OSLO/LONDON: Norwegian Air, the fast-growing budget airline trying to crack the transatlantic market by undercutting established rivals, faces mounting pressure to control costs and shore up its balance sheet to weather fierce competition.
The airline has embarked on an ambitious expansion plan buying more than 200 new fuel-efficient jets yet investors worry its drive to put more passengers on more planes is pushing up costs quickly without producing higher returns.
Doubts are creeping in because Norwegian’s fate rests on the still unproven strategy of adapting the success of low-cost short-haul travel to long-haul routes, as well as making a parallel bet on leasing out jets to rival carriers pay off.
Its shares have dropped 38 percent in 2017 bucking the industry trend and, according to Norway’s Financial Supervisory Authority, investors have taken out bets on price falls with 5.35 million of its shares, or 14.9 percent of its capital.
The so-called short-selling increased after Norwegian said the outlook for both its revenue and costs was worse than expected, its chief financial officer of 15 years abruptly quit and operational glitches left it short of pilots at the start of the peak summer season.
“The company’s ambitious growth plan is putting pressure on costs due to training of personnel and new bases,” said Jomar Kilnes, a portfolio manager at Forte Fondsforvaltning, a Norwegian Air shareholder.
“It is a great logistical challenge to make this run smoothly and we believe the recent high costs reflect that,” Kilnes told Reuters. “Operational improvements are important in order to maintain shareholders’ confidence.”
Norwegian Air, which began operating as a low-cost carrier in 2002, has led the charge for low-cost long-haul flights, especially across the Atlantic, forcing rivals to take action to protect profits and encouraging others to try their hand.
Carriers such as Lufthansa and British Airways parent IAG have set up low-cost brands Eurowings and Level for long-haul routes and US carriers have introduced fares stripping out extras.
“They have been opportunistic and in some ways it’s worked out. They’ve definitely had an impact on the market, people have followed where they’ve led, as we’ve seen with Eurowings and Level,” Jonathan Wober, an analyst at CAPA-Centre for Aviation, said of Norwegian Air.
New airlines are also taking on the transatlantic market such as Nordic budget carrier Primera Air and Iceland’s Wow air which has grabbed headlines with cut-price tickets. Others are wary, though, with doubts over whether the low-cost long-haul model can produce reliable profits in all regions.
While airlines can copy some short-haul tricks such as sticking to one aircraft type and charging for extras, there are challenges around keeping long-haul planes in use and staff costs – because overnight crew stops cannot be avoided.
Ryanair, Europe’s largest low-cost airline, has shunned transatlantic routes because it says it can’t get planes at a price to make it work. AirAsia X, which flies long-haul mostly within Asia, is not introducing European routes because of fierce competition from Gulf carriers.
Norwegian Air Chief Executive Bjoern Kjos defended the airline’s capital levels, saying it relied more on national export-import banks.
“Our financing is a little different from the usual bank financing. We use these state institutions and we have always fulfilled their requirements,” he told Reuters.