Sir Freddie Laker tried, but failed. Now a new crop of low-cost startups is trying to make a permanent mark on transatlantic air travel. Look for the invasion to continue.
A day does not go by without at least a handful of headlines heralding cheap airfare to Europe. Truly, it has never been cheaper to cross the Atlantic, with fares lower today than ever before.
Norwegian Air is rapidly growing and has become a behemoth. Iceland-Based WOW Air! is also growing and others are coming. French Blue plans aggressive expansion and Lufthansa’s Eurowings is acquiring A330-200s to begin longhaul operations. If unions can get onboard, Air France and IAG (parent company of British Airways and Iberia) will also introduce low-cost subsidiaries.
But does it make business sense?
Laker Airways was squeezed out of business when Pan Am and later TWA and British Airways dramatically dropped fares to match Laker. Booking plummeted and by 1982 the company went bankrupt.
We see the same phenomenon now: I took advantage of a $400 r/t ticket to Europe on United that was matching Norwegian. SAS has offered fares to Scandinavia for under $200 r/t. Just like yesteryear, legacy carriers seem willing to take a hit in the short-term to squeeze out competition in the long-term.
Why I Am Skeptical About the Longterm Viability of Transatlantic LLCs
Norwegian says it is different. It has a low-cost labor structure, uses Ireland to avoid corporate taxes, a fuel efficient fleet, and reported profits last year. The magic equation is cheap labor + new, fuel efficient planes = profits. But as a compromise to open its Irish subsidiary, the carrier had to abandon plans for “cheap Asian labor” and the taxman always cometh…
Other than labor, fixed costs are relatively identical to legacies. Landing fees are the same. Fuel prices are the same. Perhaps the crews stay at cheaper hotels, but that is inconsequential. For the most part, legacies are very good at utilizing their aircraft on longhaul routes, so Norwegian does not even have a competitive advantage there.
And there is political meddling too. I think of Uber. A revolutionary concept that seeks to offer consumers a truly cheap alternate, but political and labor interests may ultimately make the project unviable. Some politicians in the U.S. are already decrying Norwegian for its labor structure and tax avoidance scheme. Maybe that is a good thing.
Beyond the graveyard of Laker Airways’ Skytrain and Zoom is a more recent example questioning the viability of a longhaul, low-cost model. Air Asia X has failed to produce a consistent profit. Serious doubts persist about its long-term viability.
Perhaps Norwegian has what it takes to succeed for decades and not just years, but I have my doubts.