Winter Is Coming for Norwegian Air Shuttle

(Bloomberg Opinion) -- Winter is a tough time for any airline as customers opt for a book and a comfortable couch, instead of a holiday abroad. For Norwegian Air Shuttle AS, though, the start of 2019 has turned even chillier than usual.

The budget transatlantic carrier’s shares slumped as much as 26 percent on Thursday after British Airways’ owner IAG SA said it wouldn’t make a takeover offer for the smaller airline and would sell its small Norwegian stake. Until now, IAG’s interest had put a floor under its potential target’s stock, but that Band-Aid has been torn away. Norwegian must fend for itself.

While it’s true that business leaders are sometimes too distracted by their company’s share price, Norwegian’s chief executive and biggest shareholder Bjorn Kjos should think very carefully about what his airline’s meager $750 million market capitalization implies. The stock is at its lowest point in six years, suggesting that investors have doubts about whether Norwegian can survive as an independent entity. The sell-off makes raising fresh capital more expensive, should that be necessary (and it might). The airline’s 250 million euros ($285 million) of senior unsecured bonds, maturing in December, tell a similar story: 

Winter Is Coming for Norwegian Air Shuttle

As I’ve explained, Norwegian’s bold attempt to transform the airline industry by offering budget fares on long-haul routes has been hobbled by its overhasty expansion, too much debt, and a failure to hedge against soaring fuel prices. A capacity splurge by rivals hasn’t helped either, as it’s put downward pressure on fares.

A takeover may have been Norwegian’s best escape route, but I was skeptical about whether Kjos would accept a helping hand. He’s spent two decades building the company and must have been reluctant to abandon that dream, especially with the share price so depressed.

The gutsy former fighter pilot, who rarely seems fazed by the challenge of keeping his burgeoning fleet flying, has been forced to become more restrained lately. Norwegian is slashing costs, selling aircraft, and closing bases to preserve cash. It remains in a tight spot though. The airline has debt covenants that require a minimum 1.5 billion kroner ($170 million) of book equity. It had 5.3 billion kroner of net assets at the end of October, but that cushion will probably have weakened again after financial losses this winter, analyst estimates show. New accounting rules that oblige airlines to include leased aircraft liabilities on the balance sheets won’t make things look any prettier. IAG boss Willy Walsh could hardly have picked a crueler moment to walk away.

Kjos still has levers he can pull. An aircraft ownership joint venture with an unnamed partner, first mooted last year, would improve shareholder confidence about being able to pay for future plane deliveries, although details have been scant. It can also lean on Rolls-Royce Holdings Plc for compensation related to engine troubles on Norwegian’s fleet of 787 Dreamliner jets.

The spate of recent airlines failures in Europe suggests the odds are stacked against him, though. If Kjos has miscalculated in rejecting a suitor’s advances, Walsh may yet get another chance to pounce.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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