Norwegian Air Shuttle Flew Too Close to the Sun

(Bloomberg Opinion) -- Norwegian Air Shuttle ASA introduced a generation of travelers to $65 one-way transatlantic airfare and the idea of hopping from New York to the Caribbean, with wifi, for even less.

The no-frills airline’s filing for protection from creditors this week isn’t the end of that low-cost dream, but the company that emerges from creditor protection is likely to be smaller and less swashbuckling than before.

Though this is a sad moment for the company’s 11,000 employees, it comes as no real surprise. Norwegian expanded too quickly and amassed too much debt, and hence was in financial trouble long before Covid-19 swept the globe. It only survived this long thanks to the forbearance of creditors and by tapping shareholders for more cash. Unfortunately, their generosity hasn’t been rewarded.

Norwegian’s difficulties date back to founder Bjorn Kjos’s pursuit of growth at any cost. In 2012 the former fighter pilot (who’s since left the company) placed one of the largest plane orders in the history of European aviation. This gave Norwegian a new, fuel-efficient fleet. But it’s been struggling with the resulting debt pile ever since — it closed out 2019 with 58 billion kroner ($6.4 billion) in net indebtedness (including lease liabilities), which is a lot for a company that has regularly lost money.

You’d think tackling legacy U.S. and European airlines’ stranglehold on transatlantic travel would be challenge enough, but Kjos’s ambition didn’t stop there. He even set up a subsidiary serving Argentina’s domestic market, although that’s since been sold.

From the consumer perspective this was all pretty great, as Norwegian targeted underserved routes or those where it thought incumbents were charging too much. But as I wrote in 2017, when transatlantic air fares cost $65 someone has to pay. The identity of those people has since become clear: Shareholders, bondholders and lessors have all been scorched by Norwegian Air’s carefree expansion.

The shares have lost 99% of their value this year, while Norwegian’s 7.25% coupon bonds maturing in 2022 sell for 16 cents on the euro. It’s the credit world’s way of saying, “Kiss your money goodbye.”

In fairness, Norwegian had more than its share of bad luck. Many of the Boeing 787 jets it used for long-haul flying were grounded because engines supplied by Rolls-Royce Holdings Plc proved unreliable. Its 737 Max single-aisle jets were then forced to stay on the tarmac after the twin crashes involving that Boeing aircraft. From the perspective of Norwegian’s shareholders, it’s a pity the company didn’t sell itself to British Airways owner, International Consolidated Airlines Group SA, when it had the chance.

Norwegian’s cash struggles were exacerbated in 2019 when credit card companies began holding back ticket prepayments until customers had actually flown, because they feared getting stuck with refund claims if Norwegian went bust.

When Covid-19 forced the grounding of most of the airline’s fleet, Norway’s government wasn’t willing to help all that much, unlike the French, German and U.S. governments that furnished their national airlines with billions of dollars of support. The 3 billion-kroner loan guarantees Norway offered were an inadequate Band-Aid and came with onerous conditions. Norwegian revealed a second request for state help had been rejected just as Pfizer Inc. and BioNTech SE announced they might have a viable coronavirus vaccine that could get us flying again.

I don’t blame Oslo for not throwing good money after bad, though. Domestic passengers accounted for only a fifth of Norwegian Air’s revenue in 2019. Norwegian aspired to be a global airline and structured itself accordingly. Many of its staff were based overseas, and its aircraft assets and leasing activities were housed in an Irish subsidiary, which is where it filed for bankruptcy protection this week.

Financial engineering helped keep Norwegian flying. It collapsed because it flew too close to the sun.

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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