Norwegian’s sky-high gambles impact the South

Norwegian’s sky-high gambles impact the South

By John Daly

Next month, scheduled air services between Dublin and Hong Kong take flight. The first direct service between Ireland and the Asian mainland, via Cathay Pacific, underlines the growing trade links with the Far East, even as Norwegian Air axes its Cork to Providence winter schedule service, just six months after its high-profile launch.

While Norwegian blamed lower demand, which also hit Edinburgh and Shannon, it comes as little comfort to the Cork business and political interests who championed the service, even in the face of sustained US union opposition.

“While I understand that airlines must make commercial decisions, I am actively reminding Norwegian Airlines that the US strongly resisted the granting of the licence, and yet it was through massive political and business support, in the Munster region, that supported the award of the licence, on the basis of a year-round transatlantic flights from Cork, as headlined by the airline,” said Ireland South MEP, Deirdre Clune. More wounding still for Cork was the airline’s announcement of plans to develop a Dublin Airport base.

“I warned that this was a Trojan horse for Dublin Airport and, regrettably, so it has proved,” said Labour TD Alan Kelly.

While Cork’s discontent is justified, the bigger picture shows Norwegian negotiating turbulence in terms of income and operational costs.

Betting that fuel prices would recede from their three-year highs, the airline started scaling-back its hedged positions last year, but costs have continued on an upward increase of over 20%, putting further pressure on its stretched balance sheet. Expansion plans have also been temporarily choked by engine problems on the airline’s Dreamliner 787 aircraft, with restrictions imposed by European and US safety regulators.

“Norwegian, and several airlines worldwide, have, unfortunately, been forced to conduct extraordinary inspections on a number of Boeing 787 Dreamliner aircraft, due to issues with the specified type of Rolls Royce engines,” said a spokesman.

“This will affect our operations going forward, but it is too early to predict the scale of the issue.”

Bjorn Kjos, who controls a 27% stake in Norwegian, is an industry maverick, often compared to Freddie Laker, the pioneer who introduced low-cost, trans-Atlantic flights, with Laker Airways, in the late 1970s. He helped usher in the modern era of affordable air travel.

Kjos entered the industry in 2012, with the purchase of 200 fuel-efficient Boeing Dreamliner aircraft for €13bn, at a time when global carriers were in recessionary retreat and American Airlines had entered Chapter 11 in bankruptcy.

“When the hour is darkest is the time to think counter-cyclically and act boldly,” he said at the time.

Norwegian Air launched multiple routes to become Europe’s third-biggest budget carrier, winning a 5% seat share on the North Atlantic.

The big picture got even more interesting when IAG, the parent company of British Airways and Aer Lingus, headed by Willie Walsh, bought a 4.6% share.

“The minority investment is intended to establish a position from which to initiate discussions, including the possibility of a full offer for Norwegian,” said AIG.

However, the news last Friday, that Norwegian had rejected two takeover proposals from IAG, because “they undervalued the airline and its prospects” and was “considering options on how to proceed”, adds further impetus to the takeover tango, which will clearly make a few more rounds of the dance floor, before any kind of commercial marriage is agreed.

There is much to play for. The acquisition of Norwegian would not only eliminate a bold competitor who has shaken up the industry with its aggressive, low-cost, long-haul flights, but would also give IAG access to a new fleet of fuel-efficient aircraft to consolidate its premier position into the USA.

Given the bigger game around Norwegian Air’s possible IAG takeover, the discontent of the Cork business will not abate.

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