Various sources have reported today that IAG has taken a 4.6% stake in Norwegian. Both sides are being careful with any statements. Norwegian is going to spin this as being good because they are attractive with a viable business model. IAG is saying little for now. “The minority investment is intended to establish a position from which to initiate discussions with Norwegian, including the possibility of a full offer for Norwegian,” IAG said.
IAG has developed its own long-haul LCC in LEVEL. But as IAG and all other airlines know, critical mass and economy of scale drive the business. This is even more so when one looks at LCCs. Buying this stake now prevents a move by Lufthansa or Air France/KLM.
Norwegian has grown rapidly and proven that there is a lot of potential traffic at low fares on routes that currently are not being flown by network airlines. Norwegian has, in effect, created lots of new markets. Within a short period, the airline’s brand has become known as innovative. The airline’s rapid growth has unnerved investors.
But at the same time, the flight operations at Norwegian have suffered from rapid growth. In an email exchange with the airline yesterday, asking about flight operations we got this reply: “Unfortunately, we suffered from quite a lot of delays last summer, with one of the major reasons being the delay of the delivery of the Boeing 737 MAX, which we also addressed at the time. And since then our operation has been smooth, with some exceptions of course – primarily during the winter storms, but that affected most airlines.” But its more than MAX delays. The airline’s Rolls-Royce engines on the 787 fleet have also been plagued with issues. The breakneck growth also delivered staffing challenges to the management. Considering the headwinds the airline has faced, it has accomplished an amazing record.
Bottom line, the IAG move is an endorsement. IAG may be buying while they can at low prices, but undoubtedly it was a move made to prevent anyone else making the same move.