IAG and NorwegianBack to Forum
Quite a strange article in The Economist.
The headline (at least in the print edition) is The little airline that could, but the article seems to reach the opposite conclusion, and ends…
“If Norwegian gets into trouble, there is at least an obvious solution: a takeover by a rival with deeper pockets. Ryanair and easyJet are not interested because they do not want to complicate their business models. But Willie Walsh, the boss of IAG, a London-based group made up of several flag-carriers, seems eager to take on Mr Kjos in the low-cost long-haul market. British Airways, one IAG airline, has started to run cheap long-haul flights on the same routes as Norwegian from London’s Gatwick. In March IAG launched Level, a long-haul LCC, in Barcelona, to fight off Norwegian’s new long-haul hub there. The gossip among analysts is that IAG is readying itself to snap up its rival if it weakens further. If full-service airlines can’t beat LCCs, the answer may be to join them.”
It suggests that a cash crunch will come at Norwegian when it has to pay for 19 new A320neo jets “that it cannot currently use or lease because they have engine problems may explain the CFOs sudden departure.”
I think most of us welcome the extra competition that has been brought into the market by Norwegian, and I wonder what the competition authorities would think of IAG claiming another airline, but is this even likely….?25 Jul 2017
I think The Economist article recognises that the conditions are now right for Norwegian (and others) to make a success of low-cost longhaul flying, but that there’s a risk that it does so absorbed by a bigger rival.
I for one think it would be a shame to lose Norwegian given all it’s done to shake-up aviation and it’s potential to continue to do so. If the airline became vulnerable, personally, I think there would be no shortage of buyers. I doubt the competition authorities would present much of an issue for IAG – I find the regulators are typically behind the curve when it comes to airline deals, focused on very rigid definitions of the market. IAG might be happy for Norwegian to fall by the wayside, but would probably enter the bidding to stop it falling into the hands of a stronger rival. Despite fleet and other practical differences, there’s every reason to believe easyJet and Ryanair would be interested too for the same reason, but also as for an easy route into longhaul flying.
But I think calling time on an independent Norwegian is premature. I remember similar doubts being expressed when they brought their 787s in and there were questions about its financial stability in tandem with the teething troubles they had with the new aircraft. Certainly they’re not going to win awards for caution or lack of ambition, but they’ve made it through rougher patches before.25 Jul 2017
IAG has learned its lesson from history that it cannot let start ups come in and cannibalise its home markets, regardless of how peripheral those markets are. If IAG wanted Norwegian, looking at the relative market capitalisations, it could make an offer that would be compelling to Kjos and the other shareholders relatively easily (ie, out of cash).
Looking at its numbers, Norwegian has an exceptionally high debt to equity ratio, which is going to rise even further when imminent accounting standard changes relating to leasing become effective and even more debt, that is currently off balance sheet, goes on balance sheet. Also, despite paring its costs down to the bone, whether by fair means or by foul, it doesn’t make any real money. Its operating margins are pathetic and net margins often negative. There are people who would regard a business that hasn’t proved it can make money consistently in its home markets venturing to set up operations in low risk, stable, culturally similar and not-at-all remote countries such as Argentina in a very dim light.
Hence why IAG has determined to compete by growing itself organically rather than by acquiring Norwegian.27 Jul 2017
Reading between the lines and understanding IAG;s recent past and BA’s actions throughout the year, I’m going to create a wee list…….
And there is probably more examples, but in the above 3 cases, sustained and in some instances, underhand and immoral business pressures were applied by the dominant carrier.
I fear Norwegian, in some guise or another will be fall to a predatory approach by BA, or in other words BA.
Having said that, and travelsforfun and wastedlife’s comments combined lead me to have no real sympathy for Norwegian, because their management team haven’t really learnt the lessons from history.
Love him or loathe him, Michael O’Leary did pay attention.27 Jul 2017
mkcol74 – the first article on Norwegian is at the bottom of the link you gave and titled “Is Norwegian in trouble?”. Both articles are interesting and things do not bode well for Norwegian which is a shame.27 Jul 2017
New article by Bloomberg yesterday
Norwegian Air Shuttle Is Flying On a Wing and a Prayer
It discusses Norwegian’s plans to launch a new airline in Argentina – also mentioned here
“Norwegian is targeting $4.3 billion of investment in the country over the next decade and plans direct international flights between Buenos Aires and destinations such as Los Angeles and New York, Bloomberg News reported on Wednesday.”
“Norwegian can ill afford another fare battle. The company wants to expand its fleet by about two-thirds by 2019, yet it’s already highly leveraged and had only $700 million of cash and equivalents at the end of September.Ryanair Holdings Plc boss Michael O’Leary has asserted that Norwegian isn’t “long for this world,” a comment that needs to be treated with appropriate skepticism (Norwegian has pinched some Ryanair pilots). Kjos has proven adept at tapping new sources of aircraft finance. Even so, his globe-spanning ambitions do depend on a wing and a prayer.”1 Dec 2017