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Norwegian could be a costly flirt for Lufthansa

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Cloudy prospects. Source: PR

Europe’s airline industry is in a consolidation frenzy and Lufthansa, the continent’s largest airline, can’t seem to resist getting involved. This week, CEO Carsten Spohr admitted he is in contact with Norwegian Air Shuttle, confirming rumors that the German flag carrier may be looking at a bid for the budget airline.

“In Europe, everyone is talking to everyone. There’s a new wave of consolidation approaching. That means we are also in contact with Norwegian,” Mr. Spohr told Germany’s Süddeutsche Zeitung. Asked whether Norwegian would fit with Lufthansa, he said: “Takeovers are always a question of strategic value, the price and anti-trust. There are no easy answers.”

The comments delighted Norwegian’s investors as battle seemed to be joined with British Airways owner IAG, which has already had two offers for Norwegian rejected and seemed to be souring on the prospects of a deal. Norwegian’s CEO added more fuel to the fire on Tuesday, saying “several others” were interested beyond the two European giants. Norwegian’s share price has surged more than 10 percent in the past two days.

But is Mr. Spohr really serious about a deal? And would it really benefit the German flagship carrier? Consolidation is all well and good, but in this case, some analysts suggest IAG and Norwegian would be the better fit.

Cost outweighs the benefits

At first sight, a takeover of Norwegian would make sense for Lufthansa because its focus on budget long-haul flights would suit Lufthansa’s low-cost unit Eurowings, which is trying to expand its long-distance routes. Both Norwegian and Eurowings fly to holiday destinations but also target business travelers on selected routes such as New York. Norwegian would give Eurowings access to interesting slots for frequent travelers in London, for example.

So much for the benefits. But there are some sizeable disadvantages too. Norwegian uses Boeing 787 Dreamliner jets for its long-haul flights, while Eurowings uses Airbus. That’s bad because part of the secret of budget airlines is that they use homogenous fleets to maximize flexibility when it comes to deploying crews. Pilots tend only to hold up-to-date licenses for one type of plane, so Airbus crews can’t as a rule fly Boeing planes.

Besides, a complex integration of a new partner airline is the last thing Eurowings needs right now. It has enough on its plate after embarking on what’s proved to be an over-ambitious expansion drive following the purchase of planes from Air Berlin, which went bust last year. The resulting reorganization let to a shortage of planes and crews. Eurowings is busy getting its operations back to normal after being beset by delays over the winter, and Lufthansa is probably counting its lucky stars that it wasn’t saddled with Air Berlin’s entire operation.

“Eurowings has enough problems to get to grips with at the moment if it wants to succeed in the market in future,” said Gerald Wissel of Hamburg-based firm Airborne Consulting. “Integrating Norwegian would only increase the complexity and overstretch the team.”

How good is Norwegian, anyway?

Norwegian would also be a financial burden. It sustained an operating pretax loss of 2 billion Norwegian kroner (€207 million, $240 million) in the last business year and has net financial debt of 22 billion kroner — that’s around €2.3 billion and 5-1/2 times more than the airline’s equity capital.

In fact, the airline has yet to prove that the budget model works for long-haul flights. Norwegian’s problem is that it requires a greater crew headcount because of statutory rest periods, and those crews have to be spread around the world, boosting accommodation bills. Even if Lufthansa could negotiate a good price for the takeover, there are doubts whether it would make sense to buy such a relatively fragile business. “The basic question is whether more long-distance flights would really be good for Eurowings,” warned Mr. Wissel.

It’s a different story with IAG. The British-Spanish airline holding company wants to fend off competitors in its home market of flights from London to destinations such as New York. Norwegian has been a thorn in its side here, so removing a rival by taking it over may be worth the risk for IAG. Integrating Boeing jets would also be less of a problem for IAG, which already has Dreamliners in its fleet.

Perhaps that’s why, despite the proclamations of Mr. Spohr, another Lufthansa executive played down the idea of getting involved with Norwegian. “Of course everyone is talking to everyone. And we always made clear that we won’t just be bystanders in the consolidation to come,” said one manager, who declined to be named. He added: “If you read Mr. Spohr’s statement closely, you’ll see that that’s all he really said.”

Jens Koenen is based in Frankfurt and covers the airline industry for Handelsblatt. To contact the author:

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