Should This New Competitor Have Major U.S. Airlines Worried?

Airlines face challenges every day in getting passengers and cargo to their destinations. But the introduction of a new competitor could shake up the lucrative transatlantic market by introducing a new low-cost carrier to compete with existing airlines. How this will happen is not all certain and it depends on the actions of major airlines, unions, government officials, and the low-cost carrier itself.

A discount threat
Discount airlines have frequently been a threat to traditional airlines and Norwegian Air Shuttle could cause trouble via its intention to offer trans-Atlantic flights at rates well below those charged by major airlines.

To do this, Norwegian wants to create an Irish subsidiary for labor flexibility and access to the Open Skies agreement between the U.S. and the European Union while operating a fleet of Boeing 787 aircraft to cut fuel expenses. 

The Air Line Pilots Association union, or ALPA, has urged the U.S. Department of Transportation to block Norwegian's plan and has argued that the Irish subsidiary is being used as a flag of convenience that will allow Norwegian to use cheaper foreign labor. Delta Air Lines (NYSE: DAL  ) , United Continental Holdings (NYSE: UAL  ) , and American Airlines Group (NASDAQ: AAL  ) have all joined with ALPA in opposing Norwegian's plans for the operation of flights from an Irish subsidiary.

While ALPA objects to the plan's threat to labor rates, the airlines oppose Norwegian's move because it would add more capacity and lower fares to the transatlantic market. The U.S.-based airlines also have transatlantic codeshares -- Delta with Air France-KLM, American with British Airways, and United with Deutsche Lufthansa -- in which both partners would be hurt should Norwegian carry out its strategy.

Valuable market
For major airlines such as Delta, American, and United, the transatlantic market is where they can charge some of their highest fares. Not only can airlines profit from economy class passengers but the airlines are in a fierce battle for transatlantic business travelers. With new flight options such as lie flat seats, improved food, and suite style accommodations, major carriers are competing through both price and product.

However, if Norwegian is able to enter the market under its current plans, the carrier would have lower labor costs than major carriers allowing it to offer fares well below current market levels. Norwegian's cheaper fares would be seen as highly attractive to passengers looking for just the cheapest price posing a threat to sales of economy class tickets by major airlines. 

Norwegian's current layout of the Boeing 787 does not include a business class instead including a "Premium Economy" which, while a step up from ordinary economy, is not comparable on a features or comfort basis with the latest in business and first class offerings. With Norwegian focusing around being a low fare airline, this is not surprising but the lack of a business class offering from Norwegian means that major airlines should not feel as pressured on their higher revenue business class offerings.

Change in plans?
For its own part, Norwegian is reported to be reconsidering its plans for creating an Irish subsidiary. Reuters noted in late April that Norwegian suspended its talks to purchase an additional 20 Boeing 787 aircraft because of delays in receiving approval in the U.S. If the Irish subsidiary does not get the green light, Norwegian could still operate long haul flights from its native Norway but in doing so, it would give up the Open Skies advantages and be subject to Norway's labor laws.

Since Norwegian would still benefit from having fewer legacy costs and more efficient aircraft, it could still operate as a low cost carrier offering lower fares than competitors. However, without the Irish subsidiary, Norwegian would pose less of a threat to major airlines because its would not be able to offer even cheaper fares.

So far the Transportation Department has not made a decision, but the airline industry will be watching closely.

A new challenge
The airline industry is always full of challenges and the entrance of a new competitor is the latest one for Delta, American, and United. With a new business strategy, Norwegian Air Shuttle could begin offering fares far below current levels due to a lower cost structure and discount airline approach. But like many smaller airlines, Norwegian's path to growth is uncertain. Over the next several months, investors should get a better picture as to whether Norwegian will be able to operate these flights and what levels of fares they will offer.

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Read/Post Comments (15) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 29, 2014, at 2:45 PM, jgrippe wrote:

    I just do not understand this, a company wants to start a new discount airlines for overseas travel, now all airlines want our government to ban such a plan.

    Isn't our government supposed to be for the people, thus, if a company can save us money, then, why should the government even become involved. It certainly is not a safety issue as there are oversights for this.

    If this happens and our government approves of it, then it will only show me that our government has gone overboard for big business and has put it to the average joe once again.

  • Report this Comment On May 29, 2014, at 2:47 PM, lonesometraveler wrote:

    When Norwegian Air starts to fly the Atlantic, I will use them, as long as they don't charge me for a tiny bag of snacks, don't charge me for the privilege of bringing my clothes with me, and find other ways to quote a decent fare and increase it for providing necessities. They will run an efficient business because they have to in order to build a following.

