Norwegian Gets Serious About Survival

Norwegian

Watching Norwegian this year has been like watching a completely new airline. In the first part of this year, the airline really tried to start tightening things up. It stopped trying to grow so fast, it made some prudent route decisions, and it shed itself of its misguided CEO. That was just the start. The airline has now gone into overdrive trying to create a sustainable airline before it runs out of money.

New Leadership

In November, Norwegian announced its new CEO, Jacob Schram would take the reins on January 1, 2020. This seems like an odd choice considering Jacob has absolutely no airline background whatsoever.

Jacob spent most of the last decade running Circle K’s European operation, so he does have big business experience. But in December 2018, he left for McKinsey. That is always a red flag considering McKinsey’s sordid and destructive history in the airline industry, but I’ll give him a pass since he didn’t actually work on the airline side.

I don’t know anything about his management style, and that’s why the most important indicator is to see with whom he surrounds himself. So far, so good. Geir Karlsen was brought in as Chief Financial Officer (CFO) back in 2018, and he became the interim CEO until Jacob was appointed. Anyone who could keep that airline afloat financially deserves a gold medal (or prison time, but let’s just assume the best here). So it’s encouraging that Geir is staying as CFO and will be Deputy CEO.

More importantly, however, is the decision to bring in Marty St George as Interim Chief Commercial Officer (CCO). You all know Marty as the former CCO at JetBlue until earlier this year. If Jacob is a good leader, then he needs someone who really understands the nuts and bolts of the airline industry while also being able to motivate the troops. Marty is that guy. (In fact, I would have thought Marty would have been an excellent addition at American if there was a big leadership change there.)

The press release makes it sound like Marty had to really be convinced. After all, he’s only the Interim CCO, officially. That being said, there is no time limit on the whole “interim” thing, or at least not one that’s been announced publicly.

If Marty is going over there, he has to believe there is a chance to do something good to save the airline. It’s going to be a challenge, but if it were an impossible challenge, I can’t imagine he would have taken the job. The fact that he went, even on an interim basis, gives me hope that this airline has a future.

Route Changes Already Happening

The other good news is that there must be people who understand the business at Norwegian, because there are some smart moves being made even before the new leadership walks in the door.

When I spoke with Lars Sande, Norwegian’s SVP of Sales and Distribution back in June, he told me that the Nordics were weak. In fact, he said at the time that summer bookings were down 15 percent year-over-year. Whether that was due to increased competition, reduced demand, or a combination of everything isn’t entirely clear, but it did not bode well for air service there.

Sure enough, this winter, Norwegian said it would cancel all long-haul flights from Copenhagen and Stockholm going forward. All those flights were suspended for the winter so they just won’t come back next year… except for Ft Lauderdale to Stockholm which, as TPG noted, ends for good on March 27.

Oslo will still have long-haul flights, and that isn’t a surprise since it’s the airline’s headquarters. But shedding those Danish and Swedish routes will do two things. First, it will give the airline more slack in its system so that continuing 787 engine issues won’t push it to enter into expensive wet-leasing deals to operate its schedule. Second, it will allow Norwegian to cull the worst performing routes and refocus where the money is.

Another positive trend is that Norwegian continues to shift into higher-revenue airports instead of secondary ones. In the US, it has shifted several flights from Oakland to San Francisco including London, Paris, and Barcelona. The Ft Lauderdale to London flight has moved over to Miami. Norwegian has also left Newark entirely in favor of moving everything to JFK. It has also shelved all those 737 flights from the East Coast to Europe, including the elimination of flying to Stewart/Newburgh, Hartford, and Providence.

On the other side of the Pond, there are no longer US flights to Paris/Orly with all of them going to Charles de Gaulle instead. But the biggest news is that Norwegian has snuck its way into Heathrow, albeit on a very limited basis. The airline will have three weekly slot pairs next year which isn’t much, but it is something to keep an eye on.

The end results is an incredible turnover in routes between the US and Europe on Norwegian. Take a look:

Data via Diio by Cirium, Map generated by the Great Circle Mapper – copyright © Karl L. Swartz.

Overall, Norwegian has dropped 27 routes and added 24. Only 14 flew in 2017 that are still flying by next summer.

A New Tango Partner In Argentina

One of the more curious (read: ridiculous) plans that Norwegian had was to start short-haul operations within Argentina. That country has long been a painful place to operate for airlines, but when the government swung the doors open to new competition, a bunch of companies jumped in. Norwegian’s chances of success were close to zero.

Somehow, the airline has now found someone to actually take this garbage off its hands. JetSMART — an Argentinian start-up backed by Indigo Partners — has bought the Norwegian operation in Argentina outright. Norwegian didn’t say what JetSMART paid, but I’m guessing it was basically nothing. The deal doesn’t even include the three airplanes in the fleet — those go back to Europe. JetSMART probably said “hey, we’ll help you stop hemorrhaging if you give us the airline. We won’t even make you pay us.”

