marketing, business development to clients in travel & aviation. He blogs about topics in tourism, travel, aviation, digital marketing.
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