Little-Known Oslo-Based Discounter Is Disrupting Big Airlines’ Profit Model

< Back to all news

Little-Known Oslo-Based Discounter Is Disrupting Big Airlines’ Profit Model


Category: Airline / Travel

A foreign airline you have likely never heard of was just awarded the highest honor bestowed by an aviation industry website you probably didn’t know existed ― and it’s an honest-to-goodness big deal for the tens of millions of Americans who fly to Europe each year and, potentially, for the even larger number who in the future will be flying around the world.

Norwegian Air Shuttle, which operates under the simple name “Norwegian,” last month was named Airline of the Year by CAPA-Centre for Aviation, a global airline consultancy and online aviation news aggregator. Based in Sydney, Australia, CAPA gave its award to Norwegian primarily because of the fast-growing European discount carrier’s penetration of the heavily traveled trans-Atlantic air travel markets. While there have been multiple efforts to blaze a discount carrier trail over the North Atlantic over the past 40 years, none survived because they couldn’t attract enough passengers to offset even their relatively low costs. Norwegian, however, has been flying between the United States and Europe for more than four years now and expanding steadily both in the trans-Atlantic and the intra-Europe markets. And, most notably, it has remained profitable throughout and now ranks as Europe’s third-largest discount airline behind Ryanair and EasyJet.

The trans-Atlantic routes have been dominated for 70 years by powerful, big-name U.S. and European “flag carriers” like British Airways, Air France, Lufthansa, American, Delta and United (and their various predecessor brands). But Norwegian and WoW, a similar startup based in Reykjavik, Iceland, have so disrupted that historically lucrative, high-priced travel market that two of the biggest conventional European airline companies are launching new “low cost” units to beat back the threat to the industry’s long-standing profits formula.

That formula, hammered out in the United States in the rough-and-tumble years after deregulation in late 1978 (and later in Europe) is built largely on two premises:

  • Capture dominant positions at key major cities through aggressive high frequency service in hub-and-spoke operations that help bring large enough numbers of people from smaller cities witin a given region to fill up long-haul flights. Typically such operations work on a break-even or slightly better basis.
  • Offer lots of long-haul flights from major hubs to very popular foreign destinations. These operations typically generate significantly higher revenues that ultimately provide the lions’ share of such conventional airlines’ profits.

In response, International Airline Group, the parent company of British Airways, Iberia, Aer Lingus and Spanish discount carrier Vueling, launched “Level” in June as a two-plane carrier flying mainly low fare-paying leisure travelers from Barcelona to Western Hemisphere cities (Los Angeles, Oakland, Buenos Aires, Argentina and Punta Cana, Dominican Republic). Three more planes – Airbus A330s seating 314 passengers – are scheduled to join the two existing A330s in Level’s fleet in 2018.

Air France-KLM will launch “Joon” on Dec. 1, as a low cost carrier self-styled as an “airline for millennials” (“joon” sounds like the French word “jeune,” which means “young”). Initially it’ll offer only flights from Paris to five other European destinations plus the Seychelles islands in the Indian Ocean, off East Africa. But next summer Joon is expected to begin adding long haul flights to the Americas.

So far, none of the Big Three U.S. carriers flying the trans-Atlantic market have followed IAG and Air France-KLM into the low cost subsidiary venture, a tactic that has been mostly unsuccessful when airlines have tried it in the past under admittedly different circumstances. Still, leaders at American, Delta and United are concerned about the encroachments being made by Norwegian, primarily, and by WoW. The discounters’ mere presence in the North Atlantic market has driven down the Big Three’s average fares between the U.S. and Europe.

It’s not that those big carriers and their major European counterparts no longer offer high-end fares aimed a business travelers and the wealthy, they do. But they still must fill up the remaining 50% to 70% of their available seats with more price-sensitive travelers who, in many cases are willing to fly into less-convenient airports (i.e., London’s Gatwick airport rather than Heathrow), or to fly to less popular cities like Oslo or Berlin to begin their vacations if doing so will save them lots of money. So, to combat the potential draining of their market share the big conventional airlines on both sides of the pond are having to keep their coach prices lower than they would prefer and to make bigger percentages of their coach seats available at those uncomfortably low (for the carriers) prices.

