Norwegian Air: Easy Times, Desperate Measures; The long-haul airline disruptor has raised capital, but still looks financially precarious

The Wall Street Journal
By Stephen Wilmot
March 21, 2018 1:42 p.m. ET


If the airline industry were in desperate straits, Norwegian Air Shuttle would have a better excuse for the measures it announced late Tuesday to shore up its balance sheet.

The low-cost carrier, which is shaking up trans-Atlantic flying with sub-$250 flights, raised equity equal to almost a quarter of its total before the market opened Wednesday. This hardly came from a position of strength. The shares are down nearly 40% over the past year, despite the best industry conditions in years.

The capital increase took the form of a private placement of discounted shares with key investors, including founder and Chief Executive Bjørn Kjos. Diluted smaller shareholders get the chance to buy shares at the same price in May, but only about a sixth as many.

Norwegian has undertaken a breakneck expansion, applying the low-cost model pioneered by the likes of Southwest and Ryanair in short-haul to trans-Atlantic travel. But there’s a key difference: It has done it with a highly leveraged balance sheet that leaves little room for error.

The private placement will boost by 1.3 billion Norwegian krone Norwegian’s equity cushion, which finished 2017 at just 4.1 billion krone ($529 million). But net debt, which clocked in at 22.3 billion krone in December, will still be almost four times its expanded equity. And this doesn’t include the company’s even greater lease liabilities, which will need to be put on the balance sheet under new accounting rules starting next year.

A reclassification of the company’s stake in a bank holding company, Norwegian Finans, has also freed up capital on paper, but shows the depth of worry. The local regulator required the airline to change the accounting treatment of the stake, almost halving its total equity cushion. Norwegian Air Shuttle can now roll back that treatment since its chairman announced his resignation from the bank’s board last month.

Mr. Kjos raised the possibility of further moves to improve the company’s capital position, including selling its loyalty program and spare Airbus planes, though details were scant. Airline loyalty programs are valuable because of their data; but for the same reason it’s hard to see why a digitally minded airline would want to sell its program—except out of desperation.

At some cost to small shareholders, and with an eye on accounting technicalities, Norwegian has bought itself breathing room. It may need it: With fuel prices rising, the operating environment for airlines is getting stormier. Norwegian’s need to beef up its books after one of the industry’s best years on record raises the uncomfortable question: How will it weather a tough year for the industry?

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