    U.S. Airlines don't need to be efficient carrying passengers because their big revenue stream is luggage.

  • Report this Comment On May 29, 2014, at 2:56 PM, nevlee2000 wrote:

    If they are allowed to operate transatlantic flights they will become my airline of choice...These major US Airlines are ripping off their customers by charging more for less.

  • Report this Comment On May 29, 2014, at 4:53 PM, GeeBee103 wrote:

    What they are not telling you here is they are planning on using south Asian flight crews under contract. If you don't think this is a threat to your safety, Google "Indian Pilot license fraud". This is the reason why they are setting up shop in Ireland instead of Norway. So while you are trying to save a few bucks, wondering if your Norwegian Air flight crew is really qualified remember all those good folks who saved a buck on ValuJet. You remember that airline, the one who tried to save a buck on hazardous materials training to give you "low fares". Enjoy your flight.

  • Report this Comment On May 29, 2014, at 6:15 PM, airlineanalyst wrote:

    Valujet was flown by an Eastern Airlines scab. She was otherwise fully qualified to fly that plane.

    DAL, UAL and AAL all need some real competition. Protecting the shareholders and the union wages of overpaid pilots is not the concern of the public and should not be the concern of the gov't. The last three MEGA-mergers of the US airlines need to be tested.

    Good luck to Norwegian. And with all due respect, the world is full of unemployed pilots, it will all be okay.

  • Report this Comment On May 29, 2014, at 7:18 PM, globeflyer wrote:

    The first question that the consumer needs to ask is: Is the "playing field level"? If the U.S. Government is not going to insist that a major competitor play by the same rules they have set up for U.S. carriers, then it's a "no-go". The U.S. airline industry is the most regulated "de-regulated" industry in the Nation, as well as one of the most taxed industries. If the consumer knew how cheap their ticket would be if not for taxes, they would revolt. But, alas, all that is hidden in the small print from D.C. Some would have you believe that the world "is full of unemployed pilots"....that's true if you count all the Cessna 150 pilots with less than 100 hours. Look at the result of less-than-qualified pilots at the controls of a 777 in San Francisco. But hey, they were saving money!

  • Report this Comment On May 29, 2014, at 8:35 PM, MVflyer wrote:

    Norwegian is already flying transatlantic routes--from JFK, LAX, Oakland, Orlando and Miami--to London and Scandinavia. And they can be cheap--they're advertising $250 one way fares from JFK-London (Gatwick) for early next year. But you do have to pay for food and drinks as well as baggage, etc. like most European discount airlines. You're flying on brand new 787s, better than most of the US airlines. No biz class, though, just premium economy or economy classes. Ultimately, they will give the US legacy carriers a run for their money--they're well funded, flying new planes that don't require much maintenance, and get you from point A to B.

  • Report this Comment On May 29, 2014, at 9:02 PM, GeeBee103 wrote:

    You are not qualified to fly if you cannot figure out that the cargo manifest contains hazardous materials you are not authorized by law to carry. There is more to being a Captain than yanking and banking and that is where low cost crews fail the test, time and again. 45 years of experience, and by the way I have no financial interest here, can recognize a Charlie Foxtrot operation and the Irish subsidiary of Norwegian Air will be just that. I've seen this movie too many times, be it People Express, ValuJet, Apple Air or any of the other low cost airlines de jour.

    By the way, if you are an analyst you should know there is now a pilot shortage thanks to new experience requirements of FAR 135 & 121 as well as the new rest requirements of FAR 117. Airlines are hiring now.

  • Report this Comment On May 29, 2014, at 10:05 PM, rcdj47 wrote:

    Norwegian should not be denied its aplication to operate its tranatlantic fleet,because it want to offer lower cost to consumers.if these major airline keep having there way not small airline will ever make it.competition is good on all level for the general public.so i hope the dot dept aprove this deal as soon as possible.everyone that fly is looking to save money.

  • Report this Comment On May 30, 2014, at 9:00 AM, 231545 wrote:

    "overpaid pilots" Really?

    Have any of you taken the time to consider what it takes to be a professional airline pilot? What do you think the compensation for this job should be?

