Norwegian Bases Long-Haul Plan On 787

By Jens Flottau
Source: Aviation Week & Space Technology

Norwegian's move into long-haul has to be seen in the broader perspective of the company's recent development. “We started as a Norwegian company, became a Scandinavian, then Nordic, then pan-European company. I think that is the way things will go for all airlines. They have to think global and compete in a much larger market.”

As far as its network is concerned, the routes have so far almost exclusively originated in Scandinavia. However, when Norwegian placed its massive orders for a 100 Airbus A320NEOs and 100 Boeing 737 MAXs (not to forget another 64 outstanding deliveries for 737-800s from a previous order), it became increasingly clear that the airline's ambitions went beyond connecting Scandinavia with the rest of Europe.

And now Norwegian is taking the first concrete steps to become truly pan-European. Last month, Kjos announced 15 routes from a new base at London Gatwick Airport, currently a stronghold for EasyJet. Tromso in northern Norway is the only Scandinavian destination, the rest are leisure markets in Southern Europe—Spain, Italy and Croatia. Last week Norwegian announced similar plans to grow its presence in Germany. From November onward, the company will enter 11 new markets from three German airports (Cologne, Munich and Hamburg) to a total of four destinations in Spanish territory (Malaga, Alicante, Gran Canaria and Tenerife). It will be a cautious start in the sense that frequencies will be limited to 2-3 weekly services, but there is more to come, given its backlog of capacity on firm order.

There is considerable risk involved. Norwegian is leaving its relatively protected niche in Scandinavia and is increasingly competing head-to-head with the other pan-European low-cost carriers, EasyJet and Ryanair. Norwegian's addition of more destinations within Europe does not yet have much of an impact on the legacy carriers, which have long pulled out of many of the routes Norwegian is targeting. The mega-order has also been a gamble for the airline as to whether there will be room in markets it has not previously served.

For now, Norwegian seems to be handling its huge growth spurt relatively well. In 2012, the company made a 632 million krone ($108 million) pre-tax profit on sales of 12.9 billion krone. Revenues increased by 22% as the airline carried 13% more passengers. In the first quarter of 2013, the airline posted a 160 million krone pre-tax loss, common for the season and much reduced compared to first-quarter 2012, so there are clear signs of improving financials.

The move into pan-European flying is not only a consequence of having to place a large amount of new aircraft, it is also a way of escaping the traditionally very high labor costs of Scandinavia. The airline is outsourcing most work, where feasible, to different parts of Europe. Some of the back-office functions have been moved to Latvia and Ukraine. Crews operating the Bangkok service will be based in Thailand, not Norway, to take advantage of lower labor rates.

But the Bangkok crew base offers more than a cost saving. “The main thing is the large streams of people flying from the Far East to Europe,” Kjos says. Norwegian's long-haul venture is not so much about Europeans going to Asia or to North America, but about Asians visiting Europe.

With travel patterns shifting, Kjos is betting that smaller long-haul hubs will disappear and be replaced by direct long-haul services where the market is big enough and can be stimulated by lower fares. “Direct long-haul will be cheap to fly.” At the same time, Norwegian is making a point of avoiding the large long-haul catchment areas in Europe of strong incumbents like Air France, British Airways and Lufthansa.

Kjos does not buy into the argument that the long-haul low-cost model will not work because there are few ways to achieve the same cost differences that distinguish LCCs from legacy carriers on shorter routes. “It is correct to a certain degree that on long-haul routes the cost advantage is smaller,” he concedes. “But on the other hand, when it comes to the 737-800, SAS has double the costs of Norwegian. But our infrastructure is paid for by the 737 and we earn money. I would be doing something wrong if I didn't have substantially lower costs than my competitors.”

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