The Long-Haul Airline Disruptor Isn’t Built For Turbulence: Unlike its low-cost airline forefathers, Southwest and Ryanair, Norwegian Air Shuttle runs a risky model of fast growth and high debt

The Wall Street Journal
By Stephen Wilmot
Sept. 29, 2017 7:19 a.m. ET


If you’ve booked a cheap trans-Atlantic flight with Norwegian Air Shuttle ASA, you can relax: It probably isn’t about to go bust. Whether the Oslo-listed airline’s high-risk business model can withstand more difficult market conditions is doubtful.

Michael O’Leary, the outspoken boss of European low-cost leader Ryanair Holdings PLC, told journalists in London last month that “Norwegian will go in four or five months.” Norwegian flatly denied it had financial problems, and more recently identified a motive for Mr. O’Leary’s accusations: Its mushrooming long-haul business has poached pilots from Ryanair. Crew shortages have forced the Irish carrier to cancel thousands of flights over the coming months.

Norwegian’s finances do look stretched, but this isn’t new. In 2012 the airline astounded the industry by ordering 372 planes. Since then it has resembled a land-grabbing property company, using its profits as cash deposits for highly leveraged plane purchases. Many of these equip its trans-Atlantic long-haul business, launched in 2013, which is selling round-trip flights between New York and London next month for under $500.

The company’s growth model has showed signs of strain this year. Like Ryanair, Norwegian has faced crew shortages in short-haul, partly because its own pilots have also defected to long-haul. Whereas Ryanair has canceled flights, risking the wrath of customers, Norwegian leased planes complete with crews. This was an expensive solution: Operating cash flows for the year through June were roughly a quarter lower than in the comparable period.

Even so, there’s little evidence of a cash crunch at Norwegian: It had 5.8 billion krona ($720 million) at the end of June, almost double the level a year before. The company still seems to have access to debt, and could also raise cash by selling planes. As long as it sorts its operational problems out, and conditions remain benign, there’s no reason why its aggressive expansion plan can’t continue.

The real question is whether the company’s financial model can survive an economic downturn or higher oil price. Feverish competition, not least from Norwegian, has taken the shine off the industry’s recovery since the financial crisis, but it continues to operate at near-record levels of profitability. When turbulence comes, Norwegian will be severely tested.

The airline operates a very different growth model to tried and tested low-cost carriers such as Southwest Airlines Co. in the U.S. and Ryanair in Europe. These combine a disruptive approach to operations with a conservative one to finances. Crucially, strong balance sheets and fat margins have given them the muscle to expand through downturns, when rivals are in retreat and customers hungry for bargains.

With its slim margins and leveraged balance sheet, taking advantage of a downturn will be much harder for Norwegian. Frequent fliers may hope its ambitious project to disrupt the North Atlantic oligopoly thrives. History suggests they shouldn’t get their hopes up.

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