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BUSINESS MODEL OF NORWEGIAN

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INTRODUCTION

            An airline is a business entity that provides air transport services for passengers or freight. Airlines make use of aircraft to render these services and at times, may form alliance with other competitive companies for codeshare agreement. The global airline industry is entering a stage where it faces huge competition from other international companies and have slow market growth. Thus, airline companies apply business models to make money from operations. A business model represents a firm's mode of operations and strategy to sustain and earn in market. The present report is based upon Norwegian Air Shuttle ASA which is a highly successful company and in modern context, is one of the largest European low-cost carrier. This report explores the way in which company applies business models so as to gain high stake in  market and look at growth and expansion opportunities.

Industry Overview

            Airline industry in today's world is becoming highly competitive and gaining edge over many other service sectors. In a world where globalisation is taking place at a fast pace, it is that sector of economy that is highly associated with different parts of the world. It is a complex business industry as its reach in terms of customers is very large. Due to its global presence, this sector of economy is highly required to be adaptive as well as possess effective skills to bring effective strategical options for the business associations in this industry to sustain for a long run. At present, the airlines that have dominated the industry so far are ascertained to be network,  legacy and carriers.  At places where traffic volumes allow the growth, low cost carriers (LCCs) like Norwegian have also managed to plant roots and systematically function.

Business Models

            The business model (BM) concept is a process adopted by companies that contains a set of elements and their relationships which tends to allow the expression of the business logic and strategy of firm. In other words, in a prescribed manner, it is the value that company offers to individuals or groups that represent themselves as customers or a specific target audience of airline. It is a new concept in management that offers the investors a way that is practically accessible, systematic, functional, logical and describes and evaluates the company at any given point of time.

            Business models specify four major components. These are namely, the firm’s value proposition, market segments it addresses, structure of the value chain which is required for realizing the value proposition, and the mechanisms of value capture that the firm deploys.

Historical background of Norwegian Air Shuttle Airlines (ASA)

            Norwegian Air Shuttle Airlines, trading as Norwegian, is a low-cost airline. It was found on 22nd of January 1993. The company started to run operations which had previously been carried out by a Braathens subsidiary called Busy Bee of Norway A/S. In the beginning, NAS had a small fleet consisting of only three Fokker F-50 aircraft, which were flying regional routes on the west coast of Norway in close cooperation with Braathens S.A.F.E (South-American & Far East). During the next nine years NAS gradually expanded its production for Braathens. But in 2002, SAS purchased Braathens S.A.F.E., which led to a termination of NAS' west coast operations. As a result, NAS decided to start competing directly with SAS Braathens on domestic flights.

            As part of the company's expansion plans, NAS established a Polish subsidiary with two planes stationed at the Warsaw base in 2006. In the following year, NAS acquired FlyNordic from Finnair, thereby strengthening its position in the Scandinavian market, as well as making Stockholm its Swedish base. The same year, NAS placed an order to buy 42 Boeing 737-800 aircraft to be delivered within 2014. Moreover, the company launched both a full scale online bank “Bank Norwegian” and its own frequent flyer program “Norwegian Reward”. NAS' first new generation aircraft Boeing 737-800 was delivered in 2008, which was the first step of company towards becoming a more effective, efficient and eco-friendly company.

                          

Cost Focus of of Norwegian

            Norwegian focus being a low cost carrier (LCC) focus upon cost reduction in order to implement a price leadership strategy in relation to the market that they wish to target. There are a number of strategic measures which lead to the reduction of unit cost categories which are explained with the help of following table:-


    

            By utilising a young and homogeneous fleet of medium-sized aircraft, Norwegian aims at reduction of cost in terms of fuel, staff, maintenance and overheads. Along with this, in case of placement of large orders at discounted prices, it results in diminution of capital costs. Lower unit costs of all categories can be obtained by engaging in the practice of high-density seating. This can take place as more seats and passengers will still occupy fixed costs while in-flight seating and fuel costs increase as  a result of more passengers in flight. Through company's cost strategy of serving small and uncongested airports, the delays and ground times can be avoided. Also, the company looks upon maximising the block hours and aircraft utilisation by making sure that all the flights of company are on time.

 

 

            The “free seating” philosophy may also be quoted in this context, since it encourages passengers to board quickly and thus also helps to avoid delays. Apart from the lack of congestion, small airports usually charge lower fees than the established ones and are more willing to co-finance the promotion of new routes. Finally, unit costs are reduced by directly selling tickets online, by implementing a high density seating configuration, and by eliminating all kinds of free inflight services, such as catering, onboard entertainment and newspapers..

