Norwegian - golden ticket or bubble waiting to burst?

[BehindBlueEyes]

The low-cost airline changing the way we fly - BBC News (http://www.bbc.co.uk/news/business-43049554)

[Ivor Fynn]

Bubble!

Ivor

[Torquelink]

https://leehamnews.com/2018/02/14/norwegian-flies-thin-air/

[G0ULI]

It all rather depends on whether Nowegian has a coherent strategy for growth or it is relying on a pyramid scheme of investment to get so big it can set its own conditions for purchases and repayments. Is there an ultimate exit strategy to merge with another large carrier in the future?

Exploiting a niche market is one thing. Taking on the national carriers and having to provide scheduled flights no matter what the passenger numbers is another.

[txl]

Up to now, I was under the impression that the no-frills/lo-cost-model doesn't work on long haul routes. Ryanair has shied away, with O'Leary repeatedly stressing that the numbers just don't add up.

Has anything changed? Are modern ER/LR versions of aircrafts like A321 or B737 that more fuel/cost efficient?

[andrasz]

Up to now, I was under the impression that the no-frills/lo-cost-model doesn't work on long haul routes.



Go figure yourself. The main elements of the low cost-model:

High density seating - can do, but a longhaul business class seat (if filled) generates about 5x the revenue of an economy seat while takes up the space of around 4.
Quick turnaround times - on 1 hour sector lenghths it makes a huge difference in a/c utilisation if ground time is 20 min or 50 min. On 10 hour sector lengths, this is pretty irrelevant
a/c & crew always returns to base overnight - no crew accommodation and third party maintenance costs (except if irregularity). Cannot be done on longhaul.
Better aircraft utilisation with flights scheduled also for uncomfortable early morning / late evening times. Not really relevant on longhaul with over 6 hour sector lengths.
Secondary airports used. Intra-Europe landing fees may take up 25-30% of total operating cost. On longhaul fights this drops to 10-15%, so savings have less impact.
Reduced on board service permits minimum crewing. On twin aisle a/c with the requirement for one crew per exit there is less difference between minimum and full service crew than on single aisle models (ok, forget the Qatar 16 cabin crew in a T7)
Single aircraft model based fleet (737 or A319/20/21 family) to allow maximum crew flexibility and maintenance synergies. DY already compromised this by adding the 787 sub-fleet.
Fares offer a basic service, tolerated only by the mazochists among us. All creature comforts cost extra - this is probably even more relevant on longhaul, but customers can only be fooled for so long. Some of them can actually count.
Overall, on shorthaul the low-cost model can achieve up to 30-35% cost advantage over the traditional model, but a lot of that is given up by offering promotional fares below cost to attract customers. On longhaul this cost advantage is reduced to max 10-15%, not enough for a really massive reduction of fares, especially if the premium segment is out of the equation.

[ExXB]

Freddy Laker always said that the big network airlines (he had other words for them) ganged up and put him out of business.

But what really happened is they put up with him while he was small, but once they started to lose business they matched his pricing. (Well one did, and the rest matched the first) Given the choice of an elderly DC10 with a stop in Bangor, vs direct flights, or with connectivity vs point-to-point, it didn't take long until he was flying less than full.

Norwegian has addressed one issue by using new B787s and opening new markets. But can they generate enough profits (not just revenue) to sustain the capital costs of a new fleet. Summer and Winter? Only time will tell.

[JW411]

ExXB: "an elderly DC-10 with a stop in Bangor, vs direct flights"

I'm afraid your memory is letting you down. In fact, Fred took delivery of 5 brand new DC-10-30s at the end of 1979 for the LAX (and MIA) routes so there was nothing elderly about them. (I flew my first direct service with G-BGXE on 05 Jan 1980). There was no need to go anywhere near Bangor with a -30 (more's the pity).

It was the fact that Fred was flying up to 3 direct LGW - LAX services per day with the new aircraft that got the big boys' attention.

[txl]

Thanks, andrasz, great summary.


Fares offer a basic service, tolerated only by the mazochists among us. All creature comforts cost extra - this is probably even more relevant on longhaul, but customers can only be fooled for so long. Some of them can actually count.
Overall, on shorthaul the low-cost model can achieve up to 30-35% cost advantage over the traditional model, but a lot of that is given up by offering promotional fares below cost to attract customers. On longhaul this cost advantage is reduced to max 10-15%, not enough for a really massive reduction of fares, especially if the premium segment is out of the equation.

