Norwegian Air takes on big names with long-haul challenge

OSLO Thu Nov 8, 2012 9:30am EST

A stewardess looks out from a Norwegian Air Shuttle Boeing 737-800 at Budapest Airport February 2, 2012. REUTERS/Bernadett Szabo

A stewardess looks out from a Norwegian Air Shuttle Boeing 737-800 at Budapest Airport February 2, 2012.

Credit: Reuters/Bernadett Szabo

OSLO (Reuters) - Budget carrier Norwegian Air Shuttle will launch long-haul operations next year with heavily discounted flights to Bangkok and New York, hoping to undercut battered Nordic carrier SAS in yet another market.

Norwegian will start the new services from its bases in Oslo and Stockholm in the second quarter when it receives the first of eight Boeing (BA.N) 787 Dreamliners, turning up the competitive heat with SAS just as it is trying to cut costs, sell assets and extend credit facilities.

"Long-haul prices in Europe are very high. Operators are simply milking the market," said Norwegian Chief Executive Bjoern Kjos, a former fighter pilot. "We have to do something about the market so everyone can afford to fly."

A one-way ticket to New York was going for 999 Norwegian crowns on Wednesday until Norwegian's website crashed shortly after tickets went on sale.

Norwegian (NWC.OL) is a rare success story in an industry struggling with high costs, expensive fuel and crippling legacy costs. It placed the biggest aircraft order by a European airline this year with a deal for 222 planes worth $21.5 billion at list prices.

SAS, which has not made a full-year profit since 2007, had been due to unveil a restructuring plan on Thursday but delayed until Monday saying it needed more time. The plan may include the sale of 3 billion Swedish crowns of assets.

Meanwhile Deutsche Lufthansa (LHAG.DE) is pushing ahead with painful cost cuts, Air France-KLM (AIRF.PA) is shedding about 5,000 jobs and Iberia could soon announce 7,000 job cuts.

Norwegian shares have risen 67 percent over the past year while SAS shares are down 46 percent.

STRATEGIC SHIFT

"There is a strategic shift going on in Europe and Norwegian is one of the winners," said Preben Rasch-Olsen, an equity analyst at brokerage Carnegie.

"Passengers want to fly point-to-point. They are no longer interested in being flown all over Europe before they get to their destination," he said.

Where Norwegian and other budget airlines offer these direct flights to and from smaller destinations, traditional flag carriers often operate through large hubs.

"SAS is not the only one suffering, just look at Lufthansa and others. Ryanair (RYA.I), EasyJet EZJ.J and Norwegian will be the big winners."

Airlines have also suffered as jet fuel prices soared above $1,000 a tonne in October, punishing airlines like SAS, which fly with older, less fuel-efficient aircraft, and helping companies like Norwegian and Ryanair, which fly with newer models.

To reduce cost further, Norwegian will establish a base in Bangkok, flying to Europe with an Asia-based crew. The firm earlier estimated that a Bangkok-based Dreamliner could be operated as much as 50 percent cheaper compared to a rival's older jet.

"If you take the Dreamliner, where the operating cost is 20 percent lower and you also save 30 percent on the service, and you combine that with an Asian crew, which is cheaper, then could get to 50 percent," Rasch-Olsen said.

Kjos, who still flies gliders and also writes mystery novels, estimated that Norwegian would carry 1.3 million long-haul passengers a year by the time all eight Dreamliners come into operation in 2015, and said its overseas service would be cash positive from day one.

While Norwegian thrives - its fleet will grow 18 percent next year - and finances itself from the market, SAS needed government funding in both 2009 and 2010, and could again ask the Swedish, Norwegian and Danish states for help.

"It just doesn't make sense that taxpayers money should be used this way," Kjos said. "If private investors do not want to put their money in there, then why should states?" (Additional reporting by Vegard Botterli; Editing by Dan Lalor and Sonya Hepinstall)

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