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Sunday, June 4, 2023

Bonuses spoil the ‘New Norwegian Air’s’ take-off

NEWS ANALYSIS: Long-troubled Norwegian Air’s plans for a triumphant return to the skies landed in an embarrassing mess this week. Large bonuses secretly paid out last month to the airline’s two top executives have severely damaged their credibility and angered Norwegian’s new investors, its long-suffering employees and the politicians who helped rescue the airline that had severe financial problems even before the Corona crisis began.

This photo of Jacob Schram was taken just weeks ago, when he was still CEO at Norwegian but neither investors, government officials, analysts nor the public knew he’d been granted an NOK 11 million bonus in addition to a severance package that must keep paying his salary for two more years. PHOTO: Norwegian Air/Bo Mathisen

The latest drama around Norwegian Air started on Monday, when its chief executive was suddenly fired by the airline’s new board of directors. Jacob Schram had been brought in less than two years ago to replace Norwegian Air founder Bjørn Kjos and lead an urgently needed recapitalization program. The latter was already underway, led by the airlines relatively new finance director Geir Karlsen, who’d also served as acting CEO between Kjos’ departure and Schram’s official arrival in January 2020.

Then came the Corona crisis, which grounded Norwegian Air and most all other airlines around the world. Suddenly the airline’s sheer survival was at stake. Schram and Karlsen ended up having to seek bankruptcy court protection in both Norway and Ireland to keep creditors at bay while they scrambled to reorganize the airline and restructure is finances.

That was finally completed just this spring and both Schram and Karlsen posed with signs reading “We’re back!” in May. After a year in which thousands of employees had lost their jobs and Norwegian taxpayers effectively had to back billions in loan guarantees offered by the government and Parliament, it looked like a sharply scaled-down Norwegian (all its intercontinental routes have been dropped) could finally spread its wings just as the Corona crisis was winding down.

Norwegian Air’s new CEO, Geir Karlsen (right), posed with his predecessor Jacob Schram and a Norwegian Air captain, Marianne Vikse Lien, when the airline emerged from bankruptcy late last month. Now Schram is gone and neither he nor Karlsen will comment on the secret bonuses they received before a new board of directors took control a few weeks ago. PHOTO: Norwegian Air

That’s why Schram’s abrupt dismissal surprised just about everyone following the airline. Karlsen was kept on as Norwegian’s new CEO, at the same salary he’d had as finance director (NOK 4.5 million/USD 529,000) that was much less than the NOK 7 million Schram was paid. Norwegian’s new board of directors, led since early June by Svein Harald Øygard, also made a point out of noting that it had tried unsuccessfully to get Schram to agree to a less-generous severance package than the one he’d negotiated with Norwegian’s former board in 2019.

Karlsen, meanwhile, won support from investors, analysts and even Norwegian’s often unhappy pilots’ union in Norway, Sweden and Denmark. Its leader, Alf Hansen, called Karlsen “both the brain and implementer” of Norwegian’s recovery, and told newspaper Dagens Næringsliv (DN) on Tuesday that the Karlsen was “someone in which we (the pilots) have put all our confidence.”

Then came the first report from financial news service E24 late Tuesday night that both Karlsen and Schram had received secret bonuses last month. On Wednesday, DN reported that the bonuses amounted to NOK 11 million (USD 1.3 million) each, very high by Norwegian standards. In Schram’s case, it came in addition to his severance package that will continue to pay him his current salary for the next nine months (he’ll allegedly keep working for Norwegian in some as yet undefined role) plus another 15 months after that. It all adds up to around NOK 30 million at a time when most everyone else associated with the airline has suffered.

The cries of protest have been audible, not least after Karlsen himself had told reporters earlier in the week that Norwegian still needs to cut costs. Some feel Karlsen deserved a lucrative reward for how he’s worked day and night to save the airline from bankrupcy. Many media commentators and financial experts even claim Karlsen has “made financial history” in Norway because of  his ability to successfully deal with both creditors and new investors (including one of his own old bosses, the demanding billionaire shipowner and businessman John Fredriksen) who provided the capital needed to keep Norwegian airborne. Many, from founder Kjos to the pilots and analysts, praised the airline’s new board for making a good choice.

Later in the week, however, the secret bonuses seemed to throw Norwegian into yet a new crisis. The board that took over shortly after the bonuses had been paid out called them umusikalsk (literally, not in in harmony with the still-tough situation at Norwegian Air). They hadn’t mentioned the bonuses in their announcement of the executive reshuffle Monday, but they clearly played a role in their sudden decision to fire Schram and replace him with Karlsen at lower pay. Investors like Fredriksen and not least Norway’s Folketrygdfondet pension fund were not pleased. Many investors in the airline had no idea Schram and Karlsen had already been paid NOK 11 million each on top of their salaries and other benefits.

