Amid expectations for opportunities to arise from the anticipated round of airline consolidations and collapses, European low-cost operator Norwegian is one carrier which has already rapidly reacted to exploit the demise of neighbouring Sterling at Copenhagen.
Norwegian chief executive Bjorn Kjos acknowledges the timing of its Copenhagen move has come sooner than he might have planned, given the carrier only now appears to have got its Swedish operation where it wants it. But he notes when an opportunity arises, "you have to grab it".
For Norwegian the opportunity emerged following the collapse of Danish budget carrier Sterling in October. Norwegian, which already had a codeshare in place on some flights with Sterling, quickly swooped.
"When Sterling went bust, first of all we had to look after the passengers on the codeshare routes from Sterling," explains Kjos. "After that, there were obviously a lot of opportunities for grabbing a new market."
Within days of Sterling's failure Norwegian had launched flights from Copenhagen to Aalborg, Nice, Alicante and Malaga, to add to its existing Oslo and Stockholm flights. It has since firmed plans for a dozen more routes and to base six Boeing 737s at the Danish airport from next March.
 |
|---|
©Billypix |
It marks further expansion and development on a growth path which has already seen the Oslo-based operation transformed from a small regional carrier into one of Europe's largest low-cost airlines, with commitments in place to operate an all-Boeing 737-800 fleet of at least 53 aircraft within the next five years.
Overseeing this transformation has been former air force pilot, Kjos. He has been involved since buying into a revamped Norwegian Air Shuttle in 1993 when the carrier began operating Fokker 50s under contract for Braathens. But the defining moment in Norwegian's recent history came nearly a decade later when in 2002 its contract work ended after Braathens was acquired by SAS.
"We had either to close down or start a competitive business," recalls Kjos, who returned to the carrier in 2002 first as chairman then as chief executive to oversee its relaunch. "So we closed down our Fokker 50 operation and started all over again. Of course we didn't have any sales system and so had to start building everything from scratch. We started to build up in April and May 2002 and launched flights in September."
It launched with four Boeing 737-300s on high frequency domestic routes from Oslo Gardermoen to Stavanger, Bergen, Trondheim and Tromso under the newly created Norwegian budget brand. But it quickly had to grow to survive amid stiff competition.
"We had to lower the costs and the only way to do that was to get more passengers onto the planes. We knew to get the costs down considerably we had to expand. So we couldn't take any strategy other than to grow and to grow fast in order to not be taken out of the market," he says.
"We managed to drive down the costs and that's what we have been doing ever since then and it's always been a matter of cost principle for us. If we can't drive down the cost, we won't expand any more."
It has since expanded from carrying 1.1 million in its first full year as Norwegian to 6.4 million last year and is on track to carry around 7.5 million for 2008. This growth has already seen Norwegian expand with operations into Poland and Sweden, though it has taken longer than it first expected for these developments to find their feet.
In 2005 the carrier moved to take advantage of the growing travel requirements of the Polish labour market which followed the country's entry into the European Union.
"What we saw were the labour movements across Europe, particularly in Poland, and in order to have access to that we had to have Polish costs and that's why we set up a Polish base. A lot of those Poles were flying into Scandinavia, and that was our main target."
It now serves five cities in Poland and this year based a third Boeing 737 at Warsaw, from where it provides links to a number of holiday destinations in addition to Scandinavia.
The Polish operation recorded a small net profit last year and the carrier's guidance is for it to develop satisfactorily. "The Polish [operation] is gradually doing better and better, even though they have faced difficult times in Poland over the last half year," says Kjos, referring to the impact on the jobs market from the economic slowdown across Europe.
Norwegian's move into Sweden followed its acquisition of budget operation FlyNordic in 2007 from Finnair, in a deal which also saw the latter become a small shareholder in Norwegian Air Shuttle. Finnair holds a 5% stake in the airline, part of around two-thirds of Norwegian that is listed and held by private investors. The remaining stake is held by companies controlled by Kjos.
"It was a lot of challenge," says Kjos of integrating FlyNordic, which has since been rebranded Norwegian.se. "First of all you have to migrate it to a unified booking system, because they were on a separate system. So that was a lot of work. Secondly they were flying MD-80s, and we have a high utilisation on our fleet, and we learned the hard way you cannot utilise the MD-80s like you can the 737s. There is much less utilisation capacity because the technical cost will rise tremendously if you have a high utilisation.
"We had to do some drastic turnarounds. First of all the equipment was not fit to apply in the low-cost operation and we also had to turn round its flying schedule, it wasn't a very good fit for flying business passengers.
"It is still a loss," Kjos says - the company's Swedish operations recorded an operating loss of NKr48.1 million ($6.9 million) in the third quarter. "It will be profitable in 2009 but then we have turned it around completely," he adds. Restructuring measures have included pulling back and refocusing its Swedish capacity, as well as replacing some of the MD-80s.
"We have gradually been increasing the domestic operation in Sweden," Kjos explains. "When the fuel prices hit us all at the start of the second quarter we saw there were a lot of routes that couldn't take the fuel surcharges and we went out of many of the routes that didn't take those surcharges, also to get access to production that we could use in better ways in Scandinavia."
