Nordica posted a nine-month loss of €11.9 million this year. A memo drawn up by the Ministry of Climate noted that the economic activity of Nordic Aviation Group AS (NAG), i.e. Nordica, and its subsidiary Regional Jet OÜ, which operates under the Xfly brand, has suddenly become unprofitable this year, and the majority of this loss has accumulated in just the last four months. These grim economic results have led Nordica to a liquidity crisis.

The company is currently undergoing a special audit, and over the summer hired a consulting firm whose turnaround team has already implemented initial measures to slow the deepening of its losses.

The memo pointed to issues in four areas as reasons for the negative economic results: contract terms that are detrimental to the company and do not adhere to the aviation market general practice; complex organizational structure; contracts not properly implemented or sufficiently effectively implemented; and the use of too many different types of aircraft.

"In short, the difficulties are due to new contracts that the company lacked the necessary skills and resources to fulfill, and service to the current customer suffered as a result as well," the document states. "Preparation expenses for servicing the contract (recruiting and training [flight] crew, aircraft rental) significantly exceeded revenues, which turned out lower than forecast as the contracts could not be fulfilled at planned volumes."

Currently, both contracts concluded last year as well as a previously concluded contract with Scandinavian Airlines (SAS) are unprofitable for the Estonian airline.

In addition to unexpected worsening of the company's financial results, the Climate Ministry memo likewise makes note of the several changes in management NAG has seen. On July 25, Jan Palmer announced his resignation as Nordica CEO that same day. As according to aviation rules he was also the individual designated as Nordica's accountable manager, however, such an abrupt departure meant that the company could have immediately lost its Air Operator Certificate (AOC).

The company's supervisory board therefore had to find a rapid solution for restructuring the company's operations – which led to the involvement of a consulting firm specializing in international aviation business. NAG signed a contract with Knighthood Global on August 1, the goal of which is to restructure the company's operations and reverse the course of its financial results back to positive.

In order to remedy the situation, the company has to stabilize its financial results – this is a prerequisite for taking the next steps.

For the past two months, the board, supervisory board and consulting firm have been negotiating the most unprofitable contract terms with the aim of either changing them or terminating the contracts. The airline has also suspended implementation of its expansion plans as well as new employee recruitment for next season.

Talks have also been launched to bring other contract terms into alignment with the aviation market's general practice, and efforts are being made to make all operations more efficient.

"As these changes will take time, insolvency can't be ruled out either," the memo warns.

Each successive forecast gloomier than last

On June 8, Nordica's board presented the company's four-month results for this year, revealing that the company had posted a loss of €3.7 million. As summer marks the high season in aviation, positive results were expected for the months to come.

On July 13, however, it turned out at the supervisory meeting that the assessment of the company's economic indicators had turned highly negative. Instead of the expected €400,000 profit, Nordica posted a loss of €2 million in May, and by the end of August, the company's net loss had increased to €10.69. The monthly loss decreased in September, however from June through August, the monthly difference in results between the previous management's forecasts and actual numbers essentially totaled €4 million a month.

According to the Ministry of Climate memo, the main reason for Nordica's lower sales revenues is related to the difficulties in launching a new line of business.

"While [the company] failed to recruit and train new crews fast enough in the first half of the year, in recent months there have been fewer flights due to aircraft-related incidents," it noted.

"The main reason for Xfly's lower sales revenues is below-target levels of servicing flights due to aircraft-related incidents, lengthening maintenance intervals as well as a small number of crews and lack of crew planning process," the memo added.

As NAG is a service company that essentially lacks assets, negative financial results are reflected directly in a decrease of working capital, which according to the memo is why this loss doesn't exist in merely accounting terms. This means that the company's financial results lack a depreciation component.

According to the company's forecast, NAG was supposed to have €14.6 million in financial resources by the end of the year. Projected cash flows presented by the management board on July 13, however, indicated that the company's cash flows would dip below the critical €4 million mark by this October and into the red by the end of the year, starting off the new year with a €5 million deficit. The ministry memo notes that this was also why changes were made at the executive level and a consulting firm was hired.

"It has become clear by now that NAG's financial position and cash flows are significantly worse than the previous management's initial forecast," it emphasized.

Nordica not to reach profitability before August

Namely, the new forecast presented by the freshly appointed company board on August 10 indicated that the company's cash flows would dip below the critical limit by August already, and reach a deficit by the turn of the year of €10.4 million.

After a thorough review of the company's situation, the new board presented the supervisory board with a financial forecast on September 14 indicating an even worse cash flow situation for 2024.

"According to the latest updated forecast, the company won't achieve positive cash flows until next August – and this in the event that implementation of measures to improve the situation is unsuccessful," the memo notes.

"Given that NAG's financial results haven't changed significantly and that fall-winter is a low season in aviation, including from NAG's perspective, there is a real risk that debts will increase to such an extent that creditors will initiate insolvency proceedings," it warned.

Should these proceedings be initiated, air operations would automatically be immediately suspended – as required by flight rules. That, in turn, would mean that the company can no longer fulfill its obligations for subcontracting, and according to its current contracts, this would constitute grounds for terminating them. The memo highlights that the latter scenario is extremely likely and will lead to NAG's bankruptcy.

The interim results of the special audit ordered by Minister of Climate Kristen Michal's (Reform) earlier this year should be published by mid-November. The special audit must assess whether the activities and decisions of NAG's management and supervisory boards complied with the conditions provided for due commercial care, owner expectations, strategic goals and the granting of state aid.

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