Norwegian Air’s Global Expansion Draws Fire From a Jilted Rival
Norwegian Air “is not long for this world,” says Michael O’Leary, the chief executive of Ryanair Holdings Plc, itself in turmoil thanks to a pilot-staffing pinch that’s killed travel plans for hundreds of thousands of customers.
“That’s just nonsense,” says Norwegian CEO Bjorn Kjos. Norwegian is under investor scrutiny given its large order of more than 200 aircraft, split roughly between Airbus SE and Boeing Co., to support a global growth spurt. Industry observers caution that even with low fuel and labor costs, a glut of competitive capacity and cheap fares may well injure Norwegian’s long-term financial health as it digests all the new planes. Especially if economies on either side of the Atlantic hit a rough patch.
So, despite only a modest overlap of routes and facing their own unique challenges, these two CEOs are now engaged in a very public spat.
The bad blood comes just as Ryanair and Norwegian ended talks on a deal to transfer passengers on connecting flights, and as Norwegian began recruiting pilots from Ryanair. Norwegian instead announced a deal with easyJet Plc to transfer passengers at London’s Gatwick Airport. In Europe, many passengers flying discount carriers “self-connect” at airports, so the airlines are hoping to formalize these transfers and collect new fees in the process.
It’s unclear whether O’Leary has some other reason for making his comments about Norwegian. Ryanair didn’t gain access to any non-public financial information during the transfer discussions, Norwegian spokesman Anders Lindstrom said.
“There’s nothing in these allegations,” Norwegian CEO Kjos said Wednesday in an interview from New York. “We are very happy with the financial situation we have.” He added that Norwegian has financed all 32 of the aircraft it’s taking delivery of this year and has arranged financing for most of the planes coming in 2018. “This is Michael O’Leary’s style,” Kjos said. “He likes to project headlines. I don’t have any dispute with Ryanair.”
O’Leary has his own troubles, some of which he might attribute to Norwegian. Ryanair is canceling more than 2,000 flights—and the travel plans of 315,000 customers—over the next six weeks amid a pilot shortage that’s been exacerbated by Norwegian’s recruitment of as many as 160 Ryanair pilots. (Ryanair has disputed these figures, provided by Norwegian, as high.) O’Leary recently said Norwegian is over-extended due to its new planes and what he said was a shortage of cash. In a public message to any defecting pilots, O’Leary was eager to note that while Norwegian may fly new Boeing 787s with higher pilot pay rates than 737s, it’s in a financially precarious state.
Amid its growth initiative, Norwegian has been trying to pad its cash flow by starting an aircraft leasing unit, with the initial five planes from an order for 70 Airbus A320neo aircraft going to Hong Kong Express Airways Ltd., a low-cost carrier. The new A320s, however, have been slowed by engine glitches and subsequent replacement work at Pratt & Whitney, the engine maker owned by United Technologies Corp. The other 30 Airbus purchases, A321LRs, and all of the 108 Boeing aircraft being acquired, will be used for Norwegian’s own operation. Some older Boeing jets are likely to be sold as new ones join the fleet.
As it accumulates planes, Norwegian has been expanding its destinations at a torrid pace, from smaller U.S. cities to Southeast Asia to South America. Next spring, the airline hopes to begin service in Argentina, a market that could support as many as 70 aircraft over time, Kjos said.
The Norwegian CEO rejects assertions that his company is stretched too thin or that it faces a cash-crunch. But while he said there are no plans to sell the leasing operation, he added “you should never say never.” The company has received offers for the unit, given interest in single-aisle aircraft and aviation growth in Asia, he said. “If the price is right it might be that you should sell and not lease out” aircraft, Kjos said. However, Kjos said, “the bank is not for sale.”
The bank he refers to is the company’s 17.5 percent stake in Norwegian Finans Holding, an online financial institution formed in 2007 which also handles Norwegian’s affiliated credit card. (The carrier did sell a 2.5 percent stake in it earlier this year.)
Despite O’Leary’s prediction that Norwegian has bitten off more than it can chew—at a time when airlines such as WOW Air, Air Canada, and IAG’s new Level carriers are adding capacity across the Atlantic—Kjos said Norwegian’s growth has been carefully planned. He doesn’t see a competitive environment between the U.S. and Europe that’s “much different” from times past, nor does he think fares for the big legacy carriers like American Airlines Group Inc. and United Continental Holdings Inc. have declined much, despite all the new flights across the pond. “We absolutely have no problem in placing the capacity on the Atlantic,” he said. “If we didn’t think it was going to be profitable, we would not have these flights.”
Last week, Kjos’s HBK Holding AS spent about 192.7 million Kroner ($24.7 million) to buy more than 800,000 shares of Norwegian Air Shuttle ASA, which has been a recent target of short sellers. “Why would I do that if I didn’t think it was a sustainable business?” Kjos said. If it weren’t, he added, “I would of course sell the shares.”