Norwegian shuts down its long-haul operations. What went wrong?

Yesterday, Norwegian announced that it was shutting down its long-haul operations with a loss of over 2,000 jobs. Going forward, it will focus purely on short-haul routes.

The company had been one of the pioneers attempting to bring the low-cost business model to long-haul. At the peak, they flew more seats to New York than British Airways.

So what went wrong?

Norwegian was in trouble long before COVID

It is tempting to see Norwegian’s decision to abandon its long-haul ambitions as yet another consequence of the pandemic. Long-haul has been hit even harder than short-haul and is expected to take longer to come back. Of course, COVID was the final nail in the coffin, but in truth Norwegian had been in trouble for some time.

In the financial year ending December 2017, the company reported pre-tax losses of NOK 2.5 billion ($300m). The following year’s loss was just as bad. Drowning in debt and out of cash, the company was forced into an emergency rights issue in January 2019, raising NOK 3 billion ($350m), more than half the company’s market capitalisation at that time.

How did the company get to that point? The roots of Norwegian’s problems lie in the extraordinarily ambitious growth plan that it set in motion more than 10 years ago, so let us step back in time and tell the story from the beginning.

Bjorn Kjors, a man with a big vision

In 2011, Norwegian was a relatively obscure low-cost carrier based in Scandinavia. It had been set up in 1993 by former jet fighter pilot Bjorn Kjors, starting with three leased Fokker 50 turboprops operating domestic routes in Norway. By 2011, Bjorn had build up the business to 62 Boeing 737 aircraft, with annual revenues of NOK 10.5 billion ($1.2 billion). The business was profitable, but with pre tax margins of less than 2% and an equity base of only NOK 1.9 billion ($230m), it was not exactly a financial power-house.

So the aviation world was shocked on 25th January 2012 when the company announcing an order for 372 narrow-body aircraft, of which 222 were firm commitments. The order had a value at list price of $15 billion and was claimed to be the largest ever order placed by a European airline.

Not all of these aircraft were intended to be used in their own operation. With both Boeing and Airbus keen to land a large and growing low-cost carrier in Europe, they competed hard to secure Norwegian’s business. They were as surprised as everyone else when instead of winning or losing, they discovered that they had both “won”. Bjorn believed that he had secured such good prices from the OEMs that instead of choosing between the two offers, he should accept both and set up an aircraft leasing company. It has never been clear to me whether the contracts with Boeing and Airbus allowed them to do that. I think it is incredibly unlikely, but obviously Bjorn Kjors believed he would be able to work around any contractual restrictions.

In truth this was not the first time that Bjorn had raised eyebrows in the industry with his bold and unconventional moves. In October 2009, he had announced that Norwegian planned to start long-haul operations, initially flying from Oslo to Bangkok and New York. At the time, many people assumed that he was trying to demonstrate to local governments in Scandinavia that they could afford to let SAS collapse rather than continue to bail out the perennially loss-making carrier. He was ready to step into the vacuum on the short-haul side and would now be able to replace SAS on long-haul routes too.

After dipping his toe in the water with leased 787s, in 2015 Bjorn placed yet another massive aircraft order, this time for 19 787-9s with a list price of $5 billion. Norwegian was a bigger airline by then, but this commitment was still roughly double their annual turnover and the company was still not really making any money, reporting a pre-tax margin of 0.3% in that year.

So the stage was set for an extraordinary period of accelerated growth, with the airline doubling its capacity in just three years from 2015 to 2018.

The short-haul business grew rapidly, but much of the ASK increase came from the build up of the wide-body fleet, which went from 8 aircraft in 2015 to 37 by 2019. Often described as Scandinavia’s answer to Richard Branson, Bjorn had created a long-haul business not much smaller than Virgin Atlantic in a fraction of the time it had taken Sir Richard.

