挪威航空：低成本长途航线的冒险

　　以低成本模式运营长途航线，半价卖票，而且还要能挣钱。这是挪威航空要进行的一次冒险。

The destinations are unremarkable: New York, Los Angeles, Fort Lauderdale. But, if successful, the gamble Norwegian Air Shuttle is taking would transform the business model for long-haul travel.

From last winter, passengers boarding one of the airline’s Boeing Dreamliners at Copenhagen have been able to fly direct to these US cities using tickets half the price offered by larger rivals.

Europe’s third-biggest budget airline is not the first to bet on a low-cost long-haul business: think Sir Freddie Laker in the 1970s and more recently Air Asia. But Norwegian believes the advent of a new generation of fuel-efficient aircraft — shrinking a fuel bill that can account for up to half an airline’s operating costs — makes the enterprise viable.

“It is key,” says Bjorn Kjos, Norwegian chief executive, of the importance of the Dreamliner to his operation. “We did our mathematics on other types of aircraft and it couldn’t add up.”

The fall in oil prices since the summer will help the calculation, although many airlines hedge their spending on fuel. But Norwegian has also incurred millions in costs stemming from problems with the Dreamliner, and Mr Kjos says it is too early to say whether the technical problems are over.

Stretching the low-cost model to profitably operate intercontinental flights would open a new chapter in aviation.

“The low-cost model, short-haul, has been so phenomenally successful that on the surface it seems an obvious idea to apply that model in long-haul,” says James Stamp, global head of aviation at KPMG. “There have been a number of unsuccessful attempts, as structural reasons make replicating the model difficult.

“But if someone could crack it and establish a niche, the example set by the low-cost carriers that started early is that they have tended to become dominant and hard to displace.”

The original budget operators such as the US carrier Southwest Airlines in the 1970s, and then Ryanair and easyJet in Europe in the 1990s, revolutionised short haul air travel — making flying suddenly affordable for millions of people. The model of selling cheap air fares was a winner and the rapid growth of the new kids on the block rocked the established players, luring away their customers and forcing them to slash costs in response.

Some are hoping to have a similar impact in the long-haul end of the business. Michael O’Leary, Ryanair’s combative chief executive, has made no secret of his desire to offer rock-bottom fares across the Atlantic, if only the aircraft could be bought at a price that would make an attractive deal.

“There is an opportunity for someone to do a transatlantic, low fares airline in long-haul,” says Mr O’Leary. “We’d be very interested in doing it, if I could get some long-haul fleet cheaply.”

For it to work, he believes a fleet of dozens of aircraft would be needed to link US cities with parts of Europe. However, analysts suggest the fact that the Ryanair boss has not yet done it speaks volumes for how difficult the long-haul market is.

Norwegian Air, launched just over 20 years ago, has invested huge sums in the past year on a fleet of seven Dreamliners, which will rise to 17 by 2018. The list price of a 787-8 used by Norwegian is $218.3m, although typically airlines secure a substantial discount.

The operation on the ground looks anything but revolutionary. At Copenhagen airport, a 787 rests by a terminal as maintenance crew bustle through the aircraft. Inside, 32 grey padded seats make up a premium cabin, with 259 less upholstered seats further back.

Aside from Copenhagen, Norwegian also runs long-haul flights out of Oslo, Stockholm and London Gatwick. The scale is small: at Gatwick there are two services a week to Los Angeles and Fort Lauderdale, and three to New York. It is a similar picture in Oslo and Stockholm. The competition is daunting. British Airways alone flies 16 times a day out of London to New York.

Making the routes pay

Norwegian’s calculation is that it can make its long-haul service profitable in spite of widespread scepticism.

The cost of flying an aeroplane from New York to London on a 787-9, the Dreamliner model Norwegian has on order, is roughly $90,000 one way, says one industry figure. That includes fuel, crew, maintenance, navigation and landing fees, ground handling and ownership or lease costs — but not sales, marketing, distribution, back office, other overheads or profit margin. Taxes and non-fuel charges are passed directly to the passenger.

If that aircraft had 354 seats like the 787-9 and typical load factors — a measure of how full planes are — for low-cost airlines, a year-round average one-way airfare, including passenger ancillaries such as food and drink, would need to be about $340-$380 to earn a margin of about 4 per cent.

Seat mile costs, another standard industry measure, on the smaller 787-8 are slightly higher, requiring an estimate of about 5 per cent more revenue. According to Mr Kjos, the Dreamliners each bring a 20 to 30 per cent fuel cost saving — close to $10m a year each — but the planes need to be put to work for up 18 hours a day to make the operation viable.

With Norwegian pricing its transatlantic airfares out of London at around ￡300 return, compared with the ￡500-￡600 offered by rivals, the scale of its low-cost ambition is so daring many doubt it can pull it off.

“This feels like yet another airline that starts up, has a go and runs out of money,” said Gerald Khoo, an airline analyst at Liberum, a broker. It was unclear whether Norwegian’s maths added up, he says, adding: “I don’t see how the Norwegian model is any different to lots of other airlines that have tried and failed.”

The flamboyant British entrepreneur Laker was first to try transatlantic routes, launching at ￡59, not far off the average gross weekly wage in 1977. It was wildly popular with the public and the fare was well below the average ￡100 charged by rivals such as BA and PanAm. However, five years later Laker was bankrupt, the venture killed off by a declining economy, aircraft problems and competition.

The following year low-cost US carrier People Express tested the transatlantic routes but imploded five years later, overstretched and hit by management problems. Three business class-only airlines, Silverjet and the US-based carriers MaxJet and Eos, all tried transatlantic routes before the companies folded between 2007 and 2008.

