IAG moves on Norwegian Air to battle expected turbulence
LONDON/BERLIN (Reuters) – IAG’s move on budget carrier Norwegian Air Shuttle may prove a shrewd move for the group led by Willie Walsh ahead of expected further turbulence in the European aviation industry.
Norwegian plans to bring the lowcost model that has proven so successful on short-haul routes in Europe to flights across the Atlantic. That has affected IAG’s British Airways more than other carriers in Europe because Norwegian has targeted flying from Britain in particular.
Analysts estimate British Airways makes the majority of its profit on North Atlantic routes. Alliances between established carriers on both sides of the Atlantic have for years helped to protect prices more than in other regions.
In response to the low-cost threat, and mindful of how it was slow to react to short-haul budget carriers in Europe, BA parent IAG has set up budget long-haul unit Level, cut costs and moved to offer deduced fares on North Atlantic routes.
Last week, IAG, which also owns Iberia, Vueling and Aer Lingus, went a step further, saying it had bought 4.6% of Norwegian with a view to starting takeover discussions.
Norwegian has shaken up the market and given others, such as Icelandic Wow, Lufthansa’s Eurowings, Level and Primera, the confidence to try out low-cost, long-haul flights. But its rapid expansion has put it under financial strain.
It had net debt of 22.3 billion Norwegian crowns ($2.86b.) at the end of 2017, while its cash liquidity reduced by 27% to 4.04b. crowns in the final three months of 2017. This year it has raised 1.3b. crowns in a share sale to ease its balance sheet.
Ryanair boss Michael O’Leary has often predicted Norwegian’s demise, while others are still unsure whether long-haul flights can work without high-paying business-class passengers up front.
“Norwegian is in need of execution and capital, frankly, and maybe IAG can give that, so it definitely on the face of it makes strategic sense for IAG,” Davy analyst Stephen Furlong said.
One industry source who has advised on major European airline deals in the past said Walsh would be unlikely to make a quick move and would be more interested in the longhaul operation and the Norwegian brand.
With Norwegian’s large level of debt, Walsh may move to split up the airline to de-risk it, such as seeking a buyer for the short-haul operations, he said, adding: “The ideal outcome here is that Willie buys it and carves it up and O’Leary buys the short-haul business off them.”
Ryanair declined to comment when asked whether it was interested in Norwegian.
JOSTLING
The move on Norwegian continues a wave of consolidation that began last year, with Alitalia entering insolvency and the failures of Britain’s Monarch and Germany’s Air Berlin.
Airline CEOs have repeatedly said more consolidation will come, whether via takeovers or failures, and easyJet and Lufthansa are currently jostling for Alitalia.
The assets of collapsed Monarch and Air Berlin, including takeoff and landing slots, planes and crews, were keenly fought over last year by Lufthansa and easyJet, as well as IAG and Ryanair.
However, a bidding battle is not expected for Norwegian due to its shaky finances and because it may be hard to buy without paying a premium given that founder and CEO Bjorn Kjos controls almost 24% of the shares.
The airline failures last year already helped to ease pressure on ticket prices, and the adviser said IAG buying Norwegian would be good for other airlines in Europe because it would remove a rival that was growing at a loss.
“If Norwegian was part of IAG, it would curb the growth rate that they are on because they are not making any money the way they are growing,” he said.