            On the sales and demand side, the pricing policy of the low cost carriers is usually very dynamic, with heavy discounts for tickets booked long in advance, which leads to the generation of new demand from low-yield passengers and heavy bargainers who would not have flown otherwise. Also, LCCs earn ancillary revenues by selling other products and services both onboard and on their websites, which include fees for check-in luggage and for credit card payments.

            While LCCs initially focussed on short-haul services, they have since extended their networks to medium-haul services. The main reasons for this development can be regarded as both increasing competition on the established routes and new ASAs between Europe and third countries.

            This is one example of the positive impacts that LCCs (in deregulated markets) can have on competition and thus on consumer benefit. Generally, increasing competition and declining prices could be observed on virtually all routes and city pairs offered by LCCs. In addition, the presence of Low Cost carriers at uncongested regional airports can boost the respective regional economies and – in some cases – help a region maintain or boost the air services.

Norwegian Business Model

            Airline business models into four distinct groups; low-cost model, legacy model, charter model and long-haul low-cost model. According to NAS's website and annual reports, the company presents itself as a low-cost airline, and seems to possess most of the product features which characterizes the low-cost model. For instance, NAS has a high aircraft usage and frequency, ticket less and automated check-in systems, point-to-point connection, online distribution, a high degree of fleet commonality and passengers have to pay for amenities. However, the company does have some features which are considered to belong to the legacy model; NAS operates mainly from primary airports and has its own frequent flyer program Norwegian Reward, as well as optional seat assignments. Despite these differences we will consistently throughout this paper be using the two terms low-cost carrier (LCC) and low-cost airline, when referring to the business model of NAS and similar airlines.

Norwegian Business strategy

            Norwegian Air Shuttle is guided by its vision; “Everyone should afford to fly”. In short, the company‟s primary objective is to give as many people as possible the opportunity to travel by air, and to offer a high quality travel experience at low fares. Moreover, NAS‟ business and behaviour is affected by three corporate values; simplicity, directness and relevance; as well as three operational priorities; safety, service and simplicity. According to its website, Norwegian Air Shuttle‟s business strategy is twofold. The company aims to become the preferred supplier of air travel in its selected markets, and to generate excellent profitability and return to its shareholders. Furthermore, NAS believes this could be achieved by following a list of selected business principles. First, NAS‟ employees need to adhere to the corporate values and priorities. Second, NAS aims to attract customers and stimulate markets by providing operational excellence, helpful friendly service, and low operating costs which results in low ticket prices. Third, by offering customers “freedom to choose”, NAS is ensuring a broader market reach as several customers demand additional products and services and are willing to pay for it. Fourth, providing a comprehensive and attractive route network is crucial. Thus, NAS is constantly working to offer a route network consisting of both high frequency business destinations to primary airports within or outside of Scandinavia, as well as popular destinations for leisure travellers. Fifth, NAS continuously monitor and work to improve its cost base wherever possible; in addition, the company aims to maximize its revenue through the use of passenger revenue management. Sixth, NAS uses industry leading technology in order to develop high quality cost efficient products and services which could improve the level of convenience and comfort for travellers. At last, the company utilizes its strong brand name and efficient distribution channels to further increase ancillary revenue.

Financial Performance of Company

            NAS' financial performance has developed over the years. By reviewing several key financial figures of NAS and its peer group, we aim to gain a better understanding of which direction the company is moving, and how it performs in comparison to its main competitors. When measuring airline performance, the main emphasis is often put on analyzing operational metrics such as ASK, RPK and load factor, while financial performance in terms of profitability and liquidity have a tendency to be given a lower priority. Yet, it is important to measure a company's ability to make profits, its short-term liquidity and long-term solvency, to be capable of understanding the factors that directly influences its survival.

      Norwegian Air is a remarkable agent of change. It has broken new ground strategically as the only independent European LCC with both single aisle and twin aisle operations, as well as establishing operating subsidiaries in multiple jurisdictions. Norwegian's innovation has encouraged legacy groups such as Lufthansa and IAG to launch their own long haul low cost operations, and prompted local rival SAS to establish bases outside Scandinavia.

However, Norwegian slumped back into losses in 2017, when continued rapid expansion also further inflated its growing debt.

A loss when the world's airline industry is enjoying a sustained period of historically high profitability again raises questions about Norwegian's ability to convert pioneering expansion into sustainable profitability. Even in good years, its margins have been modest.

Norwegian expects better results in 2018, but low profit margin and high debt levels leave it exposed to any cyclical downturn or localised demand shock affecting its network, and to hikes in oil prices or interest rates. Little wonder that Norwegian Air Shuttle ASA has been the worst-performing share among bigger European airlines over the past year and the past five years. Yet the company has a scope of growing by modifying its business model so that company gets back on track as earns high revenues and profits ahead of its competitors.

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