‘Sad, disappointing’ and ‘distasteful’
When E24 and DN found out about the bonuses, allegedly made to retain Schram’s and Karlsen’s services just before the new board took over, analysts like Robert Næss at Nordea Funds said they were “difficult to understand.” Other investors are complaining and demanding answers. Alf Hansen of the pilots’ union called the timing of the bonuses “extremely bad,” while the head of the flight attendants’ union, Rene-Charles Gustavsen, called the bonuses “distasteful.” He told DN that “many members have contacted me and they are disappointed. We are disappointed. This was supposed to be a join effort (to save the airline). I think it’s sad to see that colleagues have lost their jobs while others get fat bonuses.”

Many Members of Parliament and the government also believe the bonuses defy at least the intention of the state aid provided to airlines including Norwegian during the Corona crisis. Initial loan guarantees specifically forbid payment of any dividends or bonuses. Trade Minister Iselin Nybø contends that the ban on bonuses applied until May 26. She acknowledged that more recent debt workout plans did not include a specific bonus ban, but she now wants to know exactly when the bonuses were paid out.

Niels Smedegaard, the former leader of Norwegian Air’s board who had hired Schram in 2019, defends both Schram (who’s been branded as having left most of the work to Karlsen during Norwegian’s reorganization and recapitalization) and the bonuses. He denies Schram wasn’t sufficiently involved in the airline’s rescue, rejects DN‘s reports that Schram and the board had spent too much money using expensive external firms like Boston Consulting Group and that the bonuses themselves did not violate any of the terms in state aid packages. He conceded that the new board is within its rights to make its own decisions, “but I just think that when you send Jacob Schram out the door, you should acknowledge his contribution.”

Smedegaard told DN on Wednesday that Schram played an important role in “convincing people that there was a future for Norwegian.” After news broke about the bonuses, Smedegaard claimed all the criticism was “out of proportion.” He defended the need to keep both Karlsen and Schram “on board” during what was “a life-threatening situation for Norwegian” last winter. Despite the state’s attempt to ban bonuses and dividends, Smedegaard admits the board started to discuss as early as last winter “what you can call a ‘retention bonus,’ or ‘success bonus’ if we got through the restructuring plan.” He suggests that a total investment of NOK 22 million in two people “who succeeded at attracting investors who contributed NOK 6 billion, secured jobs and kept Norwegian going benefits customers, employees and Norwegian society as a whole.” That justifies why he thinks what some commentators are already calling “Bonusgate” is being “taken out of proportion.”

New forces at work
Smedegaard, who denies he and his board were “a bunch of idiots,” is now out of Norwegian but can expect questions from Trade Minister Nybø, who in turn is under pressure from angry members of the opposition in Parliament. She told DN that “we did what we could to secure the taxpayers’ money,” NOK 22 million of which now has arguably gone into the pockets of Karlsen and Schram although it technically may have come from other loan packages. Neither Karlsen nor Schram have been willing to answer questions about the bonuses they were paid.

The “red-nosed” jets remaining in Norwegian’s fleet now need to be filled with passengers, right in the middle of a new credibility crisis at the airline. PHOTO: Norwegian Air

There’s no question that new forces are now at work in Norwegian. Karlsen will need to answer to a presumably tougher board of directors, and to suddenly disillusioned employee groups. Karlsen and Schram have often referred to everyone at Norwegian Air as “Red Nosed Warriors” who worked together to save the airline. Now many of them aren’t so sure such solidarity exists.

Analysts, meanwhile, note that with powerful investors like John Fredriksen keen to earn more money on Norwegian, Karlsen will have to keep costs under control and hope the airline industry rebounds after Corona groundings. More pressure is also likely to be put on Boeing to compensate Norwegian for faulty 737MAX and 787 Dreamliner aircraft that caused lots of Norwegian’s problems. The new leader of Norwegian Air’s board’s compensation committee, Lars Boilesen of the former Opera Software, also claims Norwegian’s new board has “chosen to end” the kind of lucrative executive compensation paid to Schram and Karlsen. Karlsen may still qualify for a bonus based on results for 2021 but his severance package will yield a maximum of one year’s pay.

Most importantly, the airline will also need to win back passengers, many of whom have also registered the bonus controversy this week. If fares rise too high, or Norwegian fails to deliver reliable airline service, its business can take a nosedive. The airline’s own annual report published in April claimed that executive pay should be competitive, but should not have any “negative consequences for the company or damage its reputation” among the public. The opposite has already occurred. Berglund



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