A potential merger between IAG and Norwegian should worry flyers

0
22


WHEN flag carriers such as British Airways (BA) ruled the skies, only the rich could afford to fly across the Atlantic. That was until Freddie Laker, a British entrepreneur, came along. His dream was to open long-haul travel to the masses. In 1977 he launched Skytrain, the first low-cost long-haul flights between London and New York. “Thanks to Freddie Laker you can cross the Atlantic for so much less,” declared Margaret Thatcher in 1981. “Competition works.” But within a year of her speech Laker Airways had gone bust, amid accusations of predatory pricing.

Since 2013 Norwegian, another low-cost carrier, has been trying to make Laker’s dream a reality. Last year it painted his face onto one of its jets to show it is serious about disrupting transatlantic air travel. But just like Laker Airways, it has run into financial headwinds. And BA is once again a potential beneficiary. On April 12th IAG, a group of flag carriers including BA, said that it had bought 4.6% of its budget rival as a precursor to possible takeover talks. That cheered Norwegian’s investors. Its shares rose by 47% (see chart). But passengers have much more to lose from a deal.

Norwegian’s difficulties stem from its foray into long-haul. Founded in 1993 by Bjørn Kjos, still its chief executive and biggest shareholder, Norwegian started off with just three small planes that served a few domestic routes. Then in 2002 it expanded into short-haul flights in Europe, becoming the continent’s third-largest low-cost carrier. Following a few years of decent profits, from 2013 Norwegian launched new “no-frills” long-haul routes to America, Asia and Argentina after having placed orders for 222 new jets costing several times its own value.

By the end of 2017 the airline had 145 aircraft operating on 512 routes. But to grow rapidly, and achieve the scale needed to compete against established carriers, it had to slash ticket prices to fill planes. In February Mr Kjos revealed that the airline had lost NKr299m ($36.2m) in 2017, against profits of NKr1.14bn the previous year. In March the airline had to raise fresh capital, sell some aircraft and put its frequent-flyer scheme up for sale to avoid breaching banking covenants. Last year its net debt (including leases) was 14 times its gross operating profits, compared with just 0.7 and 0.4 for easyJet and Ryanair, its two biggest low-cost rivals, says Ross Harvey of Davy, an investment firm.

Norwegian’s sagging share price is an opportunity for IAG. It launched a low-cost long-haul brand last June; adding Norwegian would strengthen that venture. But IAG may also see the advantage of removing a rival that has lowered fares on routes flown by all four of its main airlines.

A takeover would therefore be a “curate’s egg for passengers”, says Andrew Charlton of Aviation Advocacy, a consultancy. It would ensure that the weakness of Norwegian’s balance-sheet does not kill off low-cost long-haul flying. But it would take out the biggest disruptive threat to IAG and other flag-carrier rivals.

A deal might be blocked on competition grounds. Last month the European Commission’s transport chief, Henrik Hololei, said he did not want Europe’s five biggest airline groups, including IAG, to gain market share. From a competition perspective, a takeover by a low-cost rival such as Ryanair would be preferable. It does not yet do long-haul and would have no qualms about carrying on disrupting the flag carriers. But Ryanair’s boss, Michael O’Leary, is surprisingly cautious about a bid. It is harder to boost aircraft utilisation on longer flights, which is what makes Ryanair so cheap on shorter routes. Moreover he is convinced that Europe’s three big flag carriers and their partners, which now control 78% of transatlantic flying, will do everything they can to destroy low-cost rivals. Including, perhaps, buying them.



Source link

NO COMMENTS

LEAVE A REPLY