I've looked at Norwegian routes to the US for some business travel recently and found them to be not (or just slightly) cheaper and far less convenient than many flights offered by LH or similar carriers. Even if you can plan your trips well in advance (as we can with annual fairs etc), as soon as you add decent seats and some luggage you might as well chose LH.

[andrasz]

...as soon as you add decent seats and some luggage you might as well chose LH.

Had exactly the same experience DY vs BA recently and that was shorthaul, BA cost 5 pounds more for in/out of Heahtrow than DY to Gatwick.

[sitigeltfel]

Yesterday's DT gave some passenger load factors.

Ryanair 96%
Norwegian 87.7%

Which airlines fly with the most empty seats? (http://www.telegraph.co.uk/travel/travel-truths/airlines-by-average-load-factor/)

[OxfordGold]

DY offer a superb service- far superior to BA,EZY & FR.

[andrasz]

DY offer a superb service...


Exactly what elements of the service on DY is superb in comparison to the listed others, given that none of them offer any... ? :P

[SINGAPURCANAC]

As long as they-(ryr,easy,norwegian etc) are safe,bussines model will last.

[old,not bold]

After about 55 years in the business, it seems to me that what's really happening long-haul, except to S America, is that established, maybe legacy, large and fairly well-financed airlines are beginning to turn their cattle-class cabins into "Loco" cabins, while they increase the yield from their other cabins by offering add-ons which are worth it on a 6 - 10 hour flight.

If this apparent trend is for real, there is no way that the locos like Norwegian can compete, in the medium long run. The analysis about Laker's Skytrain in previous posts is largely true, although what shot him down finally was huge debts in the wrong currency.

The big airlines can offer much greater frequency than a new loco on long-haul. They can also offer the little temptations that count for much more on a long flight. And they can take a financial hit at the cattle-class end while a competitor goes bust, just like BA did to Freddy Laker.

These thoughts are triggered by a last-minute 10-day trip we're doing next week for a shot of sunshine; BA from LHR to Abu Dhabi and back for 2 of us, just over £1,100 all-in. Now that's available on Etihad and perhaps others, but the difference is that with BA it's Premium Economy, because we value the extra space. If the food's good that'll be a bonus.

I simply cannot see how any airline could survive profitably long-haul with the kind of seat/km yield that BA and the others are getting from Economy, but for the whole aircraft with no revenue from Business, Club, First etc etc.

But I can see intense price competition developing among long-haul carriers for the low-cost market to fill the back half of the aeroplane.

I was once told, after a meeting at the White House in Dublin, that Ryanair reckoned to fill 70% of the aircraft at low fares, averaging at that time about 35 Euros per seat per flight, which was enough to make a fair profit on each flight. 20% went to "silly" promotional fares like £1.00 plus airport charges. And 10% went to last minute buyers in a hurry with no alternative, and that's where their enormous profits came from.

On long-haul that "loco" model won't work, because the market and the competition is quite different.

[BehindBlueEyes]

Interesting reading from all of you.

One of the reasons I asked is; every time I have flown with NAS whether it’s SH or LH, every seat has been filled. My personal experience, although no doubt others will have differing views, has been very positive. Modern, clean fleet (a lot of the BA aircraft I’ve travelled in have been pretty tatty) reasonable costs, helpful, interested crew - again had experience of some very bored, petulant staff with others. Great choice of routes.

I find it quite interesting that a lot of the legacy carriers feel threatened enough to be changing their business model to that of NAS - too long some of them have had the monopoly on certain routes and therefore, could set their prices accordingly.

The major plus, however, seems to be that Bjorn Kjos is no way as irritating and confrontational as MOL! :yuk:

[WindSheer]

Norwegian is another culture buster. That is, they don't accept that things should carry on the way they have always been done.
Ryanair have achieved enormous things by challenging the status quo, I think Norwegian will do the same.
I just hope the likes of IAG can remain competitive, or they'll just have to buy them out.....

[oldchina]

WindSheer:
"Norwegian is another culture buster"
I fear for a bad outcome. Too many subfleets and service models.

Up to now single-type (successful) LCCs have been proven right.
They are in the short haul business to make money. And they do.
Legacy carriers only fly short haul to feed their profitable long haul networks.
Low frequency long haul which is not low cost but has low yield passengers. Ho ho.

[crewmeal]

There was no need to go anywhere near Bangor with a -30 (more's the pity).

