From 156 airliners at the start of this year, Norwegian Air is currently flying only six, nearly all on domestic services in Norway. Of the carrier’s 9,300 staff worldwide, just 600 are still working. While workers are furloughed, Norwegian is still facing debt and leasing obligations in excess of $5 billion across its fleet. And this fleet is entirely held by companies registered in Ireland.

Last week, the High Court appointed Kieran Wallace of KPMG as interim examiner to five companies in the group. Norwegian Air Shuttle, their parent company in Norway, is also receiving protection from the Irish insolvency process as a related party. The independent expert’s report prepared for the court by Deloitte’s Ken Fennell details the challenge ahead for Wallace in the next 150 days – or more critically 60 days, due to international rules specific to aviation finance.

The document tells the story of Norwegian’s lightning growth from small domestic operations with turboprop aeroplanes along the west coast of Norway at the turn of the century to major listed European low-fares airline – to the current situation where it will run out of working capital by January and one of its Dublin-based subsidiaries holding 24 Boeings is already “cash-flow insolvent”, with more set to follow suit.

The report also shows that while the pandemic has put the company on its knees, it is only the latest occurrence of turbulence in the airline’s recent history and could not have come at a worse time.

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Norwegian graduated from local operator to international low-fares airline from 2003, when it listed on the Oslo stock exchange. First through code-shares with more established carriers, then by acquiring FlyNordic in 2007, it took to much wider skies. That year, it placed its first large-scale aircraft order – worth $3.1 billion – for 42 Boeing 737-800s and an option for 42 more.

In the following years, the airline grew its fleet and routes at supersonic speed. “In January 2012, Norwegian announced the largest orders of aircraft in European history,” Fennel’s report notes. “The orders consisted of 22 Boeing 737-800s and 100 Boeing 737 MAX 8 aircraft with options for another 100 of the latter, and for 100 Airbus A320neos with options for another 50.” Leases and further orders constantly added to the fleet. The expansion included Ireland, with flights from Dublin, Cork and Shannon to destinations including New York, Boston and Toronto. 

In the process, Norwegian became a truly multinational corporation. The group comprises five distinct airlines registered in Norway, Sweden, the UK and Ireland to fly into different markets – the Irish operator, Norwegian Air International Ltd, is among the companies now entering examinership. Each of these airlines leases aircraft from any of the group’s 36 Irish holding companies, all subsidiaries of Arctic Aviation Assets DAC (AAA). Located at Dublin Airport, they employ seven staff. AAA and its subsidiaries Drammensfjorden Leasing Ltd (DLL), Torskefjorden Leasing Ltd (TLL) and Lysakerfjorden Leasing Ltd (LYK) are part of the insolvency process.

Norwegian’s passenger numbers peaked in 2018, topping 37 million and driving revenue. But that same year, its Ebitda turned negative, reversing the progress towards net profitability achieved in the previous three years. Behind the scenes, the airline’s difficulties had already started.

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Norwegian’s reliance on various versions of Boeing’s 737 and 787 aircraft was initially a strong point. The recent so-called Next Generation and Dreamliner models carried more passengers with less fuel. The unified young fleet presented the airline with a competitive advantage – as long as it was reliable.

It wasn’t the case, according to the independent expert’s report. “Norwegian experienced ongoing issues with Rolls Royce Trent engines which affected the full utilisation of Norwegian’s Boeing 787 fleet.” The engines came directly from Rolls Royce under a separate contract. “Norwegian’s Rolls-Royce Trent 1000-powered 787 aircraft have suffered from long-running reliability issues that have resulted in premature and unplanned maintenance, in turn causing disruptions to Norwegian’s operations at significant cost.”

Meanwhile, the development of the group’s long-haul routes, including out of Ireland, depended largely on the Boeing 737 MAX. The aircraft was involved in two crashes causing hundreds of deaths within five months of each other in late 2018 and early 2019. Aviation safety authorities across the world took the 737 MAX out of circulation immediately after the second crash. 