Revenue Going Up

All that really matters is that Norwegian Argentina is gone. The overall airline group has new leadership in place, and it is making strides. After big cuts of more than 25 percent year-over-year, Norwegian saw load factor climb more than 4 points and unit revenue increase 18 percent in November. That’s probably what you’d expect to see with such massive cuts, but it is nonetheless encouraging.

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26 comments on “Norwegian Gets Serious About Survival

  1. I do not understand how Newburgh was not a profitable route. We flew from there several times within a year or two (to Dublin a few times, to Bergen, to Edinburgh), and each time the plane was full to bursting. Each of the sister planes leaving for other routes when we departed were full, too.

    How can a route with a 100% load factor not make money?

    1. so many answers to this. First, routes like that may be prime for non-rev / zed fares which can easily fill a plane with 0 revenue. Next, with low fares needed to attract people, they may not make any money, but raising fares results in a dramatic loss of traffic (i.e. 10 customers at $100, but 2 customers at $150.) Retail customers aren’t the only ones — sometimes tour operators or travel agency / consolidator fares can help fill planes, but the prices are very low. Being in the NY area, it wouldn’t surprise me if they dumped inventory to those channels. There could also be subsidies from airports, businesses, cities and tourism boards, etc. which may work for a season, but not long term. There may also just be limited demand in terms of schedule — i.e. there are good weeks and bad weeks and not enough good weeks to cover the bad ones and not worth it to run extremely limited schedules.

      Lastly, there may just be better places to deploy planes. Again, as an example with no basis in real data, a 5 hour flight at $100 per passenger may be suboptimal to two, 2 hour flights at $60 per passenger. Long range and international has more complications in staff management, operations, supply chain, etc.

    2. SWF is in a bad location. It’s very far from the core of the NYC metro area, with infrequent and poorly-advertised transit connections. This makes it generally unattractive for people originating in or around NYC, who will pay a premium to fly from EWR or JFK, both of which are much more convenient to get to.

      By itself, this doesn’t have to be a deal-breaker. Other airports in the periphery of the metro area sustain a reasonable amount of traffic, including HPN, ISP, and TTN. They do this by catering to passengers who live nearby, rather than encouraging passengers from the region’s core to schlep all the way out there. The big difference is that SWF is located in an extremely low-density part of the region. Look at satellite maps of the area around HPN, ISP, and TTN: you will see a lot of gray, indicating roads, parking lots, shopping centers, offices, and development. If you look at the satellite map of the area around SWF, you see mostly green, indicating farming communities and giant state parks.

      In fact, you could interpret Harriman, Bear Mountain, and Hudson Highlands State Parks as a “moat” preventing customers from reaching SWF. They represent 20 miles of empty space that customers have to drive through to get to the airport, but it’s a no-mans-land that contributes no passengers to the airport.

      1. Alex,

        Good analysis of the local catchment area for SWF.

        Sometimes outsiders forget that HPN borders Greenwich, CT (where many of the hedge funds are headquartered, and where many of the Wall Street types live), and is actually closer to Greenwich than it is to White Plains, NY. Long story short, even excluding those who take private jets from HPN, there are many, MANY people in the Fairfield County, CT and in Westchester County, NY (the county north of NYC, for outsiders) who have disposable income for leisure flights, plus those who travel for work and would prefer not to have to go to LGA/JFK/EWR. Also worth noting that there are a lot of blue chip companies with global or US headquarters ln White Plains, Greenwich, Stamford, Fairfield, and other nearby towns.

        Beyond the relatively low population density around SWF, I think the mental hurdle is a big one for people who live in the northern NYC suburbs to get over… SWF feels much farther way in people’s minds than the geographic distance and travel time might suggest, as it’s “upstate” and not visited very often, whereas NYC is visited (or commuted to) often, and feels much closer.

      2. I’ve never been to SWF itself, but having driven through Newburgh a few times over the years, you are really out there. Plus, the commuter rail line is in Beacon, which is on the opposite side of the Hudson River. It really does feel a world away from NYC.

        What’s the biggest city nearby, Poughkeepsie?

        1. Poughkeepsie is only a bit bigger than Newburgh itself. The closest real population centers are in southeast Rockland County (25+ miles away by road) and southern Westchester County (35+ miles away by road).

    3. If I tell you that LF = 100%, that sounds great, but if every passenger is only paying $1, then it’s less great.

      Sure, that’s an extreme example, but it makes the point. LF, in isolation, is not a particularly useful metric. If LF = 100%, the most you can say is that it’s likely you can raise fares a bit.

      Likewise average fare, in isolation, is also not that useful. If you were told that the average fare for a transAtlantic flight from SWF was $1000, hey, that sounds terrific. Oh, but did I mention that there’s only a single passenger per flight? Oh, not so great. Again, extreme example to make the point.

      What you really care about is metrics that describe how successful you are for devoting a given capacity to the market, whether you prefer revenue per seat, or RASM or whatever.