It cut capacity on routes such as Madrid, Paris and London, generating enough capacity to launch three new business destinations in Norway.
"We also decided to phase out the MD-80s earlier than we had anticipated. When we bought the Swedish operation we had a contract that we should redeliver those aircraft in late 2009, but we saw with the high fuel consumption and technical expenses of MD-80s, we decided to phase these out earlier. We have redelivered half of that fleet, but when we started up Copenhagen we needed the rest of them. We had four left and we needed them to start up Copenhagen, that's why we decided to keep them until September."
Now Kjos believes its Stockholm operation is in the right shape, the carrier finds itself expanding again with the Copenhagen move. But its experience in taking on FlyNordic certainly informed its approach on the Danish opportunity.
"It is much easier to start on your own from scratch, that's why we never bought Sterling," he says. "We were watching the whole thing and we were offered to purchase it at a price that seemed interesting to many, but we have learned the hard way that purchasing an airline is a long story.
"Especially for us, if you have a high utilisation, a well-trimmed fleet and workforce, it's very tough to take over a new entity because in order to have it run as we feel it should be run, you have to turn it around, [have] the same booking platform, the same schedule system and the same high utilisation," he says.
One reason Norwegian was able to react flexibly to the Copenhagen opportunity was that it had already taken out of service some of the MD-80s in preparation of re-delivering the aircraft. Consequently it was able to rapidly find capacity to redeploy for the start of Copenhagen flights, though Kjos indicates it will probably require some additional capacity in addition to the 737-800s already due to replace its MD-80s next year.
The carrier will grow from the six routes already operated out of Copenhagen to 18 by next May. These include flights to London Gatwick, Amsterdam, Budapest, Edinburgh, Faro, Heraklion, Paris Orly, Palma de Mallorca, Prague, Pisa and Split. It is also plans future Copenhagen flights to destinations such as Rome and Barcelona.
But it is not alone in seeking to exploit the gap in the market. Dutch carrier Transavia also swiftly moved into the space. Seeing an opportunity it is targeting leisure destinations out of Copenhagen and is basing two aircraft at the Danish airport from December to provide scheduled flights on 10 routes. EasyJet is also starting a Gatwick-Copenhagen service from January, on which Norwegian will compete when it launches its flights in March, while SAS and its Spanair operation are also adding routes and frequencies. Indeed, the airport operator noted plans for 159 frequencies in total were added within two weeks of Sterling's demise.
"It is a natural home market for us - we had already served it from Stockholm and Oslo," says Kjos. "In order to compete in these markets you have to be strong on your home markets. That was essential for us to build up a strong home base." Copenhagen provides Norwegian with a presence at key airports in all three Scandinavian capitals - mirroring the position of long-established rival SAS.
The strong domestic network provides key feeder traffic into Norwegian's intra-Scandinavian and international routes. "So you have to have high frequenciesyou have to get up to seven or eight a day," he says. The sudden demise of Sterling and the hole it left for Copenhagen Airport helped provide an eased opportunity to gain access to key peak time slots at the Danish airport.
"In Scandinavia it is hard to get interesting slot times. Most of the airports have a lot of restrictions in the peak times," Kjos says. "It was much easier for us to build up the needed frequencies. We are still in the process of building up. We have to have more frequencies and we will add them," he says, adding he expects the Copenhagen operation to be profitable in 2009.
As the line between budget and network carriers becomes increasingly blurred, Norwegian certainly has a foot in either camp. While it is set up as a low-cost carrier, with a concentration on keeping its costs low, a simple fares structure and single-class configuration aircraft, it has many of the trappings of full-service carriers. Its focus on high frequency routes to main airports is designed to attract business travel it operates its own Reward frequent flyer scheme and it distributes through the global distribution services and was launch customer for the Amadeus low-cost carrier platform Pioneer.
Similarly Norwegian's moves into the telecommunications and banking sector (see box story), through its wholly-owned Call Norwegian subsidiary and its 20% stake in Bank Norwegian have the dual aims of meeting higher service expectations and boosting ancillary revenues.
Both projects aim to leverage the brand and existing customer base of Norwegian. In the case of Bank Norwegian, it establishes the carrier with a loyalty programme - cash points with the carrier's Rewards programme are accrued on credit card spending - while Call Norwegian aims to deliver both a door-to-door online connection via mobile devices for its passengers and develop revenues from the onboard connectivity.
Kjos sees the airline largely in competition with SAS, rather than budget carrier Ryanair, which operates from secondary airports in the Scandinavian countries.
"Ryanair is a very tough competitor and we will never be able to reach the costs of Ryanair - even with the decrease in costs from the new 737-800s - because we fly to the main airports. But they are not our main competitor. Our strategy is high frequency on main airports, particularly in Scandinavia."
In line with cutting its costs the carrier in 2007 committed to replacing its fleet of 28 Boeing 737-300s and the remaining ex-FlyNordic MD-80s with Boeing 737-800s. The carrier in 2007 struck a deal to lease 11 of the type and placed an order for 42 more with Boeing for delivery from next year until 2014. The order includes purchase rights for another 42 of the type.
