How the low-cost approach will work on long-haul routes
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.
An optimistic Bjørn Kjos, CEO of Norwegian, addresses the summit on the future of aviation.
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