The size of the heavily discounted rights issue is more than two-thirds of the airline’s equity value © Reuters

When Norwegian announced plans to launch low-cost transatlantic flights in 2012, it gave some of the world’s leading long-haul carriers a major jolt. Now the company’s aggressive expansion looks like its undoing.

Since April last year, the company’s share price has fallen 60 per cent as investors have worried that the Oslo-based carrier has overstretched itself. This week’s announcement of a vast emergency rights issue confirmed these fears.

“As the Germans say, Norwegian is trying to be too many animals in the zoo at the same time,” said aviation consultant Philipp Goedeking.

The airline has tried to be a low-cost intra-European and low-cost transatlantic airline as well as Norway’s flag carrier. But without scale, “it can’t work, it never did,” he added.

The writing has been on the wall for a while. Shares surged nearly 400 per cent between the start of 2012 and April 2016, but then started to fall as investors began questioning the sustainability of the airline’s rapid expansion strategy.

This was why the announcement on Tuesday of a NKr3bn ($350m) rights issue, more than half Norwegian’s market capitalisation of NKr5.5bn, to keep the company from breaching its covenants did not come as a big surprise to some analysts.

“All in all, this was the most expected equity issue for years and now it’s finally out,” said Kenneth Sivertsen, analyst at Pareto.

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In the past year, the share price has been helped by potential buyers circling around the group, as it eased concerns of those investors that considered a takeover the airline’s best hope for survival.

Indeed, last year, IAG, the owner of British Airways, expressed interest in the group, buying 4.6 per cent as a prelude to takeover talks. This underpinning of the share price was taken away last week when IAG announced that it would sell its stake. Norwegian shares fell more than 20 per cent in response.

The airline’s shares plummeted another 30 per cent to a six-year low on Tuesday after the rights issue announcement before recovering to stand 14 per cent down at the close after investors digested the carrier’s plans to go it alone, now that there are no suitors to hand.

In short, the company’s plan is to divest aeroplanes, postpone deliveries and continue its NKr2bn cost savings strategy.

The rights issues is a key part of its strategy with the company’s largest shareholders, chief executive Bjorn Kjos and chairman Bjorn Kise, already committed to buying NKr343m worth of shares. Other large shareholders have said they will take NKr267m.

One vote of confidence was the presence of Norway’s richest man, oil, shipping and salmon investor John Fredriksen, among the underwriters for the remaining NKr2.4bn.

Mr Kjos said: “Norwegian has been through a period with significant growth . . . We will now get in place a strengthened balance sheet that supports the further development of the company.”

However, not everyone is convinced that this will be enough to keep Norwegian aloft into the 2020s.

Daniel Roeska, analyst at Bernstein, said the equity raising was almost inevitable.

“There’s no way they could have made it through Q1, and that made this not a choice but a necessity, otherwise the bonds go bust at the end of March.

“I don’t think, if you want to get until the end of 2020, this will be the last cash or equity injection they need.”

Mr Sivertsen said the preliminary 2018 results, which Norwegian pre-announced on Tuesday were “better on the cost side than we had anticipated”.

But the numbers are still worrying for shareholders, with earnings before interest, tax, depreciation and amortisation dropping to a loss of NKr2.2bn, compared with a NKr59m profit a year earlier and a NKr3.1bn gain in 2016.

For some, therefore, consolidation still remains a possibility and arguably the company’s best chance to stay in business.

Mr Goedeking suggested that IAG walking away was “a negotiating position”, in the hope it might be able to pick up the airline more cheaply at a later date.

The other likely candidate, he said, was Lufthansa, which would acquire Norwegian’s valuable slots at Gatwick, right in IAG’s backyard.

“Norwegian is fighting,” Mr Goedeking said. “But they have a huge uphill battle in terms of complexity they need to get rid of.”

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