Norwegian Escalates its US Invasion

Anyone here flown Norwegian yet? If not, you’re going to have plenty of opportunity. Norwegian has stepped up its efforts to become the first airline to be a successful long haul, low cost carrier with a slew of new service to the US. I really want this to work, but naturally, I’m highly skeptical, especially about the airline’s most recent announcement.

Norwegian started off in a nice, comfortable environment – Scandinavia. Why is that comfortable? Because when your biggest competition is bloated, high-cost SAS, it shouldn’t be hard to get a foothold. Sure enough, Norwegian has grown like a weed. Check out this map of flights from Oslo alone.

Norwegian Oslo

The airline has done well with short haul flying, but it’s taking a big chance by moving into long haul. It’s taking an even bigger chance by buying brand new 787s to do the job.

This summer, Norwegian started with 3 daily flights each from Oslo and Stockholm to New York and Bangkok. Then it added twice weekly flights from Oslo to Ft Lauderdale. Not enough? Copenhagen and Stockholm to Ft Lauderdale followed.

The service started with some hiccups. 787 Dreamliner problems meant that the service had to start with a leased A340, not exactly what they had in mind. This, however, should be worked out soon enough. Then will it work? Eh, not so sure about that.

The problem with long haul flying by a low cost carrier is that there is no low cost fuel. If you’re a low cost carrier, you are probably buying fuel at or close to market price. The longer the flight, the bigger percentage fuel becomes of your total costs. It creates a more level playing field. To be fair, Norwegian has to buy less fuel than others because it uses fuel-sipping 787s. But those 787s cost a lot of money to buy upfront. It’ll take awhile to pay those puppies off. And with more 787s coming off the line, they need to be put to work.

Where are those airplanes going? Norwegian decided to burn even more fuel and go even LONGER haul. Flights will go twice weekly from Stockholm to LA and Oakland. Copenhagen will see twice weekly flights to New York and LA. Oslo will get a weekly flight to LA and thrice weekly flight to Oakland. Orlando will get a twice weekly flight to Oslo as well.

Right, so this is interesting. How is Norwegian going to pull this off? Well, first it laid out a traditional low cost carrier experience. You pay for bags, meals, seat assignments, etc. But there are perks – lots of entertainment onboard, for example. That’s all good for generating a little more revenue (a much smaller percentage of the total ticket price than on short haul), but what about costs?

First it decided to compete with SAS. That gives anyone an instant cost advantage. That being said, Norway is still a very high cost place to do business. That’s why Norwegian has outsourced a lot of its cabin crews to countries with lower costs (like Thailand). Then it loaded up its airplanes with a bunch of seats.

Japan Air Lines has 186 seats on the 787. United manages 219. Norwegian has 291. Of course, United has a bunch of flat beds that will generate a ton more revenue. Norwegian has a lot of coach seats with only a 32 seat premium economy section.

Ultimately, route selection will help here, if done right. Most of these new routes have no nonstop competition and they only operate a couple times a week. These are some relatively thin routes, but that’s a strategy that airlines like Allegiant have made work on short haul routes (granted, with older, lower cost airplanes). It might be a strategy worth pursuing, and I’m really curious to see how these initial routes pan out. For its next round of announcements, however, Norwegian went off the rails.

Over the years, Norwegian has expanded outside its home market, and one of its bases is at London/Gatwick. In fact, it has grown it fairly quickly there, as you can see.

Norwegian London Gatwick

Next summer, Norwegian will fly twice weekly from London to both Ft Lauderdale and LA. It will also fly thrice weekly from London to New York.

These are not long, thin routes. These are some of the busiest routes in the world. So, uh, what is happening here?

Well, clearly Norwegian thinks fares are too high on these routes and it wants to bring them down. But coach fares really aren’t all that high on these routes most of the year. And a huge chunk of the cost is in those high British taxes that apply to everyone equally. Sure, Gatwick is lower cost than Heathrow, but I just have a hard time seeing how this works.

I find myself looking at this mixed bag from Norwegian wondering what, if anything, will turn a profit. I imagine that much of this will work during the peak summer season while Florida should do better in the winter. But these are expensive airplanes that need to be flown a lot, all year long. I think this is going to be very tough-going for Norwegian.


