European budget long-haul gets a window of opportunity
* Dreamliner a game changer due to fuel efficiency
* Norwegian has just two Dreamliners, six more to come
* Norwegian CEO sees 4-5 year head start to make long haul work
* Asian carriers the biggest likely challenge
OSLO, Oct 3 (Reuters) - Norwegian Air CEO Bjoern Kjos was on his way to Thailand last month to celebrate the opening of his budget airline base but instead got a lesson in why many low-cost carriers have failed in the long-haul market.
As mechanics beavered away to fix his brand new $212 million Boeing 787 Dreamliner, he watched the hours tick by, knowing he would miss the party in Bangkok.
Norwegian's first two Dreamliners broke down more than a dozen times in September, forcing it to lease planes or cancel flights. A full-service long-haul rival, typically part of a big alliance, could have called for back-up from its allies.
The Nordic carrier this year became the only European budget airline to take on long haul, arguing that the Dreamliner, with a 20 percent fuel saving, made it possible.
Others, including carriers who have made a success of low-cost long-haul in Asia, doubt the business model for Europe, and are waiting to see how the experiment turns out before following suit.
Even without direct low-cost competitors, it will be a stiff challenge.
"It takes more to succeed in the Champions League than in the local top league," says Per Arne Villadsen, the CEO of Berg-Hansen, a top Norwegian travel agency. "On (long-haul) overseas destinations the company faces an entirely different competitive situation; its largest competitors are well-functioning alliances, with each company holding an advantage in its home market."
Norwegian, Europe's third biggest budget airline, operates at a 44 percent lower cost than its biggest Nordic rival, SAS , but that advantage can be cut in half over longer flights because fuel is a much higher proportion of the cost.
The small size of its long-haul fleet - currently two, rising to eight - will also strip away some of its cost advantage, and while it might have stolen a march by hiring cheaper cabin staff from its Bangkok base, rivals can be expected to use similar tactics.
Attempts to fly cheap long-haul routes date back to the 1970s, when Laker Airways flew from London to New York. It went bankrupt in 1982 when rivals cut fares and squeezed it out of the market.
Malaysia-based Air Asia X recently tried flying between Asia and Europe but gave up, arguing that the low-cost model cannot work until it gets more fuel efficient planes.
While the more fuel-efficient Dreamliner changes the economics, Norwegian's early advantage will evaporate as rivals get their own, or the Airbus A350.
"Eventually the Airbus A350 will come with similar fuel consumption, so in five to six years everybody will have the planes with similar operating capabilities," says Kenneth Sivertsen, an airline analysts at Arctic Securities in Oslo.
Qantas unit Jetstar, arguably the most successful budget carrier in long haul, will get the first of its Dreamliners this year and has already signalled plans to fly to Europe from Asia. Within Asia, budget long-haul has gained traction as flight distances are shorter, crew costs are lower and the overall market is growing much faster, giving newcomers a chance to quickly carve out market share.
Still, Norwegian won't face a low-cost challenger in the Nordic market for years, and SAS, which is struggling to complete another round of restructuring, doesn't get its A350s until 2018.
"We have a four to five year lead on the rest of the pack," Norwegian CEO Kjos says. "That's the timeframe we envisage that we can build up a strong operation on long haul."
Kjos dismissed doubts about the business model, saying he believed in it even more now, because the Dreamliner's operating costs were actually less than advertised, and the reliability issue was temporary.
"Oh, 99 percent of the people said the exact same thing when low-cost airlines started flying short-haul," Kjos said. "They said Ryanair and EasyJet were a joke. Now the low-cost carriers have 50 percent of the market in Europe."
Compared with full-service carriers, some of Norwegian's advantages will persist even after its head start has been clawed back; Norwegian will fly Dreamliners up to 18 hours a day, 50 percent more than rivals, it will opt for cheaper landing slots, and its operations will remain leaner.
Norwegian is now offering round trip tickets to Bangkok for next month as low as $580, well below prevailing fares of $1,200 for Thai Airways and $1,400 for SAS. Its long-haul planes are currently flying 98 percent full, analysts say, well above expectations for 90 percent.
There will be further cost savings when its other six 787s are in service by 2015.
Some say that is still far too few.
Michael O'Leary, the CEO of Ryanair, Europe's biggest budget airline, recently said flying long-haul with two to six planes made no sense. He thinks 30-50 are needed.
Investors seem to be siding with Kjos. The stock is up 105 percent in the past 12 months, outperforming a 22 percent rise in the travel and leisure sector index. Over the past month it has held steady, despite headlines about its Dreamliner troubles.
"Norwegian is clearly increasing the risk with long haul, but investors pay management to take calculated risks," Arctic Securities' Sivertsen said. "I don't think it's time yet to question the model."