Norwegian Air Shuttle Takes to the Skies Again

(Bloomberg Opinion) -- Just when the excitement about a potential takeover of Norwegian Air Shuttle AS was beginning to flag, here comes another pocket of air to keep it aloft. 

British Airways owner IAG SA has sounded more circumspect lately about its stated interest in the transatlantic budget airline. So shareholders in the target will have been delighted by comments from Lufthansa AG’s boss, Carsten Spohr, who says he too is “in contact” with Norwegian. Though thin on detail, Spohr’s intervention caused Norwegian’s shares to surge as much as 12 percent on Monday.

Norwegian's big Scandinavian route network, its young fleet and nascent low-cost, long-haul business are attractive assets. But renewed optimism about some kind of deal belies at least two big hurdles.

First, Norwegian’s CEO Bjorn Kjos, who controls more than a quarter of the shares, has given the impression of not wanting to sell up. As a prudent allocator of capital, Spohr will have some big reservations about Norwegian’s liabilities. These include about 2.2 billion euros ($2.6 billion) of net debt, plus some chunky aircraft lease obligations.

True, Lufthansa has recent form of engaging with wounded peers. It struck a deal to lease planes and crew from Air Berlin Plc a year before its collapse. That early engagement put it at the front of the queue to pick over Air Berlin’s bones later. Integrating Air Berlin was risky but investors supported it because they could see it would strengthen Lufthansa’s pricing power on important short-haul routes and accelerate the expansion of the company's budget Eurowings brand.

It’s hard to see as strong a case for buying Norwegian, especially if IAG’s interest inflates the price. Lufthansa has only recently fought its way back to financial health, thanks in part to favorable pay and pension deals with its crew. Its capacity for servicing its debt has improved, freeing up cash for acquisitions. But Lufthansa’s shares still trade on just five times estimated earnings. That shows investors are still fearful about the industry wasting invested capital.  

With rising jet fuel prices piling yet more pressure on Norwegian's finances, the scavengers are gathering around the company. And if Spohr could snaffle up another bargain, he’d be foolish not to. But with other bidders in the wings, this would be a tough fight to win. He could do worse than return any surplus capital to shareholders.

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