(FILES) In this file photo taken on March 16, 2017 a new aircraft Airbus A 350 of the German airline Lufthansa is pictured at the Lufthansa terminal of the Franz-Josef-Strauss airport in Munich, southern Germany, prior the annual press conference of the airline Lufthansa on March 16, 2017. 
Lufthansa announced cancelling 800 flights on April 10, 2018 in German airport strikes. / AFP PHOTO / Christof STACHECHRISTOF STACHE/AFP/Getty Images
© AFP

Success at poker takes guile, luck and calculation. Europe’s airline bosses need those qualities to profit from their industry’s consolidation too. Lufthansa has upped the stakes by expressing an interest in buying Norwegian Air Shuttle. The move sent the low cost carrier’s share price up 12 per cent.

The move might be a bluff, some say. Bidding up the price of Norwegian would make life tougher for would-be acquirer IAG. It would not be the first such accusation. When Ryanair was said to be in the running, boss Michael O’Leary accused Norwegian of “trying to manufacture a mythical interest”.

But Lufthansa could be serious. It has made it clear it wants to participate in the wave of mergers in Europe’s fragmented airline industry. It could be in the running to buy struggling Alitalia, though the sale process is being held up by political turmoil. Having modernised its fleet and improved its margins, Lufthansa has the financial muscle to deal with Norwegian. The rapid growth of the airline run by Bjorn Kjos, the “Freddie Laker of the fiords”, has created deep losses and debts.

Even so, the merits of such a tie-up are limited. The operations of the two airlines are poorly matched. Nor would Lufthansa have a need for all the spare aircraft that would come with a Norwegian deal.

IAG would be a better fit. The benefits would go beyond the ability to damp down transatlantic competition. These, however would be significant given that Norwegian’s biggest long-haul base is at London Gatwick, in BA’s backyard. If Norwegian was valued at five times ebitdar, a cash earnings measure that includes rental costs, it would be worth €1.6bn, say analysts, after deducting net debts of €5.2bn. But this depends on cost cuts and, more nebulously, so-called “marketing synergies” totalling €3.3bn when taxed and capitalised.

The implicit share price would be 30 per cent above current levels. That looks a stretch. The risks involved in buying Norwegian are real. Success is not guaranteed when it comes to applying the low-cost model to the long-haul market, where costs among the legacy airlines are already low.

After two rejected approaches, IAG insists it will not enter a bidding war for Norwegian. The share price is already two-fifths higher than in the months before IAG revealed its interest. Investors expecting further gains risk overplaying their hands.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Sign up at ft.com/newsletters.

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