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IAG’s Norwegian move fuels speculation

There are a number of reasons why the British Airways-Iberia group may want to buy into Norwegian.

News that the airline group IAG has bought a 4.61% stake in Norwegian, before possible talks that might lead to a full offer, has unleashed a flood of speculation – and brought a much-needed shot in the arm for Norwegian.

Shares in the Scandinavian airline closed 47% higher after news of the bid interest broke, although IAG’s share price fell 1.2%.

IAG thinks Norwegian would be an attractive investment, it said in a statement, and the minority stake “is intended to establish a position from which to initiate discussions”.

It added, however, that no discussions have taken place. Norwegian maintains it had no prior knowledge of IAG’s acquisition in the company.

IAG chief Willie Walsh has been interested in the low-cost long-haul concept for a long time – long before it set up its own LCC, Level, from Barcelona.

“This may be an attempt to accelerate its development, while also adding to the scale and reach of [IAG-owned] Vueling in the intra-European market,” Liberum analyst Gerald Khoo suggests to the BBC.

Norwegian’s move into ‘low-cost long-haul’ has shaken up the market and forced legacy carriers to react. Buying Norwegian would allow the British Airways and Iberia owner to boost market share as competition from LCCs continues to rise.

A good concept
Although Norwegian is losing money – its finances also weighed down by the quantity of planes it is buying – IAG’s revelation suggests Norwegian has proved the concept is a good one, the BBC speculates.

BA began selling Basic fares this week from London to some long-haul destinations. It needs to stop low-cost competitors like Norwegian “poaching passengers” from it, Simon Calder of the Independent says.

This is an era of growing consolidation among European airlines. But an investment, or a full takeover, does not solve the Norwegian’s problems.

“Unless you have the right business model, deeper pockets only help you fund losses for longer,” Jonathan Wober, analyst at CAPA Centre for Aviation, tells the Financial Times.