But Mr Kjos, a former fighter pilot, is not alone in his bet on air travel. Lufthansa is also looking to set up a low-cost, long-haul operation. Chief executive Carsten Spohr said the no-frills service could run flights to holiday destinations such as the Seychelles or to cities in China from late 2015, as part of an overhaul at the airline to fend off low-cost and Middle Eastern carriers.

So how close is Norwegian to profitability on its transatlantic routes?

The operation is “starting to stabilise”, says Mr Kjos, without giving any detail on when the routes will become profitable. Planes are running at about 80-90 per cent full on all routes, he says. Expansion is being mapped out. Paris, Barcelona and Rome are on the long-haul list, as part of Norwegian’s strategy to target the tourist market. Traffic will be added on existing routes from 2016, when it is due to receive the 787-9s.

He maintains that Norwegian will be able to retain its advantage even when rivals take delivery of their fuel-efficient aircraft, arguing it still has a lower cost base. “If they lower fares, we know that will drive up volume. And then there will be enough for everybody.”

Mr Kjos does admit its stab at low-cost long-haul might be too small initially to threaten the bigger airlines on the transatlantic routes. “In order to fly a good set-up, you would need more Dreamliners, maybe twice as many.”

Protectionism

But it is not just capacity that threatens the fledgling operation. Norwegian is locked in a dispute with US authorities over further flying rights despite an open-skies agreement with Europe.

Pilot unions and rival airlines have railed against what they see as Norwegian’s creative ways of squeezing out costs. The airline obtained an Irish operating licence which critics say is an attempt to sidestep Norway’s high labour costs, while it is also employing cabin crew from Thailand. Meetings between EU and US officials have failed to break the deadlock, which means the airline cannot obtain the rights to operate US flights with its Irish licence.

The unions argue that the short-term benefits of cheap tickets would come at the expense of the industry’s long-term stability, driving down wages and standards. Labour is one-fifth of Norwegian’s overall costs.

Mr Kjos says rivals are afraid of competition and that the airline will operate flights out of Ireland — not just use the licence as a way to enter other markets. Norway is not an EU member so is not part of bilateral agreements between the EU and Asia, unlike Ireland.

Also stacked against the Scandinavian airline’s chances of success, critics say, is its rapid rate of expansion, in an echo of the undoing of those who have tried and failed before.

What Norwegian is trying is “monumentally difficult”, says Mr O’Leary, in simultaneously developing short and long-haul. “While they’re doing [long-haul] they’ve taken their eye off the ball in growing the short-haul business,” he says, pointing to half-year results in July that took it into the red with operating losses before tax and interest of Nkr85m.

The real opportunity, to build a low-cost, long-haul business is in Asia, say observers. “If we look at the underlying view of how the market will develop in Europe, it will be inbound leisure traffic from Asia,” said Chris Tarry, an aviation consultant. “The growth markets are in China and south Asia.”

While AirAsia is having some success in the region, the challenge for European carriers such as Norwegian is to build a profitable low-cost, long-haul model. In spite of the significant barriers to success, industry experts insist someone will manage to make the model work.

As one analyst says: “At some point someone is going to find ways around the complicated airline industry restrictions that still exist, in order to develop a lower-cost model on long-haul as well as short-haul.”

Asia: Drop in oil boosts ‘sexy proposition’ for airlines

A growing middle class has driven low-cost, long-haul air travel in Asia. Companies began testing the model in the mid-2000s with the creation of Jetstar, partly backed by Australian national airline Qantas and Malaysia’s Air Asia. Analysts say the latter’s Air AsiaX, Asia’s largest low-cost airline, is in prime position, with an order book for 50 fuel-efficient A330-900neo aircraft, which carry 315 passengers.

Ninety per cent of its growth is forecast to come within Asia, but London, Paris and Rome top its list as “vanity routes”, says the airline’s founder Tony Fernandes. Those routes will begin to be added when it takes delivery of its aircraft. Having a high number of passengers transfer from its short-haul flights has been essential, as has been a 12-seat premium cabin.

“This model will work, there’s no doubt about it,” says Mr Fernandes, despite having had to cut a previous initiative that ran routes to Paris and London in 2012, after a rise in fuel prices. “This is an airline that could be not too far off what Emirates is doing [in terms of its reach].”

The optimism is based on the new aircraft cutting fuel and running costs but also the airline’s strength in connecting passengers from its short-haul routes, and infrastructure such as the dedicated low-cost terminal at Kuala Lumpur.

"We have a huge opportunity to be one of the largest long-haul carriers in the business,” says Mr Fernandes. “The vision is to grow as quick as you can, being profitable, have a few bases around Asia and, combined with the short-haul flights, be able to dominate the space.” With oil languishing around $60 a barrel, he adds, the model has become even more of “a sexy proposition”.

His confidence comes in spite of overcapacity in the region. In an increasingly competitive market, Air Asia reported a third-quarter net loss of Rm210.9m in November and has reviewed its growth plans.

Although in an experimental phase and with profitability uncertain, others in the region are dabbling in long-haul, among them Korean budget airline Jin Air and Singaporean-Thai venture NokScoot. Aviation consultancy OAG says a number of carriers are well positioned to step into the market.

In China, the big three state-owned carriers — Air China, China Eastern and China Southern — have been able to keep low-cost competition at bay, with the aviation regulator banning the establishment of new carriers from 2007 to 2013. “They [the state-owned trio] love the status quo,” says a Hong Kong-based industry analyst who asked not to be named. “They have an oligopoly that controls 80 per cent of the domestic market. Whenever times are bad, all they need to do is jack up ticket prices.”