The cracks start to show

All the size metrics were showing an impressive upward trend and the company was winning awards for “World’s Best Long Haul Low-Cost Airline” and “Best Low-Cost Airline in Europe”. However, the financial strains of this super-charged growth were becoming evident. After one year of profits in 2016, helped by lower oil prices, the company started making big losses, almost certainly driven by losses on their new long-haul routes. The company suffered from a slew of operational problems, some of its own making and some caused by issues which hit all operators of Rolls-Royce powered 787s. Bigger airlines had other aircraft types to fall back on, but for Norwegian the 787 was all they had.

Meanwhile, the aircraft kept arriving and the cash kept declining.

Enter IAG

With continued losses, there was growing scepticism amongst investors about the company’s strategy and doubts about the company’s financial sustainability. The company raised NOK 1.3 billion of additional equity from the founders and other local investors in early 2018, a sum of money that most observers thought fell far short of what was needed. In the Spring of 2018, the market capitalisation stood at a paltry NOK 7.5 billion (c.$750m).

On the 12th April 2018, the shares took off when the news broke that IAG had purchased a 4.6% stake in the company and intended to initiate discussions which might lead to a full takeover offer.

Most commentators focused on IAG’s interest in the long-haul business, some seeing it as a defensive move, responding to the threat that Norwegian represented to IAG’s position on the North Atlantic. Having been at IAG at the time, I can say that the company was genuinely interested in having a low-cost long-haul business in the portfolio. Many see the concept as being fundamentally flawed, but Qantas-owned Jetstar has been making low-cost long-haul work for some years and Norwegian’s popularity with customers was very evident. With Norwegian’s decision to pull out of long-haul, we will now never know whether they could have made the model profitable as well as popular, given time to fix the execution mistakes that had been made in the mad rush for growth.

I think missed by many was that IAG was also interested in Norwegian for its short-haul operations. IAG owns a successful low-cost airline based in Barcelona called Vueling, with 121 aircraft at the time. Adding Norwegian’s 132 short-haul aircraft would have created a business with 253 aircraft. That would be more of a match from a scale perspective with larger low-cost rivals such as easyJet, who had 315 aircraft in 2018.

However, discussions dragged on for nine months without the two sides being able to reach agreement on terms. IAG finally announced in January 2019 that it had sold its stake and was no longer interested in acquiring the company. The shares continued to slide over the following year before finally falling to effectively zero as COVID pushed the company into bankruptcy type discussions with its creditors.

Where is Norwegian now?

Visionary founder Bjorn Kjors stepped down from his position as CEO in July 2019, leaving the company temporarily in the hands of CFO Geir Karlsen. Before leaving, Bjorn had already been forced to accept the need for a change of strategy, switching from growth to retrenchment, cost cutting and a focus on profitability. Since January 2020, the company has been run by former oil and retail executive Jacob Schram. He must have been expecting the job to be a challenge, but the ravages of 2020 will undoubtedly have exceeded his expectations in that regard.

The company completed a financial reorganisation in the first half of 2020, with its lenders and lessors agreeing to swap NOK 15 billion of money owed to them for equity in the business. That enabled the company to access NOK 3 billion ($350m) of loan guarantees from the Norwegian government, but as the crisis has dragged on, the company has felt the need to request additional aid, which has so far been declined.

Whether Norwegian manages to survive or not perhaps still hangs in the balance. What is certain is that whatever emerges from the wreckage will be a shadow of the company that Bjorn built.

A final thought

The story of Norwegian is one that is full of “might have beens”. What if the company had taken a more conservative approach to managing growth? What if Bjorn hadn’t been so keen to avoid his shareholding being diluted and had raised more capital much earlier, when their share price was higher? What if he hadn’t overplayed his hand in the negotiations with IAG and had instead moved quickly to agree a deal?

Having been involved on the IAG side of all of this as one of the last projects I worked on before deciding to retire from IAG in mid 2019, I have obviously had to be careful in this narrative to stick to things that are in the public domain. What I will say is that I have added a bullet point to my CV, in the section where I list my achievements at IAG.

• Decided not to buy Norwegian in 2019