This has been a rough fall for budget airlines. The season of discontent was kicked off by the sudden collapse of Primera, leaving thousands of passengers and air crews stranded. Cobalt of Cyprus followed, as did some smaller start-ups.
Then in November, a seismic wave hit as low-cost long-haul leader WOW agreed to be swallowed up by its fellow Icelandic airline, Icelandair. That deal apparently fell apart in due diligence. Now Indigo Partners, a private equity firm that owns Frontier (and has invested in other low-cost airlines) is said to be WOW’s angel.
“New start-up airlines have no brand, no airport slots, expensive aircraft and high-priced fuel,” says aviation expert Jonathan Breeze, a former RAF pilot, Fellow of the Royal Aeronautical Association and now CEO of Aardvark Compare, a travel insurance comparison site. “Start-ups have no natural advantages in a business that rewards scale, so many are doomed to fail.”
But one low-cost airline seems to fly above the tumult: Norwegian Air. This week the international budget airline announced new services, including Boston to Madrid and Boston to Rome, as well as London to Rio De Janeiro, Brazil. The latter will begin in March, giving the airline time to build local awareness and a ticketing and marketing structure in Brazil.
Britain’s Telegraph left no doubt which announcement it considered more important. In a story headlined “Norwegian moves to break BA’s monopoly with first low-cost flights from Britain to Brazil”, the first line was equally breathless; “Norwegian has launched the first ever low-cost flights from Britain to Brazil.” The publication compares Norwegian’s announced roundtrip fares for April, which start at £480, with British Air at £696—a difference of more than 40%.
Norwegian is also bringing its version of the “Southwest effect” (when a low-cost airline lowers fares in a new market) to the US in Boston. Norwegian’s new service from Boston to Rome will begin on March 31, 2019, with fares starting at $299.90 in Economy and $779.90 in Premium one-way. Boston to Madrid service will launch on May 2, 2019, with fares starting at $199.90 in Economy and $639.90 in Premium one way.
Norwegian spokesperson Anders Lindström told Forbes, “On Boston to Madrid and Boston to Rome, we will cut the average fare by almost in half. We’ve seen one-way fares average as high as $600 in that market.”
Norwegian also announced a play for more prominence in the San Francisco Bay area market, where the airline is moving flights from Oakland to SFO. In Florida, it will move from West Palm Beach Airport to Miami.
Norwegian spokesman Lindström explained, “We expect to get better yield out of larger airports—more business travelers, more awareness. We also see better cargo opportunities, and we believe Norwegian will appear in more search engines.” With more business travelers, Norwegian should sell more seats in its Premium Cabin, according to Lindström. The airline is increasing seating in its more profitable Premium Cabin on 787-9 aircraft from 35 to 56.
While Americans think of Norwegian as a transatlantic airline, it is also the third largest low-cost carrier in Europe behind easyJet and Ryanair. “EasyJet is a partner; you can buy a ticket on easyJet, then connect in London or Paris to a transatlantic flight,” says Lindström. Jonathan Breeze says, “If profits can be made through cross-selling European short-haul customers onto long-haul flights, then Norwegian has executed a clever strategy.”
For Norwegian, the overarching question is how long can the budget airline undercut its competitors before it undercuts itself? It is a question constantly asked by doubters and “haters”, perhaps most notably Michael O’Leary, CEO of rival Ryanair.
In September, O’Leary said of Norwegian that he was “shocked it’s still flying as it loses heroic sums of money.” He predicted Norwegian will “go bust this winter.”
Still, at the end of last year, Norwegian had around £2 billion ($2.55 billion USD) of net debt. While the airline has impressive passenger numbers, carrying 3,389,000 passengers worldwide in October, it continues to deal with rising costs as it expands service. Norwegian reportedly has eleven Boeing 787-9 Dreamliners (which list for $281 million each), twelve Boeing 737 MAX 8 and two Boeing 737-800 aircraft scheduled to arrive this year.
O’Leary said, “Norwegian has huge aircraft orders that they don’t have the cash to pay for.” Yet Ryanair is not Norwegian’s only critic. Travel industry publication Skift says Norwegian is second from the bottom among 74 airlines ranked in profitability, with a negative 8% operating profit margin.
Even Norwegian CEO Bjorn Kos noted “We are now entering a period of lower demand, tough competition and high oil prices, making it even more important for the company to continue reducing its costs.”
The airline has other rough edges. Norwegian still has “wet leased” aircraft from outside companies operating its Newark to Paris, Newark to Rome and Chicago to London services, as it waits for new aircraft and for 787s pulled for Rolls-Royce engine inspections.
A similar issue this summer, when an A380 had to be brought in to handle summer JFK to London traffic, led to four-hour delays and angry customers. “People did not get the experience they were expecting,” acknowledged Lindstrom, who believes the leased aircraft will be replaced by Norwegian flights by the spring. “It’s not good for the brand or the business.”
So will Norwegian continue to defy gravity, or will it end up in what O’Leary calls the graveyard “of airlines who had low fares and high costs”?
“Norwegian is operating highly efficient aircraft whereas most carriers are not. They operate aircraft in a high-density configuration and fill a healthy proportion of those seats on every flight,” says Breeze. “Their brand structure is good; well-developed, and trusted. They must, beyond everything else ensure positive cash flow; occasional operating losses are not critical, but negative cash flow kills. The future of Norwegian will depend on the continued support of its banks–an airline’s life support system.”
“There’s a plan behind all this growth,” says Lindstrom. “All our extensive investments will pay off sooner than what critics think.”