Low Cost & Regional

Breaking ground: An analysis of Norwegian’s market position


Norwegian’s expansion of its long haul low cost model has broken new ground strategically and attracted much interest from airline group IAG as a possible acquisition target. Alan Dron analyses the carrier’s market position.

Norwegian Air Shuttle (NAS), to give it its full title, has been in the news more than normal in recent weeks, following the thunderclap news by International Airlines Group (IAG) in early April that it had not only amassed a stake in Norwegian but had done so with the possible aim of launching a takeover bid for it.

“IAG considers Norwegian to be an attractive investment and has acquired a 4.61 per cent ownership position in Norwegian,” the UK-Spanish group said in a statement. “The minority investment is intended to establish a position from which to initiate discussions with Norwegian, including the possibility of a full offer for Norwegian.”

It did not take it long to do so: less than a month later, Norwegian accompanied the release of its 1Q18 results with the news that it had received – and promptly rejected – two offers of a takeover.

The Norwegian board described the IAG offer as undervaluing both the company and its future prospects and said that it intended to press on with its strategy. For its part, IAG CEO Willie Walsh said that, “an initial contact has not led to any agreement” and that IAG was now considering its future options.

In many ways, an IAG takeover would make sense – at least for IAG. It would give the group much greater presence in the booming low cost market; British Airways (BA) has conducted much research in recent years that shows that, on short haul routes, price trumps every other factor.

Passengers wanting to move around Europe don’t really care about convenient timings, loyalty schemes or onboard food and drink. They just want cheap tickets.

And Walsh has on several occasions expressed his admiration for NAS’s efforts in the nascent low cost long haul market, even if he has tempered his praise with comments that the Norwegian carrier has ‘not got it quite right’.

The danger for IAG is that rapidly-expanding Norwegian is starting to eat into its profitable long haul services.

Norwegian Air Shuttle
Norweigan’s pace of expansion has been startling


Having seen its short haul markets badly affected by low cost carriers such as Ryanair, easyJet and Wizz Air, BA in particular is anxious not to cede the long haul market – especially its highly- lucrative transatlantic routes.

IAG has already responded to the threat by setting up its own long haul low cost carrier, level.

This operation began services with two Airbus A330-200s last summer and is due to build up to five of the Airbus twin-aisle design by mid-summer 2018, but it is known that IAG would like to substantially increase the size of the fleet, perhaps to as many as 30 aircraft in the next few years.

Buying Norwegian would remove both a threat and the additional costs involved in building up a new sub-brand.

It would raise the question of the future of Vueling, IAG’s Spanish LCC. It would make little sense to keep two LCC sub-brands. Could Norwegian, Level and Vueling all be merged into a single LCC that would be a major rival to Europe’s other major LCCs, as well as having a long haul component that Ryanair, easyJet and Wizz Air lack?

BA has also fought back against the rapidly- growing Norwegian presence at London-Gatwick, (which is Norwegian’s second-largest base) by embarking on a modernisation of some of its older Boeing 777-200s based there.

This includes ‘densifying’ the cabin by going to a 10-abreast configuration in economy, allowing the UK national carrier to spread its costs over a larger number of passengers and bring them closer to those of its Scandinavian rival.

The IAG intervention must have come as an unwelcome diversion for NAS’s management, which has its hands full with the company’s rapid expansion.

Its sprint for growth has left Norwegian with a large debt overhang and some airline bosses have publicly expressed doubts whether it will survive.

Norwegian Air Shuttle
The 787s are opening new route possibilities


One of the most vociferous has been Ryanair’s CEO Michael O’Leary, who has repeatedly said he believes Norwegian will run out of money and collapse – an opinion roundly rejected by Norwegian.

Norwegian’s pace of expansion has been startling. In 2017, for example, no fewer than 35 new aircraft were inducted into the fleet – 17 Boeing 737-800s, six 737 MAX 8s and nine 787-9s. That pace is continuing: 1Q18 saw a further six 787-9s and two 737-800s delivered and next year will also see the start of deliveries of Airbus A321neoLRs.

The arrival of the A321s and the MAXs, with their improvements in performance – notably range – over their predecessors, will allow Norwegian to increase the number of transatlantic services operated by single-aisle types.

All this has led many observers to compare Norwegian’s CEO Bjørn Kjos to 1970s cut-price long haul pioneer Sir Freddie Laker, whose Skytrain service, using Douglas DC-10s (again from Gatwick) for a short time revolutionised transatlantic travel, allowing passengers to travel between the UK and US for a fraction of what the legacy carriers were then charging.