“On 12 March 2019, the group grounded all 18 of its Boeing 737 MAX aircraft at the direction of the European Union Aviation Safety Agency, after the Ethiopian Airlines and Lion Air crashes. These aircraft remained grounded,” Fennell reported. It was only last week that US authorities lifted their ban on the aircraft, subject to costly updates and pilot re-training. “Due to the grounding of these aircraft Norwegian had to wet-lease additional aircraft throughout 2019 at significant cost in order to avoid cancellations and disruptions across its network.” Shortly afterwards, Norwegian axed Irish transatlantic services.

Norwegian’s uphill battle against looming insolvency has, in fact, been going on for two years. At the end of 2018, the group reported striking an agreement with Rolls Royce on compensation over engine reliability and embarked on a $250 million cost-cutting programme called #Focus2019. It sold its new Argentinian subsidiary, culled 50 of its less profitable short-haul routes to replace them with 22 new ones and refocused its long-haul business on Oslo and big international hubs such as London, Paris, Rome and Barcelona.

Fennell reports that the plan delivered on its objectives last year, with an eight per cent rise in revenue to $4.74 billion and a return to operating profitability – although the group still posted a net loss. Norwegian’s share price fell by 85 per cent over the same period. 

“On a consolidated basis Norwegian generated a loss of NOK1,609.1 (US$175.4 million) for the year-end, 31 December 2019, however with an improved operational cost base management were optimistic about the future of the airline and indeed returning to profitability in 2020,” his report observes. The upbeat forecast, issued on February 13, was predicated on further rationalisation across the group’s cost base and route network.

Three weeks later, Norwegian withdrew this guidance.

The Covid-19 shock was swift and severe for Norwegian. On March 16, it cancelled 85 per cent of its flights and laid off around 7,300 workers. Within weeks, another 4,700 were hit by bankruptcies and contract terminations at subsidiaries and contractors employing staff on behalf of the airline. 

On April 27, Norwegian applied for state aid in Norway, which is not part of the EU. To qualify for government assistance, the airline presented a restructuring plan including the grounding of its entire fleet except seven aircraft flying within Norway and the conversion of bonds and leasing obligations to equity, releasing nearly $2 billion. “Share value in the airline continued to decrease with markets anticipating the conversion of the Norwegian’s debt to equity, which completed on 20 May 2020, resulting in lessors with large lease debt exposures to Norwegian also becoming the airline’s largest shareholders,” the independent expert reports.

Another key aspect of the rescue package was a deferment of lease payments due by Norwegian’s Irish subsidiaries and worth $250 to 285 million until March 2021 through so-called “power-by-the-hour agreements”. “These agreements effectively mean that no payments are made to respective lessors unless the aircraft is in use, however overall lease obligations continue to accrue during this standstill period. The differential between contractual rent and the cash rent paid for usage is to be ‘paid’ in Norwegian equity in April 2021,” Fennell explained. 

The plan allowed the airline to access over $330 million in loan guarantees from the Norwegian government and remain afloat. After attempting to resume European services with 25 aircraft in the summer between the two waves of the pandemic, the airline had to row back in the autumn. 

This time, however, state aid is not forthcoming. On November 9, Norway refused to provide fresh financial support to the airline. “This announcement, combined with newly imposed strict Covid-19 measures, has placed Norwegian in an extremely challenging situation both financially and operationally,” according to the expert’s report. 

Moreover, existing arrangements with creditors are not sufficient: “While certain restructures of lessor positions have been successful the operating group remains in default of its obligations across its entire fleet.” Its Irish subsidiaries hold 55 debt-funded aircraft and 85 leased ones, totalling $5.19 billion in liabilities. 

Already, not all lessors are happy to defer payments. On November 6, DLL, an Irish vehicle that leases in 20 Boeing 737s and leases them out to Norwegian group airlines, was ordered to pay over $6 million in arrears to US lessor Aviation Capital Group by the English High Court. Another of its suppliers, Wings Capital Partners, is threatening to sue over a $5.9 million arrears claim and up to $15 million in compensation for each of its two aircraft – not to mention their repossession.

