Norwegian’s Ambitions Test Open Skies Deal

By Jens Flottau, Cathy Buyck, Sean Broderick
Source: Aviation Week & Space Technology
February 24, 2014

Bjoern Kjos may be experiencing much of what Herb Kelleher did in the early 1970s when he tried to establish Southwest Airlines as a new kind of carrier in the U.S. Like Kelleher, the CEO of Norwegian Air Shuttle is spending an enormous amount of time with lawyers to try to gain regulatory clearance for his new operating model. But what appears to be a dispute over U.S. access and labor standards has much broader implications.

Kjos's Norwegian, Europe's third-largest low-fare airline, has already launched long-haul operations with a growing fleet of Boeing 787s. The carrier has applied for and received an Irish Air Operator Certificate (AOC) in the face of an intense lobbying campaign launched by U.S. labor unions and supported by several legacy carriers who aver that the only reason Norwegian is relocating the legal headquarters of its long-haul unit is to bypass strict Norwegian labor laws. Kjos responds that his detractors: “Want to keep up their high fares on the transatlantic routes.”

When the European Union liberalized the intra-European air travel market in the 1990s, few airlines took advantage of the new freedoms because they were not useful for their established hub-and-spokes business model. It was only when low-fare carriers like Ryanair and EasyJet arrived on the scene that the new regulations were employed—these carriers introduced services between European countries they were not originally based in. By now, liberalization has allowed the low-fare airlines to develop what is the superior business model on short-haul routes.

Much the same has been true for the open skies agreement between the European Union and the U.S., which was introduced in two steps in 2008 and 2010. So far, the most substantive change was the opening up of London's Heathrow Airport when the legacy Bermuda II agreement was superseded by the new rules. But there were few attempts to step outside of well-known territory and fly from remote bases: Air France tried and failed on the London-Los Angeles route, and Aer Lingus stopped a wet-lease for United Airlines on the Washington-Madrid route in little more than a year—United's pilots did not like the arrangement at all. The only European airline operating from an EU member state other than its home country is Open Skies, a British Airways offshoot that operates two daily Paris-New York roundtrips using three Boeing 757-200s.

Norwegian, trying to use the EU-U.S. open skies pact to its advantage, plans to fly its 787s from bases throughout Europe. Only a fraction of its capacity will touch Oslo, its original home base. Instead, the airline's 787s might soon be flying from Barcelona to New York, much like it is already operating to the U.S. from Copenhagen, Denmark, and Stockholm.

And Kjos has Asia in his sights: Norwegian already flies to Bangkok, but he would like to add China, India and Vietnam. In fact, he has ambitions to serve all large population bases. To do so, his airline needs traffic rights—and an EU AOC. While the U.S. treats Norway as if it is part of the European Union (which it is not), Asian countries do not. Therefore Norwegian cannot fly between places such as Barcelona and Bangkok or London and Beijing without a European AOC. The Ireland base also makes the airline eligible for export credit agency and Export-Import Bank financing for both Boeing and Airbus aircraft. The fact that Ireland has signed the Cape Town Convention—an international treaty to standardize transactions involving movable property—gives the airline access to cheaper financing; corporate tax levels are also low. “All of this has nothing to do with labor issues; we do not plan to base any crew in Ireland,” Kjos tells Aviation Week.

The Irish Aviation Authority granted Norwegian Air International (NAI) the much-sought-after approval earlier this month, in what is a major step in turning Kjos's dream into reality. NAI also received an air operating license from the Commission for Aviation Regulation on Feb. 19, which is being filed with the U.S. Transportation Department as part of the airline's application for a foreign air carrier permit. If this is granted, it will allow operations between any point in the EU and the U.S.

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