Silicon Valley startups have long recognized the benefit of having a few grownups in the room to make sure the youthful, idealistic founders don’t forget about the bottom line. At Norwegian Air Shuttle ASA it’s the older crowd you’ve had to keep an eye on.
The transatlantic budget airline’s 72-year-old co-founder Bjorn Kjos has been on a breakneck expansion drive over the past few years, but now he’s stepping down after being forced to abandon that high-spending strategy to ensure his company’s survival.
Kjos, who’s staying on as an adviser, has been Norwegian’s CEO for 17 years, making him one of the oldest corporate leaders in Europe. A former fighter pilot and lawyer, his achievements are the stuff of industry legend. Norwegian has come from nowhere to now carry about 38 million passengers every year. American customers flying to Europe are its biggest source of revenue.
Unfortunately, Kjos had a big weakness: An obsession with growth that almost proved Norwegian’s undoing. In 2012 Norwegian placed Europe’s biggest ever aircraft order, and the pace didn’t let up. Kjos has since opened a subsidiary in Argentina.
The growth has taken a huge toll on Norwegian’s balance sheet. The company has 61 billion kroner ($7.1 billion) of net debt and lease liabilities but generates little profit. Forced to raise 3 billion kroner of fresh capital in January, Norwegian’s liquidity and capital base remains thin. Since its shares peaked in 2015, they have fallen 80%.
Compared to the colorful Kjos, his interim replacement Geir Karlsen may seem a trifle grey. But the plain-speaking former chief financial offer, who has a degree in business administration, is just what Norwegian needs to win back the trust of the capital markets.
While second-quarter revenues and earnings published on Thursday were pretty good, the coming months will be difficult. The airline must repay or refinance a 250 million euro bond in December. Yet credit card companies are making its life difficult by holding back more cash until passengers actually travel (an insurance policy in case it can’t fly at some point). Norwegian’s receivables – the cash expected on ticket sales – ballooned to 12.6 billion krone during the second quarter. That’s almost 50% above a normal level.
That pressure should alleviate somewhat as Norwegian’s customers take the flights they’ve booked, allowing the credit card companies to release the money. Norwegian has other ways to raise cash too, including selling airport takeoff slots and divesting its stake in Bank Norwegian AS. Because of the grounding of the Boeing 737 Max, the company won’t have to spend as much this year on new jets and it’s doing a decent job of reining in costs. Details of a long discussed aircraft-owning joint venture remain scant though.
The airline now expects passenger capacity to increase by a maximum of 5% this year; indeed it might not grow at all. The Kjos era of more planes, more seats, and more routes appears to be over for now. It’s about time.