Norwegian, loss, Soth America, strategy, Brazil, Argentina, plan, coast, flights, aircraft
Norwegian

Norwegian: first Argentina, next Brazil. Genius or madness?

The Nordic low-cost carrier is embracing growth in South America as its capacity rises rapidly. But it’s also falling heavily into debt.

The Oslo-based low-cost carrier Norwegian grew its ASKs (available seat kilometres) by 25% in 2017 and is heading for no less than 40% ASK growth in 2018.

Despite the growth in 2017, Norwegian’s financial results did not follow suit, resulting in closing its books for last year with a net loss of NOK 298.6 million (€31 million). In 2016, it delivered a net profit of NOK 1.135 billion.

This year is going to be much better, promises CEO Bjørn Kjos, as the main growth will be on long-haul low-cost flights between Europe and USA, Asia and South America.

Norwegian will take delivery of 11 new Boeing 787-9 Dreamliners, 12 Boeing 737 MAXs and two Boeing B737-800s (the last of the 100 ordered from Boeing in Seattle) during 2018.

But while Norwegian plans to have a fleet of 165 aircraft this year, it will push its debt to new highs as its 2018 capex is estimated at $2.2 billion. At year end 2017, net debt was a staggering NOK 22.2 billion.

To pay off its financial costs Norwegian is ramping up capacity on the North Atlantic, but this is not enough and the airspace between Europe (especially UK and Ireland) and the US is starting to get pretty crowded with airlines in the long-haul low-cost segment.

Large chunks of Asia are blocked for Norwegian as it is not granted access to the ‘Siberia Corridor’ over Russia, resulting in an overly expensive operation flying over Central Asia.

This opens up South America as flight-plan B for Bjørn Kjos & Co.

$4bn investment
In 2017, Norwegian Air Argentina (NAA) was established in Buenos Aires and the company was granted no less than 153 route concessions by the Argentinian national air regulator (ANAC).

These concession routes cover Argentina, Americas, Europe, Africa, Asia and Oceania and will enable NAA to operate to all over the world, from Argentina.

Norwegian CEO Bjørn Kjos says he aims to invest no less than $4 billion in its Argentina business over the next five to eight years.

Operations start soft with a few domestic routes in May or June and during 2018 four to six Boeing 737-800s are due to be included in the fleet, these aircrafts being taken from the current fleet operating in Europe, while next year Airbus A321neos are likely to be added.

Underserved Brazil
But Argentina is not enough for Norwegian. The growing fleet needs new destinations from Europe as Asia has turned out to be tricky, so Brazil seems to be a good target.

After the collapse of VARIG Brazilian Airlines in 2006, Brazil has been underserved on international flights to Europe and North America, driving airfares up and negatively affecting tourism and business travel.

VARIG alone operated more than 100 weekly flights between points in Europe and Brazil, including a three times weekly route between Copenhagen and Sao Paulo/Rio de Janeiro, a route considered as one of the most profitable in VARIG’s global network.

Up-to-date information in the media indicates that Kjos has been on a tour in Brazil to negotiate with the Brazilian National Air Regulator (ANAC) about route concessions. Brazil does not have an Open Skies agreement with the EU or the USA and this requires new routes to be negotiated on a bilateral basis, and it’s likely Norwegian is looking for opportunities on new routes from Europe, the Caribbean and the USA to Brazil.

Norwegian uses the Boeing 737 MAX on low-density long-haul routes. This aircraft has a maximum range of 5,741 kilometres, which limits its operational capacity to operate from points in Europe to cities on Brazil’s north-eastern coast. Faro and Lisbon in Portugal are within range but depending on the wind conditions during some parts of the year.

The best alternative for Boeing 737 MAX operations to Brazil are airports on the Canary Islands with average distances of around 4,500 kilometres to the north-eastern coast, where several large cities, each with more than one million inhabitants, are lined up on the beach-and-palm coast between Salvador and Belem.

Another option would be to use Airbus A321neo aircraft, as this type has a maximum range of 7,400 kilometres and would enable non-stop flights as far north as London Gatwick.

Working with Brazil’s LCCs
Such an initiative is likely to be saluted by the tourism business in Brazil as it would put the current dominant airline TAP Portugal under pressure as Norwegian attacks the market with low fares.

One should not be surprised if Norwegian plans to team up with one of the Brazilian low-cost carriers, GOL or Azul, in a cooperation like the Norwegian-easyJet set-up at Gatwick.

The airports in Fortaleza or Recife are most likely to be used as hubs for transfers of passengers from Norwegian’s international flights to domestic GOL or Azul flights.

If Norwegian aims to use the Boeing 787 Dreamliner to Brazil, it is most likely such routes will be operated from London Gatwick, Paris, Madrid, Barcelona, Rome, Milan and cities in Scandinavia to Rio de Janeiro and Sao Paulo and to use these airports as hubs for transfer to domestic flights in Brazil by GOL or Azul.

Brazil has been in economic and political turmoil for years, but there are some lights in the end of the tunnel, although one the key issues for the tourism business in South America’s largest country is the dominance of the domestic market.

This fact forces the tourism industry into large-scale designing and planning its business on the domestic market, resulting in foreign visitors in most cities outside Rio de Janeiro and Sao Paulo not always getting the service and quality they expect.

This is a dilemma that has been a bottleneck in Brazil for decades, and one way to improve it is to ramp up international scheduled flights from Europe and the USA to the north-eastern part of Brazil, where there are thousands of miles of sandy beaches and sun 300 days a year and an attractive climate.

Norwegian may get the Brazilian authorities to support its plans, but it’s not enough to get support from the federal government in the capital Brasilia without support from the local governments in the different states, each of which is the size of an EU country. With limited local support it will be challenging to secure sustainable flight operations.

What happened to SAS
As in Argentina, the risk is high also in Brazil, and over time Europe-based airlines have struggled in making their routes to Brazil profitable. SAS operated for decades routes from Copenhagen to points in South America until the beginning of the 1990s, when SAS teamed up with VARIG and discontinued its own South America services.

SAS never made any profits on the South America operations due to the soft currencies, inflation, high taxes and rigid banking system limiting the transfer of revenues from ticket sales in South America back to its accounts in Sweden. This resulted in SAS having the most prominent offices overstaffed and its crew laid over at 5-star hotels, just to have ways to spend the soft currency earned on ticket sales in Brazil and other countries in South America.

Not exactly Bjørn Kjos’ and Norwegian’s style.

Legend
Norwegian
HQ in Oslo, 144 aircraft, 33 million passengers, 9,000 full-time employees.

GOL
HQ in Rio de Janeiro, 119 aircraft, 33 million passengers, 15,300 full-time employees, 36% market share on domestic passenger traffic in Brazil. Owns the VARIG brand.

Azul
HQ in Sao Paulo, 127 aircraft, 21 million passengers, 10,000 full-time employees, 32% market share of domestic passenger traffic in Brazil.

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