Few airlines have expanded as quickly as Norwegian. In the 10 years years to 2018, it quadrupled its fleet size to more than 160 aircraft as it focused on growth above all else.
But Norwegian's ambition was not just to grow, but to establish the viability of the low-cost long-haul sector – and as part of this effort, it boosted capacity, as measured in available seat-kilometres, ninefold in the same period, while offering one-way transatlantic fares as low as $99 each way.
Low-cost long-haul is a notoriously tough market to crack. Norwegian planned to succeed where others had failed by basing its widebody fleet solely on the Boeing 787, would enable it to minimise fuel costs and undercut rivals.
Yet purchasing new widebodies meant taking on huge debt, while filling the jets with passengers required Norwegian to discount ticket prices to a degree that many of its routes were operating at a loss.
"The business was run around the growth agenda – they had too many aeroplanes," says Andrew Lobbenberg, head of European transport equity research at HSBC. "The tail was wagging the dog because the network was being designed to absorb the fleet plan rather than the fleet plan was being designed to meet the network."
Last year was a pivotal one. The group's total liabilities were approaching $6 billion, its second-quarter results show, and the decision was made abandon its growth strategy in favour of profitability.
Norwegian began to cut costs, sell aircraft and optimise its routes.
A year later, founder Bjorn Kjos was replaced as chief executive, on an interim basis, by finance chief Geir Karlsen. "It is crucial that we continue to deliver on our cost reduction initiatives and that we constantly ensure that we have a route portfolio that yields profit," Karlsen said upon taking the role.
The result has been a doubling down of Norwegian's efforts to slim down, cut debt, and achieve profitability before it runs out of cash.
Key to this has been a lightening of its debt load.
In January of this year, it launched a $348 million rights issue. Soon after, it emerged that – fearful of a liquidity crunch – credit-card companies had begun withholding payments to the group until after the flights had taken place. This reduced the company's working capital by $439 million during the second quarter.
In September, Norwegian reached an agreement to reschedule two bond repayments on $380 million of unsecured debt by up to two years, a move for which it offered its slots at London Gatwick airport as collateral.
"One of the biggest things that is allowing us the time to reach profitability is the extension on our bonds," says Norwegian. "It extends the time that we have to get [to profitability]."
The $245 million that was realised by the sale of a bank stake in August also softened some balance-sheet concerns.
Norwegian's other debt-reduction strategy has been aircraft sales, but this has been hampered by the worldwide grounding of the Boeing 737 Max and the engine problems that afflicted many of its 787s, constraining spare capacity. Nevertheless, the airline has made $127 million from selling excess aircraft – and will be able to resume sales once the Max is able to return to the skies and deliveries resume.
Cirium fleets data shows that Norwegian, across its various arms, has 144 aircraft in service: 106 737NGs, 32 787s and six Airbus jets (two narrowbodies, four widebodies). The group has 23 aircraft in storage –18 Max jets, five 787s – and 185 on order. Those include 88 A320neo-family aircraft as well as 88 Max jets and a handful of 787s.
A plan to sell around 70 spare on-order Airbus aircraft to a newly formed joint-venture leasing company are ongoing, Norwegian says, citing "positive" conversations. If successful, this "could be a very large step toward de-risking the business", notes Lobbenberg.
Efforts to shrink its network have also gathered pace. It has cut three North American services from Ireland and several intra-European links within the past several months. Last year brought the end of its London Gatwick to Singapore connection, as well as the closure of its Edinburgh base.
"We have looked at out routes with far more scrutiny than we did in the past," says Norwegian. "We have been far more aggressive in stopping routes that are not profitable and you are not seeing so many route launches from us – what we are doing is changing frequencies. Some are going up and some are being reduced, all because that makes business sense."
It adds: "The journey to profitability is not instant. The whole aviation industry is having a tough time – but we need to be on a stable platform.”
Lobbenberg agrees that they are on the right track. "Growing much less and focusing on managing the business for profitability – and not on absorbing the aircraft they've ordered – is a very significant step forward.”
Yet there are still questions about the viability of the low-cost, long-haul model. To date, no such operators have proven that it can be done profitably, notes aviation analyst Seth Kaplan. "As you push out the sector length, the cost benefits of operating low-cost deteriorate and the revenue deficit expands," he points out.
