StockBeat: Norwegian Air Skids off the Runway

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Investing.com — The dream is very nearly over and history is set to repeat itself. 

Norwegian Air Shuttle  (OL:NORR) stock plunged another 7.3% to a new all-time low on Friday after warning that the bailout from investors and government that it received in the spring may not be enough to stop it going bankrupt.

“Although the company believes there are reasonable prospects to resolve potential defaults and obtain necessary working capital, there is a significant risk that the company becomes insolvent and enters into bankruptcy if, inter alia, the company is not able to reach an agreement with its creditors, access to working capital and regain normalised operations,” Norwegian said on Friday as it presented its second-quarter results.

The airline has been unable to recover from the grounding of its planes for most of the second quarter, when its passenger numbers fell by 99%. All it could fly in the three months through June were a handful of domestic routes in Norway. Despite mothballing over 100 aircraft and laying off or furloughing 8,000 workers, the company still made a loss of 5.3 billion Norwegian krone ($602 million) in the quarter.

Efforts to resume services in the third quarter ran almost immediately into problems when governments – including Norway’s – were quickly forced into reimposing restrictions on travelers to Europe’s sun belt. That ended hopes that the airline could stabilize cash flow in its current state.

As such, the company looks a near-certainty to join Freddie Laker’s Skytrain in the graveyard of those who tried and failed to make budget travel across the Atlantic a reality.

Norwegian’s problems, of course, began long before Covid-19. It borrowed heavily to buy a suite of new fuel-efficient jets that it hoped would change the economics of transatlantic routes, allowing it to do for long-haul what the likes of Ryanair and EasyJet had done for short-haul. But established competitors fought back with discount lines of their own – and then disaster struck when the Boeing (NYSE:BA) 737 MAX, the plane at the heart of its strategy, was grounded after two fatal crashes. 

The company’s share price had already fallen by three quarters as a result of that when the Covid-19 pandemic exploded, bringing lockdowns that choked off the revenue streams it needed to service its debt. While a huge debt-for-equity swap by its bondholders addressed some of the balance sheet issues and unlocked a sizeable loan guarantee from the Norwegian government, nothing has been able to fix the cash flow problem.

“We are thankful for the loan guarantee made available to us by the Norwegian government which we worked hard to obtain. However, given the current market conditions it is not enough to get through this prolonged crisis,” chief executive Jacob Schram said.

Norwegian’s backers and management have every right to feel aggrieved. The likes of Deutsche Lufthansa  (DE:LHAG) and Air France KLM (PA:AIRF) have had multi-billion injections of equity from their home governments in a flurry of interventionism that makes Michel Barnier’s current lectures to the U.K. government about a ‘level playing field’ after Brexit a truly LOL moment in the history of international trade. 

However, it is also true that Norwegian’s founders and lenders went into this with their eyes wide open, under no illusion that aviation is  – and always has been – a business at constant risk of government intervention that damns it to endless overcapacity and low profitability. While the Norwegian government has an obligation to the people whose livelihoods it has wrecked with its public health measures, the investors must – unfortunately – lose their shirts.