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July 17, 2024
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The airline business is competitive – more so than most other types of business.  It is also a complex business because its reach is global.  The airlines that have dominated the industry so far tended to be network, or legacy, carriers.  In some markets, where traffic volumes allowed it, low cost carriers (LCCs) managed to plant roots and thrive.

An early pioneer of low cost long-haul travel was Sir Freddie Laker’s Skytrain.  It was a brilliant idea.  Then came People’s Express.  Both failed.  The complexity of connecting people to fly across the North Atlantic worked if you lived in or near the two points being served.  Moreover, the ability to market tickets to travelers was difficult – you depended on travel agents.  They wanted a commission to make the deals, and LCCs didn’t have the margin to afford this sales channel. Today we have the Internet and the typical travel agent has been dis-intermediated.  Booking systems like the GDS’ are not critical.  An airline can distribute its products effectively from its own website.

The idea of low cost long haul has not gone away.  We have Air Asia X trying it in Asia.  We also have Norwegian trying the North Atlantic.  As with all long-haul flights it’s the feed and distribution that is tough.  Air Asia X has its in house feed, so does Norwegian.   But Norwegian is going one step further, it is doing feed deals with other LCCs.  CNN reported on Norwegian’s deal with Ryanair.  Ryanair has been interested in long-haul service for a long time.  The Norwegian deal allows them to experiment without buying additional aircraft (with associated capital expenditure and operational complications).  EasyJet is reported as next on the deal list.  Even without these feed deals, Norwegian was already disrupting the market.

Norwegian is going to base some UK-registered aircraft in the US at Providence (near Boston) and Stewart (near NYC).  These aircraft will fly Trans Atlantic flights.  The Ryanair deal provides feed and distribution in the EU for Norwegian.  Almost certainly Norwegian is going to look for a similar deals in the US.  The simple chart shows what this might look like.

As we have seen, Norwegian is not going to make its EU LCC feed exclusive.  It could therefore do similar deals in the US with US-based LCCs.

Let’s look at the market.  We have three sources providing some view on the traffic between the EU and the US.  The following chart is based on data from AEA.  The trend as shown by the dashed trend lines.   The market has seen steady growth – through all sorts of disruptive events. Taking a simple trend line out to 2020, barring any exogenous shocks, the market looks like offering steady growth.

The consistent growth looks to offer Norwegian a stable platform on which to build its business.  The impact of Norwegian on the market has been apparent since 2016.  As CAPA stated, by September 2016, Norwegian was busy with an ambitious Trans Atlantic expansion plan and had carried three million passengers between Europe and the US since 2013. This was despite its market access being limited by the US DoT.

A second source is eurostat which produced this chart showing the EU origin air traffic for 2015.  According to them, North America attracted nearly one in five European air travelers.

A third source that counts travel between the US and Europe is the US Department of Commerce.  For 2015 they state there were 12.6m US residents who traveled to Europe.   For 2015, the Commerce Department estimates there were 14.8m West European arrivals.  Using Commerce Department data, we estimate the 2015 Trans Atlantic market was 27.4m air travelers.

Using the Commerce Department 2015 data, a 1% market share is 278,000 passengers.  A 787 with 291 seats at 80% load factor operating for 360 days generates 83,800 seats.  Norwegian has a dozen 787s and another 32 on order (Norwegian’s 787-8 have 291 seats and its 787-9 have 344 seats). Those dozen 787s, operating on the North Atlantic generate over 250,000 seats annually.  This is close to 1% of the 2015 market.

Current Ryanair and easyJet customers flying across the North Atlantic travel on legacy airlines.  If Norwegian’s strategy with these two LCCs works, this could lead to a 1:1 conversion to Norwegian.  Norwegian has another 100 737 MAX8s on order as well.  These 737s are to be used between the US east coast and Ireland and Scotland.  Norwegian is going to rapidly add seats to this market.  It will draw traffic, especially when there is talk of $75 one way. That number will draw LCC feed on both ends.

A key question is how much of Norwegian’s traffic will be new – like the “Southwest effect”.   CAPA notes: “Well over half of Norwegian’s North Atlantic routes are new to the market, which has been significantly stimulated by its entry.”  So its not entirely a threat to the legacies.  But Norwegian will almost certainly divert traffic.  Which is to say, some airlines are going to get hurt.

Who is going to lose market share?  We would guess this includes the very airlines that reacted so vigorously to Norwegian’s entry to the market: American, Delta and United.   The big EU legacies are not immune either. Can Norwegian grab 1% of the market? Certainly.  Add the additional 787s and the 737 MAXs and the Norwegian plan grows even more disruptive.

author avatar
Addison Schonland
Co-Founder AirInsight. My previous life includes stints at Shell South Africa, CIC Research, and PA Consulting. Got bitten by the aviation bug and ended up an Avgeek. Then the data bug got me, making me a curious Avgeek seeking data-driven logic. Also, I appreciate conversations with smart people from whom I learn so much. Summary: I am very fortunate to work with and converse with great people.

1 thought on “Norwegian’s massively disruptive business model

  1. Björn Kjos’ international traffic system for Norwegian Air Shuttle (international divisions NAI and NUK included) resembles a true copy on a low cost plan and for transatlantic services of Jan Carlzon’s GTS (Global Traffic System) established on a Legacy plan in the late 80’ies : SAS, Continental Airlines, Swissair, Austrian Airlines, All Nippon Airlines, LAN Chile, Finnair, Thai … co-operated with feathered schedules for optimum interconnexions (GTS was a vanguard precursor to STAR, OneWorld and SkyTeam alliances). But Jan Carlzon – as Addison points out – was not able to control the distribution strategies of the (SABRE/Galileo/Amadeus/other + or – independant or not) GDS whereas Norwegian & Co today shall have full control through their own internet on-line CRS. So (if not barred by a devastating Trump blocade ?), Kjos stands to succeed where Sir Freddy Laker and Don Burr failed !

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