02-Feb-2012 5:30 PM

Norwegian's orders make it a candidate for first LCC to join a global alliance - or a Gulf carrier

Analysis

In a distorted and fast changing airline world where partnerships and mergers are key to future survival, Nordic LCC, Norwegian is fast making itself one of the most attractive unattached propositions in the market.

Norwegian's steady move towards becoming a long-haul Boeing 787 operator, alongside a growing European short-haul distribution system, promises to make it a serious low-cost network airline. The carrier's recent deal to lock in access to a large fleet of 222 fuel-efficient short-haul aircraft over the second half of the decade (and at opportunistic prices) will transform a successful local LCC into a global force.

The order announcement therefore does a lot more than promise a bigger airline. Its potentially strong position now propels it into a new sphere where it becomes a candidate to be the first LCC member of one of the big three global alliances - until now the exclusive realm of legacy network airlines.

Summary

Norwegian's recent deal to acquire 222 fuel-efficient short-haul aircraft will transform it into a global force and potentially make it the first low-cost carrier (LCC) member of a major global alliance.
The order announcement puts pressure on Scandinavian flag carrier SAS, making it harder for potential buyers to acquire the struggling airline.
Norwegian's move towards becoming a long-haul operator, alongside its growing European short-haul network, positions it as a serious low-cost network airline.
Norwegian's expansion and success in the Nordic markets have made it a significant force to be reckoned with, signaling a warning to other LCCs eyeing the region.
As Norwegian enters the long-haul market, it faces challenges from incumbent network airlines that have the advantage of established hubs and global alliances.
Potential partnerships with Gulf airlines or Chinese carriers could create a formidable competitor against European hub carriers and provide unrestricted access to the German and French markets.

For Norwegian, standing still is not an option

Norwegian has been Europe's most successful and highest growth airline over recent years. Aggressively expanding in the Nordic markets and across Europe, helped along by the failure of Denmark's Sterling Airlines, the carrier has a low-cost base and a strategy that recognises standing still is not an option. It is also the first organically grown European LCC to plot a course to becoming a long-haul airline too, connecting traffic into its fast expanding European short-haul network, between Asia and the US East coast.

Norwegian order sounds a warning to SAS, but also to would-be LCC intruders

Much has been made of the fact that the Jan-2012 order (for 222 Boeing and Airbus single-aisle aircraft, along with another 150 options) sends a massive shot across SAS' bows. Norwegian's action will certainly make any prospective buyer think that much harder about acquiring a position in the Scandinavian flag carrier, which would in turn also influence SAS' planning - and funding - options.

But, for Norwegian, this is more than serious poker posturing. SAS has been very effective in reducing its costs over the past couple of years, essential moves but also undoubtedly designed to make itself more attractive to any potential suitor. Lufthansa has baulked at another purchase - probably more than just a negotiating tactic - and it is hard to conceive any other airline buyer emerging now. SAS has exhausted all of the easier cost reduction measures and, despite sustaining some strength in yields, the airline still remains dangerously close to the brink.

As a result, SAS as a competitor is becoming very much a known quantity for Norwegian. Even if the legacy carrier does find new ways of reinventing itself (and it too has 30 Airbus A320 neos on order), its unions are beginning to show signs of the sort of terminal behaviour consistent with a belief that they have nothing further to lose. That is not a good position to be in, with Europe's economy - even regardless of short-term catastrophes - promising a subdued consumer growth profile for at least two years.

The departure of SAS would give Norwegian a much bigger free kick even than the 2008 demise of Sterling, after its Icelandic backers failed. But with Norwegian's new order that may become merely a sideshow. The carrier has now moved up a few flight levels, regardless of competition.

Perhaps more importantly, for other would-be entrants into the northern markets, Norwegian is signalling that it has become a much bigger force to be reckoned with. Several other LCCs like easyJet and Ryanair have seen the potential of Nordic markets, where traffic recently has held up reasonably well. As beleaguered SAS becomes more defensive, so the challengers circled, looking for opportunities.

Norwegian's evolution to a low-cost network airline: 'A price revolution is coming to long-haul flying'

The first of the new narrowbody aircraft orders will not be arriving for another four years and many will be replacements. By that time the airline's Boeing 787s should be feeding long-haul traffic in from Asia and North America, as the strategy increasingly embraces a network operation. An influx of new fuel-efficient short-haul aircraft greatly improves its position to distribute that traffic across Europe.

Norwegian has five 787s due to arrive in the next couple of years. In 2010, the carrier contracted with ILFC to take two 787s. They were originally due to arrive in 4Q2011. A further three were subsequently picked up from the order book of hard-up Icelandair in mid-2011. CEO Bjorn Kjos is keen to have more of either the 787 or the competition's A350s. When, according to Mr Kjos, they save 23 tonnes of fuel on an Oslo-Asian round-trip, the seeds are sown for a new generation of long-haul tourism - a "price revolution" is coming.

