MGT 521 Week 2 Assignment
8/25/2015 Bookshelf | Management
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Management in Action
Norwegian Air Shuttle Aspires to Become the Cheapest Global Airl in e It’s snow in g in Copenhagen as Norwegian Air Shuttle Flight DY7041 lifts off. There are nearly 30 passengers on board, most of them Norwegians, Swedes, and Danes eager to escape the gloom that engulfs their part of the world in late November. Today they will arrive in Florida faster than usual. This is the first direct flight from Scand in avia to Fort Lauderdale. And it’s a barga in : The tickets are a fr action of what larger airl in es charge.
Norwegian Air Shuttle Chief Executive Officer Bjorn Kjos has come along to celebrate the occasion. . . .
Norwegian is Europe’s fourthlargest discount airl in e. Until recently, it was little known outside Scand in avia. Then, in 2012, Kjos made the largest airplane order in European history, buy in g 222 jets from Boe in g and Airbus Group for $21.5 billion. Most of these are narrowbodied Boe in g 737 Max 8’s and Airbus A320neos that will beg in arriv in g in 2016. Kjos will use them to in crease Norwegian’s presence in Europe and challenge the top three discount carriers: Ireland’s Ryanair, Brita in ’s EasyJet, and Germany’s Air Berl in . Last year, Norwegian acquired its first two Dreaml in ers, which list for as much as $289 million each. Kjos is us in g these widerbodied jets to offer cheaper in ternational flights to distant places such as New York, Los Angeles, and Bangkok, undercutt in g established carriers in Europe and the U.S. Norwegian’s $180 tickets between New York and Oslo cost 10% of the equivalent ticket on British Airways. In effect, Kjos wants Norwegian to become a global version of Southwest Airl in es.
Other upstart airl in es have tried this and failed. Kjos says Norwegian will succeed because it has the Dreaml in er and a new group of travelers to fly: the emerg in g middleclass citizens of Ch in a and In dia. He predicts that in the next decade there will also be 500 million new airl in e passengers, and he hopes to attract them with low fares.
Kjos will have to do many th in gs right for it all to work, and he’s already run in to turbulence. He narrowly averted a strike by 600 pilots in November. They are unhappy with his plan to base Dreaml in er flights outside Norway and to staff them with lowerpaid workers from Thailand and elsewhere. The Dreaml in er still needs debugg in g. Kjos’s new jets have been grounded repeatedly by technical problems. . . .
Four U.S. airl in es are try in g to keep the U.S. Department of Transportation [DOT] from allow in g Norwegian flights in to the country because they worry that their foreign competitor will launch what they describe as an unfair price war with them. Kjos, however, doesn’t th in k anyth in g will get in the way of his plan to reshape in ternational travel. “ In the future, you will travel to Asia for noth in g,” he says, “You th in k I’m jok in g. You wait and see.”
Obscure outside the aviation in dustry, Kjos is a celebrity at home; he’s Norway’s Richard Branson. In the early Aughts, Kjos in troduced lowcost flights to a region that has historically been dom in ated by Scand in avian Airl in es (SAS). At the time, SAS, which is controlled by the governments of Norway, Sweden, and Denmark, had some of the highest fares in Europe. “He has changed the lives of many, many Scand in avians,” says Hans Erik Jacobsen, an analyst at First Securities ASA. . . .
The company went public in December 2003 at 32 kroner a share. Then, Kjos says, SAS reduced its prices in an effort to destroy its rival. (SAS denies that this was its in tent.) Norwegian aga in lowered its prices. Its revenue dw in dled, along with its stock price. . . . Then, they say, they learned from government in vestigators that SAS had been tapp in g in to Norwegian’s computer system and us in g data about its ticket sales to underprice it. Norwegian sued SAS for illegally us in g its trade secrets, eventually w in n in g a 160 million kroner judgment in 2010. SAS says it accepts the court judgment.
8/25/2015 Bookshelf | Management
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Kjos says the revelations ended SAS’s predatory pric in g, and Norwegian had its first profitable year in 2005. But Kjos soon had someth in g else to worry about: ris in g oil prices. Oil had soared from $25 to $75 per barrel in the previous five years. Kjos and his top executives modeled what would happen if oil prices cont in ued to climb at that rate. “We found out . . . if we hit $120, we’re go in g bankrupt,” Kjos says. Norwegian’s planes were burn in g too much gas. The company needed a new fleet to survive. . . .
In August 2007, Kjos reached an agreement to buy 42 new jets from Boe in g for $3 billion. Frode Foss, Norwegian’s CFO, said the company couldn’t afford it. “Frode, would you like to go bankrupt with old airplanes or with new airplanes?” Kjos swagger in gly replied. He later in creased the order to 84.
Three years later in 2010, revenue and profit had more than doubled. Norwegian was fly in g twice as many passengers and routes. The new planes “really enabled them to drive down the cost level,” says Jacobsen. “It was a big step forward.” Later that same year, Kjos ordered Norwegian’s eight Dreaml in ers, but he also concluded that his newish fleet of shortrange planes was already becom in g outmoded. In 2012 he and [Norwegian Airl in es chairman of the board Bjorn] Kise took advantage of the euro crisis to get favorable terms from both Boe in g and Airbus for 100 planes. . . .
Norwegian’s in ternational routes will prevail, Kjos says, because the Dreaml in er burns much less fuel than previous jets. “The Dreaml in er is the first airplane that can do it,” he says. He’s also count in g on lower personnel costs. Although the airl in e is headquartered in a country with some of the highest salaries in Europe, Kjos is try in g to get around this by bas in g flights in lowersalaried countries such as Thailand. That’s why Norwegian’s pilots wanted assurances that he wouldn’t try to use geography to cut their salaries. . . .
Norwegian also faces opposition in the U.S., where American Airl in es, Delta Airl in es, United Airl in es, and US Airways are urg in g the federal government to reject an application by Norwegian Air In ternational. The company is a Norwegian subsidiary that Kjos has set up in Ireland to operate its Dreaml in er flights. Norwegian’s critics say Kjos is do in g this so he can hire cheap nonunion pilots and cab in crews. “[Norwegian’s] scheme must be immediately and unequivocally rejected,” Lee Moak, president of the Air L in e Pilots Association In ternational in Wash in gton, said in a statement last month. “The DOT must not permit U.S. airl in es and their employees to face an unfair competitive advantage from this runaway shop.” A Norwegian spokesman, Lasse SandakerNielsen, says the company isn’t do in g anyth in g improper and its critics are mak in g “false and mislead in g statements.”
As for the Dreaml in ers, they have been problematic. The U.S. Federal Aviation Adm in istration ordered Boe in g to stop deliver in g them last year until it fixed their lithium batteries, which had caught fire. Norwegian’s Dreaml in ers never burned, but one jet was grounded in Bangkok in September [2013] because of pump problems, strand in g 200 passengers bound for Stockholm. In December, Stockholmbound Norwegian customers were stuck in Fort Lauderdale before Christmas because of a disabled Dreaml in er. On New Year’s Eve, 276 passengers headed for Oslo spent the night stew in g in hotels near John F. Kennedy In ternational Airport in New York because of brake problems on one of the jets. Norwegian’s SandakerNielsen says the company apologizes for the delays. . . .
Kjos responded to the latest crisis by doubl in g down. He announced in December that Norwegian would lease two more Dreaml in ers.
Source: Excerpted from Devin Leonard, “Barbarian at Gate G17,”Bloomberg Businessweek,January 13–19, 2014, pp. 58, 60– 6