Booking trans-Atlantic travel may have you echoing “Butch Cassidy and the Sundance Kid” when you see Norwegian Air (NAS.OL) prices well under $200 one way.
“Round trip to Europe for HOW MUCH? Who ARE those guys?”
Today’s flights are among the cheapest in history, as a confluence of heavy competition, low fuel prices, and low interest rates worked together to open up the world.
Norwegian has been at the forefront of the model, consistently at the bottom end of the trans-Atlantic price spectrum, but with shiny new aircraft at marquee airports. The publicly-traded Oslo-based airline has an impressive fleet of 236 new, fuel-efficient planes, an enormous catalog of destinations around the globe and an exciting “pay for what you want” business model that customers seem to like.
Most low-cost, point-to-point airlines (without a hub) have focused on short-haul travel, because, as one analyst told Yahoo Finance, fuel costs the same for everyone — including low-cost airlines and private jets — and the longer the flight the more fuel you use.
But Norwegian, led by CEO Bjørn Kjos, gambled on taking the business model long-haul, and currently shuttles 36 million passengers around the world. (This is approximately the size of JetBlue.)
The company isn’t brand new — it was founded in 1993 — but its rapid expansion and major investment has put it into an interesting position from a financial perspective, and for anyone who likes cheap travel.
One question investors, travelers and other stakeholders have is whether the airline can survive the industry. Financially, the airline is in a tough situation, with negative earnings likely until 2021, its financial statements estimate. Until then, there isn’t much room for error. If the airline’s assets minus liabilities (a measure called “shareholders’ equity” or “book value”) drops under 1.5 billion Norwegian kroner in the first half of 2019, a bond covenant would be triggered and creditors would have the right to recall outstanding debt.
It’s possible there will be enough, given that book value was 5.3 billion kroner ($616 million US) in Q3 2018. But according to a note from Bernstein’s Daniel Roeska, the airline faces some obstacles on its way to long-term success, including growing that buffer by 500 million NOK by the end of the Q1 2019. Furthermore, it hedged fuel for 2019 right before oil prices fell, so it won’t be able to benefit. During the last available quarter’s earnings, Kjos said growth plans would slow down.
All of this makes Norwegian one of the most interesting stories to watch in aviation in 2019. After takeover possibilities from International Airlines Group, which owns British Airways, Iberia, and more, seem to have stalled, the path to success has narrowed and there is the possibility of failure and restructuring, a sad potential end to an airline that may have flown too close to the sun.
But if the company succeeds navigating through its growing pains, passengers could end up with quality, trans-Atlantic experiences at low-cost prices — and a more competitive marketplace. So far, these have helped put downward pressure on prices.
As Robert Mann, an independent airline analyst told Yahoo Finance, the winter months are typically the toughest. According to Mann, cash receipts from advance booking start coming in toward the last half of March. “January and February are typically the worst operating financial months,” he said.