34 Responses to Norwegian Escalates its US Invasion

  1. David says:

    Not been formally announced yet but on Monday 21 Oct, GDS systems held details of a new 3x weekly Gatwick – Tel Aviv route with Norwegian as well, beginning spring 2014

    • Sanjeev M says:

      Nice. This is also short haul though so I don’t see a problem making this one work.

      • Ron says:

        The Israel–EU open skies agreement starts going into effect in April 2014. Expect a lot of airlines to dip their toes. It will probably be several years before we know what the market will look like long-term.

        This much said, LGW–TLV has traditionally been the domain of charter airlines like Monarch and the now defunct XL. I think the entry of easyJet (from Luton) has caused the charters to largely abandon the market. With open skies coming, all bets are off.

  2. David says:

    I’m with you on the puzzled factor regarding profitability. The more I look at Norwegian, the more I think of Air Berlin around 2006. Mid sized airline that has done so well so far and decides that it’s now invincible and can expand into any market it chooses at the same time

  3. Jared says:

    It will be interesting. I looked up in July of nezt year. AA, BA and VS are all about $1250 for a RT ticket from LAX to LHR. Norwegian is $700. That’s a huge price difference. They only fly on Wednesday and Sunday so they will miss out on people that don’t search for those days… It looked like they also had a package for bags and meals for $60 each way. Interesting concept. I know lots of people that travel to Europe with a carryon and don’t eat the food.

    Interesting. I just don’t know if there is enough capacity out of LAX to support Stockholm, Oslo and Copenhagen direct flights.

    • I’m sure most of the traffic will go beyond ARN/CPH/OSL, and by the route map shown they seem to have a lot of ‘beyond’ service.

      Will they be the new Freddie Laker of the LGW/USA routes?

    • CF says:

      Jared – I would think if they have any shot at all, it’s going to be in the summer. But it’s not like they can just park the airplane during the winter. Between June 1 and Aug 31, fine. But then what about the rest of the year? I really think it’s going to be tough unless they suspend service and put all their 787s in Florida or other hot spots for the winter. Even then, I’m not sure there’s enough demand in Florida to absorb all that capacity.

      I’m more bullish on the Scandinavia routes because if there is any demand, people will prefer the nonstops and that’s not available on anyone else. So you don’t need as much of a fare discount since there’s a huge service advantage. Of course, you might be right – there may just not be enough demand for it.

  4. Nick says:

    It is so wrong to me that they are outsourcing from other countries just to pay them peanuts…morally wrong!

    • David says:

      Nick – have you seen the cost of labour in Norway and the related social taxes a Norwegian employer must pay ?

      • Sean S. says:

        So? This is the kind race to the bottom mentality that encourages all of us to become the labor equivalent of third world countries. There’s a reason why people in developed economies have fought hard for labor rules and wage increases; so that we’re NOT being exploited by others.

        • Ake says:

          Sean, you have it all backwards. These are the kinds of jobs that will enable countries with low income to build up their social capital, let their kids go to school instead of work. By not letting them have these jobs, that they see as awesome, we are denying them to go through the same steps we all did in the more affluent countries.

          On the other hand, Norway is just insane. Why do you think that a large chunk of the labor force is Swedes (~10%)? Swedes who have one of the highest living standards in the world still go there to work! -Because salaries are roughly 50% higher. That should tell you something about how screwed up the Norwegian labor market is. Norwegians themselves typically don’t want these jobs to start off with…

          • Sean S. says:

            By not letting them have these jobs, that they see as awesome, we are denying them to go through the same steps we all did in the more affluent countries.

            Nonsense. This is the old saw that people throw up to explain why it is okay to exploit labor in foreign countries, because, of course, these people “need” those jobs. Yet, funny enough, when that same labor pool in low income countries agitates for raises in wages and better working conditions guess what they tell them? You are replaceable by the next low-income country in line. Jobs move from America to Mexico, Mexico to China, China to SE Asia, and increasingly looking like into Africa to places in the absolute search for the lowest cost labor pool.

