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ANALYSIS: Why Norwegian is setting the airline agenda in 2017

01 FEBRUARY, 2017 - SOURCE: FLIGHTGLOBAL PRO - LONDON

Norwegian has so far defied scepticism about its branding, the scale of its aircraft orders and its embrace of the low-cost long-haul model, to become one of the most influential airlines operating today.

Plenty remains at stake for the carrier, not least with rising fuel prices, but Norwegian is at the heart of many of the airline industry's biggest themes.

Many, both rivals and potential copycats, will be watching its progress closely during 2017.

That is already evident with the announcement from SAS that it plans to obtain a new air operator's certificate in Ireland and establish bases in London and Spain. This follows the December 2016 approval, after much wrangling and delays, of Norwegian's controversial application to operate US flights through its Irish subsidiary.

Likewise, network carriers are already taking steps to response as Norwegian has become the first European operator to establish itself in the low-cost long-haul market across the Atlantic.

And while Norwegian's transatlantic growth has been driven thus far by its Boeing 787s, it will be the first to avail of the economic performance offered by the US manufacturer's re-engined 737 Max narrowbody on transatlantic routes. It plans to launch services with its first example this summer. Indeed, it may yet be the first to deploy the type at all.

Additionally, Norwegian is in the final stages of a much-talked-about interline agreement with low-cost rival Ryanair – which would be first such deal for the Irish airline, if it is confirmed before a similar agreement being worked on with compatriot carrier Aer Lingus. Ryanair's commercial chief David O'Brien in January said it was working on the technical elements of a deal with Norwegian.

EXPANDING MODEL

Norwegian had already unveiled its intention to go long-haul by ordering 787s before its head-turning announcement in early 2012 that it planned to purchase 222 new aircraft – predominantly a mix of re-engined Airbus and Boeing narrowbodies. Thus was the scope of its ambitions signalled.

And while many sceptics believed it would be a stuck in a fight to the death with SAS for Nordic supremacy, Norwegian has steadily expanded its influence beyond its natural home markets. FlightGlobal schedules show that it is, for example, now the third-biggest airline – and largest overseas operator – at London Gatwick in terms of seat capacity, serving around 25 destinations.

Those Gatwick flights includes eight transatlantic destinations – with more to follow this year. And it is in the low-cost long-haul sector – aided by benign oil prices – that the airline has so far defied the sceptics. It now operates more than 30 routes from five points in Europe to the USA and Puerto Rico – often from secondary airports.

Norwegian transatlantic routes: February 2017

Source: FlightMaps Analytics

And it is Norwegian, together with the likes of WestJet from the North American side, which is prompting a rethink from the transatlantic incumbents.

British Airways has responded to those threats. Last year it relaunched flights from Gatwick to New York JFK, and it has said that in 2017 it will begin flights from Gatwick to Fort Lauderdale and Oakland.

"I've always pointed out that our response to Norwegian will be a competitive response," said Willie Walsh, boss of BA parent IAG, at a Washington event in November. "We've watched with interest what they've done. We've been fascinated to see the consumer reaction to what Norwegian has done with the product, and it's clear to us that there's a good market there, so we're responding."

The airline is to introduce 10-abreast seating on 25 777s, increasing the economy-class cabin from 216 to 252 seats. While trimming its business-class cabin from 40 to 32 seats, it will also double the premium-economy cabin to 48 seats.

"We're now seeing consumers who are prepared to get on board a transatlantic flight without a guaranteed seat," says Walsh. "These are things that 10 years ago we would have said were impossible."

A further battleground will also open up in Barcelona. Norwegian will begin its first transatlantic operations from the Spanish airport this summer, but IAG in December outlined its own plan to launch long-haul operations out of Vueling's Barcelona stronghold in June. IAG has not detailed the plan – which could be linked to its low-cost operations Iberia Express or Vueling – beyond describing it as a "next generation" operation, potentially serving destinations in North and South America as well as Asia.

Source: Flight Ascend Consultancy

US carriers have likewise reacted to long-haul LCCs. Their response has been revenue-focused: Delta Air Lines began testing its no-frills basic economy fare in 50 international markets last summer and is planning to roll it out as part of a larger cabin segmentation initiative by 2018.

However, they too are evaluating their product in response to the influx of Norwegian and other carriers. Delta president Glen Hauenstein said in October that it was looking at the "entire service offering and ensure that we're supplying what the market wants to buy".

Hauenstein noted: "The transatlantic has some of the most unique competitive dynamics."

American Airlines and United Airlines plan to roll out their own no-frills fares this year.

TAKING IT TO THE MAX

Norwegian will also hope to create fresh options when it debuts the Max on transatlantic routes as early as June this year, potentially as launch operator of the re-engined 737 – it is currently vying for that status with Southwest Airlines.

"You have the same seat pitch with the new seats on the Max – just about – as we have on the Dreamliner," said Norwegian chief executive Bjorn Kjos last year. "You need a little bit more if you fly 13-14 hours, that's obvious, but six to seven hours, that's no problem."

Kjos notes that the Max can be operated at a "really, really low cost, even lower cost than the [787 Dreamliner] per seat". He points out that Norwegian already operates relatively long flights with narrowbodies, such as the Oslo-Dubai route, successfully.

The carrier plans to begin flights to New England from points in Ireland and the UK a month after it takes delivery of its first Max 8 in May. It is scheduled to take delivery of six Max 8s this year, and will base at least four in the Boston and New York areas.

Norwegian is thus in line to be not only a pioneer of the new type, but at the forefront of single-aisle transatlantic operations. The likes of Aer Lingus and JetBlue have indicated interest in using the next-generation narrowbodies for transatlantic operations while Azores Airlines last autumn ordered a pair of Airbus A321neos and is acquiring four examples of the same aircraft's long-range variant as part of a fleet modernisation programme.

