* Dreamliner a game changer due to fuel efficiency
* Norwegian has just two Dreamliners, six more to come
* Norwegian CEO sees 4-5 year head start to make long haul
* Asian carriers the biggest likely challenge
By Balazs Koranyi
OSLO, Oct 3 Norwegian Air CEO Bjoern
Kjos was on his way to Thailand last month to celebrate the
opening of his budget airline base but instead got a lesson in
why many low-cost carriers have failed in the long-haul market.
As mechanics beavered away to fix his brand new $212 million
Boeing 787 Dreamliner, he watched the hours tick by,
knowing he would miss the party in Bangkok.
Norwegian's first two Dreamliners broke down more than a
dozen times in September, forcing it to lease planes or cancel
flights. A full-service long-haul rival, typically part of a big
alliance, could have called for back-up from its allies.
The Nordic carrier this year became the only European budget
airline to take on long haul, arguing that the Dreamliner, with
a 20 percent fuel saving, made it possible.
Others, including carriers who have made a success of
low-cost long-haul in Asia, doubt the business model for Europe,
and are waiting to see how the experiment turns out before
Even without direct low-cost competitors, it will be a stiff
"It takes more to succeed in the Champions League than in
the local top league," says Per Arne Villadsen, the CEO of
Berg-Hansen, a top Norwegian travel agency. "On (long-haul)
overseas destinations the company faces an entirely different
competitive situation; its largest competitors are
well-functioning alliances, with each company holding an
advantage in its home market."
Norwegian, Europe's third biggest budget airline, operates
at a 44 percent lower cost than its biggest Nordic rival, SAS
, but that advantage can be cut in half over longer
flights because fuel is a much higher proportion of the cost.
The small size of its long-haul fleet - currently two,
rising to eight - will also strip away some of its cost
advantage, and while it might have stolen a march by hiring
cheaper cabin staff from its Bangkok base, rivals can be
expected to use similar tactics.
Attempts to fly cheap long-haul routes date back to the
1970s, when Laker Airways flew from London to New York. It went
bankrupt in 1982 when rivals cut fares and squeezed it out of
Malaysia-based Air Asia X recently tried flying
between Asia and Europe but gave up, arguing that the low-cost
model cannot work until it gets more fuel efficient planes.
While the more fuel-efficient Dreamliner changes the
economics, Norwegian's early advantage will evaporate as rivals
get their own, or the Airbus A350.
"Eventually the Airbus A350 will come with similar fuel
consumption, so in five to six years everybody will have the
planes with similar operating capabilities," says Kenneth
Sivertsen, an airline analysts at Arctic Securities in Oslo.
Qantas unit Jetstar, arguably the most successful
budget carrier in long haul, will get the first of its
Dreamliners this year and has already signalled plans to fly to
Europe from Asia. Within Asia, budget long-haul has gained
traction as flight distances are shorter, crew costs are lower
and the overall market is growing much faster, giving newcomers
a chance to quickly carve out market share.
Still, Norwegian won't face a low-cost challenger in the
Nordic market for years, and SAS, which is struggling to
complete another round of restructuring, doesn't get its A350s
"We have a four to five year lead on the rest of the pack,"
Norwegian CEO Kjos says. "That's the timeframe we envisage that
we can build up a strong operation on long haul."
Kjos dismissed doubts about the business model, saying he
believed in it even more now, because the Dreamliner's operating
costs were actually less than advertised, and the reliability
issue was temporary.
"Oh, 99 percent of the people said the exact same thing when
low-cost airlines started flying short-haul," Kjos said. "They
said Ryanair and EasyJet were a joke. Now the
low-cost carriers have 50 percent of the market in Europe."
Compared with full-service carriers, some of Norwegian's
advantages will persist even after its head start has been
clawed back; Norwegian will fly Dreamliners up to 18 hours a
day, 50 percent more than rivals, it will opt for cheaper
landing slots, and its operations will remain leaner.
Norwegian is now offering round trip tickets to Bangkok for
next month as low as $580, well below prevailing fares of $1,200
for Thai Airways and $1,400 for SAS. Its long-haul
planes are currently flying 98 percent full, analysts say, well
above expectations for 90 percent.
There will be further cost savings when its other six 787s
are in service by 2015.
Some say that is still far too few.
Michael O'Leary, the CEO of Ryanair, Europe's biggest budget
airline, recently said flying long-haul with two to six planes
made no sense. He thinks 30-50 are needed.
Investors seem to be siding with Kjos. The stock is up 105
percent in the past 12 months, outperforming a 22 percent rise
in the travel and leisure sector index. Over the past
month it has held steady, despite headlines about its Dreamliner
"Norwegian is clearly increasing the risk with long haul,
but investors pay management to take calculated risks," Arctic
Securities' Sivertsen said. "I don't think it's time yet to
question the model."