It was the fact that Fred was flying up to 3 direct LGW - LAX services per day with the new aircraft that got the big boys' attention.

Don't forget BA were using ANZ DC10's on the LAX route back in the 70's and they didn't need a fuel stop.

[krismiler]

A321LR will be the game changer as it will enable low cost airlines to try longer routes without a huge commitment. A city pair can be tested and quickly dropped if it doesn't work out. The aircraft then returns to normal short haul service.

No need to go out and get a new fleet of B787 sized aircraft with the high purchase or lease cost and set up expenses as a A321LR will do a lot of what a B787 will as long as you don't need 300 seats and 10 hours range.

Low cost has so far been limited by the non stop range of the A320/B737, as the circle increase more and more people come into the catchment area. Beyond a certain point an out and back won't be possible and the crew will need to overnight, but if it still works out then why not ?

[rog747]

ExXB: "an elderly DC-10 with a stop in Bangor, vs direct flights"

I'm afraid your memory is letting you down. In fact, Fred took delivery of 5 brand new DC-10-30s at the end of 1979 for the LAX (and MIA) routes so there was nothing elderly about them. (I flew my first direct service with G-BGXE on 05 Jan 1980). There was no need to go anywhere near Bangor with a -30 (more's the pity).

It was the fact that Fred was flying up to 3 direct LGW - LAX services per day with the new aircraft that got the big boys' attention.

indeed
i can recall trying to get back home on staff travel on Laker from MIA - he had 3 flights a day all full very evening i tried - on the 3rd night BA took pity on me and took my worthless to them Laker ticket (that cost me £10)

LAX i recall at least 2 flights a day and were busy

what killed Laker was the $ v £ on his MDD lease rates and rising fuel costs

[rog747]

Can we look forward as opposed to discussing the dinosaur area? :O

sure but past history maybe quite relevant to the future of upstart airlines such as these ones now going head to head on prime long haul routes with legacy carriers who are charging more or less the same money for a flight with luggage food and a seat res.

hence this thread whether the likes of norwegian, westjet, primera, can make money on this....

[Skipness One Echo]

Great thread.
Worth remembering recent culture busters of Silverjet, Maxjet and Eos who were going to show the legacy carriers how it was down with a new business model. That proved to be a classic bubble. I have two bookings with Norwegian coming up, one with D8 and one with DI. The long haul price was outstanding which gives me pause for thought, they have a lot of new aircraft coming making them stretched and the market is long overdue for another hiccup event.

[ExXB]

Legacy carriers only fly short haul to feed their profitable long haul networks

Not quite true. There are 18-odd flights a day GVA-LON (all airports) BA is feeding their long haul. LX has no long haul connections (other than JFK), while easy is serving the local market.

[ExXB]

When fuel prices go up, the economy tends to be going south. Prices rise and demand tapers off. This cycle is long overdue.

[oldchina]

Anyone who uses "low cost carrier" to mean low fare
carrier should be banned.
With low costs and lowish fares everyone is happy.
Having medium costs and low fares means the end is nigh!
And you have to sleep in the bath. (Norwegian would).

[JW411]

crewmeal:

The ANZ DC-10s were all DC-10-30s (KSSU fit). (I used to fly one of them for Air Pacific of Fiji).

I say again, with a DC-10-30 it was always possible to do LON - LAX with a full load.

The first 6 Laker DC-10s were DC-10-10s which could never manage LGW - LAX non-stop and always made a stop at BGR. This wasn't altogether a bad move since the passengers cleared customs and immigration quickly and pleasantly in BGR so, on arrival at LAX at the West Imperial terminal, they were treated as domestic passengers, picked up their bags and left the airport so avoiding the long queues in the middle of the airport.

It was occasionally possible to do a direct flight from LAX - LGW with the DC-10-10 but that could only happen if we had approximately 250 passengers or less and that didn't happen very often.

[MCDU2]

Cargo and J and F traffic is what the low costs don't have. They also don't have interline agreements generally and lack connectivity. Hence easy pickings for the traditional carriers and makes life hard in the winter for the locos. The 321s will also provide flexibility to the traditional carriers just as much the locos. Look at Lufty with its loco subsidairies, Aer Lingus, Level etc. Even BA are exploring them and the potential for regional flights to the US if they can reduce the passenger levies to make the economics work. All in all I would say bubble and if the Norwegian regulators find that they have fiddled the books then the investors will soon vote with their feet and they will burn through their cash.