The flamboyant CEO and founding partner of Norwegian Airlines, Bjørn Kjos has stepped down with immediate effect. This comes just days after analysts reported the airline is fast running out of cash and will be forced into yet another difficult to sell shares and rights issue before years end.
The airline actually posted a tiny profit of €9.2 million – but you can take that with a pinch of salt as all sorts of quite legal accounting trickery would have been used to make it appear that way, it’s not unusual when companies are desperate to prove they’re turning things around.
Kjos’ resignation however tells you far more about what’s happening. The 72 year old former lawyer was largely responsible for the last round of cash injections, dumping a significant portion of his own wealth into the rights issue. His problem is that he’s the face of and largely responsible for, the situation Norwegian finds itself in.
The company was geared under his direction for a non-stop expansion strategy, buying dozens of aircraft and bulldozing its way past legalities and opposition to keep up momentum. The more aircraft they bought, the greater the revenue (note I deliberately don’t use the word profit here), which created the basis for more aircraft, more revenue and so it went on, by keeping share prices high.
As any startup will tell you, profits don’t matter, its all about share price and how much shareholders can make. Amazon barely made a dollar in its first 20 years.
It got to the point it was operating in a way not dissimilar to a Ponzi scheme. It needed more and more cash from the bottom of the pyramid to feed the top, and as we all know there’s a point where the level of income from the base simply can’t sustain the momentum. You run out of new viable routes, new investors, and inevitably all the publicity in the world (and Kjos was remarkably good at generating publicity and positive spin), can’t cover up that problems were everywhere and costs out of control.
In many ways the straw that broke the camels back was Rolls Royce and its 789 engine issues. I’ve personally seen Norwegian aircraft laid up for weeks waiting for fixes. It should never have gotten to the point the airline was so fragile, so thinly cushioned from the exigencies of a crisis, that when Kjos and his spin and bluster were finally recognised for what they were by other shareholders, it was too late. The other shareholders, seem to have been extraordinarily willing to accept his spin as fact, largely I feel because he believed it himself, something that happens all too often in these cases. Not only that but they wanted to believe, and again, that’s another fatal flaw that happens far too often in large businesses run by high-functioning charismatics.
The high profile failure of some the new 737Max routes – to the US – passengers reporting some of them were barely a third full, rather pointed out that perhaps Kjos was being to ambitious and his route planners overly generous in their projections; again the desire to tell the boss what he wants to hear, is another common trait in such circumstances.
You only have take a look at the recent wave of Oakland to SFO swaps to see how flawed that plan was. It really wouldn’t have taken much effort to find out that Silicon Valley dwellers were never going to drive to Oakland for a cheap flight to Europe. Now frankly I quite like the city, but it has a reputation, and chronic traffic issues over toll bridges or a drive through San Francisco. How did that ever get missed?
Likewise taking on BA and Virgin Atlantic at Gatwick on a key route like Las Vegas? Willy Walsh told them from day one, your flights are no cheaper than ours, there are fixed costs and you either sell your ticket at a loss or don’t do it. Both BA and Virgin Atlantic for whom the inclusive holiday market is a huge seller, were never going to let them take custom away and had much deeper pockets to fight it out.
The 737MAX issues that resulted in 18 of the airlines aircraft being grounded simply compounded an already dire situation.
The over reliance on Boeing aircraft could have been mitigated by introducing the A321neo. The airline had plenty on order through its Arctic Aviation subsidiary, but the financial situation proved so dire just before Max was grounded, it started selling them off to raise cash, forward selling its rights to the aircraft on order, giving it no way out.
So it’s no surprise that Kjos has been eased out. The other shareholders are starting to panic, and it wouldn’t surprise me if this time, should IAG come knocking on the door with a cash for shares offer, they grabbed the money and ran. Willy Walsh and his board at IAG are masters of the coup de grace, just look at the way they swept in and ordered 200 737Max’s right when Boeing was on its knees and desperate.