I don’t spend a lot of time talking about either international airlines or airlines’ financials. They are two interesting subjects, but probably for another blog at another time. So why is today different from all other days?
Norwegian Air Shuttle Lost A Lot Of Money
Norwegian Air Shuttle is a European ultra-low cost carrier (ULCC),* similar to Spirit or Frontier in the United States. Unlike traditional ULCCs, however, that fly frequent, short routes, Norwegian has a significant intercontinental presence between Europe and North America (and Buenos Aires). That creates a problem for them, though. ULCCs rely on having lower operating costs than their bigger peers, and the advantage that they have on a longer route doesn’t apply the same way that it would on a shorter route.**
Anyway, Norwegian Air just announced a fourth quarter loss before taxes of 1,432 Norwegian Krone, or approximately $183m. Fourth quarter is a tough one for airlines, because there is less leisure travel, but that’s still an ugly number and represents an all-time high fourth-quarter loss for Norwegian.
Does It Matter? Yes, If You Ever Fly Internationally.
Here’s the problem. You don’t have to fly Norwegian Air for them to matter to you. If you fly internationally at all, having Norwegian in the market is a good thing. Why is that? Because they keep ticket prices down. Remember, their prices are extraordinarily low because they sell you so much on-board. And while none of the legacy carriers are going to match Krone for Krone on price, they set a low enough bar that it is going to matter. The best thing that could happen for travelers flying over the airline would be if airlines like Norwegian and Wow Air expanded even faster.
Can They Lose Money But Still Grow?
You betcha. In fact, Norwegian has to grow. Like many other parts of the business, airline economics make no sense whatsoever on the surface, but they are what they are. By the way, this is going to get a little complicated.
Airlines have a certain amount of fixed costs, which are costs that they have to pay even if planes aren’t flying. For example, they have to pay the CEO. They have to pay interest on their loans. They have to pay for gates. Etc. And since costs are measured on a per mile basis, a big denominator (i.e., the total miles flown) helps as much as a reduced numerator (the total costs). When you add an airplane, your costs do go up, obviously, but a certain percentage of them had already been paid for. You don’t have to add another CEO, for instance. You may not have to pay for another gate. You’ve already got a maintenance staff. So whenever you add a plane, you numerator goes up, but not by as much as the denominator.
So airline like Norwegian get stuck in a growth trap. The only way that they can lower their unit costs (cost per seat per mile flown) is to add planes and spread out the total cost over more miles flown.*** Thus, even though they lost money on every mile flown (on average) in the fourth quarter, they are actually going to increasing the number of miles that they are flying in 2018 by 40%.
The Bottom Line: Root for these guys to succeed, even if you never personally fly them. They keep the rest of the industry in check.
*Beginner’s Hint: An ultra-low cost carrier is one that sells you a place on the plane and nothing else. If you want a seat assignment ahead of time, you’ll have to pay for it. Got a bag in the overhead? You could end up paying for that, as well. Want a can of Coke? Yup, that’ll cost you. ULCCs can make almost half of their revenue from sales of products other than the tickets themselves. The good news is, in the case of an emergency, you get to use the oxygen mask for free. The actual oxygen might cost extra, though.
**Simply put, the most expensive parts of any flight are take-off and landing. Everything in between just averages out the extremes. Since every airline, whether low cost or full service, has one takeoff and one landing (if done properly), and there are a heck of a lot of miles in between the two, a long-haul flight gives the big carrier more miles over which it can average out its costs than a short one does. Cost advantage (almost) gone for Norwegian.
***Growing does present a different problem, of course. Econ 101 says that when you add supply to a market but not additional demand, prices go down. Sadly for airlines, this is one area where they are not different than the rest of the world.
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