    4. Could be fuel, labor and airport fees all of which could be quite high in the NYC area.
      When you sell tickets for 29 cents each way it catches up.

    5. Thanks, everybody, for teaching me how numbers work. So valuable.

      If you cut through the noise, what is clear is that Norwegian did not price its tickets form Newburgh properly. They had 1 million people within driving distance of SWF who would likely have paid more to avoid the utter chaos of EWR and JFK. Price elasticity of demand – check it. It’s a thing.

    6. The only reason that Newburgh was not a success was because the Boeing 737Max was grounded, without a clear timeline for when the grounding would end. This meant that Norwegian was hemorrhaging cash, while it was wet leasing an Airbus A330 from Evelop. Without the grounding of the Boeing 737Max, Newburgh would have likely been a success.

      People who claim Newburgh is too out of the way are incorrectly measuring distance “as the crow flies,” instead of looking at the actual time to get to the airport. If someone is in Northern New Jersey and plans to drive, it is easier to go the 50 miles to Newburgh than the 20 miles to JFK Airport. Besides for dealing with a lot of Queens County traffic, parking at an off-site location and taking a shuttle adds at least another half hour to the trip. In Newburgh, you can park right in front of the terminal for $10 per day, which is a lot less than off-site parking at JFK.

      Of course, there are very few cities in Europe that could be reached with the Boeing 737Max. But Norwegian has orders of the Airbus A321XLR. With a range of 4,500 nmi, this would allow for flights from Newburgh to larger markets like London and Paris. Once Norwegian established mindshare as the main Newburgh carrier, it would have had ab easier time establishing flights to those cities.

  2. Something tells me the former CEO or McKinsey won’t be asking you to work with or for them anytime soon, though they’d probably be wise to do so!

  3. Hmm … Indigo Partners’ Bill Franke once ran Circle K. If I remember correctly, he brought it out of bankruptcy before doing the same thing at America West. Maybe there’s something about Circle K that serves as a training ground for airline executives.

  4. Maybe with Marty St. George onboard Norwegian will negotiate a codeshare with JetBlue. With Norwegian concentrated in JFK, there are a ton of one-stop itineraries that the two carriers could serve in a price-competitive way, especially travel from smaller cities in the US to the major European destinations. There might also be some potential for onward connections from FLL or MCO, but I’d expect that to be much less common.

  5. Any changes in Asia? They flew to Bangkok and might have tried a few other destinations but I haven’t been following if those are still around or how significant they are in the number of passengers or flights.

  6. If SWF transatlantic was going to work to anywhere, it would work to London, which is the single largest, richest, etc city in Europe, capital of the a country that speak the same language (more or less) as in the US, by far the biggest destination for Americans on the other side of the pond. Bergen, Belfast, Dublin, Shannon, Edinburgh – those were the places Norwegian tried instead. Lovely cities, but with a US demand that’s a fraction of that to London. Just bizarre that Norwegian didn’t lead with London. That might not have worked either, but if you’re gonna try anywhere in Europe from SWF, it should be London.

    1. They were flying the 737 MAX 8, which put London *just* out of range, after accounting for typical headwinds on the westbound leg. They could probably do it with the new A321LRs that they are just starting to take delivery of, but with the MAX grounding they probably have much better places to use those aircraft than SWF.

      In my opinion SWF is a dead-end anyway – it’s so far away from Manhattan that business travelers would never consider it, and it has an extremely low-density catchment area for originating leisure travelers (see my other comment on this).

      If they’re committed to flying into a secondary airport in the NYC area, then ISP is probably a better option in the long-term, because it has a dense, wealthy catchment area. It’s not currently an option, because ISP doesn’t have a customs facility and the runway is too short for Norwegian’s 737s. The A321LRs should be able to handle the runway, and the New York state government is interested in building the customs facility, and would probably throw a lot of money at it if Norwegian had a serious offer to run service. The short runway would actually be a competitive advantage, because it’s too short for widebodies, so Norwegian would have no direct competition from traditional carriers. That’s all widely speculative, though, and none of this should really be their top priority.

  7. I loved Norwegian – really reasonable prices, brand new cabins (yes, I flew their 737max8 transatlantic and lived to tell the tale), but most importantly, they were a much needed entity to provide meaningful checks and balances against the hubris of the 3 transatlantic JVs that behave almost like a oligopolistic cartel.

  8. Can you say more about McKinsey’s “sordid and destructive” behavior in the industry? Curious especially given all the headlines on McK as of late.

    1. Albert – Sure, the most famous is the death of Swissair thanks to an ill-advised “hunter” strategy proposed by McKinsey. That tanked the airline and put it out of business. I believe McKinsey was also involved at Sabena during that time which was mixed up in the strategy and failed as wel. In the US, McKinsey was behind many of the failed “airline within an airline” concepts including Ted at United. I shouldn’t throw all the blame at McKinsey, because other firms did damage as well. Bain at South African Airways comes to mind.

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