How the low-cost ap­proach will work on long-haul routes

Norway-Asia Business Review - - Contents - By Eric Baker

T here was al­ways a cer­tain cache to fly­ing. You were told if you could af­ford it, you were en­ti­tled to bet­ter ser­vice. But low- cost car­ri­ers changed the par­a­digm the last decade. Air Asia trum­peted “Now ev­ery­one can fly”. Short-haul routes are now con­trolled by low- cost air­lines, from Asia to Europe and even in the US. Nor­we­gian Air chief ex­ec­u­tive Bjorn Kjos ar­gues there are a num­ber of rea­sons for this shift, and now that it’s started there’s no rev­ers­ing course. He’s also gambling bil­lions of dol­lars that Nor­we­gian Air can make the same trans­for­ma­tion in the long-haul mar­ket, even if labour unions and US reg­u­la­tors are of­fer­ing some tur­bu­lence. “We also be­lieved ev­ery­one should be able to fly,” said Mr Kjos, a for­mer air force pi­lot. “But our com­peti­tors thought only the rich should fly.” The air­line had quite hum­ble begin­nings, start­ing with only four air­craft in 2002. It com­peti­tors, all legacy car­ri­ers, re­sponded by cut­ting prices 30% to try and drive Nor­we­gian Air out of the mar­ket. Lit­tle by lit­tle the air­line grew its fleet, and it wasn’t prof­itable un­til the jets num­bered 20, he said. “We also con­stantly looked for in­ef­fi­cien­cies,” said Mr Kjos. “Around 2004, Norway had the most ex­pen­sive air­line tick­ets in the world, but only 0.4% of their tick­ets were bought on­line. We fig­ured out mas­sive sav­ings could be re­alised by switch­ing to an in­ter­net-based reser­va­tions sys­tem, and within months some 30% of the coun­try’s air­line tick­ets were pur­chased on­line.”

Nor­we­gian Air now flies to 128 des­ti­na­tions in 38 coun­tries, and Mr Kjos sorted out plenty of other ways that legacy car­ri­ers have in­flated costs. Many of them have to do with the new jet mod­els, which he said have changed the rules of the in­dus­try. “It takes 73 min­utes to re­fuel an air­plane,” he said. “It’s our pol­icy that our planes shouldn’t sit on the ground for more than 90 min­utes. Legacy air­lines also keep their planes on the ground for an av­er­age of 12 out of 24 hours per day. We fly our planes for 18 out of 24 hours, be­cause that’s how the new air­craft was built to op­er­ate.” The new air­craft Mr Kjos is talk­ing about are the Boe­ing 737 Max 8 and Air­bus A320­neo planes, which he claims use much less fuel and have 30% fewer car­bon diox­ide emis­sions. “We can save $14 mil­lion per year per air­craft on fuel with the new planes com­pared to the Air­bus A340 or the Boe­ing Dream­liner,” he said. “This is es­sen­tial as fuel prices are fore­cast to keep ris­ing.”

“You can’t stop the con­sumer in­ter­est,” he said. “This is why I say the era of na­tional air­lines is over. Con­sumers want re­li­able al­ter­na­tives at a low price, and that will al­ways win out in the mar­ket.”

