Norwegian should have a very close look at the fate of Primera, which filed for bankruptcy earlier in the week. Both airlines have a very similar business model and Norwegian can learn a lot, if it wants to avoid the same fate.
Growth For The Sake Of Growth
Primera tried to grow for the sake of growing less than a month before their bankruptcy; they announced 4 new transatlantic routes out of Frankfurt, and a little while before that they announced several transatlantic routes from Madrid. This was an apparent attack on both the big Star Alliance carriers operating out of Frankfurt (Lufthansa and United), and the big Oneworld players operating out of Madrid (BA, AA, and Iberia).
Norwegian has also embarked on a big growth spurt, and hardly a month goes by without the company announcing another expansion, most recently 6 domestic routes in Argentina.
Trying to grab market shares from the big boys on busy routes works quite well on short-haul routes with minimal premium cabin passengers. Long haul can be different. Legacy carriers make most of their revenue and profit from premium passengers (Premium Economy/Business/and First). For a given flight approximately 45% of passengers make up 85% of the revenue. This means that legacy carriers can compete well with low-cost carriers on long-haul routes by offering a bare bones service. We have seen this develop as several carriers introduced Basic Economy fares which is a similar offering to low-cost carriers. In the long run, we will probably see five classes of travel on legacy carriers; Basic Economy, Economy, Premium Economy, Business, and First.
Legacy carriers can easily afford to compete with low-cost carriers in the Basic Economy fare bucket. Arguably they could even fly a proportion of the flight 10% or 15% of passengers for FREE without hurting their bottom line too much.
With paper-thin profit margins, low-cost long-haul carriers are very sensitive to cost fluctuations. A small rise in the cost of fuel can wipe out the profits of a carrier; not being able to operate the latest most cost-efficient aircraft can also seriously dent a company’s bottom line. This happened to both Norwegian and Primera, Norwegian even had to sell some of its Boeing 737’s to reduce debt and cancel some routes that were not profitable.
Rising costs has affected Norwegian recently, when they were forced to lease an Airbus A380, due to technical problems with their Boeing 787 Dreamliner, for their London to New York route. Operating an aircraft with higher operating costs means that Norwegian is probably just breaking even or more likely losing money on this route.
Long haul travel is a different game to short haul; companies that try and expand at the rate short haul low cost carriers expanded will probably lead to more companies going under. With more fierce competition from traditional carriers, and the high cost sensitivity of low-cost carriers, cautious, measured growth is the way to go. That being said Norwegian is a market leader in the low-cost long-haul market, and if it takes some lessons from Primera’s fate, it should be able to slowly and steadily grow and hold on to its position.