Norwegian Air Shuttle Is Flying On a Wing and a Prayer

Diego Maradona's "Hand of God" goal helped Argentina dump England's soccer team out of the World Cup in 1986. Three decades later, divine Argentine assistance might be needed by another colorful adventurer: Bjorn Kjos, the boss and co-founder of Norwegian Air Shuttle ASA.

Kjos has plenty on his plate running a European budget carrier and adding cheap services across the Atlantic. Undaunted, he's setting up a low-cost airline in Argentina to boot. Norwegian is targeting $4.3 billion of investment in the country over the next decade and plans direct international flights between Buenos Aires and destinations such as Los Angeles and New York, Bloomberg News reported on Wednesday.

Norwegian's balance sheet is weak enough already and management attention is stretched thin. The ratio of lease-adjusted net debt to Ebitda and aircraft rent expense is about 10 times, compared to a European peer average of about 3 times, according to Bloomberg Intelligence data.

In business, it's said there's no opportunity without risk, but Kjos seems especially fond of throwing caution to the wind. Investors who've held on despite a 37 percent stock price decline this year, will continue praying that he knows what he's doing.

It's easy to see why Kjos finds Argentina appealing. Until recently, state-run Aerolineas Argentinas held a virtual monopoly, meaning fares there are comparatively high. Without a budget option, plenty of people take the bus or train despite the long distances. Norwegian should be able to stimulate new demand in Argentina, as Wizz Air Holdings Plc has done in eastern Europe.

Norwegian has regulatory approval for more than 150 Argentinian routes, meaning it will need up to 70 aircraft eventually. It will start off with fewer than that, of course. Though it will probably lease most of those planes, Norwegian's Argentinian adventure isn't free. One reason investors have taken fright this year is because margins have been squeezed by the high cost of starting new intercontinental services. Norwegian has to hire and train staff.

There's no guarantee the Argentina unit won't face similar operational or regulatory pressures. While the local economy has exited recession, consumer price inflation is still expected to be about 25 percent this year.

Then there's competition. Norwegian's long-haul services from the U.S. to Europe have already spawned low-cost imitators. There's a risk of the same happening in Argentina. Avianca Holdings SA is targeting the country, as is startup Flybondi. JetSmart, owned by investor Bill Franke's Indigo Partners, is setting up in neighboring Chile and recently ordered scores of Airbus jets.

Norwegian can ill afford another fare battle. The company wants to expand its fleet by about two-thirds by 2019, yet it's already highly leveraged and had only $700 million of cash and equivalents at the end of September.

Ryanair Holdings Plc boss Michael O'Leary has asserted that Norwegian isn't "long for this world," a comment that needs to be treated with appropriate skepticism (Norwegian has pinched some Ryanair pilots). Kjos has proven adept at tapping new sources of aircraft finance. Even so, his globe-spanning ambitions do depend on a wing and a prayer.

(Chris Bryant - Bloomberg)