More European Consolidation? “Norwegian next” says O’Leary

European Airline leaders have been meeting for the last couple of days and inevitably, more grand standing takes place. Big airlines can stand above the other, smaller airlines like vultures eagerly looking for their next meal.

The trouble is those that are easy prey are getting harder to trap.

One that seems to have upset the others with its insatiable appetite for revenue and determination to push past conventional norms is Norwegian.

The others may think it but RyanAir CEO Michael O’Leary has no qualms about saying what everyone else thinks. He said it about AirBerlin, Alitalia and he was telling everyone Monarch was doomed 12 months before it crashed.

He hasn’t stopped saying it about Norwegian, and he repeated that again yesterday.

And despite the fact I find O’Leary irritating and predatory, I have to say I have always believed Norwegian to be a disaster waiting to happen, and I agree with him.

Some people can look at a set up and tell you instantly why it’s doomed, or why it could work.

Norwegian is one of those that’s been doomed in my opinion, from day one. O’Leary agrees and for much the same reason.

Norwegian is set up in what looks like a series of ‘wooden dollar’ businesses. These create the on-paper profit, based on seemingly money making business units that provide apparently strong figures, despite endless losses at Group level.

Wooden dollars – for those not aware of the meaning, is the same money recycled through several businesses – all of those businesses in a group might at some stage pay each other, say $100 for something. And they keep doing it. A pays B who pays C who pays D who pays A who pays B…. you get the picture? But each of the subsidiaries reports that same £100 as income. That allows the group to claim they all had turn over of $100. Magically turning $100 into $400. And it’s not illegal. Deceptive yes, but corporations can get away with things ordinary people would be slammed for.

That’s how Norwegian is allegedly, very basically set up. It has its own leasing company which buys aircraft on loans from banks – banks partly controlled by the same people who own the company. The Norwegian subsidiaries pay Norwegian’s leasing company who pay Norwegian’s banks who lend Norwegian’s subsidiary airlines money to operate, and lease the aircraft from Norwegian’s leasing company who pay the bank….and round go the wooden dollars.

To drive expansion, Norwegian needs more aircraft, to raise more cash, to pay for the leases which provide the money to buy the aircraft, so it has to expand to fund its expansion.

The model is utterly unsustainable. It cannot expand for ever. Norwegian is being very clever, flying aircraft to Argentina to run services there, to Florida, to the Far East, anywhere where it can keep shovelling in the mind boggling amounts of money it needs to sustain its growth, it drives cash hunting to a new level. Sooner or later though, it’s going to hit a block, and when that cash stops flowing, the whole thing will come crashing down in record time.

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