FlightGlobal analyserer Norwegian

ANALYSIS: IAG interest reflects Norwegian's disruptive influence

13 APRIL, 2018 - SOURCE: FLIGHT DASHBOARD - BY: GRAHAM DUNN -LONDON

It remains to be seen whether Norwegian will ultimately join IAG, but the European airline group's minority investment further illustrates the impact the Scandinavian carrier has had on the industry.

IAG disclosed on 12 April that it had acquired a 4.61% shareholding in Norwegian, stating its aim to "establish a position" from which it could begin discussions with Norwegian – and flagging the "possibility of a full offer" for the budget airline. The group stresses that no talks have taken place with Norwegian and that it has not made any decision on making an offer.

Norwegian says it had "no prior knowledge" of the transaction, and has not been involved in "any discussions or dialogue" with IAG on the subject. The Oslo-based carrier has made no comment on IAG's suggestion that it could pursue a full acquisition, but simply says that the group's interest "confirms the sustainability and potential of our business model and global growth".

Challenging convention has long been Norwegian's modus operandi. Since reinventing itself as a low-cost operator, it has aggressively expanded its fleet with new aircraft types, roamed well beyond its Scandinavian roots, challenged operational conventions with its Irish unit, and, most daringly, dived fully into the long-haul low-cost model.

It has had its critics along the way: US unions have accused it of using its Irish operation as a flag of convenience to undermine labour standards by employing crew based in Bangkok. It has also had its share of sceptics, with rivals voicing doubts about the sustainability of its business. Slumping to an operating loss of NKr2 billion ($256 million) in 2017 did little to persuade them otherwise.

However, Norwegian has also had its share of imitators. Scandinavian rival SAS has set up a base in London, with another to follow in Malaga, after establishing a new Irish air operator's certificate, which it will use for the new external services. The company says the start-up costs have been "very low".

But the influence of Norwegian is most notable in the transatlantic long-haul low-cost sector, where carriers have moved to stake a claim in newly developing premium leisure markets. That market has been targeted by operators in different ways on both sides of the Atlantic, but perhaps most obviously by IAG.

SHARED INTEREST

In an interview with FlightGlobal two years ago, IAG chief executive Willie Walsh described Bjorn Kjos – his counterpart at Norwegian – as "a very smart guy", noting that the Scandinavian carrier was "ambitious and growing fast", but added: "I'm unclear in my own mind as to where it's going. It could well be that they are trying to make themselves attractive for an acquisition, but Bjorn shows no evidence of slowing down or wanting to move out."

Norwegian's fleet and slot positions have always made the carrier appear a possible acquisition target. Likewise, IAG's position at London Gatwick and interest in the long-haul low-cost sector have always made it one of the most likely potential buyers.

IAG's focus on the developing premium leisure sector was made clear by its launch last year of Level. Notably, the group chose to debut Level at Barcelona, going head-to-head with Norwegian on Los Angeles and Oakland routes.

"Level has exceeded expectations," Walsh said in February, adding that it offered a "lot of opportunity" for IAG. Level will soon begin operations from Paris Orly, taking over the AOC of transatlantic premium operation OpenSkies. The short-term fleet-development plan for Level is to reach some 15 aircraft. Walsh, however, has already embarked on talks with Airbus and Boeing about its future fleet – and hinted at a possible future role for the 787, an aircraft for which Norwegian was one of the first European customers.

Norwegian has also prompted a response from IAG-owned British Airwaysat London Gatwick. The Scandinavian carrier has built up its presence there to become the third-largest operator – behind EasyJet and BA – and this May will operate from Gatwick to 10 US destinations, as well as Buenos Aires and Singapore.

BA responded by adding more seats to its Gatwick-based Boeing 777s and challenging Norwegian directly on several US routes.

In terms of transatlantic capacity, Norwegian remains a relatively small player overall. FightGlobal schedules data for June shows that it represents 3.3% of US-Europe routes or 155,000 seats. By contrast, IAG controls 13.4% of the market, with BA operating 420,000 seats or 9.1%.

In a note issued on 12 April, analysts from Bernstein identify "clear potential synergies", whether through combining Norwegian and Level, using IAG's existing airlines to provide the feeder traffic Norwegian needs to London and Ireland, or moving some of Norwegian's existing orders for long-haul jets over to IAG.

CTAIRA analyst Chris Tarry highlights two geographical "attractions" that any future tie-up would offer IAG. First, the group would strengthen its position in Scandinavia. Closer to home, IAG would "significantly strengthen" its position at Gatwick.

While most of the headlines on Norwegian relate to its long-haul business, this has been built off the back of its short-haul model. IAG, which has its own low-cost unit in Vueling, has already shown interest in expansion, having bid – at one stage, seemingly successfully – for Austrian operator Niki. Under that aborted plan, Niki assets would have been operated as a Vueling subsidiary.

Norwegian competes with IAG carriers, particularly Vueling, in key leisure markets connecting northern European countries such as Norway, Sweden, Germany and the UK with sun destinations in Spain, Italy and Greece.

SHAKING UP THE MARKET

A move for Norwegian would continue the shake-up of the European sector that followed the collapse of Air Berlin and the bidding for parts of Alitalia. IAG missed out on Niki and has shown no interest in the Italian carrier, for which EasyJet and Lufthansa are among the bidders. IAG, which has already acquired Aer Lingus, BMI and Vueling since its creation, now appears to have had its focus on Norwegian.

Consolidation around Air Berlin and Alitalia – not to mention the picking up of Monarch Airlines' slots, of which IAG acquired Gatwick positions – was driven by the financial challenges of those carriers, both of which entered formal restructuring. While Norwegian has its share of challenges in converting its market positions into profits, it in March raised NKr1.3 billion ($168 million) through a privately placed share issue.

For Norwegian and its long-standing chief Kjos, an IAG offer may provide the chance to capitalise on its groundwork before its fledgling long-haul model is further tested.

It also remains to be seen if this move – or even the prospect of one – will prompt efforts to secure partnerships for other carriers in the region.

Lufthansa, which has been busy expanding its own low-cost unit Eurowingswith the addition of some Air Berlin assets and taking full control of Brussels Airlines, has had a long-term co-operation with its own Scandinavian partner SAS. The two Star Alliance companies have long been the subject of tie-up suggestions – most recently in 2016 – and have previously engaged in discussions on the matter. The idea of Norwegian joining the IAG camp could prompt the two partners to look again at closer ties.

Another Nordic carrier, Finnair, has been a long-term partner of IAG carriers BA and Iberia through Oneworld. Finnair too has been touted as an acquisition target for IAG over the years, but it would require a legal change to the current state-majority ownership.

Speaking a year ago, the airline's chairman Klaus Heinemann called for a review of the ownership structure. "When the consolidation eventually stretches to Northern Europe, we lack any means to participate in it in a meaningful way for the benefit of Finland and its industries," he said. "There is a real danger that Finnair will be further marginalised by the increasingly strong competition."

Perhaps the move for Norwegian might speed that thought process in Helsinki.