    1. It takes years of expensive training to acquire the hours and experience to even be considered for the job or it takes years of serving the country as a military pilot to also reach that point of consideration. (It costs about $200 an hour for light aircraft training today. It would cost about $150,000 just to reach the level of experience to be hired as a commuter pilot)

    2. On the job, you have hundreds of people's lives in your hands.

    3. You must pass a physical every six months to prove you are physically capable of performing as a professional pilot.

    4. You are evaluated every nine months, not only on knowledge, but real-time performance in a simulator to prove you still maintain the skills and facilities to perform your job in emergence conditions.

    5. You are subject to evaluation on the job not just by your company (as in most jobs) but also by the FAA.

    6. Your job is considered so important by the Feds, you are subject constant drug and alcohol testing. Fail and you are unemployable as a pilot anywhere.

    7. Your job is considered so important by the Feds, that if you make a mistake, you can face a Senate-like hearing in front of the NTSB to evaluate whether or not you can continue to work as an airline pilot.

    8. Many pilots are also armed Federal Agents without a dime of compensation for their services.

    9. Pilots are operating equipment worth in excess of $100 million. One mistake and the cost might be in the $10's of millions. What kind of person would you want to have with that much responsibility? What would you be willing to pay for someone entrusted with assets of that value?

  • Report this Comment On May 30, 2014, at 11:05 AM, Inspectigator wrote:

    There are many airlines that are banned from Europe and the U.S. for various safety reasons. Yes the airlines and unions are out to protect themselves from competition, but they make some very good points about how safely this airline operates. They should next take an honest look at how low safety standards in the U.S. still are, even with these new laws. The FAA has finally been forced by congress to step in and tighten up safety laws in the U.S., much more needs to be done, the airlines are still side-stepping a lot of rules, and lowering standards where formal rules were never thought needed.

    And yes, there is a serious pilot shortage, caused by very low pay and conditions for airline pilots. This has come because airline unions lost the right to strike or job action in 1981. Airline management power has not been balanced by labor or congress, and they took too much from their workers to continue attracting workers to the profession. Young Americans stopped entering flight schools years ago, most schools have shut down or are now filled with almost exclusively foreign students with obligations (and better pay) overseas.

  • Report this Comment On May 30, 2014, at 11:13 AM, Inspectigator wrote:

    There are many airlines that are banned from Europe and the U.S. for various safety reasons. Yes the airlines and unions are out to protect themselves from competition, but they make some very good points about how safely this airline operates. They should next take an honest look at how low safety standards in the U.S. still are, even with these new laws. The FAA has finally been forced by congress to step in and tighten up safety laws in the U.S., much more needs to be done, the airlines are still side-stepping a lot of rules, and lowering standards where formal rules were never thought needed.

    And yes, there is a serious pilot shortage, caused by very low pay and conditions for airline pilots. This has come because airline unions lost the right to strike or job action in 1981. Airline management power has not been balanced by labor or congress, and they took too much from their workers to continue attracting workers to the profession. Young Americans stopped entering flight schools years ago, most schools have shut down or are now filled with almost exclusively foreign students with obligations (and better pay) overseas.

  • Report this Comment On May 31, 2014, at 2:52 PM, GeeBee103 wrote:

    All you have to do is look at the operational failures of Malaysia Airlines. The lack of operational monitoring, not purchasing continuous engine monitoring etc to realize just because you have new airplanes and cheap pilots does not make a safe airline. Now we have people think moving this business model to the North Atlantic would be just fine.

    Second, I wonder how many people consider cheap labor for their medical treatment just fine. No, after the plane crashes from cheap labor they will demand world class medical care.

  • Report this Comment On June 01, 2014, at 10:31 AM, cfa123 wrote:

    The plan is to be incorporated in Ireland, use Thai pilots and flight crew.

  • Report this Comment On June 03, 2014, at 9:59 PM, gofastmopar wrote:

    The concept of low cost airlines flying in the US or Europe, (EU) is not new. The Southwest Airlines model as copied/modified by Ryanair or Lion Air in Asia is not the threat. They are each competing in regional markets with similar oversight etc.

    The issue is whether the race to the bottom is desirable in not only wages/salaries but the oversight and safety mechanisms built into the industry.

    As posted by others on this thread, there are airlines who cut corners either to boost profit and/or they don't have the safety culture that legacy carriers have developed through decades of regulation and oversight.

    To register your fleet in one country (Ireland) to gain access to the EU is not itself a problem, but when you hire crews with licenses from a second country, (Thailand) and they are on individual employment contracts with a company in a third country, (Singapore)....Well, I see a lack of accountability and regulatory responsibilities when it comes to not only the airline but also the crew members. Until these issues are clarified NAI should not be given access to US markets.

    If there is an incident/accident, who investigates? who is liable?

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