Norwegian Air on the verge of running out of money (again)
At this point, I’m not sure whether to praise the management of Norwegian Air for their persistence or I wonder why they don’t just throw in the towel already…
Norwegian Air’s Challenging Journey
Norwegian Air was a favorite among travelersbecause it is a very low cost carrier with a good customer experience. There are only four problems:
The reality is that Norwegian was on the brink of liquidation even before the pandemic began.
While Norwegian has made some positive changes, the airline has also been extremely unlucky. Norwegian’s fleet consists exclusively of 737 and 787:
- The 737 MAX has played a vital role in Norwegian’s fleet, and this aircraft has been standing still for over a year
- Some 787-9s have had serious engine problems, which means that over the past two years many of Norwegian’s long-haul flights have been operated by chartered planes.
The airline was on the verge of collapse when this all started, and then of course things got worse with the coronavirus. And that brings us to the current situation …
Norwegian had to hire planes due to grounding of 787-9
Norwegian Air risks insolvency
As reported by The Wall Street JournalNorwegian Air today warned of a “significant risk” of becoming insolvent in the first quarter of 2021, as the airline lacks cash to meet its short-term obligations. The only way for the business to survive is to raise more money in the market.
But at this point, it seems highly questionable how the airline plans to secure additional funding:
- Norwegian stock is down 97% for the year
- Norwegian shareholders were heavily diluted in May, due to the conversion of debt to equity, which was necessary to Norwegian will be eligible for government loan guarantees, which kept the airline in business
- As a result of this debt-to-equity conversion, Norwegian’s major shareholders are the aircraft leasing companies that lease Norwegian aircraft.
- Therefore, the airline does not have much leverage or many assets to raise additional capital, especially given the bleak outlook for the industry.
- Norwegian has around US $ 57 million in cash, and it burns around US $ 5.7 million in cash per month (a vast majority of Norwegian planes are grounded, and the airline does not operate long-haul flights)
- Logically, an airline would want to return as many planes as possible to the leasing companies, but since the leasing companies are the major shareholders and have no other uses for the planes, they are also not in favor of that.
- For the airline to have any chance of survival, the focus should be on growing in the Scandinavian market, where the airline has always been profitable; however, in times of coronavirus the potential is also limited
Norwegian needs more money to stay in business
At the end of the line
As much as I appreciate the competition offered by Norwegian in the market, so much I just don’t see any way forward for the airline. At this point, the major shareholders of the company are aircraft rental companies, which makes fundraising even more difficult.
With global travel by some estimates not expected to recover until 2024, the airline may need a lot more money to stay in business.
Do you see a path to survival for Norwegian?