Many of the tricks that LCCs can use on short-haul trips – such as cutting back on passenger comforts, quick aircraft turnaround times or using cheaper, flexible labour – are of course less possible and in any case have less impact when flying longer distances. Higher fuel prices also place a greater strain on long-haul low-cost operations.
Lobbenberg, however, sees Norwegian's problems as related not to its business model but to its having grown too quickly and ordered too many aircraft.
"I don't think you can conclude anything about whether long-haul low-cost works from Norwegian's situation. Their financial position is difficult because it’s been impacted by many really big other factors," he argues.
Norwegian itself points out that as it runs a premium product alongside its low-cost tickets, its position is not too dissimilar to how British Airways or Virgin Atlantic are operating the transatlantic market. "I think everybody realises the business model does work," says Norwegian.
In Kaplan's view, Norwegian made a risky choice at the start of its long-haul journey: "The 787 Dreamliner is a great aircraft, but they are expensive to own, so there is a huge pressure to utilise the asset." While using an asset to its maximum is a viable strategy for low cost operators in short-haul markets, it is more difficult on long-haul routes, especially where demand can be thin.
Norwegian's approach can be contrasted with that of WestJet. Its method was to test out new routes using second-hand Boeing 767s, which may not be as fuel-efficient, but because they are so much cheaper to acquire they can be operated less intensively but still profitably.
The risk now for Norwegian is that without a significant deleveraging or improvement in its performance, a shock to demand or a rise in fuel prices – something the company is particularly vulnerable to because it engages in relatively little hedging – will place it under extreme financial pressure.
Neil Glynn, an aviation analyst at Credit Suisse, notes there are signs of a more challenging operating environment going forward, as demonstrated by a recent wave of bankruptcies across the sector and diminishing forecasts from established players such as Air France-KLM, EasyJet, Lufthansa, Ryanair and Vueling.
"You would expect any airline in Norwegian's position to formulate plans that produce a positive cash flow or manageable leverage – those plans would be sensitive to demand," notes Glynn. "The demand doubts do seem to be growing bigger for the industry."
Ryanair chief executive Michael O'Leary is certainly not been shy in voicing his opinion on Norwegian, predicting at a recent press conference that it be the next major airline to go out of business. Norwegian points out that he has said this consistently for several years.
One possible route out for Norwegian could be to offload its long-haul business and focus on being a European low-cost carrier. Another is to be bought by a bigger player.
For years, IAG looked the most likely suitor, even building up a 5% stake in the group as a precursor to a takeover. An announcement early last year that the group was no longer interested sent Norwegian's stock sharply lower; it has lost around 75% of its value since then.
There are several reasons why Norwegian could still be attractive to IAG, as the leading low-cost airline in Scandinavia and the first to seriously attempt transatlantic low-cost flights – something which could have "defensive benefits" for IAG, in Lobbenberg's view. "There is also a large orderbook for aircraft which… could be a useful source of capacity."
Set against this are Norwegian's vast debts. "The price they pay for the equity becomes almost irrelevant, because there is so much debt in the business which you would take on if you bought it as a going concern," says Lobbenberg. "In addition, there would be significant competition policy scrutiny."
IAG is probably the only European carrier with pockets deep enough for a Norwegian takeover, but to do so would likely want to see a performance improvement.
Kaplan suggests that Norwegian could repair its bottom line through targeted cuts, and notes that "all kind of airlines that don't look like they would be popular have been bought out”.
IAG chief executive Willie Walsh has backed Norwegian’s business case. "I would have liked it if we had succeeded in bringing Norwegian into the group but it didn't work out," he has said. And when he dismissed speculation that IAG would mount a fresh bid for the carrier, he added one important caveat: "I'd never say never."
Norwegian says that making itself attractive for a sale is not what it is looking to do. "We have already had a huge impact on the market; now we need to be able to prove we are a sustainable company, and put people like Michael O'Leary to rest," it says.
"If an approach came, we would evaluate it like anything else, but that's not necessarily our endgame. Our endgame is to be a strong profitable company ourselves."