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Norwegian takes off on IAG bid chatter

This morning’s news that British Airways owner IAG has taken a 4.61% stake in Norwegian Air has sent the share price of Norwegian back to levels last seen at the beginning of last year.

Inevitably it has given rise to speculation that IAG might make a full bid for the airline, that has in the past few years undergone an explosive growth path. This has inevitably raised concerns that the airline might be overextending itself.

Source: CMC Markets

In its most recent numbers Norwegian posted a bigger than expected net loss for the last three months of 2017 of $117m, down from a small profit a year before.

Its rising costs in the form of new transatlantic routes has seen its costs rise quite sharply in recent years and expects to grow its capacity by 40% in 2018.

Management plan to expand the fleet of operational aircraft to more than 190 planes by the end of 2019, from about 150 now, which when you consider the company only had 68 aircraft in 2012 is quite a sharp expansion.

Its success in eating into the market share of its peers like Ryanair and Easyjet as well as forcing down prices on long haul routes has inevitably raised concerns that in a competitive market it could be getting ahead of itself.

In a sign that it was having an effect in squeezing its competitors Ryanair CEO Michael O’Leary, never one for holding back, claimed last September that Norwegian wouldn’t survive the winter due to its ambitious expansion plans, and rising costs, prompting a withering response from Norwegian management that he was sore at losing his pilots to the rapidly expanding airline.

We have seen in the past how over rapid expansion by accumulating too much debt can quickly get out of hand.

To deal with these concerns management raised $168m in March to help boost its finances by way of a share placement, while also announcing that it was likely to make a big loss in Q1, of $335m, up from $232m the previous year.

The company kept its options open about the possibility of raising extra cash further down the line with a further placement, but it also has a 17% stake in Norwegian Finans Holdings which controls internet bank, Bank Norwegian a provider of loans, credit cards and savings accounts. The airline did sell 2.5% of its stake in the bank last year so management do have the option of freeing up more capital that way.

More encouragingly in terms of cash flow revenues rose to $916m, an over 30% increase over the same period.

Other measures to shore up the balance sheet included selling off some aircraft, while the company has postponed the launch of its low cost flight service to Canada until 2019, though this was down to aircraft delivery delays more than any concerns about costs.

Its latest passenger numbers in March showed a big rise in traffic of 48%, along with a rise in revenue per passenger. Its load factor also increased to 86.7% suggesting that for now the company continues to be able to sustain its expansion plans, though investors will inevitably remain concerned about the airlines ability to continue to grow at a time when oil prices and geopolitical uncertainty are rising.

This morning’s news might suggests that IAG feels that there is an opportunity here given the level of the share price, or it could simply be keeping its options open in the event of further difficulties. Time will tell. 

The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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