            So if everyone is busy selling out the next person in line how exactly are world standards suppose to rise and be sustained? Why have developed economies seen their wages and incomes stagnate? Because a race to a bottom destroys the safety net and wages for everyone, not just the person in the developed country.

          • Ake says:

            It didn’t let me reply to your post so here goes.
            Sorry for going insanely off topic…

            China?s poverty rate fell from 85% to 15.9%, or by over 600 million people from 1981 to 2005. I think this illustrates my point very well. Since they had the chance to educate their children, China is now well posed to also take on more qualified jobs and services. These 600M people can now buy more thing and services benefiting everybody. Sure China is starting to outsource production further south, but that is just awesome for those countries!
            It sucks for some people when the economy transforms, but as a whole, everybody is better off.

        • SEAN says:

          So well put Sean S. I thaught earning higher wages aids society on the whole, but there are those who like exploitation & justify it with ecconomics. If you remember former president G W Bush’s comment on illegal imigration, he stated there doing the jobs americans won’t do.

      • Christian says:

        Yes, which is why Norwegians enjoy one of the highest standards of living in the world. Put the median American next to the median Norwegian and the contrast is sobering. I completely agree with Sean. This kind of subversion employed (literally) by Norwegian undermines the very ideals of Norwegian society, and as a Norwegian, I can tell you that it’s not gone unnoticed in Norway and the topic of Norwegian’s expansion and operating model makes for conversation in non-aviation circles than you would expect.

        • So if it offends the Norwegians delicate sensibilities, they don’t have to fly this airline. At their prices, I’ll bet they can do just fine flying citizens from the rest of the world.

      • Jared says:

        Not saying it’s right or wrong, but cruise lines use outsourced labour from all over the place, even if they are an American or Norwegian cruise line. They fly in people from Southeast Asia and put them on a boat for 6 months. You can also say these individuals are making way more money doing these jobs than they would at home.

        It is almost thr same thing with a US company setting up a call center in India. A $20k salary in the US isn’t great but in a developing country that goes much further.

    • Kenneth says:

      I completely agree. Norwegian should not be allowed to open a US base with up to 800 employees paid US salaries. That?s exploiting cheap US labor at the expense of Scandinavian labor.

      http://www.norwaypost.no/index.php/news/latest-news/28722-aviation-norwegian-to-open-us-base

      /end sarcasm.

      • Sean S. says:

        This contradicts everything else that is posted about how they are reducing labor costs through flagging planes in Ireland and hiring crew from Thailand. I’m having a hard time imagining they are going to hire 800 crew members at prevailing US wages to staff allegedly low cost ultra long haul flights. That doesn’t make any sense. So we’re going to have two EU hubs being serviced by a mixture of SE Asian crews, US crews, and EU crews? Oh that totally doesn’t sound like a fiasco waiting to happen.

  5. Sean S. says:

    I have a difficult time seeing this work, because unlike Icelandair which has the benefit of geography, there is not an immediate natural hub in Norway unless I’m looking at things wrong. Icelandair gets away with this stuff because of the nature of its hub and the fact that it has no domestic or near by competition, and a domestic base that in fact see’s a direct benefit to its hub status. It is able to offer fares that are significantly cheaper than competitors that would be difficult for them to match on a non-stop flight.

    I think there is this magical idea that somehow cheap ultra long haul is just a market that people haven’t gotten right, as opposed to a realization that cheap ultra long-haul is a pipe dream. People interested in ultra-longhaul services are not people who are nickel and diming per se like regional tourists or leisure travelers. People from Poughkeepsie are flying to Myrtle Beach, not Nice.

    • CF says:

      Sean S – Another thing Icelandair has going for it is the ability to use 757s on these routes. They can use that 757 to Seattle and Denver, places that require more expensive and higher capacity widebodies from Europe. They really have quite the sweet spot there.

  6. Frank says:

    So what do we know Norwegian?

    It calls itself Norwegian, yet its fleet is registered in Ireland; it uses Thai-based flightcrews working under Singaporean contracts; and perhaps best yet, it’s purchasing its B787’s with loan guarantees underwritten by American taxpayer’s by way of the US government’s own Export-Import Bank.

