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StockBeat: Norwegian Air Lives to Fly Another Day

Stock MarketsDec 18, 2020 05:37AM ET
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© Reuters.

By Geoffrey Smith -- Norwegian Air Shuttle (OL:NORR) lives to fly another day.

The beleaguered discount airline’s shareholders have overwhelmingly backed a restructuring plan proposed by management that will allow it to keep flying for the immediate future, and maybe hang on until better days return next year.

Earlier this month, management had presented a plan to stay afloat that envisaged the issue of new shares to raise up to 380 million euros, and the sale of a bunch of aircraft that it won’t be needing any time soon.

That plan will form the basis of negotiations with the group’s creditors, who will also be required to convert large amounts of their claims into equity.

The company, which had captured imaginations and hearts a few years ago with its bold move to launch the discount flying model on transatlantic routes, is currently operating under Irish bankruptcy protection, after a first bailout back in the spring still left it with too much debt and not enough earning power.

The Norwegian government refused to back a second bailout on the grounds that there wasn’t much Norwegian about the airline beyond its name. Many of its planes and its financing arm are based in low-tax, light-regulation Ireland, hence that is the law that will govern the restructuring.

Why would anyone want to get involved with an obvious zombie that still has a huge amount of work to do to transform itself into a phoenix? The airline is a shadow of its former self, having suspended all international operations and running only a minimum of domestic Norwegian flights. To add insult to injury, it now faces competition from low-cost rival Wizz Air on those routes.

Available seat capacity was down 96% from year-earlier levels in November, while total passenger traffic was down 98%.

Clearly, the stock is not for widows and orphans at this point. If the talks break down, the airline will collapse, the shares will end up worthless and the undeserving state-backed giants such as Air France KLM  (PA:AIRF) and Deutsche Lufthansa (DE:LHAG), having secured billions of euros in aid from taxpayers, will congratulate themselves on seeing off another challenge from an upstart startup.

Even if the talks proceed well, the immediate outlook for cash flow is still miserable and will remain so until vaccine distribution and seasonal factors bring the pandemic under control again. Nor is the prospect for a quick resolution particularly great: the deadline for leasing companies to convert their substantial claims on the company isn’t until the end of June, leaving an important element of the recapitalization math uncertain for up to six months.

But if – IF – Norwegian can hang on that long, however, the payoff could be substantial. Travel agent bookings for next summer indicate that demand has been more pent-up than permanently lost, and competitors’ fleets have been aggressively pruned, addressing some of the overcapacity problem that is a permanent feature of the sector. Brand goodwill is likely to remain high as long as the fear of being stranded by a sudden bankruptcy can be contained.

There are surely safer ways to make a bit of money, but with most cyclical stocks having sharply rerated since November, Norwegian does offer an increasingly rare chance for some high-beta thrills.

StockBeat: Norwegian Air Lives to Fly Another Day

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Comments (4)
Heimdallr two
Heimdallr two Jun 11, 2021 3:17AM ET
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They got rid of debt and are not in danger anymore.
Geoffrey Smith
Geoffrey Smith Dec 21, 2020 2:24PM ET
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Actually I did hold the stock for a bit in a former life and, as Mr Corrigan says, I lost money on it. He's also right to say the first bailout left it with too much debt (as did Seadrill in 2018, btw - must be something about protestant Norwegian bankruptcy law). With respect to Mr Corrigan, I did spend quite a lot of space in the article detailing the risks involved in getting on board now. But plenty of companies have done well after restructurings this year. If the bankruptcy tail risk is removed for even a short space of time, it grants a window for a profitable trade. Let's have a look at the BS once the creditors have made their mind up. Always keep an eye on the exit door, mind!
wrong way corrigan
wrong way corrigan Dec 18, 2020 12:45PM ET
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Wow.  Just wow.  This company has been flushing investor money down the toilet for years with new stock offerings to recapitalize the company.  You can bet the author of this article has never bought Norwegian stock because if he had, he would be angered by his losses in the stock. As the other poster wrote, this company is the walking dead.  There's no guarantee that it will emerge from bankruptcy even if it raises new capital because it is so deep in debt that the company can never recover. The core problem with this airline is the business model.  No airline has been successful as a transatlantic discount carrier.  No company can succeed because there isn't year round demand for discount flights. One thing I can guarantee anyone foolish enough to buy stock in Norwegian Airlines.  You will lose your money.
elias skaff
elias skaff Dec 18, 2020 10:15AM ET
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walking dead
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