As Thomas Cook Collapses Into Bankruptcy—Will Norwegian Be The Next Airline To Fail?

The collapse of Thomas Cook after a staggering 178 years of operations have sent shockwaves around the travel sector. The world’s oldest travel company had been facing financial difficulties for a number of years due to changing travel habits and a consumer move away from package holiday bookings. With the recent bankruptcy of several other airlines around the world, from Jet Airways and Air Berlin to Iceland’s low-cost operator, WOW Air, the financial spotlight had been on the Thomas Cook Aviation business for a while.

So what will be the next major airline to fail?

Almost anything that could potentially go wrong for an airline, often does go wrong. From strikes to bad weather, maintenance issues, delays and stiff competition–airlines face a plethora of potential issues.

Bad Luck

Norwegian Air could potentially have been on the receiving end of the worst luck, as almost everything has gone wrong for them recently, but as a passenger, you wouldn’t know it (yet). If you searched for air fares between Europe and the U.S., chances are you will have seen some great Norwegian prices pop up. The low-cost airline dared to go where few airlines have ventured before, despite many flirting with the idea—long-haul low cost flights. 

Norwegian’s popularity has grown exponentially in the last few years, offering transatlantic flights for as little as $99 one way to 12 American cities. What the airline have contributed towards trans-Atlantic price competition has been fantastically positive for consumers. However, Norwegian’s low-cost aggressive expansion has come at a cost, which is now beginning to come to fruition.

To allow the airline to price tickets incredibly low, Norwegian maintained a very slender fleet consisting of just two of the most fuel-efficient aircraft types in the sky. Here began Norwegians problems—an incredibly bad luck. Firstly, they operate the Boeing 787 Dreamliner, which faced multiple groundings over the last few years due to Rolls Royce engine troubles. Secondly, Norwegian have had to ground their entire fleet of 737-MAX aircraft after two fatal crashes earlier this year on Lion Air and Ethiopian Airlines. As if this wasn’t bad enough luck, the airline had a 737-Max divert to Iran due to an emergency at the end of 2018, only to have the plane stuck on the ground for several months because the spare part couldn’t be flown to Iran due to US sanctions. As a result, if an airline has an aircraft grounded, it is losing money.

High debt and cutbacks

With the peak summer season now over, Norwegian is starting to look strapped for cash during the difficult winter trading period, and it wouldn’t be the first time. The airline has just tapped up their bondholders for a two-year extension in paying pack $380 million of debt—this sounds very similar to the final few weeks of Thomas Cook. In Norwegian’s instance, bondholders didn’t seem to have much of a choice. Norwegian simply doesn’t have the cash to repay the imminently due bonds that equate to two-thirds of their entire market valuation. 

However, with earnings deteriorating, and the aggressive expansion now having to be scaled back, which has been the main growth source of the airlines low-cost popularity, it seems as though delaying repayment of Norwegian’s bonds is just delaying the inevitable. With signs of the global economy slowing down, and earnings at the airline taking another hit, there are serious concerns about the airline’s survival.

With a valuation of just $540 million after Norwegian’s share price took an 80% hit since 2015, compared to an insurmountable $7.1 billion of net debt and lease liabilities after a huge aircraft order for expansion in 2012, Norwegian has almost no more margin for error. The carrier could well be entering its last months of independent operations, especially considering that the airline’s aggressive expansion now seems to have been placed on hold. A further recent announcement that Norwegian is ending transatlantic flights between Ireland and North America is further proof of the cutbacks that the once rambunctiously expanding airline is making.

To make matters worse (or possibly better depending on investor perspective), Bjorn Kjos, the co-founder and CEO who was responsible for Norwegian’s aggressive expansion has recently resigned.

What Next?

Last year when Norwegian’s difficulties resurfaced, British Airways’ owner, IAG, threw the low-cost airline a lifeline. Arguably, the model that Norwegian operated had hurt the bread and butter IAG transatlantic routes, and acquiring Norwegian made good business sense. IAG even went so far as to acquiring a minority stake in Norwegian, such was their aggressive expansion and positive market disruption. But that was then, and now, after turning down two separate bids from IAG’s boss Willie Walsh, the deal is off the table. For good this time, according to IAG at least. IAG announced in February that it had even sold its shares in Norwegian and seemingly, the only option that bondholders and shareholders have now, is a takeover approach from another airline.

The outspoken Ryanair boss Michael O’Leary has even outwardly said this week that he expects Norwegian to be the next airline to fail. A Norwegian spokesman told me that the company’s extensive cost reduction program, Focus2019, continues with full effect, and claimed that the airline is delivering on their strategy to move from growth to profitability. 

Long gone are the days of 2018 when British Airways and Lufthansa were getting to grips with a potential bidding war to acquire the much prized asset of Norwegian, and unless Lufthansa or another financially healthy carrier comes back to the table, we may see the low cost long haul disruptor slip towards the same fate as Thomas Cook. Could there be another twist though, where actually IAG do swoop in to buy Norwegian after playing down any further attempts? The world of acquisitions can be like a game of poker at times, but one thing seems certain, and that is that Norwegian will need external help to continue the low-cost, long haul transatlantic party.