Separately, LYK is facing potential legal action from the lessor of one of its Boeings, Goshawk, over $2.2 million arrears. Examinership protects the two companies from these immediate threats. The third aircraft holding subsidiary entering the process, TLL, has not reported imminent litigation but Fennell stated that it was already “cash-flow insolvent” – as is their immediate parent AAA, which is liable to pay $1.5 billion this year and $600 million next year for new aircraft yet to be delivered.

“The future survival of the companies, and indeed the operating group as a whole, requires a significant reduction in its current operations and fleet.”

Independent expert’s report

All these group companies have comfortable net asset positions on their balance sheet, but the independent expert’s report warns that this results from the recent application of IFRS16 accounting standards, which regards their right to use leased planes as assets. According to Fennell, they and the wider group will run out of working capital in January.

While Wallace technically has five months to address these challenges under extended examinership terms rushed through the Oireachtas this year in response to the pandemic, Fennell warns that the window to deal with lessors and other aircraft creditors is in fact much narrower. Under the Aircraft Protocol to the Cape Town Convention, as implemented into Irish law, an insolvency administrator must “cure all defaults” related to international aircraft debt within 60 days or face repossession.

“The future survival of the companies, and indeed the operating group as a whole, requires a significant reduction in its current operations and fleet,” the independent expert’s report states, with over 30 aircraft to be disposed of entirely including 16 long-haul-capable 787s. Within the tight timeframe ahead, the interim examiner will work with Norwegian’s management to try and implement the plan they have prepared across six fronts:

• Renegotiate lease payments to a level where Norwegian can emerge from examinership “as a viable airline with fleet costs comparable to its competitors”;
• Extend power-by-the-hour agreements beyond March for the whole of next year “given the probable slow incremental increase in airline activity throughout 2021”;
• Defer and restructure payments due on debt-funded aircraft;
• Cancel orders for new aircraft, not only with Boeing as detailed above but also with Airbus. AAA is responsible for 88 aircraft yet to be delivered by the European manufacturer and has ordered engines from Pratt & Whitney for 38 of them, which will “exceed AAA and Norwegian’s requirements given the present market conditions”;
• Renegotiate obligations with finance providers to other Irish aircraft holding subsidiaries outside the examinership process;
• Obtain additional financing, including through the sale of assets and the private placement of new shares.

“It is expected that the process of restructuring the overall operating fleet, and raising new capital, will be inter-dependent as both fleet creditors and potential new capital providers will want to know that the other is committed to the business going forward,” Fennell warned.

The airline that would emerge from the examinership process would look substantially different from the Norwegian we knew before it pulled long-haul routes out of Ireland last year. It is planning a gradual increase in short-haul services during the spring and summer, using 60 per cent of remaining aircraft from next April, but the full restructured fleet would not be flying until 2022. 

The company’s assumption is that the short-haul market will recover first. The outlook for its former US and Asian routes is more uncertain. “At the moment it is likely that no significant wide-body operations would restart before 2022,” the report cautions. Under management plans, the “new Norwegian” would ultimately fly between 110 and 120 aircraft in total. Based on this scenario, the group could return to profitability from next year.

Fennell’s assessment is that the plan offers a “reasonable prospect of survival” – though this comes with the caveat that “it is unknown at this time as to when normal trading conditions will return for airlines”. 

The alternative is bleak. “Should the petitioning group not be afforded the opportunity to restructure their balance sheets in the short term with the protection of the High Court, the operating group as a whole will become cash-flow insolvent in January 2021,” the report warns. “This in turn will impact the petitioning group’s ability to discharge its liabilities as they fall due and thus render them cash-flow insolvent also. The cumulative effect of which will result in a significant impairment to the balance sheet of NAS, as parent company of Norwegian.”

Should the group’s mothership be wound up, it would leave a hole of $7.1 billion in its creditors’ finances, by Fennell’s estimate. Each of its aircraft leasing subsidiaries, meanwhile, would see their paper assets based on right of use evaporate and leave further losses to be picked up by group parents or by their lessors.

Further Reading:

Turbulence: Norwegian Air weighs up examinership of its Irish operation as Covid restrictions decimate aviation

The European regulator is dragging its heels on the Boeing 737 Max. The delay is costing Ryanair millions

Irish companies have ordered €50bn worth of the grounded Boeing 737 Max. Who’s hurting most?