Why is Norwegian Air at risk of running out of cash?

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Norwegian Air Faces Liquidity Crisis Due to Coronavirus Pandemic Impact on Travel

Norwegian Air is facing an imminent risk of depleting its cash reserves by mid-May, primarily driven by the severe downturn in air travel demand caused by the global coronavirus pandemic. The airline's precarious financial situation necessitates a significant US$1.2 billion debt-for-equity swap and other restructuring measures to ensure its survival. This plan involves transferring ownership control to its lessors and bondholders, who are crucial stakeholders in the airline's rescue efforts.
Impact of Global Travel Restrictions on Airline Revenue

The worldwide spread of the coronavirus has led to unprecedented restrictions on international and domestic travel, causing a dramatic reduction in passenger numbers and, consequently, airline revenues. Many airlines globally, including Norwegian Air, have been forced to ground a significant portion of their fleets and seek financial assistance, often from governments, to avert bankruptcy. The sharp decline in travel demand directly impacts an airline's ability to generate income from ticket sales and ancillary services, leading to severe cash flow problems.
Restructuring Plan Involves Debt-for-Equity Swap and Share Issue

To address its critical liquidity shortage, Norwegian Air is implementing a comprehensive rescue plan that includes a debt-for-equity swap. This financial manoeuvre essentially converts outstanding debt owed to bondholders into ownership stakes in the company. Additionally, the airline plans to raise approximately 400 million Norwegian crowns through a share issue. These measures are designed to deleverage the company's balance sheet and secure necessary funding.
Stakeholder Support Crucial for Rescue Plan Approval

The success of Norwegian Air's survival plan hinges on the approval of its key stakeholders, namely its lessors and shareholders. While bondholders initially rejected the proposed debt-for-equity swap, a crucial agreement has since been reached with the largest holders of the NAS07 bond. This agreement aims to improve the terms for these bondholders, potentially increasing the value of their bonds by up to 38% based on the valuation of London Gatwick airport slots, which serve as collateral for this particular bond. Similar improved terms are expected for NAS08 bondholders, though not for NAS09 bondholders. An extraordinary general meeting is scheduled to seek shareholder approval for the overall rescue package.
Access to Government Guarantees Contingent on Financial Restructuring

A significant component of Norwegian Air's rescue strategy involves accessing government guarantees, potentially up to 2.7 billion Norwegian crowns. However, the release of these state funds is contingent upon the airline successfully reducing its debt-to-equity ratio as part of the debt-for-equity swap. This condition underscores the importance of the restructuring plan in demonstrating the company's commitment to long-term financial viability to secure public support. In the interim, the airline is prioritising payments for essential operational costs, such as staff salaries and IT infrastructure, while deferring payments for services like ground handling and lease obligations.

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Why is Norwegian Air at risk of running out of cash?

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