And that has stock analysts and investors grinding their teeth over declining unit revenues, or “Revenue per Available Seat Mile.” The price competition being driven by Norwegian, WoW and others hasn’t driven the established carriers into the red. But analysts and investors are starting to ask why they should continue to own those big airlines’ shares if they aren’t going to produce better, and growing returns?

And leaders at the big carriers are beginning to worry about the longer-term implications of additional growth in the trans-Atlantic and other long-haul markets by Norwegian and similar airlines. And there’s good reason for such concerns.

Just last week, Norwegian officials told analysts that the Oslo-based carrier now plans to increase its capacity 25% next year. The announcement had three purposes:

  1. Calm the fears of stock analysts and investors on both sides of the Atlantic. While planning to grow 25% percent year-over-year in any industry is a sure-fire heart attack-inducer among analysts, Norwegian’s announcement actually represented a significant scale-back of Norwegian’s previous growth plans for next year, sending the signal that management somewhat understands that the market’s fear of hyper-growth.
  2. Dramatically grab the attention of millions of more air travelers – particularly on this side of the Atlantic – who would be interested in flying to Europe on Norwegian from one of the 13 U.S. airports it already serves, the two additional U.S. cities (Chicago and Austin) that will get service beginning March, and the dozen or so other large and mid-size cities where it hopes to begin flying over the next few years.
  3. Scare the cold snot out of top executives sitting in conventional airline headquarters in London, Paris, Frankfurt, Fort Worth, Atlanta, Chicago and other major cities around the world. It’s working. While European carriers are using their labor contract flexibility to launch low cost competitors, the Big Three U.S. carriers have been complaining in the halls of Washington, D.C., that Norwegian, in particular, is using “flags of convenience” tactics to acquire international route rights to serve the U.S. from places like Ireland and the United Kingdom, that, as a Norwegian airline, it should not be allowed to use. (Norway is not part of the European Union, but is a member of the European Economic Area. U.S. carriers argue – so far unsuccessfully – that it doesn’t qualify to use routes covered by the U.S.-E.U. Open Skies Air Service Agreement.)

Not only are the big conventional U.S. airlines worried about Norwegian’s (and others’) growth in the trans-Atlantic markets, they also are keeping an eye on Southwest Airlines, the No. 4 U.S. airline which also operates on a discount airline model closer to Norwegian’s than to their own. Until just a few years ago Southwest operated solely within the domestic 48 states using only Boeing 737s, a plane not typically capable of long over-water flights. But with its acquisition of AirTran in 2014 Southwest inherited routes to the Caribbean. Since then Southwest has expanded service to Mexico, and will launch service to Hawaii in 2018. Canada and even northern South America also are in its sights.

Beyond that, Southwest could launch trans-Atlantic service in a few years as its fleet of new Boeing 737 MAX jets, the first of which recently entered service, grows eventually to 200. With 175 seats (or more) and a range of 4,000 miles, it could fly from the East Coast to London, Paris or virtually any destination in northwestern Europe, and do so at costs 30% percent or more below the conventional carriers’ operating costs even while charging lower average fare prices.

That won’t happen soon, but JetBlue, a hybrid low-cost carrier that has become a serious competitor in the U.S. domestic market could soon find itself competing with both conventional U.S. and European carriers via a link up with a European discounter. Norwegian’s CEO, Bjorn Kjos, openly has been courting JetBlue to be his carrier’s U.S. domestic partner. And given Norwegian’s new partnership with EasyJet, which provides U.S. travelers aboard Norwegians’ New York-London flights easy connections to the rest of Europe o, there’s growing speculation that the formation of a three-way JetBlue-Norwegian-EasyJet partnership could do enormous harm to the conventional airlines’ profit models while generating considerable bargain travel opportunities for travelers.

So yes, while you may well have not heard of Norwegian before reading this, if you are now, or plan in the future to become a trans-Atlantic traveler, you now can understand why it was named Airline of the Year for 2017.

Source: Forbes