A New Chapter for Norwegian Air? Chief executive Bjørn Kjos is stepping down and trans-Atlantic profitability is improving, but starting a new era won’t be so easy

The Wall Street Journal
By Jon Sindreu
July 11, 2019 7:36 am ET

Troubled budget airline Norwegian Air Shuttle is trying to turn the page: Its chief executive is stepping down and flights between the U.S. and Europe are finally becoming more profitable. But investors shouldn’t hold their breath.

The Scandinavian carrier has been the talk of the airline industry since it launched a breakneck expansion in 2013. On Thursday, Bjørn Kjos, the Norwegian entrepreneur and former fighter pilot who co-founded the company as a regional airline in 1993—and then championed its more recent strategy of bringing Southwest’s low-cost model to trans-Atlantic flights—said he was taking a more back seat role after 17 years as CEO.

Norwegian shares have fallen 70% over the past year, including roughly 5% after the announcement.

The 72-year-old Mr. Kjos had already hinted that he could step down, but his decision does seem to have some connection to the airline’s desire to flag that the era of debt-fuelled growth is over and a new phase of restraint and profitability has begun. A further signal is the appointment of numbers man Geir Karlsen, who only came aboard as chief financial officer in 2018, as interim chief executive.

Second-quarter earnings, posted Thursday, seemed to offer some vindication of the new approach. Operating profits came in much stronger than analysts were expecting, despite the pain caused by the world-wide grounding of Boeing 737 MAX jets—Norwegian owns 18 of them—since March.

Yet investors should be skeptical that Norwegian is really starting a radically new chapter.

For starters, Mr. Kjos will remain an adviser to Chairman Niels Smedegaard as well as the anchor shareholder. Even though his stake was diluted earlier this year when the company issued stock to stave off bankruptcy, his investment vehicle still owns a dominant 17% of the company. This will make it hard for the new management team to change course.

Tellingly, Norwegian has directed its route-slashing efforts so far toward short-haul flights. This has worked well because the European domestic economy has slowed while demand on trans-Atlantic routes has remained incredibly strong—as U.S. full-service carriers like Delta Air Lines and United Airlines have also indicated.

But the trend is likely temporary. Over many years Norwegian and other carriers have proven that there is money to be made in budget flights within Europe. Whether the same can be said for Mr. Kjos’s bet on $400 trans-Atlantic return flights remains unproven.

Analysts and investors have too often seen Norwegian’s fate as either bankruptcy or acquisition by another airline. A safer path would be for the company to shrink Mr. Kjos’s ambitions and survive as a niche carrier.

Right now, Norwegian still seems committed to trans-Atlantic expansion. On top of that, its stock remains expensive: An enterprise value of 8.6 times operating earnings compares with an industry average of 3.3. This isn’t a ticket investors should buy just yet.