Norwegian Air has flown into what its chief executive Jacob Schram called “its most important week” ever, as he and his colleagues scramble to land a rescue deal to ensure the airline’s survival. They’ve even placed full-page ads in Norwegian newspapers, pleading for shareholder support.
Headlined as “Our most important ad” to date, and aimed at shareholders in Norway, Norwegian’s management claimed that “it’s in fact up to you as shareholders whether the measures needed to gain access to the state’s loan guarantees will be approved.” The state bailout offer valued at NOK 2.7 billion (after the airline already qualified for NOK 300 million in guaranteed loans) would “give us sorely needed liquidity” that’s in turn needed “to secure further operations.”
In order to get that, “we depend on converting debt to capital and raise new capital in a stock issuance,” the ad continues. “That’s where you (small shareholders) come in … those of you who have cheered us on, who already are shareholders or who could consider becoming one. You are urged to vote in favour of the New Norwegian, preferably today.” At the latest, it’s implied, by Monday May 4th, when the airline has to hold an extraordinary shareholders’ meeting to gain approval for its rescue plan.
“We think the rescue plan is realistic, and we believe it’s a good plan,” Schram told Norwegian Broadcasting (NRK) just after the plan was presented on Monday. The “New Norwegian” will take off as “an even better edition” of the airline, Schram said. Today only seven of Norwegian Air’s 156 aircraft are flying. Future operations will offer around 40 percent less capacity than before the Corona virus crisis grounded airlines all over the world, but will still involve around 110 to 120 aircraft flying within Norway, around Europe and on intercontinental routes that have proven to be profitable. Those between London, New York and Los Angeles are viewed as most likely to continue if the airline stays aloft.
“What remains now is for shareholders to take part in the extraordinary shareholders’ meeting and vote ‘yes,'” Schram told NRK. “That will save the company.”
Many small shareholders, however, have already said they’ll vote “no,” reported newspaper Dagens Næringsliv (DN) on Tuesday, for fear of the airline “landing in the hands of bond holders and aircraft leasing companies.” Then, they fear, the airline would simply be sold off and they’ll lose out.
Their own holdings would at any rate be diluted to near nothing when new capital is raised, and bondholders stand to lose as well, but the state and its taxpayers can’t be as concerned about them, editorialized DN. The most important thing, not least to all the Members of Parliament who approved the government’s crisis aid package for Norwegian, is to keep the airline flying and preserve as many jobs as possible.
Frode Steen, a professor at Norwegian business school NHH in Bergen (Norges Handelshøyskole), seems to agree. “All players involved with Norwegian who’ve been asked to give up values have an alternative that amounts to nothing,” Steen told DN. “I think many of the shareholders will come to their senses and vote for a solution (the management’s rescue plan) that can take the company further.”
If not, warned Steen, “I’m afraid it will be ‘farewell to Norwegian’ during the month of May.”
Steen has followed the drama around Norwegian closely and thinks those holding Norwegian’s debt will approve the plan to convert it to shares. Norwegian has also been negotiating with 24 different leasing companies, asking them to convert claims amounting to NOK 5.3 billion as well. Around 670 small shareholders have been banding together in Norway but collectively hold just around 17-18 percent.
“I think many small shareholders have speculated that the state will save both them and the company, but that’s like believing in Santa Claus,” Steen told DN.
Still huge challenges ahead
He warns that a “New Norwegian” will still face huge challenges and may need yet another capital infusion later this year. The airline itself admits in its own ad that “a world that’s standing still (because of the Corona virus crisis) is a challenging world for an airline.”
But CEO Schram maintains that Norwegian Air had been sorting out its heavy debt problems and was poised for “one of the best summers in the cmpany’s history,” with strong bookings, lower costs and possible a profit for 2020. “We had put in place the largest turnaround operation in Norwegian’s lifetime to make operations more efficient,” the airline itself claimed in its ad. “Our entire route system had been re-evaluated and we had put programs in place so that Norwegian would also be able to make the world accessible for everyone.”
The airline now envisions a fleet reduced from around 170 aircraft (including new jets due to be delivered over the next few years) to between a maximum of the 110 to 120 aircraft due to fly after the Corona crisis abates in 2021 or 2022. Norwegian’s domestic routes in Norway are viewed as its “core operations,” providing necessary competition to rival and also ailing Scandinavian Airlines (SAS), along with fewer flights between Nordic countries and Europe.
“Our plan will roughly cut the fleet of long-distance aircraft, and then we’ll see what the demand becomes,” Schram told NRK. “We have faith in direct flights that challenge those with expensive tickets, and we can become much better at offering that, and where these routes will be between.” Customers won’t argue that Norwegian could offer much better service: NRK has also reported that Norway’s consumer council is currently “drowning” in complaints filed by Norwegian customers.
Bankruptcy remains an option, with a reorganization possible under new laws in Norway that could allow the airline to negotiate with lenders in an effort to keep the 42 Boeing 737 and 11 Boeing 787 aircraft that it actually owns.
With cash flow expected to remain negative even during the summer high season because of Corona containment measures still in place, it’s critical for Norwegian to gain access to the state’s aid. Its own rescue plan acknowledges that most of its aircraft will remain grounded until the end of the first quarter of 2021. Operations will then gradually be built up again towards summer of next year, and be back to a new normal in 2022.
Under the plan presented and needing quick approval, Norwegian’s bond holders and leasing companies will wind up owning 42- and 53 percent of the company respectively. Current shareholders will sit with just 5.2 percent, until a new issue raises NOK 400 million more in needed capital.
Professor Steen admitted that no one knows whether the rescue plan will in fact save Norwegian Air. “That all depends on when we can start flying again,” Steen said, and he doesn’t expect many flights will be taking off this year. Most agree airlines will still be needed in the long run, but with reduced route systems and probably higher ticket prices.