Norwegian Air to raise cash

Norwegian Air says it is not in talks with any potential buyers after British Airways owner IAG abandoned its plans to buy it last week. Asked about Lufthansa, which held talks with Norwegian last year, and Ryanair, which has denied speculation of its interest, Mr Kjos declined to discuss specifics. “I can’t say who, I can only say that more than one interested party has contacted us,” he said, while praising IAG as “a very good company”.

IAG’s decision to walk away from the talks had spurred concerns about Norwegian’s finances, with analysts widely predicting that a capital increase was likely. No wonder, then, that the budget carrier wants to raise 3bn Norwegian kroner (£268m) through a rights issue to improve its finances. About 2.4bn kroner of the total will be guaranteed by DNB Bank, Danske Bank, and Mr Fredriksen, who last year pulled off the painful restructuring of his offshore drilling company Seadrill.

A rights issue happens when existing shareholders of a company are offered the chance to buy new shares at a special price. The news comes as the company announced that its preliminary earnings for 2018 showed an operating loss of roughly 3.8bn kroner. In early trading on Tuesday, the company’s shares plunged by 16%, declining to their lowest level since 2012. The decline came on top of a 25% fall last week. But the carrier’s bonds recovered losses recorded last week after IAG pulled out. Its €250m of notes due December gained 13 cents on the euro to 96 cents.

Billionaire John Fredriksen and the airline’s chief executive Bjorn Kjos and chairman Bjorn Kise have all agreed to underwrite the issue. Mr Kjos explained that the airline was going to change its strategic focus from growth to making cost savings. “We will now get in place a strengthened balance sheet that supports the further development of the company,” he said. In a statement, the airline added that this would “increase its competitiveness and stand-alone financial strength”.

The company is nothing if not ambitious. Norwegian’s chief executive, Bjorn Kjos, has overseen a major expansion of the airline over the past five years, doubling the size of its fleet and expanding its route network dramatically.

Norwegian’s biggest gambit has been a major play into the low-cost long-haul market. Cheap transatlantic travel is not a new idea: Freddie Laker tried it in the 1970s. But it was only with the development of highly fuel-efficient aircraft like the Boeing 787 Dreamliner — which Norwegian is using — and the Airbus A350 that the idea really took off. Last year, Norwegian Air launched the first-ever budget flight from London to South America Fares on the 14-hour trip to Buenos Aires started from £259 one-way.

But all of this has come at a price. Norwegian has debts of $3.5bn and expects to rack up a sizeable loss for 2018. Small wonder Mr Kjos now says the carrier will focus on cost-cutting and profitability, rather than growth. His airline has shaken up the market — now it needs to to become consistently profitable, before the money runs out. Truly, a race against time.

The company started as a small regional airline flying between Bergen and Trondheim in 1993. Mr Kjos turned it into Scandinavia’s largest airline and the third-biggest budget carrier in Europe.

Norwegian’s price strategy has been based on flying a young fleet of aircraft such as Boeing’s 787 Dreamliner, which burn less fuel per passenger compared with other long-haul aircraft. These offer passengers a more upmarket experience than they may have come to expect from a budget airline, with modern interiors and the benefit of free wi-fi on all routes in the future.

It flies from Gatwick, Manchester and Edinburgh airports to more than 150 destinations across Europe and worldwide including Boston, Dubai and San Francisco. But in the second quarter of last year, the Civil Aviation Authority’s most recent data, Norwegian was the airline with the second highest number of complaints from UK passengers, of those still in business. It received 526 complaints per million travellers carried in that three-month period to June 2018, behind Tui Airways with 663, but ahead of TAP Portugal, with 430, and Ryanair, with 319.

Budget airlines have had differing fortunes in recent months. In November, EasyJet announced a 41% rise in pre-tax profits to £578m for the year to 30 September. And earlier this month, it said that it expected its full-year profits to meet City forecasts. However, Ryanair cut its profit forecast, blaming lower-than-expected air fares.