Mr Kjos still in­sists when Nor­we­gian Air made Europe’s largest jet or­der of 300 planes in 2012 it was not a gam­ble. Even though the air­line only uses 90 planes now and the bulk of the or­ders have not been de­liv­ered, he pointed out 70% of all flights are on leased planes and the air­line plans to lease those jets they don’t use. Plus the bar­gain hunter just couldn’t help him­self when he went shop­ping for planes, know­ing both Boe­ing and Air­bus were des­per­ate to land a large or­der for their new fu­el­ef­fi­cient mod­els. He played both off each other, but they kept low­er­ing their prices un­til he went to the board and told them it needs to ac­cept both of­fers be­cause it will not likely see sim­i­lar prices again in their lifetime. Nor­we­gian flies to Thai­land and the US from Europe on its long-haul routes now, and Mr Kjos is on a mis­sion con­tact­ing gov­ern­ments around the world, try­ing to con­vince them to open up their airspace be­cause it’s go­ing to ben­e­fit peo­ple in those economies. “You can’t stop the con­sumer in­ter­est,” he said. “This is why I say the era of na­tional air­lines is over. Con­sumers want re­li­able al­ter­na­tives at a low price, and that will al­ways win out in the mar­ket.” “Thai­land has been very re­cep­tive to open­ing its skies up to Europe, and it has ben­e­fit­ted their tourism mar­ket. But the next great shift will be Asians head­ing to Europe, as Chi­nese and Korean and South­east Asian economies con­tinue to grow. All the growth is hap­pen­ing in Asia; Nor­we­gian and Euro­pean com­pa­nies have moved to Asia, and we have turned Europe into a mu­seum. But you need peo­ple to visit a mu­seum to af­ford to keep it open. “Look, Europe has a 10% un­em­ploy­ment rate right now, and I think you could solve that just by open­ing up the skies be­tween Asia and Europe. I pre­dict you could have an av­er­age of 300 mil­lion new tourists head­ing to the UK and Europe from Asia, and you would need to hire at least 10-15 mil­lion more peo­ple in Europe just to ser­vice them. That solves your un­em­ploy­ment prob­lem. Some coun­tries such as In­dia are try­ing to pro­tect their na­tional car­ri­ers, but it needs to re­alise more com­pe­ti­tion cre­ates more jobs. Sure, some air­lines might die in the process, but they would have died any­way even with­out Nor­we­gian Air be­cause they weren’t com­pet­i­tive.”

The air­line planned to launch flights from London and Scan­di­navia in April via a new Ire­land-based sub­sidiary, but it needs ap­proval from US au­thor­i­ties. Nor­we­gian Air has also been crit­i­cised by labour unions, who say it is try­ing to cir­cum­vent Euro­pean labour laws by reg­is­ter­ing air­craft in Ire­land and hir­ing staff at lo­cal bases in Europe, Asia and the US. Cabin crews in Norway have threat­ened to strike a hand­ful of times over labour con­di­tions. “What unions don’t see is the over­all pie will be big­ger,” said Mr Kjos. “They ar­gue it will be a race to the bot­tom in terms of stan­dards, but if you dou­ble the traf­fic on th­ese routes you need to hire more work­ers and even­tu­ally in­crease their salaries. “There is a min­i­mal dif­fer­ence be­tween the ad­justed salaries for Thai, US, Bri­tish and Span­ish air crews. In fact, Nor­we­gian Air crews in Thai­land have higher pur­chas­ing power than sim­i­lar crews based in Norway. “Look, salaries for Nor­we­gian Air and Ryanair are ac­tu­ally higher than at legacy car­ri­ers. We just hired an Amer­i­can pi­lot who dou­bled his salary by com­ing over to Nor­we­gian. You have to pay mar­ket prices if you want com­pe­tent em­ploy­ees.”

Nor­we­gian has had a suc­cess­ful and rapid ex­pan­sion, claim­ing 90% load fac­tors on its long-haul flights be­tween

Europe and the US and Thai­land, and Mr Kjos is adamant that its model of air­plane move­ment of­fers a ma­jor com­pet­i­tive ad­van­tage over the legacy car­ri­ers. “The hub and spoke model, where planes and cus­tomers have to sit and wait for hours at cer­tain bases, is out­dated,” he said. “The key is to have sev­eral flight crews in large pop­u­la­tion catch­ment ar­eas. Your crews have to be based in the ar­eas where all the cus­tomers are. This means we will have more crew based in New Delhi than Oslo in the fu­ture. In fact, in the fu­ture it is highly likely your flight won’t go to Oslo; we only have room for two planes to fly into Oslo now. “You can’t have a plane or a crew sit­ting in a city for four or five days un­til the next flight out of that city. Routes aren’t go­ing to be lin­ear. A plane may fly to four or five ci­ties un­til it re­turns again. This is also why labour strikes won’t be as ef­fec­tive, if you have sev­eral flight crews based in sev­eral dif­fer­ent catch­ment ar­eas.” Mr Kjos is also bullish on South­east Asia, as he be­lieves the Asean Sin­gle Avi­a­tion Mar­ket will force other coun­tries in the re­gion to follow Thai­land’s lead and open their skies as the in­dus­try lib­er­alises.

Photo TNCC

An op­ti­mistic Bjørn Kjos, CEO of Nor­we­gian, ad­dresses the sum­mit on the fu­ture of avi­a­tion.

Photo: Nor­we­gian Air Shut­tle ASA

Nor­we­gian’s cur­rent route struc­ture: This is only the be­gin­ning!

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