Troubleshooter takes aim at low-cost long-haul market

Back in the 1970s, Bjorn Kjos spent six years in the Norwegian Royal Airforce chasing Russians out of his country's airspace. These days, there are a few people who wish he would stay out of theirs.

Kjos is the chief executive of Norwegian Air Shuttle, the Scandinavian carrier that appears to have come from virtually nowhere to launch a low-cost long-haul service connecting Europe with the US and Far East, charging around $350 return for some transatlantic flights.

Not surprisingly, the plan has its critics. But, alongside those who say it will never work, the former fighter-pilot has been taking a lot of flak in both Europe and the US for basing the company that will operate the airline’s long-haul service in the Republic.

In February, Irish Aviation Authority and Commission for Aviation granted Norwegian Air International it the necessary permits to run an airline from the State.

Before and since, groups on both sides of the Atlantic, including trades unions and rivals, claimed that the Irish subsidiary was simply a flag of convenience that would allow Norwegian to sidestep costly labour laws and social protections in its own country and hire staff from low-cost economies in the Far East on Irish employment contracts.

"Those allegations are ridiculous," Kjos says. "You have to bear in mind, if you have a crew based in Oslo, it's regulated by Norwegian law: if you have a crew based in Stockholm, it's regulated by Swedish law: if you a crew based in Gatwick, it's regulated by UK law. It's not regulated by Irish law.

"So far, we don't have any bases in Dublin. Even if the law was very liberal, it doesn't help us because we don't have any bases here in Ireland, we only have management here in Ireland."

At this stage, the group employs 40 people in its offices close to Dublin Airport. It plans to hire more. Some industry sources suggest that could be as many as 200 over the next two years. Kjos won’t be drawn on numbers.

“It’s too early to say but we will definitely hire a lot more than we have today,” is all he will say. He does confirm that a number of operations will be run out of the Republic over time.

For a start, most of its craft will be held through a holding company based here. The State is a key hub for aircraft leasing, a position soon to be bolstered by the adoption of part of the Cape Town Convention, an international treaty that gives extra security to lenders that finance this activity.

As a result, Norwegian will do much of its financing through here. At present, 45 of its 90 planes are owned by Irish entities. This will increase as it begins to take delivery from Boeing and Airbus of the aircraft needed for its long-haul business. At the same time, a lot of its branding, marketing and digital operations will be located in the Republic.

Easy access to finance was one of the reasons the company cited when the regulators gave it the go-ahead to formally set up shop here, but the State’s membership of the EU is a critical element. As an EU-based airline operator, Norwegian Air International is covered by the Open Skies agreement. This means it can fly to countries with which the EU has an agreement from any member state.

While Norway – which is not in the EU – has bilateral treaties with many of these destinations, the airline can only fly there from Norway itself. Kjos says that market is too small to sustain the long-haul business that it is developing. Hence it needs to be established in the EU.

“You [the EU] have Open Skies agreements with a lot of countries, or you have the right for all your members to fly into certain countries, and the EU is very active in opening up the sky,” he explains. “Norway, not being a part of the EU, is limited in its possibilities.

“Also, Ireland has an extremely good record on aviation. The Aviation Authority here in Ireland is, like in Norway also, very professional. Ireland is actually a perfect place for us to be.”

Norwegian will manage its long-haul business from the Republic, but it has no immediate plans to actually offer transatlantic services from here. The business is up and running with bases in New York and Fort Lauderdale, Florida, in the US, and London Gatwick and Bangkok initially. It plans to establish further far eastern and European bases over time.

Lower operational costs
The crew and craft are based in the big cities from where they can hit a large number of destinations. Its strategy is to target price-conscious travellers such as tourists, and fly from "large catchment areas to smaller catchment areas" such as Oslo, Stockholm, Copenhagen, even Bergen; and from London to US destinations and Bangkok.

“Typically,” he says, “our prices will be below $200 across the Atlantic one-way and down to $150. So that, for $300 to $350, you should be able to fly across the Atlantic on a return flight.”

It already has four craft flying and 14 under order, seven of which will arrive in the summer. In July, it will begin services from Gatwick, Fort Lauderdale, Orlando, New York, LA and San Francisco. It began last year with transatlantic services to various points in Scandinavia.

Others have tried low-cost long haul before – starting with Laker Airways in the 1970s and ending with attempts by big players such as Virgin and Continental – but they all failed, at least in offering bargain-basement flights between Europe and the US. There was, Kjos argues, a simple reason: they didn't have the tools for the job, but that has changed.

