The world has become such a small place
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There was a time when going from one place to another would take tons of preparation and cost lots of money. As aviation developed and companies evolved, only people with a big wallet could use this fine transportation. Flying has over the years become a means of transportation for almost everyone, and working for an airline company has until recently been regarded as a high profile job.
Today the airline companies are struggling with declining revenue. New low cost companies are significantly lowering the prices, and in this price war, only the best airline companies survive. One of the survivors is Norwegian (XOSL: NAS) which in 2013 they was ranked as the third best low cost airline company in the world.
Figure 1 Norwegian was founded 1993 in Norway. Officially it started as a low cost domestic airline company in 2002.Today Norwegian operates 411 routes to 125 destinations with 3695 employees.
How can a low-cost airline company not only survive, but also make profit?
The secret lies in expenses and how to keep them low. Norwegian is a growing company with a great management that has a clear answer to how they can win the low-cost airline war.
The management believes in buying new planes that are more cost effective, so-called eco-planes (Boing 737-800). These planes have a lower fuel cost and are better for the environment. For the travelers convenience they are also provided with the newest technology, including Wi-Fi.
A continuous fleet renewal effort has become an integral part of Norwegians business. By early 2012 Norwegian had placed the largest aircraft order in European history. By year-end 2013 Norwegian had a total of 271 undelivered aircraft on firm order: 60 Boeing 737-800, 100 Boeing 737 MAX8, 100 Airbus A320neo and 11 Boeing 787 Dreamliners.
Since 2008 when Norwegians fleet renewal began, its fuel consumption per seat kilometer has decreased by a staggering 17%. Today, emissions per airline passenger are approaching those per train passenger in many countries. Norwegian is almost free of leasing planes, which for many airlines is a big cost and with its big expansion Norwegian is actually able to lease out its own planes, if a situation needs it. Better in the air than in a hanger.
Figure 2. The diagram shows the grams co2 per passenger per kilometer and how Norwegian has succeeded to decrease emissions due to the investment in low co2 planes.
Something had to change
Lets go back to the time where only the best could be hired in the aviation industry. At least in Scandinavia, all high profile industry jobs were followed by a retirement plan so great that you would not have to worry about your retirement. That has been a huge problem for big airline companies like SAS (Scandinavian airline system (XCSE:SAS) today, and they have been fighting the crew in court trying to reduce their pension and renegotiate their retirement plans. This has not been the case for Norwegian because it is such a new company that from the beginning has been a low cost company, and therefore has made retirement plans that match modern time in aviation. Norwegian is also establishing new bases around the world, which makes it alot cheaper to fly to destinations around the world.
Another way Norwegian is cutting costs is in the buying process. The ticket only offers the flight. You have to buy everything from choosing seats to drinks and food on the plane. You also get the possibility to buy fast track attached to your ticket for a small fee if you dont like to stand in line. Norwegian has expanded, first only flying in Norway, then Scandinavia, then Europe, to flying to all big destinations around the world. And they are still expanding.
27% shareholder, lawyer and pilot Bjrn Kjos runs Norwegian, which he has done successfully since 2002. Kjos has been nominated entrepreneur of the year in 2009 by Ernst & Young, and is exactly that kind of executive we treasure when we look at management.
New deal between Sweden and USA.
Dublin airport is one of Europes biggest with a lot of daily flights. Why? PRECLEARANCE! What does preclearance mean? Travellers going to USA are going through US customs and passport control in departure country. This means that more flights are now possible to more cities in USA where they dont have passport control. They dont have to transfer in one of the other big airports. The Swedish government is currently finalizing a preclearance deal with the US government. Norwegian CEO Bjorn Kjoos expects more growth with this deal, this is off course not 100 % certain but its something that could be a catalyst to future growth.
What are the risks and what do we look for?
Needless to say that falling passenger numbers will deteriorate unit cost and hurt the bottom line. Rising oil prices will hurt, and there are rumors that Norwegian is facing lawsuits from costumers who were denied compensations from delayed or canceled travels, its something we have to keep an eye on, because reputation means a lot for low cost airlines. An economic exhaustion and rising problems around the world could short term have an impact on share price.
Norwegian has in the last couple of months been the subject for bad publicity in the news. FSA accuses Norwegian for hiring inexperienced pilots in order to keep up with their growth. Norwegian says only 20 pilots out of 100 come directly from aviation school. They have also been accused for not following FSA guidelines when it comes to hiring staff in overseas positions and that they are not getting the proper education. Norwegian claims that there have only been 21 unregulated incidents, but Norwegian better get this right as security is one of the most important things people are looking at when flying.
The last months have been very good for airline companies if not just for falling oil prices, and I think Norwegian could be a good investment right now.
The article This company benefits from low oil prices. originally appeared on Fool.com.
Jesper Johnsson holds no position in companies mentioned in this article.
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