Norwegian unveils ‘New Norwegian’ amid continued existential challenge
Norwegian has been struggling for years from rapid expansion, high debt, high costs, and an unclear focus from multiple ‘distractions’, including Norwegian Air Argentina (since ended) and its long-haul, low-cost development. As it says: “Our core customer will continue to be all those who seek an affordable alternative to the traditional legacy carriers without compromising on quality.” The problem of this approach is renowned, yet it keeps appearing.
Norwegian says it’ll run out of cash by mid-May
Norwegian has warned that it will run out of cash by mid-May it if does not secure all of the NOK3 billion (EUR265 million) state aid, the carrier said in its 27 April 2020 presentation to bondholders. So far, it has received NOK300 million (EUR27 million). It believes that NOK3 billion will be “sufficient” to cover its liquidity until the end of the year as the airline’s “hibernation phase” continues. This is where 95% of its aircraft are grounded with just seven aircraft operating state-subsidised domestic services.
Two-year ramp-up to New Norwegian
Norwegian expects an almost two-year ramp-up to “new normal” operations. It foresees its hibernation phase – almost full grounding – to continue until summer 2021, with the period until then all about cash preservation and preparing for New Norwegian. Essential to New Norwegian is a reduction of at least USD$500 million in aircraft lease obligations in a proposal that would convert debt to equity. If leasing companies accept their idea, 53.1% of New Norwegian would be owned by lessors and 41.7% by bondholders.
New Norwegian from 2022
In its “best scenario”, Norwegian doesn’t expect operations to resume until January 2022. And when they do restart, they’ll be in the guise of New Norwegian. This will have four pillars, as below. It is expected that New Norwegian will be much smaller and more focused and optimised. It’ll focus on unit revenue growth from reducing capacity to match demand, focusing on profitable routes, becoming more summer-seasonal (two times as much summer than winter capacity), and growing ancillaries to one-quarter of its ticket revenue. It says that “improving our route portfolio alone will drive a significant improvement in operating margin”. Meanwhile, it expects its “simpler and more efficient” network to yield benefits such as improved aircraft utilisation, stronger OTP, and lower crew costs. It foresees a 30-35% reduction in staff.
Norwegian’s fleet down by up to 34% as Nordic core to be strengthened further
New Norwegian will have a fleet of between 110 and 120 aircraft – down from 168 pre-coronavirus – with these deployed on profitable routes. Understandably, it’ll be retreating to its core as it further strengthens its primary market: the Nordics. It expects intra-Nordic and Nordics – EU to have far fewer capacity cuts than non-core areas. It is interesting that long-haul will continue despite the myriad challenges afflicting the airline. However, many changes to its long-haul network have already occurred, such as 20 routes cut in the past year or so, fewer served airports, and actively targeting feed at both ends with JetBlue and easyJet. Its move towards ‘normal’ long-haul operations continues, which clearly should make them more sustainable. So too focusing on what it calls “hub-to-hub” flying – i.e., involving major cities with strong traffic flows – with London, New York, and Los Angeles cited.
Strong growth since 2010 as moved away from core
Norwegian’s total seats (excluding its Argentina unit) have grown by a CAGR of 9% since 2010, ending 2019 with almost 44 million seats. Domestic capacity – within Norway, Sweden, Finland, Denmark – has reduced to just 27% of the carrier’s total from 50% in 2010. This isn’t from a reduction in total domestic seats – they grew by a sluggish CAGR of 2% from their already good size – but rather everything else has grown much faster. Its international Nordic seats are up by a CAGR of 10% since 2010 and now represent 53% of its total. But its non-Nordic focus has grown quickest – a CAGR of 57% – from fewer than 100,000 seats in 2010 to nine million last year, pushing its share to one-fifth of the carrier’s total capacity. It is this which will see the main cuts.