"You need an aircraft with lower operational cost and low fuel burn," he says. "The only aircraft that is available to do that is the Dreamliner and, in due course, also the Airbus 350. And you need high utilisation, that is, flying them frequently. That means, actually, that you fly one long sector and one short sector, you fly the Atlantic together with Asia. "

As a simple example of what was beginning to sound like difficult-to-follow airline logistics, he explains that you fly a craft from Copenhagen to New York, it then turns around and flies from there to Stockholm, and following that to Bangkok.

As you operate in both those directions on all those routes, you have another craft doing the same thing the other way around. This only works if you fly direct and not through hubs – or “hub structure” as he calls it – where people make connections to other flights to reach their final destinations.

Legacy carriers
"In a hub structure, you aim for the flow of passengers," he says. "That means that you might land in the morning and take off in the afternoon. So, for example, if you fly to Johannesburg, you would land in the morning and take off in the evening, so you would never get that high utilisation."

If this all sounds very familiar, it's because it is. Ryanair did something similar, it offered point-to-point flight s and turned its aircraft around quickly so they could fly more often, aiding it to sell seats more cheaply than its rivals. And, in much the same way that the Irish airline developed a new market by making it more affordable to fly more often, Kjos believes his approach will have a similar impact.

“Like Ryanair has done in Europe, we are building our own volumes [of passengers],” he says. “The more you ramp up the volume, the more pressure you will put on the legacy carriers, so they will have to come down in price, so a lot more people can afford to fly. We saw that when we started to fly direct to Dubai. Up to that, people were used to flying, through hubs, with the legacy airlines. Overnight we ramped up our volume to 94 per cent.

“So we will build our own volume: the legacy carriers, they will have their volume, but there will be many more passengers, the winners will be consumers and all the jobs that we create on the ground.”

Everybody can afford to fly short haul, he points out, so why should longer distances be any different?

“We fly from Oslo to Dubai. It’s seven hours, you can do that [now] for $150,” he says, “but if you fly 30 minutes more, to New York, it costs three times as much. Why? It’s totally crazy.”

He says the real reason is lack of competition. Three global airline alliances have 87 per cent of transatlantic traffic, Kjos says, and they “obviously hate the idea” of someone coming along to offer cheap fares on those routes. Not only that, he claims some of the legacy carriers involved will not be able to cope with the competition.

"You have other carriers that really are in a good position to compete like Aer Lingus, like British Airways, buy you also have legacy carriers with incredibly high costs that cannot compete, like SAS," he says.

In the US, he adds, Delta has joined forces with labour unions in their criticism of his company’s plans, but they are doing this he says simply to stop competition.

Norwegian Air Shuttle's rivalry with Scandinavian flag carrier SAS, runs a good deal deeper than simply competing with it for business. The pair's history is entwined. In the early 1990s, Kjos joined some former air force comrades in setting up the company to provide a shuttle service in western Norway for another carrier Braathens.

SAS took over Braathens in 2002 and promptly cancelled the shuttle service contracts. It was the worst possible time, just months after 9/11, and the industry was reeling.

“So I said the only thing we can do is start going into competition with SAS. That’s why we started Norwegian as it is today,” Kjos recalls.

They started with just four 737s. Along the way, there have been a lot of tussles with SAS, some of which ended up the courts, but Kjos notes that low-cost airlines are used to established carriers treating them in this way. Ryanair and South West, the US carrier that partly inspired its model, met the same opposition, he says.

While Kjos draws several parallels with Ryanair and makes it clear that Norwegian uses a similar low-cost template, he is now doing something about which the Irish company has only talked.

Does he think that Michael O’Leary will follow suit? “Michael O’Leary is a smart guy and he also knows that if you want to do that, you have to have the right tools to do it, the right aircraft,” he says. “I think they will in due time.”

Can it be done for about $10, as O’Leary promised?

He laughs: "Everybody can do it for $10, but your average fare has to be higher than that, so sadly not."

CV: Bjorn Kjos
Name: Bjorn Kjos
Position: Chief executive of Norwegian Air Shuttle
Why is he in the news? The airline has located the headquarters for its low-cost long-haul business, which was recently licensed by the Republic's regulators, in Dublin.
Career: Began his career as a fighter pilot with the Royal Norwegian Airforce, flying interceptors against Russian intrusion in the 1970s. Subsequently
graduated in law and worked in that area until the early 1990s when he established Norwegian with some former air force comrades. He remains a major shareholder today.
Family: Married to Gerd Helene Kjos, with two daughters, one of whom is a pilot with Norwegian, and a son.
Something you would expect: He loves the outdoors, sailing, skiing and hunting.
Something that might surprise: He has written a spy novel, The Murmansk Affair.