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For air passengers, the nice thing about booking a ticket with your credit card is knowing you can probably get your money back if the carrier goes bust before you travel.
For cash-strapped airlines, the arrangement has a downside. If card providers are worried about a particular carrier’s finances, they can withhold more money on ticket sales from the company, potentially making its liquidity problem worse.
These so-called “credit card hold-backs” contributed to Flybe Group Plc’s cash troubles earlier this year, as well as Frontier Airlines’ Chapter 11 filing a decade ago. They’ve been a big headache too for Norwegian Air Shuttle ASA.
Norwegian was forced to raise 3 billion kroner ($350 million) in capital in February to head off a liquidity and capital crunch that was made worse by cautious credit card companies. And as the airline’s first-quarter results showed on Thursday, these hold-backs are still an unwelcome feature of its balance sheet. Receivables — mainly cash due to the company from ticket sales — jumped by more than one-third to an eye-popping 10.7 billion kroner in the first quarter.
While that’s due partly to its success in selling more tickets, Norwegian remains in a tight spot. The shares, a favorite with short-sellers, have plunged almost 60 percent this year. Meanwhile, Norwegian’s 250 million euros of unsecured bonds, which it must repay or refinance in December, yield a distinctly unflattering 19.5 percent. A first-quarter 1.5 billion kroner net loss wiped out about half of February’s capital increase.
In fairness, Norwegian is making some sensible moves to keep its planes in the sky, which helped lift the shares almost 5 percent on Thursday. The company has signed up a couple of additional credit card acquirers (companies that process card transactions) to free up more cash next winter, and the receivables balance declines naturally as the busy summer season commences.
It has also postponed delivery of certain aircraft, including the Boeing 737 Max, to cut about $2 billion of capital spending over the next couple of years.
While the grounding of its 18 737 Max jets creates additional operating costs, the airline should be able to recoup some of those from Boeing. Furthermore, the grounding may increase the value of other Norwegian planes, which it could sell if necessary. A fleet joint venture with an as-yet-unnamed partner may help too, although management provided few new details on that. Norwegian said it saw no need to raise more equity in the next 12 to 18 months.
This is encouraging, but it still has a mountain to climb. New accounting rules this year oblige companies to include operating lease liabilities on their balance sheets. As a result, Norwegian’s now shows almost 62 billion kroner ($7.2 billion) in net debt. That’s a lot for a business that may struggle again to make a profit this year. Rising oil prices aren’t helping.
Passengers remain fond of Norwegian because of its cheap long-haul fares and fleet of shiny new jets. Those wanting to help it out might consider paying by debit card.
©2019 Bloomberg L.P.