Norwegian Issues Statement on End-of-Year Shutdown Speculation

Dec 23, 2018

This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.

It’s been a rough year for low-cost and ultra-low-cost airlines in Europe. From the sudden collapse of Primera Air back in October to the ongoing saga of Wow Airlines, it’s been a tough year for operators. And it seems that Norwegian Air might be next to go, with some saying as early as the year’s end.

The low-cost carrier is facing its own set of unique issues in its attempt to stay solvent. In its efforts to rapidly expand, the company racked up a huge mountain of debt to acquire aircraft. The repercussions of that move are now apparent as reports circulate that the airline could be unable to meet its debt requirements.

The current issue stems from an outstanding bond that is due for repayment in Nov. 2020. The terms of that bond include a covenant that requires the airline to maintain a minimum of 1.5 billion NOK (Norwegian Krone) in book equity. Book equity, in its simplest terms, is the net worth of the company, or the total amount of capital that could be disbursed to investors if the company should liquidate all assets and pay all debts.

If the creditor calls the debt in the event of a breach, it could lead to an immediate tailspin for the company. Other creditors could lose faith in Norwegian’s ability to pay its debts and start to demand payments in cash for things like fuel, airport fees and aircraft maintenance. For the already cash-strapped airline, this could be the final death blow.

A spokesperson for Norwegian Airlines told TPG via email, “This is pure speculation. Our liquidity is satisfactory, we attract hundreds of thousands of new passengers every month and we are currently divesting a big part of our fleet, as previously announced, which will also further strengthen our financial situation.”

Norwegian has been in private talks about a joint venture to help solve its problems. Although details of the venture haven’t been made clear, it’s likely that the new entity could take over the airline’s debt obligations on its current aircraft orders, thereby relieving some pressure on cashflow for the airline.

Daniel Roeska, an analyst with Bernstein who covers the European transportation sector, told TPG via email that the venture would have to be carefully crafted “in order to bridge the gap in book equity” and avoid the covenant breach.

Completing another capital raise could also be a solution for the troubled carrier. Earlier this year, the airline raised $168 million to help cover rising fuel costs and fund its expansion after posting larger than expected losses in the first quarter of the year. If their plan to divest their current aircraft orders falters, a capital infusion could be a way to stabilize the company — for the near term at least.

Roeska said that “even with lower fuel prices, operating losses will likely dilute book equity value below the critical threshold of 1.5bn NOK.” The resulting breach could allow the debt holder to “call the debt” and demand repayment in full immediately.

In fairness to Norwegian, the debt breach scenario is speculation by the market on one possibility should the company not be able to execute its plan for stabilization. The airline’s statement would have us believe that the company is confident in its ability to level the wings, while the market is speculating on worst-case scenarios.

Either way, if you have tickets booked on Norwegian in the near term it might be a good idea to review your travel protection offered by your credit card in the event that the market has the right call, and Norwegian fails to navigate its way out of the current situation.

For now, it’s too early to definitively state what the outcome will be for the troubled carrier. One thing is for sure: the market will be keeping a close eye on the airline in the coming days and months.

Featured photo by Francis Dean/Corbis via Getty Images

2018 TPG Award Winner: Mid-Tier Card of the Year
Chase Sapphire Preferred® Card

WELCOME OFFER: 60,000 Points

TPG'S BONUS VALUATION*: $1,200

CARD HIGHLIGHTS: 2X points on all travel and dining, points transferrable to over a dozen travel partners

*Bonus value is an estimated value calculated by TPG and not the card issuer. View our latest valuations here.

Apply Now
More Things to Know
  • Earn 60,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $750 toward travel when you redeem through Chase Ultimate Rewards®
  • 2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases.
  • Get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards. For example, 60,000 points are worth $750 toward travel
Intro APR on Purchases
N/A
Regular APR
17.49% - 24.49% Variable
Annual Fee
$95
Balance Transfer Fee
Either $5 or 5% of the amount of each transfer, whichever is greater.
Recommended Credit
Excellent/Good

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.