The market savvy CEO will have made both manufacturers well aware of the upside potential for 787 and A350 sales to Norwegian, a feature that will have translated to an even better deal for the A320 neos and 737MAXs.

As Norwegian moves into the long-haul market and takes on the appearance of a low-cost network airline, several things happen. First it gets into the big league, where the incumbent network airlines have the benefit of longer established hubs, well known global brands and market awareness.

Norwegian runs up against the might of the global alliances

Secondly, those competitors are almost all members of global alliances, something that gives them enormous leverage. The mutual marketing and traffic feed (along with joint Frequent Flyer Programmes and other cooperative activities) is starting to make them well-nigh invulnerable on long haul network operations.

The advantages of alliance members are especially enhanced in the cases where partners have been granted "metal neutral" anti-trust immunity, allowing them to operate effectively as a single airline, sharing capacity and pricing information and marketing and selling jointly.

For example, in Norwegian's immediate vicinity, two carriers, Finnair and SAS, gain great strength from their membership in oneworld and Star Alliance, respectively. Even though Finnair owns a 5% share of Norwegian, a legacy of the LCC's purchase of FlyNordic from Finnair, there will be no rush on the Finnish flag carrier's side to welcome Norwegian into oneworld.

By a simple process of exclusion that would suggest SkyTeam will be most interested in forging the first bridge between global alliances and LCCs. But the turbulence of the present market makes for much less predictable outcomes - and KLM, now becoming well-embedded with its Chinese SkyTeam partners, may also share some concerns at Norwegian's effect on its own best interests.

And Norwegian would be an almost perfect fit with Emirates, Etihad or Qatar Airways

But against that, the danger that the increasingly threatening power of Norwegian would fall into enemy hands also makes for a strategic dilemma for Europe's big three.

Meanwhile of course there are at least two - and perhaps three - airlines in the Gulf which would see potentially valuable synergies from a closer tie-up. Etihad has already staked its claim in northern Europe with its ownership in airberlin, so may be a less likely partner.

A highly efficient northern loop across the north Pole would be symmetrically beautiful with their around-the-middle operations, allowing a complementary north Asia-to-northern Europe partnership.

For the Gulf airliness, a combination with Norwegian could make for a fearsome competitor against the European hub carriers. They are finding it increasingly hard to access the tightly held German and French markets and there would be enormous attraction in gaining the unrestricted back door access that Norwegian could offer. (Although Norway is not a member of the EU, its membership of the European Free Trade Agreement (EFTA) and the European Economic Area (EEA) gives Norwegian effectively the same access as any another EU carrier.)

And, for that matter, an increasingly acquisitive Chinese airline industry may also find attractions....

An attractive proposition with a holistic airline supply chain

The next few years will almost certainly see significant changes in the ownership pie below. Although Mr Kjos remains the largest shareholder, Norwegian is not a small orphan either.

Norwegian Air Shuttle Group ownership structure

It is progressively embedding itself as an all-round player. The Norwegian Air Shuttle ASA Group, embraces a number of airline-related companies.

These include wholly-owned subsidiaries Norwegian Air Shuttle Polska (which does not operate independently, but has supplied crew and administrative services to the Group) and Norwegian Air Shuttle Sweden AB (also supplies crew and provides technical service).

Norwegian Air Shuttle ASA (NAS) also wholly owns communication services company Call Norwegian AS, which provides mobile and content services, mobile broadband, airport Wi-Fi and Voip - hence one of the highly popular features of Norwegian is free in-flight Wi-Fi and calls on its Boeing 737-800 fleet.

The group also owns all but 0.1% of NAS Asset Management (wholly-owned NAS Asset Management Norway AS owns that tiny share), an Irish based company established for aircraft financing purposes, as is the Norwegian company and 20% of Norwegian Finans Holding ASA (Bank Norwegian AS). Bank Norwegian offers online banking services in Norway, including credit card facilities to Norwegian passengers.

Norwegian Air Shuttle Group holdings

Asia the target - and Europe the market

Norwegian has the wherewithal to go it alone - or at least the share market appears to believe that - but this new order is of such magnitude and its behaviour of such aggression that prospective partners will undoubtedly be making their interest known in the near future.

With the cost base and dedication to low-cost principles that Norwegian is following, there is every indication that the airline is set to ruffle more than neighbouring SAS's feathers.

As a low-cost network airline, operating as it will be with the world's most efficient fleet, Mr Kjos may be generating a revolution in more than simply pricing.