High Sights for Low-Costs

31 August 2008 (Last Updated August 31st, 2008 18:30)

In an industry struck by soaring fuel prices, some low-cost airlines are being bold, expanding their portfolio of routes. Daniel Skjeldam, chief commercial officer of Norwegian, speaks to Future Airport about embracing structural change and investing in new aircraft.

High Sights for Low-Costs

The highly competitive nature of the low-cost air travel sector is forcing airlines to think creatively and make braver investment decisions in order to fuel further growth. For some carriers, this is already paying dividends in the form of higher passenger numbers and options to increase their number of routes.

"From over five million passengers in 2006, we saw passenger numbers up by 36% in 2007, and we expect further growth in 2008," says Daniel Skjeldam, chief commercial officer of Norwegian, which recently became the largest low-cost airline in Scandinavia.

"Norwegian placed a $3.1bn order for 24 new 737-800s."

Norwegian has a strong appetite for expanding its services to reach new destinations and investing in new aircraft to make more routes viable and improve its efficiency. In 2007, the airline bought FlyNordic from Finnair and has since absorbed the brand. FlyNordic flew 1.2 million passengers in 2006. "The two airlines now operate on common systems, the most important of which is the booking platform for customers," notes Skjeldam.

Norwegian launched low-cost domestic flights between Oslo and Stavanger, Bergen, Trondheim and Tromso in 2002. The following year it added new domestic airports and destinations in Spain and Portugal, as well as routes to London and Stockholm. Five years later it has 130 routes, of which 11 are domestic and 199 international, which it serves with a fleet of 148-seater Boeing 737-300s.

The acquisition of FlyNordic heralded the start of a cooperative relationship between Norwegian and Finnair, opening the door to a huge opportunity to add routes and step further beyond the traditional scope of a low-cost carrier. Norwegian's routes throughout Scandinavia are now linked to Finnair's growing network of destinations across Asia. Finnair can now operate these routes without having to run services from every Nordic destination, while Norwegian can expect more traffic carrying passengers from Asia to Scandinavia.

For Skjeldam, this cooperation is a key strand of Norwegian's development strategy, but he notes that the airline is constantly looking for other opportunities to expand. Nevertheless, for the low-cost sector in particular any expansion must be weighed against the growing pressure on margins.

"We want to grow our existing routes and add new ones, but we have to choose them carefully. Some markets are already saturated, as capacity has started to exceed demand. There are some niche routes that have the capacity for city breaks, but there is definitely pressure on yield," he explains.

"We have good presences in Norway and Sweden, and we also have a good knowledge of the Polish market, but we fly all over Europe. New routes must offer potential for growing demand, so we have to find trends or create them. We must also look at routes where competitors have excessive pricing on a similar route."

"The new aircraft has been recorded as burning 22% less fuel and carbon dioxide than the current 737-800s."

Among the new international routes is a service from Stockholm to Dubai, but Norwegian's presence in Poland could be equally important for its future. Boeing has recently predicted that the expansion of the European Union coupled with the continued prospering of low-cost airlines will lead to higher passenger numbers throughout Europe and CIS.

Airlines such as Norwegian will be keen to make their presence felt in Eastern Europe. At the same time, Norwegian is looking carefully at how to improve efficiency to maintain the profitability that sustains its expansion plans.

"We have been experimenting with red-eye flights this summer to give us better utilisation of our aircraft, but we have to be very careful about scheduling," adds Skjeldam.

The hour of the hybrid

The growth of Norwegian is an interesting example of the success of what Sabre Airline Solutions calls hybrid airlines, which it sees edging out traditional low-cost carriers.

In a study of 540 airlines Sabre observed that while 123 define themselves as low-cost carriers, more than half of these had added complexity to their business models in recent years to the extent that 7% had become full-service airlines and 52% had become hybrid carriers.

Hybrid carriers are those that have incorporated three or more elements of the full-service business model, which Sabre defines as: operating international routes, using a global distribution system, codeshare agreements, connecting services, always offering multiple fares, advanced ticketing services, operating multiple aircraft types, interline agreements or long-haul destinations.

A fleet for the future

One of the characteristics of Norwegian that marks it out as a hybrid airline is that it operates more than one type of aircraft in its fleet. The airline's appetite for expansion has inevitably forced it to re-evaluate what it requires from its aircraft, and the result has been a strategy of major investment in larger, more efficient planes to serve its international destinations. Last year it leased 11 new Boeing 737-800 aircraft in order to expand its route network to more remote destinations, enabling it to launch services to Las Palmas and Tenerife.

Following that, the airline placed a $3.1bn order with Boeing for 42 more of these aircraft, the largest ever order from a Scandinavian carrier, which takes its fleet to over 50 aircraft.

"Blended winglets, which reduce aerodynamic drag on the wing, can reduce fuel consumption and carbon emissions."

Fuel economy

One of the key characteristics of these new aircraft will be their improved fuel economy.

"The real challenge for the industry is the price of fuel, so it is important to focus on fuel-efficient aircraft. Low margin routes are suffering the most because customers won't pay more," observes Skjeldam.

The new 737-800s will all incorporate the advanced technology of blended winglets, which reduce the amount of aerodynamic drag on the wing. This technology alone can reduce fuel consumption and carbon emissions by up to 5%.

For a typical flight the new aircraft has been recorded as burning 22% less fuel and carbon dioxide per passenger than the previous model of 737-800 that Norwegian operates. Furthermore, the new aircraft are more versatile in terms of their performance on short- and long-haul routes.

The creativity and willingness to invest that is epitomised by Norwegian suggests that, despite the challenges that undoubtedly lie ahead, the reach of the world's low-cost air travel network is set to continue expanding, and that competitive pressures are likely to take the hybrid model further.