BA owner swoops on budget rival
IAG tells investors it wants to bring transatlantic Norwegian carrier into the fold as it builds 4.6pc stake
BRITISH AIRWAYS owner IAG is lining up a takeover of low-cost airline Norwegian Air Shuttle, sparking concern over its dominance of transatlantic routes and landing slots at Gatwick.
IAG revealed it had built a 4.6pc stake in Norwegian as a platform from which to launch a full offer for the firm.
Shares in Norwegian, which was valued at around £630m before the manoeuvre by IAG chief Willie Walsh was disclosed, took off to rise almost 40pc before trading in the company was halted on the Oslo stock exchange.
IAG told investors it “intended to establish a position from which to initiate discussions with Norwegian, including the possibility of a full offer”.
“No such discussions have taken place to date, [and] no decision has been taken to make an offer at this time and there is no certainty that any such decision will be made,” it added. Including Norwegian’s £2bn debt pile, analysts suggested IAG could pay as much as £3bn for control of the carrier, which has pioneered no-frills long haul flights. A one-way ticket from Gatwick to New York can cost as little as £99.
Mr Walsh’s plan to bring the airline into the IAG fold, which as well as BA includes the Spanish flag carrier Iberia, Aer Lingus and Vueling, is likely to draw fire from rivals and regulators, however. John Grant, of aviation data business OAG, said he would expect to see IAG have to make concessions to win approval. IAG is the sixth-largest airline in the world and has almost 550 aircraft across its brands, which are made up of both “legacy” full-service airlines and budget carriers.
“Whether it is giving up slots at airports such as Gatwick where Norwegian and BA are big, or inviting others to get into some of their routes, something would have to be offered,” he said.
The two operators duplicate several routes, which could be rationalised. “It seems IAG’s strategy has been ‘follow Norwegian’ when it comes to expansion out of Gatwick,” Mr Grant added.
However, at EU level regulators have been generally supportive of airline consolidation, according to Liberum analyst Gerald Khoo, with larger airlines being more resilient than smaller ones, which have suffered a wave of recent high-profile failures including Al Italia and Monarch. Last year IAG had revenues of €22.9bn (£20.1bn) and pre-tax profits of €2.4bn, generated from the 105m passengers it carried.
Norwegian is much smaller, with a fleet of about 150 jets, and only established itself as an international player about 15 years ago, though has expanded rapidly since.
In 2012 it set up a Gatwick base on its way to becoming the sixth-largest lowcost airline in the world with an extensive European network. A year later it started long-haul flights, serving South America, South Africa and Asia.
Last year it began its challenge to the
lucrative UK-US transatlantic market, offering bargain flights on routes dominated by traditional airlines such as BA.
In 2017, Norwegian had revenues of 31bn Norwegian krone (£2.8bn) and made a 298m krone loss on the 33m passengers it flew.
IAG’s move on Norwegian shows that the larger company is all too aware of the challenge it poses in the increasingly cut-throat and low-margin air travel industry, which has suffered a rash of collapses recently as costs continue to rise.
“This shows IAG’s growing recognition that Norwegian is becoming a vast airline with a vast route network,” said independent aviation analyst Alex Macheras, adding that IAG launched its own budget airline Level to take on Norwegian directly.
“However, just because Norwegian has a lot of flights does not mean it is profitable – its financial results are not the best,” Mr Macheras added.
IAG may have chosen to swoop now precisely because of the financial strain Norwegian is under, having launched a 1.3bn krone cash call last month. The target airline is also buying new aircraft at a high rate, with more than 200 on order.
Michael O’Leary, chief executive of budget carrier Ryanair, Europe’s largest airline, has been a harsh critic of Norwegian, predicting it will fail.
Speaking in the autumn, the outspoken Ryanair boss said Norwegian had “huge aircraft orders it doesn’t have the cash to pay for” and said it was an “open secret” in the industry it was in trouble.
At the time Norwegian dismissed the claims as “nonsense” saying it had been profitable for a decade.
The carrier called IAG’s stakebuilding a “demonstration of the sustainability and potential of our business model and global growth”.
Willie Walsh, the IAG chief, is lining up a takeover of low-cost airline Norwegian after it revealed it had built 4.6pc stake