Amid global concerns about the rising cost of lending following the credit crisis, Kjos points out Norwegian already has pre-delivery payments in place on the first 10 aircraft due for delivery from June next year running into early 2010.
"If we hadn't done the restructuring we have today and done the financing on the first 10 aircraft, that would have been a worry," notes Kjos. The remainder of the financing of these aircraft is provisionally provided by US Ex-Im bank guarantees.
But Kjos says it has its own substantial cash position, bolstered by completion of a NKr400 million rights issue earlier this year. And while ready for tougher times ahead, Kjos believes Norwegian is reaping the benefits of earlier restructuring work this year.
"We renegotiated long-term contracts with our suppliers in order to reduce the costs. We managed to reduce costs 16% excluding fuel in the third quarter. We managed to offset the increase in fuel costs with the lowering of costs in all other areas.
"In the third quarter we had our strongest quarter ever and in October we recorded traffic much stronger than last year. The credit crunch will hit Norwegian as it will hit everyone else and you have to anticipate it. [But] we have been much better set to meet the credit crunch that followed," he says.
The carrier, which recorded a net profit of NKr84.6 million in 2007, boosted revenue 48% in the third quarter to NKr1.97 billion and net profits for the period grew to NKr414.4 million from NKr76.3 million over the same period last year. Net profits at the nine month stage are running ahead of the same stage last year at NKr141.5 million.
"Everyone anticipates tougher times in 2009, but we will have a lower cost because of the oil price drop," Kjos adds. The airline, which has only a small amount of hedging in place, expects its fuel bill to be far lower than the tumultuous levels endured last year. Kjos also believes the airline is benefiting from some trading down of business travellers from rival SAS.
"We have seen that a lot of companies that have been booking business class have traded down and you see some of the very low yield traffic dropping out," says Kjos. "Probably one of the reasons we have not been so hard hit is we have been getting it from above and losing it from below.
"From what we are seeing so far, we will have sustainable demand for 2009. It will be dropping, but we have been able to drive our costs down and we should be able to keep our results profitable in 2009. There are a lot of opportunities, you have to grab them. But you have to stay lean and mean. If you can keep down the costs you will really be able to have good margins for the future."
Despite Michael O'Leary's long-term predictions that consolidation in the European airline sector will ultimately leave room for only one large budget operator, Kjos - at least for the foreseeable future - sees a standalone future for Norwegian.
"For the time being we are very happy to be alone. We have been profitable for the last three years and anticipate to stay profitable in the future. We don't need to team up with anybody."
"It's always been a matter of cost principle for us. If we can't drive down the cost, we won't expand any more"
Phoning ahead
Like other carriers, Norwegian has signalled its interest in providing web and mobile phone access onboard. But rather than simply acquiring a product, it has established its own telecoms subsidiary Call Norwegian to develop services across a passenger's journey. "We don't develop it [the technology] ourselves, but we help put it together," explains Kjos. "You have to be very advanced technologically. It's quite essential that you have a set-up for business people. They have to be able to go direct to gate." Kjos enthusiastically demonstrates how passengers can book their ticket and check in using the connectivity on their mobile phone. It aims to expand this connectivity to the onboard environment in 2009.
At the same time as meeting the expectations of business passengers, Kjos sees the venture as boosting key ancillary revenues, both in terms of revenues for the onboard connectivity services and future advertising opportunities from the strong customer base. The carrier expects continued strong growth in its ancillary revenues, which nearly doubled per passenger year-on-year in the third quarter.
Norwegian's famous fleet
Norwegian's fleet of aircraft includes distinctive tail fins representing some of Norway's most famous figures. This Boeing 737-800 features a tail fin celebrating the life of Norwegian composer Edvard Grieg and is one of 15 aircraft adorned with some of Norway's most celebrated names. Other famous Norwegians featured on tail fins in the airline's fleet include explorers Fridtjof Nansen, Roald Amundsen and Thor Heyerdahl aviation pioneer Gidsken Jakobsen 19th century playwright Henrik Ibsen painter Edvard Munch and figure skater and actress Sonia Henie.
Storyteller
Bjorn Kjos' career certainly has not lacked variety. Aside from being an airline chief executive, Kjos has been a fighter pilot, is a partner in a law firm and most recently an author. Kjos published a spy novel in 2007. The Murmansk Affair is set in the 1970s around the Russian border town of Murmansk. He was able to draw upon his own experience as a fighter pilot in Norway's air force during that period, where he served for six years. Despite this early connection with aviation, Kjos describes his entry into the airline industry as "accidental", having embarked on a law career. It was 1993 when he was convinced to invest in the relaunched Norwegian Air Shuttle, serving as chairman until 1996. He took the chairman's role on again in June 2002 during its transition into a budget carrier, before becoming chief executive in October that year. He has since been on a leave of absence from law firm Vogt and Wiig, where he is a partner.
For more on Norwegian, read our web chief executive interview with Kjos at flight global.com/lccreports
Source: Airline Business