Norwegian Air Lives to Fly Another Day By

© Reuters.

By Geoffrey Smith — Norwegian Air Shuttle (OL:) lives to fight 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%.

As such, the stock is obviously 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 and Lufthansa will congratulate themselves on seeing off another challenge from an upstart startup.

Even if they 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.

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