April 12, 2018 / 3:25 PM / 12 days ago

Breakingviews - IAG picks good time to ride Norwegian jet stream

LONDON (Reuters Breakingviews) - IAG has picked a good time to chase Norwegian’s jet stream. The owner of British Airways may bid for budget carrier Norwegian Air Shuttle. The target’s plan to disrupt transatlantic travel is taking off, but its finances are stretched, and rival bidders could struggle to get off the ground.

Parked Boeing 737-800 aircrafts belonging to budget carrier Norwegian Air are pictured at Stockholm Arlanda Airport, Sweden, in this March 6, 2015 file photo. REUTERS/Johan Nilsson/TT News Agency/File PhotoATTENTION EDITORS - SWEDEN OUT. THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. EDITORIAL USE ONLY. - GF10000385369

IAG Chief Executive Willie Walsh wants to get in ahead of the pack. Having missed the boat on budget short-haul travel in Europe to upstarts like Ryanair, he has now taken a 4.6 percent stake in loss-making Norwegian and may bid for the whole group. The Nordic carrier is trying to create the equivalent of a low-frills airline for transatlantic travel, offering flights for as little as $99 to New York.

IAG has its own rival product, called Level. But it would make sense to snap up Norwegian now before it gets too big, or steals too many of IAG’s own customers. And Norwegian itself is in a weak position to mount a defence. It suffered a larger-than-expected fourth quarter loss in February and had to raise $168 million to pay for planes and fuel. Its debt this year will total 20 times its EBITDA, according to Eikon.

And IAG should be pretty well placed to fend off rival bids. No-frills airlines such as easyJet and Ryanair are still focused on short-haul flights in Europe. Air France-KLM, meanwhile is in the midst of a costly strike and unlikely to want to take on too much of a fresh risk. That leaves Lufthansa. It has been hoovering up short-haul competitors like Air Berlin, and trying to buy Alitalia. But it would have fewer synergies than IAG, which competes more directly with Norwegian.

Walsh is keeping his options open. IAG’s minority stake may not be followed by a bid straight away. It could be a cheap way of keep rival airlines at bay, and lining up IAG as a partner if Norwegian struggles and needs fresh capital. Norwegian’s shares have shot up by nearly 50 percent since IAG confirmed its stake. Investors shouldn’t bank on a first-class premium.

Breakingviews

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