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Norwegian Air Shuttle’s new boss battles to save struggling airline

Geir Karlsen has huge task as he attempts to shore up finances in the low-cost carrier

Geir Karlsen has been busy. Over the past four months, the chief executive of Norwegian Air Shuttle has sold off a large chunk of the airline’s assets at a remarkable pace as he attempts to secure the future of the world’s fifth-biggest low-cost carrier. But the 54-year old acting chief executive, who took the top job in July and also wears the airline’s chief financial officer hat, remains sombre. “We’re not happy”, he said, when asked if he is pleased with the changes he has made, but added that the airline is “on the right track”. Mr Karlsen’s task is huge. The fast-growing group has been a disruptive force within the airline industry since it announced plans to launch low-cost transatlantic flights in 2012, leading the charge in reducing fares and forcing rivals to respond with their own budget services. But Norwegian’s turbocharged growth has put Europe’s third-biggest low-cost airline under heavy financial pressure. Since April last year, the company’s share price has plummeted 75 per cent as investors have worried that the Oslo-based carrier has overstretched itself. It has a big debt burden of NKr62bn ($6.8bn). It tapped investors for money twice in the past two years and it remains heavily lossmaking. According to Bloomberg consensus figures, the airline is not predicted to make a net profit until 2021. This year, analysts are estimating a NKr2.16bn net loss.The Nordic airline has also been hit by problems beyond its own control in recent years, including ongoing engine troubles with Boeing’s Dreamliner aircraft, the grounding of the 737 Max since April, and an aborted takeover attempt by Spanish rival IAG, the owner of British Airways.Significantly, Mr Karlsen has not ruled out another rights issue to raise money from investors to help keep the airline afloat.“This is a fight for survival, there’s no doubt about it,” said Daniel Roeska, aviation analyst at Bernstein. Just a year ago, Norwegian announced a significant strategic shift, prioritising profitability over growth and raising fresh capital. This plan has accelerated over the past six months, with the airline restructuring two maturing bonds, selling a stake in a Norwegian bank, as well as implementing a NKr2bn cost-cutting programme. It has also changed both its chief executive and chairman as it cut ties with its old ambitious growth strategy. In October, Norwegian also sealed a long-awaited aircraft joint venture with a subsidiary of one of China’s biggest banks, which entails the airline offloading 27 of its Airbus aircraft on order and slash its capital expenditure by $1.5bn. 



Andrew Lobbenberg, aviation analyst at HSBC, said: "Geir (Karlsen) is a financial escapologist, he’s a financial expert, that is what they need right now"


“They are pulling as many levers as they can grab to improve the liquidity position of the business,” said Andrew Lobbenberg, aviation analyst at HSBC. Analysts agree that the airline appears to have done enough restructuring to enable it to survive the traditionally weak winter season — and avoid the fate of other struggling carriers such as the UK’s Thomas Cook, which collapsed this year, the UK’s Monarch and Germany’s Air Berlin in 2017. “Without this aggressive restructuring, I don’t think they would have made it through the winter,” said Mark Simpson, analyst at Goodbody. However, he added that the airline remains highly exposed if oil prices rise or there is any weakening in aviation demand as a result of the slowdown in the global economy. Mr Simpson said the airline must “prove the business model or go bust”. Mr Karlsen, who joined Norwegian as chief financial officer in April 2018 before being promoted to acting chief executive following the departure of the airline’s charismatic co-founder Bjorn Kjos, knows there are big challenges still ahead. In an effort to improve profitability, Norwegian has been looking hard at its network and reducing capacity as well as terminating routes such as its long-haul flights between Ireland and the US. The airline has said it expects to cut capacity by 10 per cent in 2020. It is undertaking a review of its wide-ranging network, which has businesses in the Nordic region, Europe and Argentina. More details are expected in February at its full-year results. Mr Karlsen said the carrier is committed to the long-haul market, which makes up about half of Norwegian’s capacity. Some analysts think the airline could cut some of its short-haul European routes, an issue that Mr Karlsen was not prepared to comment on. But paring back the business has its challenges. “It’s a difficult task in the airline industry to improve earnings while shrinking your business. Not many airlines have been able to do it,” said Jacob Pedersen, analyst at Sydbank. A big issue for Norwegian is how to deal with the big order book of aircraft it still has from manufacturers Airbus and Boeing. While it hopes to place the rest of its Airbus order into the recently announced Chinese JV, it is in talks with Boeing about its 737 Max orders. Out of the 92 still on order, Norwegian was due to receive 16 in 2019 before the grounding took place. On top of this, it has also got a number of leased 737s being delivered over the next two years.Mr Karlsen hopes to finalise a deal with Boeing in the next few weeks. “Our aim is to find a solution where we can get compensation from Boeing but also at the same time make sure we set a proper plan going forward for the deliveries that we need.”The turbulence over the past two years has caused some investors to exit the airline. Leif Eriksrod, head of Norwegian equities at Alfred Berg, told the FT it sold out of Norwegian around the time of the bond extension negotiations despite believing in the new strategy.“The problem with the Max situation is that a lot of extra cost will incur, which more or less puts the financial situation back to where they were before the share issue in February. The main positive thing with the company is the brand name. It is very strong,” he said, adding that the company may look to come back as a shareholder at a later point. For Mr Karlsen, the restructuring of the group’s two maturing bonds, which pushed out the dates to 2021 and 2022 by putting its Gatwick slots up as collateral, has been one of the most important changes. “That was a massive one. It was a wall in front us that we needed to find a solution in order to move on other parts of the capital structure,” he said. The next 18 months will be crucial for Norwegian, according to analysts. “If time permits, financial engineering gives them some breathing space. But the winter season is not forgiving,” said Philipp Goedeking, managing partner at Avinomics.Bernstein’s Mr Roeska added: “I’m not sure if there has ever been an airline that has walked away from a debt pile as big as this.”A continuing problem is the squeeze on liquidity by credit card companies, which are gating a large amount of funds amid concerns that they would be liable if the airline were to fail. “In a normal situation we should probably have about £350m to £400m more liquidity than we currently have in a normal holdback situation with credit card acquirers,” said Mr Karlsen. The airline is trying to improve the problem by adding more credit card companies to reduce the risk. It means the pressure may not let up on Mr Karlsen over the coming months. “It has been more busy than I was anticipating when I came into this company that’s for sure,” he admitted. “When this is all done, and most of it is done — we would like to have a deal with Boeing that will help — then we have created ourselves room for the next 18-24 months with the aim to turn this around operationally. That’s the most important part of everything.”