Norwegian ‘exposed’ to increased oil price

Norwegian ‘exposed’ to increased oil price

Low-cost long-haul carrier Norwegian Air is “very exposed” to the rise in the oil price and its balance sheet “most stretched”, according to Willie Walsh, chief executive of International Airlines Group (IAG), which offered to acquire Norwegian two months ago.

Norwegian rejected the bid from IAG, parent group of British Airways and Iberia, in April and Walsh said the carriers have “had no contact since”.

Walsh told the Guild of Travel Management Companies (GTMC) conference in Wicklow, Ireland: “We remain interested [in Norwegian] at the right price.”

But he said: “The fuel price has gone up since our approach and Norwegian is not hedged. It was 25% hedged at the start of this year when we were 70% hedged.

“Norwegian is very exposed to the oil price increase. They are leveraging the most-stretched balance sheet you will ever see.”

Walsh said: “Some people have predicted the model will disappear, [and] and there is a risk of that.”

He insisted: “Norwegian is a good airline. It has proven consumers will buy the [low-cost long-haul] product. But it has not been able to generate a profit. We believe we can operate in that sector profitably.”

Walsh added: “We’ve had no contact for two months, [but] we’re watching. I admire [Norwegian chief executive] Bjorn Kjos. I know him well.”

The IAG chief warned: “The fuel rise will have a significant impact on the cost base of all airlines. There has to be an adjustment to prices. Fuel is 24% of our cost base and on long-haul it’s significantly more.”

The oil price rose above $70 a barrel in May, up from $60 a barrel at the turn of the year and from under $50 a year ago. That remains well below the peak oil price of 2007-08.

However, Walsh pointed out: “In 2007, the exchange rate of sterling was $1.67. The exchange rate now is $1.34. That is a significant change.”

He told the GTMC conference: “It represents a challenge to the industry. I hope it moderates. But if the oil price stays where it is it will inevitably push up prices.

“The industry is reasonably well hedged. But when the oil price peaked in 2008, within about 12 months fares reflected the increase.”

He said: “We can’t just absorb the increase. If oil goes from 24% of my cost base to 34% that wipes out my profit.”

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