Thursday, April 26, 2018

Norwegian Air’s Disruptive Days Look Numbered: The latest company to champion low-cost trans-Atlantic flights either needs to rein in its ambition or sell out



The Wall Street Journal
By Stephen Wilmot
April 26, 2018 10:20 a.m. ET

Cheap trans-Atlantic flights may become harder to come by, whether or not Norwegian Air Shuttle gets taken over.

Norwegian shares took flight Thursday after the company said, alongside its first-quarter results, that it had “received several inquiries” following IAG’s expression of interest.

The parent company of British Airways announced earlier in April that it had bought a 4.6% stake in the trans-Atlantic disrupter, with a view to exploring an offer. Norwegian has established a steering committee and hired advisers to review the situation.

Norwegian also said it would sell up to 140 aircraft. Although this figure amounts to the vast majority of its current fleet, the company expects to take delivery of a further 60 aircraft in 2019 and 2020 and will likely lease back enough of the planes it sells not to disrupt operations. Crucially, however, disposals release cash.

The airline has grown rapidly by piling on debt to buy new jets and offering cheap trans-Atlantic flights. But now it desperately needs to shore up its balance sheet. Even after a roughly $165 million private placement in March, Norwegian finished the first quarter with just $260 million of equity, supporting total assets of $6.3 billion. If equity falls below roughly $190 million, the company is in breach of its bond covenants.

Selling planes eases the pain, but the only long-term cure is to improve margins. Rising fuel prices are a headwind. The company’s first-quarter unit costs fell 2% on the year, but only because of the weak dollar: At constant currencies, they would have risen. Norwegian’s focus on new, fuel-efficient planes should eventually put it at a competitive advantage if fuel costs continue to rise—but only if it survives the short-term margin squeeze.

Little wonder vultures are circling. German flag-carrier Lufthansa and low-cost leader Ryanair also have the heft to contemplate buying Norwegian, even if IAG is probably the most natural acquirer, given its experience with Iberia and Aer Lingus, and holding company structure.

One question concerns antitrust scrutiny: Adding Norwegian’s base at London Gatwick Airport to IAG’s home at Heathrow could be seen as an attempt to quell competition on the busy and lucrative London-New York route.

However this plays out, Norwegian looks set to be a less disruptive force.

Original article can be found here ➤ https://www.wsj.com

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