Laker Airways went bust in 1982 (with accusations of predatory pricing and conspiracy by several rival carriers) and the dream of cheap long haul fares faded until recent years.

However, the arrival of more-efficient, new-technology aircraft and the much greater sophistication in the setting of fare levels by airlines has bought the late Sir Freddie’s dream back into focus – and potentially turned it into a nightmare for the legacy carriers.

It is probably too early to say how successful Norwegian’s long haul service is proving. Certainly, it has been getting good load factors on many sectors (overall, it filled 88% of its seats in 2017), but some routes have not worked out.

Edinburgh to Hartford, CT, has already been dropped and the service from the Scottish capital to Providence, RT, will cease over the coming winter season, although Norwegian says that a major reason for these routes is the failure of the devolved Scottish government to cut the onerous Air Passenger Duty.

The Scottish government’s response is that it still wants to do so but is snarled up in taxation negotiations with the European Union over aspects of its plans to continue exempting from the tax journeys from remote airports in the Highlands and Islands, something that requires EU approval under state aid rules.

Norwegian Air Shuttle
The airline says bookings are stronger for 2018


Beyond those special cases, however, Norwegian also plans to suspend several routes between secondary airports on both sides of the Atlantic, such as Belfast and Bergen to Stewart International in NY, as well as Cork and Shannon to Providence.

Ironically, Norwegian is finding itself challenged by other newcomers in the long haul low cost space, notably Iceland’s WOW air and Latvia-based Primera Air. The former is expanding rapidly, while the latter is starting flights such as London-Stansted to Washington, and Toronto and Birmingham to Newark.

But it remains publicly confident that it is on the right road. Since the arrival of its first Boeing 787-8s in 2015 NAS has operated from the Scandinavian capitals of Oslo, Stockholm and Copenhagen to US leisure destinations such as Miami and Las Vegas.

Since then it has steadily opened up transatlantic routes from London-Gatwick and Paris Charles de Gaulle, as well as flights from Barcelona to Oakland, Fort Lauderdale, Los Angeles and Newark.

It can operate all these services using NAS’s existing AOC and under the EU-US Open Skies agreement. Although Norway is not a member of the EU, it became a party to Open Skies in 2011.

Norwegian can also base aircraft in the US and has started flights with Boeing 737-800s from New York JFK, Boston and Baltimore/Washington to the Caribbean islands of Guadeloupe and Martinique. This is possible because those islands are French possessions and thus come within the ambit of Open Skies.

Last September, its Ireland-based subsidiary, Norwegian Air International (NAI) finally gained full permission from the US Department of Transportation for it to fly to the US, after a tortuous process that saw the licensing process stalled after US carriers protested that the only reason NAI was basing itself in Ireland was to cut costs through hiring crews that would not be subject to Norway’s expensive labour legislation.

Norwegian denied the accusation.

Norwegian, meanwhile, has opened another new front: South America. It has received permission to set up a subsidiary in Argentina and says that it believes the continent is ripe for the low cost movement to prosper.

Norwegian’s 2017 financial results showed an after tax loss of NOK299 million ($37 million) for the year at a time when most airlines were turning in hefty profits.

Its turnover jumped 19 per cent to NOK31 billion, but it noted that it had incurred the loss due to a combination of that rapid expansion, increased wet-lease and passenger care costs (signalling shortfalls in aircraft and delays in getting passengers to their destinations), as well as the rising fuel costs that affected airlines in general.

“We are not at all satisfied with the 2017 results,” said Kjos. “However, the year was also characterised by global expansion driven by new routes, high load factors and continued fleet renewal.”

His forecast for the current year was upbeat, but still contained a veiled note of warning.

“Norwegian is far better positioned for 2018, with stronger bookings, a growing network of intercontinental routes complementing our vast European network and not least, a better staffing situation.”

He noted, however, that “our major global expansion reaches its peak in the second half of 2018, when 32 of our 42 Dreamliners on order will have been put into service.” That implies a further outflow of funds as more aircraft enter the fleet.

The 1Q18 results – admittedly the weakest quarter for many carriers in the northern hemisphere – were also less than scintillating, with a loss of NOK46 million.

This was much better than the same period a year previously, when the company recorded a NOK1.49 billion loss, but the latest result benefited from a financial gain from reclassification of the airline’s investment in Norwegian Finans Holding of NOK1.94 billion.

Norwegian commented that its global growth strategy “will provide economies of scale and lower unit costs”. It must hope that this strategy succeeds, or else it faces the possibility of an offer it cannot refuse from IAG.

Editor’s Note: The post was originally published in July 2018.

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