(Bloomberg Businessweek) -- As a pilot in the Royal Norwegian Air Force at the height of the Cold War, Bjørn Kjos spent his days chasing Russians out of NATO airspace, a game of cat and mouse that was risky, terrifying—and utterly exhilarating. “It was the best life you can live,” Kjos says, running his fingers over one of two model fighter jets he keeps in his office.
These days, the 71-year-old chief executive officer of Norwegian Air Shuttle ASA is again flying perilous skies—though the risk comes from bankers and rival airlines, not the cockpit of a MiG. Norwegian, which has expanded from a low-cost regional carrier into a globe-spanning colossus shaking rivals with trans-Atlantic fares as low as $99, lost almost $250 million in the fourth quarter of 2017—at a time many airlines are seeing near-record profits. Investors, convinced Norwegian’s shares are defying gravity, made it the industry’s most-shorted stock.
On Thursday, that became a wager to regret as International Airlines Group, the parent of British Airways and Iberia, said it’s considering a bid for Norwegian. The company’s shares surged 47 percent in Oslo trading as IAG revealed it had acquired a 4.6 percent stake “to establish a position from which to initiate discussions with Norwegian.” An offer could value Norwegian, which has a market value of more than $1 billion, at about $3 billion including debt, people with knowledge of the matter said, asking not to be identified because the deliberations are confidential. Norwegian Air said it had no advance notice of IAG’s interest, but that it “confirms the sustainability and potential of our business model.” On Friday, Kjos told reporters that he hadn’t spoken with anyone from IAG in recent days, and that he hasn’t “thought about selling at all.”
Kjos (pronounced Shoos) blames last year’s loss on a pilot shortage and engine glitches that delayed the arrival of new jets. Those difficulties were compounded by the cost of preparing 38 new planes for service—the most ever for the company in one year. With $2.9 billion in debt and expenses of $4.5 billion for aircraft in 2018 and 2019, Kjos in March was forced to sell new shares equal to almost a quarter of the company’s market value to avoid breaching minimum capital requirements demanded by lenders. This year, he says, things will start looking up. Short sellers “have been betting against us since 2002,” when the company began operating as a low-cost carrier, says Kjos, who controls 27 percent of Norwegian. “They will lose that bet.”
After slowly building the company by flying winter-weary Scandinavians to sunny locales across southern Europe, in 2013 Kjos began offering long-haul flights such as Oslo to New York and Stockholm to Bangkok. Today Norwegian flies 60 intercontinental routes and is on track to have 193 planes by 2019, double the number in 2015. Kjos has established subsidiaries in Britain and Ireland to win regulatory permission for trans-Atlantic and Asian routes from more than a dozen European cities including London, Paris, and Barcelona. And he’s establishing a separate unit in Argentina that he aims to expand into a regional carrier with 70 aircraft and flights across Latin America.
Key to his strategy is a fleet of newer, fuel-sipping aircraft. By yearend, Norwegian will have 32 Boeing 787s, a plane made largely of lighter composites that allow it to burn 20 percent less fuel than older jets. And starting next year, he’ll get the first of 30 long-range Airbus A321neos, 200-passenger, single-aisle aircraft that can fly for up to eight hours, allowing direct links such as Copenhagen to Boston. “You have to get to a critical fleet size, and a modern fleet, and then you have an efficient operation,” Kjos says.
Creating that fleet, though, means piling on debt. In 2012, Norwegian made Europe’s largest-ever aircraft purchase, 222 jets with a book value of $21.5 billion—largely financed by loans—to be delivered over the course of a decade. Although Kjos aims to create one of the industry’s most-efficient fleets, his expenses per passenger are climbing. That measure of efficiency dropped sharply from 2008 to 2016, before bouncing back up a bit last year.
Kjos also faces growing competition as rivals old and new mimic his approach. British Airways, Virgin Atlantic, American, and Delta have introduced no-frills trans-Atlantic fares to attract the budget travelers Kjos is after. IAG has set up a low-cost unit called Level that’s offering long-haul flights from Barcelona and Paris. And Primera Air is flying narrow-body jets across the Atlantic just as Norwegian does, with service to Boston and New York from London and Paris starting this spring.
A maxim Kjos brought to business from his six years as a fighter pilot is to “avoid risk zones,” and if you find yourself in one, “always have a Plan B to get out.” Barring an IAG offer that he deems sufficiently rich, his Plan B is to sell as many as 120 planes—both recent models and older jets—which Kjos says he can do without compromising operations. That may be wishful thinking, says Bloomberg Intelligence analyst George Ferguson. Though Norwegian might get $1.5 billion or more for the aircraft Kjos wants to sell, many of them would need to be replaced if he doesn’t want to shrink the airline. That would mean more debt—from increasingly cautious lenders. “As Norwegian’s situation gets more difficult, creditors will want to hold more of the company’s cash to hedge risk,” Ferguson says.
Kjos points out that the airline scrapyard is packed with discount concepts backed by big carriers: BA’s Go Fly, KLM’s Buzz, and SAS’s Snowflake all “melted away,” and he predicts the same for newer long-haul projects. Once he replaces older jets with more efficient models, he insists, he can compete with anyone in the industry. “You cannot think you are flying low-cost with a bunch of old aircraft,” he says. “In the long run you can never beat low cost with high cost.”
--With assistance from Jonas O Bergman
To contact the authors of this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net, David Rocks in Berlin at drocks1@bloomberg.net.
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