Norwegian and SAS dominate the Norwegian market, together carrying 83% of the country’s domestic passengers. If you include SAS-owned Widerøe, this market share grows to 96%. There is more competition in the international market, with the home carriers only having 58% of that market, while the large network carriers KLM and Lufthansa each have a 5% share. Other key players are Ryanair, British Airways, Air France, Finnair, Widerøe, TUIfly and Air Baltic.
Norway is a small country populated by fewer than five million people, but is perfect for flying with its mountains and fjords, its poor road conditions and its high income per capita. In fact, it is the largest aviation market in Scandinavia. The domestic market comprised 11.3 million passengers in 2010, while 13.1 million people flew on international flights. As many as 50 airports have scheduled flights and the busiest routes between Oslo and Bergen/Trondheim have more than 1.5 million passengers each.
Looking back
The Norwegian airline market has been deregulated since 1994 but it was not until the opening of the new Oslo Airport in October 1998, with its new infrastructure and added capacity, that competition, particularly in the domestic market, took off. At that time a new low-cost carrier, Colorair, began to challenge the two incumbent carriers, Braathens and SAS.
Colorair opened routes from Oslo to Bergen, Trondheim and Ålesund. Braathens and SAS responded by each increasing their capacity. Total capacity increased immensely, resulting in vast overcapacity and very low yields. On the main domestic routes, it got to the point where there were more than 40 daily departures and this was a situation that could simply not last.
Colorair disappeared in September 1999 and Braathens was subsequently swallowed up by SAS in December 2001. The acquisition came despite Braathens having been in operation since 1946 and having had more than 50% of the domestic market share in the preceeding decades.
Then Norwegian was formed in August 2002 in response to SAS’s new dominant position. Since then, it has grown from four aircraft to 53 aircraft in December 2010. Norway is by far its most important market, but Norwegian also has bases in Stockholm and Copenhagen and opened a new base in Helsinki in April.
The Norwegian market is different from other markets in at least two senses. Firstly, the domestic market is large compared with the international market and, secondly, there are two big home carriers of similar size, and they compete against each other more than they do against foreign carriers. Norwegian’s growing market share is mainly a result of SAS pulling back and the carrier’s total market share has been relatively stable since 2002. This competition has led to aggressive capacity offers, low yields and price campaigns.
Tough competition, poor balance sheets
The carriers’ balance sheets reflect the fierce competition in the market. SAS has produced large deficits over recent years, which resulted in its needing two capital infusions, to the total of $2 billion. As SAS is 50% state owned, there has been criticism of this “state aid” in the media. In 2010, it again produced a loss of $500 million.
A major problem for SAS is the huge pension liabilities and possible new tax ruling. In a worst-case scenario, SAS might have a negative equity and new capital would be needed to keep the company going. It, however, seems unlikely that the Scandinavian states would be able to take part in a third rescue mission.
Norwegian’s 2010 results were worse than in previous years. Passenger revenue was $160 million lower than its costs. Ancillary revenue is a very important contributor to the balance sheet and it is steadily growing, making up about 12% of total revenue in 2010.
At the end of 2010, Norwegian had 53 B737s in its fleet. This will grow to 73 aircraft by the end of 2014. Seat capacity will increase by 51% as a result of more aircraft and the change from B737-300 aircraft (148 seats) to B737-800 with 186 seats. From April 2011, Norwegian has been aggressively attacking the largest domestic routes in Sweden by adding two more aircraft to its Stockholm base. It is also putting three aircraft in Helsinki and allocating one aircraft to charter operations. This in itself is impressive, but even more so is the fact that there are still 14 more aircraft coming in the next four years. The question is, where will they be based and how will their arrival affect yields and the competitive situation with SAS?
SAS has chosen different tactics. Through its ‘Core SAS’ strategy, it is pulling capacity from leisure-dominated markets and focusing on the business market. SAS is increasing load factors and massively cutting costs in administration and increasing crew productivity. This is vitally important to survival, but the production cuts partly offset the cost improvements because of the negative effects of scale effect. Still, the company has a long way to go to catch up with Norwegian in terms of Cost of Available Seat Kilometre (CASK).
First Ryanair base in Norway
In October 2007 the new airport, Rygge, was opened, which is situated 60km south east of downtown Oslo. Rygge was originally a military airport, but private capital was allowed in order to establish a civil sector at the airport, which is now a competitor to Oslo Gardermoen and Sandefjord in Torp on the other side of the Oslofjord.
Norwegian was the first carrier to start operations in 2008 using two B737-300s. Then, in September 2009, Ryanair started operations and from April 2010, it established a base of three aircraft offering 1.5 million new seats in the first nine months. Of Ryanair’s 26 new destinations, only four were in direct competition with Norwegian. The latter has reacted to the competition by focusing on domestic routes and changing international destinations in order to avoid competition with Ryanair. Norwegian’s latest move involved transferring its two Rygge-based aircraft to other airports. The remaining international network is very limited and there is speculation as to whether Norwegian will cease operations at the airport entirely.
Ryanair has operated from Torp Sandefjord on the western side of the Oslofjord since 1997. After opening the Rygge base, it scaled down its Torp operations, as Rygge is closer to downtown Oslo. In January this year Ryanair celebrated its one millionth passenger at Rygge and succeeded in attracting a lot of new passengers to the airport.
It is, however, assumed that the new Ryanair base has been a very costly venture for Rygge Airport. Norwegian has been complaining about unfair competition, referring to the terms offered to the two competing airlines. The airport results show a total deficit of $42 million for the period 2007–2009 and it is expected to post a negative result for 2010. The question is whether it is possible for the airport to make money with Ryanair as its main (and sole) customer.
Low-cost long-haul operations
In October 2009, a new start-up airline, FeelAir, published plans for low-cost long-haul routes from Oslo to New York and Bangkok from 2010. Soon after that Norwegian launched plans for the same type of operations, also starting in 2010.They have not been very specific about bases, but it was expected that there would be flights from both Oslo and Stockholm, and the most likely destinations were New York and Bangkok for the initial phase. Since then not much has happened. Neither carrier has published routes or start-up dates and, at the moment, Norwegian’s start-up is postponed until 2012 owing to late deliveries of the new B787.
Even though SAS reopened its Oslo–New York route in April, Oslo (and Stockholm) has limited long-haul operations as SAS is concentrating its intercontinental traffic at its main hub in Copenhagen. Even Copenhagen has a limited long-haul operation compared with its competitors Frankfurt and Amsterdam. Therefore it is the European and domestic traffic that is most important to SAS.
Both Lufthansa and KLM have feeder flights from several Norwegian cities to Frankfurt and Amsterdam that overfly both Oslo and Copenhagen. KLM is operating flights to Amsterdam from six Norwegian cities and Amsterdam has more transfer passengers to/from Norway than Copenhagen does. A start-up of low-cost long-haul routes from Oslo will challenge SAS, as well as Copenhagen’s position as Scandinavia’s number one intercontinental hub. Copenhagen is arguably the least favourable geographic spot for a long-haul hub in Scandinavia as Oslo is closer to all Western destinations (USA and Canada) and Stockholm is closer to the Far East.
With such a strong and fast-changing market in Norway, it seems certain that we will be seeing new airline networks emerging in Scandinavia over the next few years.
This article features in Routes News 2011 Issue 3
