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Norwegian Air Cuts Costs to Stay Afloat

Dec. 24, 2018
4 min read
Norwegian Air Cuts Costs to Stay Afloat
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Numerous articles and blog posts have surfaced in recent weeks claiming that Norwegian Air, arguably the pioneer of successful low-cost trans-Atlantic flying, was on the verge of collapse. Over the weekend, Norwegian told us the company is healthy and talk of a demise is pure speculation, and on Monday it reiterated that its liquidity is satisfactory -- in other words, it can still pay its suppliers.

This past year has been especially tough for low and ultra-low-cost rans-Atlantic carriers with Primera Air abruptly ceasing all operations in October and WOW Air facing collapse and being possibly rescued by Indigo Partners, the private equity firm that also owns Frontier and Volaris.

The cabin of a Norwegian 737 MAX 8 (Photo courtesy of Norwegian)

Norwegian may have bought itself time, however, with a cost-cutting manuever just before the holiday break. Reuters is reporting that Norwegian has outlined a rigorous and comprehensive effort to "shore up its balance sheet" through cost-cutting measures. While the extent of these cost-cutting measures isn't clear, it does appear that Norwegian plans to cut its fleet, cut routes, and overhaul its operations to run more profitably. The measures are reportedly going to save over $230 million. Norwegian outlined plans to refinance one of its Boeing 787s and confirmed financing for all future deliveries in 2019.

In a press release posted on the Oslo Stock Exchange, Norwegian Air said that issues with its Boeing 787s powered by Rolls-Royce engines also stunted profitability. Some Rolls-Royce powered 787s have had to be grounded for repairs, wreaking havoc with airline schedules all over the world. Norwegian has been forced to lease airplanes from other carriers to cover for its grounded 787s, at great cost.

Norwegian said it has reached a confidential agreement with the engine manufacturer, presumably for a hefty compensation. Changes to capacity are also imminent. However, the airline has yet to make any of this information available.

When we reached out to Norwegian Air for information regarding potential cutbacks or route terminations, we were directed to a late-November press release highlighting a planned expansion. However, the airline's most recent press release posted Monday mentions "adjusting capacity" and "divesting aircraft". Norwegian confirmed that two of its aircraft will exit the fleet in early 2019.

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Map from late November showing an US expansion (Image via Norwegian Air)

While little is known about what this means for passengers other than the likelihood of capacity and route cuts, there does appear to be a light at the end of the tunnel for the struggling budget carrier and its passengers. Norwegian Air also confirmed that talks of a joint venture for aircraft ownership "also continues with full force."

Speculation of Norwegian Air's imminent collapse came as it transpired that the airline would likely not be able to maintain a minimum of $171 million USD 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." Norwegian Air's new cost-cutting strategy dubbed "#Focus2019" appears to have accomplished the airline's goal of maintaining that $171 million in book equity.

For now, Norwegian Air will live to see another year. Passengers booked on Norwegian Air flights in the coming months should continue to plan accordingly -- it's unikely the airline will park its planes in the immediate future.

Featured image by Photo by Zach Honig.