    Frankly, it sounds as if Norwegian is an airline designed from the ground up to evade the laws of nations around the world, and I agree with ALPA, that it’s disgraceful that the US government approves of its application to fly here. (see: http://bit.ly/15MFzu4)

    • I’m sort of curious how they end up getting around Norwegian or Ireland’s labor laws (Whichever applies, I’d figure it’d be one of them.) Wouldn’t they have to provide what is legally required of any Norwegian or Irish employer?

      • CF says:

        Nick – This all sounds pretty fuzzy to me. Clearly someone has done the research and they’re allowed to legally outsource crews. I imagine it has something to do with the fact that they serve Bangkok. Maybe they somehow build the crew pairings to originate in Bangkok and then connect through? I don’t know – just guessing. At best, it seems a little shady.

      • I guess that the airlines are taking a lead from cruise ship operators who often employ a wide range of nationalities to staff their ships even though each boat has to be registered to a specific country

  7. Alan Bowen says:

    Norwegian has been incredibly successful operating flights out of LGW, their timekeeping and service throughout the peak season was the talk of the travel industry. However many wonder whether this is a folly too far. They claim fuel costs are 20% lower with the 787 than anything they have ever flown before but it has been anything but a Dream for them. Reliability is below 50% and they said last week their actual costs due to endless problems meant their real costs were 50% higher than expected.

    The fares on launch day were good, every flight in July 2014 was £300 ($420) return to New York including taxes but it seems they had very few seats at the base price and at the end of the day, fares had doubled. At £600, plus £30 for food and bags, they don’t seem such a steal at all and with turnaround times of only 90 minutes at all US airports, and seemingly trying to operate the whole transatlantic operation from the UK with a single 787, it seems ripe for disaster. Norwegian as an airline is great, but this could be a big mistake

  8. Aren’t their 787s leased instead of purchased? I’ve flown Norwegian a couple years ago between Helsinki and London. I actually really enjoyed the flight.

  9. RAW says:

    The 787s are leased from ILFC, based right here in LA. I think David has it right, Norwegian looks very much like the Air Berlin of yore, before their fatal overreach and their now perpetual dance on the edge of bankruptcy. I’d ascribe that to the guy running (and owning much of) the airline: Bjørn Kjos. A prickly and grandiose personality.
    As to the merits of the business case: Jared, it’s deceptive if you look up $1250 for legacy liners and $700 for Norwegian. As someone else noted, there’s an additional $120 for bags and crackers, surely another $60 or so they get out of you for use of their entertainment program, on board sales, etc. Total cost will probably be close to $1000. Also, Norwegian prices like Ryanair: small contingent of the $700 seats, then prices rise. They won’t make (and don’t seem to want to make) this work as a true low cost competitor. So what’s their competitive advantage? New planes, direct connections from underserved, high net worth areas, competition with the likes of Thomas Cook who fly old 767..
    Will it work? I doubt it. Their labor costs and per unit costs are already higher than Ryanair, Wizzair and even Easyjet (and their pilots are just getting ready to throw a few cogs into their wheels). SAS is radically cutting costs, eroding Norwegian’s advantage. And Thomas Cook (after a successful turnaround at the holding parent) has money to spend on capital improvements (they, too, will take 787s soon). Plus, Norwegian had breakneck growth in one category; now they throw international flying into the mix: added complexity, cost (crew and scheduling), overstretched management, consumer complaints (just read Skytraxx!). This will not end as Mr. Kjos presently envisions it..

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  11. yo says:

    Oslo to Oakland? What, Vilnius to Palmdale didn’t pan out?

    • OAK is a better option to SFO and used by a lot of charters. It’s closer to the majority of the bay area population then SFO/SJC, it’s cheaper to operate from, the flight will have customs to themselves, and on days like today and the last two days, we’ve had fog so OAK is operating and SFO will be at a crawl.

      • yo says:

        Trust me, I know. I remember the Rich International DC-8 flights, and when Corsair brought in their wonderful 747-SP. I prefer OAK to SFO every day. It does look like Norwegian is going all post-regulation Braniff.

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