The Portuguese carrier is to operate the two A321neos on transatlantic routes until 2019, when it will exchange them for four long-range versions of the A321neo. Icelandic low-cost operation Wow Air, with its much shorter stage lengths to the USA, is meanwhile set to add its first A320neos this spring.

OVERSEAS MODE

In developing its transatlantic operations, Norwegian has also found itself at the centre of another key industry issue. Its application to operate US routes through an Irish subsidiary prompted calls to block the move from US majors and, in particular, unions, ostensibly concerned that the move was a way of circumventing labour rules – and costs. This led to lengthy deadlock.

Three years after Norwegian Air International's application for a foreign air carrier permit, US regulators approved it in the last days of the Obama administration in December. The decision means Irish-based NAI can launch low-cost transatlantic service to the USA. Norwegian itself already operates long-haul US flights, but says NAI will be able to utilise EU traffic rights.

"Regardless of our appreciation of the public policy arguments raised by opponents, we have been advised that the law and our bilateral obligations leave us no avenue to reject this application," the US Department of Transportation noted in its final order.

Whether that is the end of the matter remains to be seen. Emboldened by the "America first" rhetoric of the new Trump administration, US unions have called on the White House to overturn the decision on NAI. That decision became effective on 29 January.

Assuming its approval remains intact, other carriers could react with moves of their own. Notably, Norwegian's local rival SAS has already done so. At the start of February SAS announced plans for a new AOC in Ireland and to establish bases in London and Spain, to cut costs and reinforce its position in the leisure market. These new operations will start in the winter of 2017-18.

The company says they will "complement" its current services, but is taking the step to ensure it has the "same preconditions" as other market participants, and to reduce differential costs. While airports are not specified, London and Spain are both markets in which Norwegian is present.

LEASING MOVES

Since doing its bit to inflate the backlogs at Boeing and Airbus, the airline has sought to acquire the flexibility to scale its capacity such that it matches demand. Norwegian's efforts in this direction have put it in the vanguard of yet another industry trend: like AirAsia and Lion Air, it now has its own leasing arm. Arctic Aviation Assets in December took delivery of the first of the 70 A320neos Norwegian has on order. It is leasing the Neo, plus a further 11, to Hong Kong Express.

In what could be construed either as damning dismissal or as backhanded compliment, leasing-industry luminary Steven Udvar-Hazy was last month moved to dismiss the emergence of airline-related players in the sector as "a fad from 2014 that has died down". Speaking at the Airline Economics Growth Frontiers conference in Dublin, the Air Lease executive chairman declared: "Airlines are better at running airlines and we are better at leasing."

Udvar-Hazy believes the new entrants will struggle to access funding, and that airlines will prove reluctant to lease from a competitor.

One option could be to follow the path of AirAsia, which is hoping to close the sale of its leasing arm, Asia Aviation Capital, by the second quarter of the year.

For its part, Lion Group founder Rusdi Kirana told FlightGlobal in January that the key role of Transportation Partners was to aid the group with its aircraft financing, and it had no plans to sell it off, nor to expand its third-party leasing business.

"In my opinion, a leasing company is good when you have a variety of customers to minimise the risk on the portfolio. I don't think I want to do that. I just want to focus on my airlines, and let Transportation Partners support us," says Kirana.

ACQUISITION TARGET?

For all its influence, Norwegian has so far delivered relatively modest profits. Profits were up at the nine-month stage and another surplus this year would mean it has been in the black for seven of the last eight years. But cumulative net profits over the seven years to 2015 stand at $119 million.

"Norwegian's profits have been extremely seasonal since they started long-haul operation, much more so than IAG," notes Flight Ascend Consultancy's Richard Evans. "Ryanair is also highly seasonal, but with consistent small profits in the winter, against losses for Norwegian. SAS has made improvements, and has been profitable in the winter – helped by lower fuel prices.

"Norwegian Air International has the lowest fuel burn per RPK across the Atlantic, but appears to have structurally lower yields too, so could be vulnerable to higher fuel prices to some extent," he adds. "It is unclear what level of fuel hedging Norwegian has, and unit costs have been impacted by the fall in the Norwegian krone since 2014 too."

Snapshot: quarterly operating margins Norwegian and rivals

Source: Flight Ascend Consultancy

Yet investment in its market positioning, young fleet and early delivery slots make it regularly talked about as an attractive acquisition target – both in terms of removing a competitor and adding a carrier with strong assets. Flight Fleets Analyzer shows that Norwegian has a fleet of 68 aircraft today – including 11 Dreamliners. But it has a further 22 787s, over a hundred Boeing Max jets and almost 90 Airbus narrowbodies on order.

Thus far European airline consolidation has been driven by a mix of strategic moves and distressed acquisitions. Current conditions point to there being more of the latter on the market this year, making any move for Norwegian likely to be a strategic one.

Norwegian could be a fit for UK operator EasyJet – which, in addition to having a large presence at Gatwick, is in the market for a European air operator's certificate. Ryanair has shown limited interest on growth by acquisition since buying Buzz, but Norwegian could be jump-start the long-haul operation of which Michael O'Leary has long talked. BA parent IAG, which already has one low-cost operation in Vueling and a remit to grow, perhaps could be tempted.

Asked of possible interest last year, in an interview with FlightGlobal, IAG boss Walsh said he was unclear where Norwegian was going. "It could well be that they are trying to make themselves attractive for an acquisition but Bjorn [Kjos] shows no evidence of slowing down or wanting to move out."

The airline's progress – and the key issues developing around it – will as 2017 develops likely make the endgame much clearer. But however it develops, Norwegian seems certain to remain an industry disruptor.