Norwegian Air Shuttle's Gutsy Pilot Won't Leave Cockpit Quietly

(Bloomberg Gadfly) -- With short-sellers targeting the stock, a balance sheet weighed down by vast liabilities and costs and competition increasing, a company's owners would normally be only too happy to get news of a possible takeover bid.

But Bjorn Kjos, the Norwegian Air Shuttle ASA boss who also controls about one quarter of its stock, isn't like most stakeholders. If IAG SA is serious about buying the cash-strapped budget airline, a proposition first reported by Bloomberg News, CEO Willy Walsh is going to need some real powers of persuasion.

As I've written before, Norwegian is skating on very thin ice. Determined to dominate the nascent market for cheap long-haul air travel, in 2012 it placed one of Europe's biggest ever jet orders. Six years later, taking delivery of those planes means it is burning through lots of cash, while getting transatlantic services up and running causes costs to balloon.

Norwegian Air Shuttle's Gutsy Pilot Won't Leave Cockpit Quietly

Before Thursday's 38 percent surge, the shares had shed more than half their value since April 2016 and almost one-fifth of the stock had been loaned out by short-sellers. Norwegian had to raise fresh capital last month.

Kjos, a former fighter pilot and trained lawyer, knows only one direction though -- forward. Instead of curtailing his ambitions, he's launching a new airline in Argentina. And rather than cut his financial exposure to Norwegian, he sought to increase his stake last year.

So why would IAG be interested in an airline that Ryanair boss Michael O'Leary has suggested "is not long for this world?" For one, there's those aircraft orders. IAG could rapidly bulk up its own emerging budget long-haul services using the fuel-efficient Boeing 787 and 737 Max jets ordered by Norwegian. Any planes deemed surplus to requirements could be sold or deferred.

Norwegian has done much of the heavy lifting already. It's been training up crews and obtaining permission for new routes. By now, passengers are familiar with its brand and they seem to enjoy the experience. Norwegian has won plenty of awards.

IAG can afford it too. It has about 6.7 billion euros ($8.25 billion) of cash and equivalents, while net debt adjusted for capitalized leases is a modest 1.5 times a comparable measure of earnings. In contrast, Norwegian's lease-adjusted net debt is almost 12 times comparable earnings, according to Bloomberg Intelligence.

True, Norwegian's liabilities would take the shine off IAG's balance sheet. But with an enterprise value roughly fives times that of Norwegian, IAG can afford the risk. And it wouldn't have to spend as much expanding its own long-haul budget brand.

Even so, this is a distance from being a done deal. So far, IAG has acquired only a 5 percent stake and hasn't held discussions with Kjos. Having spent a quarter century building Norwegian, he's unlikely to be a willing seller, particularly not at what he'd consider a low point for the airline and before the fruits of the new transatlantic services are felt (even after today's surge, the shares are only back where they were a year ago). Other investors still holding the stock before today were also presumably convinced that his high-risk gamble would pay off. 

Perhaps Walsh will convince Kjos that competing with IAG and other better capitalized airlines is suicide. But Kjos is hard to bully. This could turn into a dogfight. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

To contact the author of this story: Chris Bryant in Berlin at cbryant32@bloomberg.net.

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