New TransAtlantic budget carrier times its launch to U.S. border reopening. Now comes the hard part
The moment long-awaited by European airlines has finally come: After 18 months of severe COVID-related travel restrictions, the U.S. is opening its borders to non-essential visits by vaccinated foreign travelers.
And a brand-new transatlantic budget airline—Norse Atlantic Airways—has risen to try to fill the pent up demand.
It’s a route many have risked before. The most notable and most recently fallen, Norwegian Air, disrupted the market by offering ultra-low cost transatlantic flights across the Atlantic Ocean. Norwegian was joined in its attempt, and later retreat from the U.S. market, by WOW Air and Primera Air, which both went out of business.
Budget airlines traveling short distances operate on tight margins, but there are still tools they can use to increase profitability. Airlines can turn around flights faster, raise fees for baggage, or reach cruising altitude more quickly to cut fuel costs.
Across the Atlantic however, these levers don’t exist and margins are razor thin, making transatlantic budget airlines seem like Sisyphus—pushing their boulder up the hill only to see it roll down every time.
Since COVID-19 roiled markets, however, nothing is as expected in the airline industry and Norse hopes to go further than the ones that preceded it—even though it shares plenty of DNA with a certain previous Norway-based budget aspirant that stumbled in the U.S.
“Right now the problem is that there are too many aircraft in the air and too few passengers,” Bjørn Tore Larsen, founder and chief executive of Norse Atlantic, told Fortune. “Once the pandemic is behind us, our thesis is that next summer it will be business as usual and then it will be too few aircrafts and too many passengers.”
The U.S. has kept borders effectively closed to Europeans since March 2020, and consensus in the airline industry holds that there is a pent-up demand for travel between the U.S and Europe.
“When the U.S. opens up their border, that’s when you will see the long haul players actually seeing some recovery,” says Sathish Sivakumar, head of European Transport at Citi Research.
On cue, after the announcement on Monday that the U.S. would reopen its borders to 33 countries, including members of the European Union as well as Britain, China, India, South Africa, Iran and Brazil, shares in airlines surged.
Letting vaccinated visitors enter the U.S. provided the “the thrust needed to send the recovery in airline stocks full throttle,” says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. Shares in German carrier Lufthansa climbed nearly 9% at their peak on Monday while British Airways owner IAG jumped 11%.
The recovery, however, will not be the same for everyone.
While most legacy players lay wounded after hemorrhaging cash for 18 months, newcomers have a different outlook. “COVID-19 has given opportunities that perhaps weren’t available to newcomers into the market. New slots at the airport, cheaper aircrafts,” says Gus Gardner, associate travel and tourist analyst at Global Data.
The most notable opportunity is the availability of takeoff and landing slots. Prior to the pandemic airlines were required to use 80% of their airport capacity or have the slots taken away, and there was scarce opportunity to acquire slots, especially desirable ones such as evening takeoff from London and morning arrival in New York. Today, the market has opened up.
“The pandemic has changed certain things, especially at [London] Gatwick,” says Sivakumar at Citi Research. With Norwegian Airlines exiting the market and British Airways consolidating its offering to Heathrow, more slots will become available and “that opens up more opportunity now,” he says. Gatwick is the chosen airport for Norse.
Another advantage for newcomers has been the wide availability of airplanes. After the pandemic hit and a string of airlines went bankrupt or massively scaled back operations, a graveyard of aircrafts became available on the cheap. Norse founder Larsen says those airport were “very, very attractively priced”—and goes as far to call the cut-rate deals the catalyst for his entry into the business.
At the same time aircraft and slots are in good supply and competitors are disappearing, ticket prices are rising. According to data from Deutsche Bank, the price of a transatlantic flight ticket purchased 21 days in advance were up an average of 34.4% in the week ending on Sept. 17 compared to two years ago.
Flights from New York’s JFK to London Heathrow on American Airlines were 53% more expensive than they were two years ago, while the same flight on Delta was 57.5% more expensive.
“This is probably the best time ever to create a new airline with the proposition we are doing,” says Norse’s Larsen.
A familiar model
Norse Airlines will fly from three European destinations—London, Oslo, Paris—to Fort Lauderdale, New York and and Los Angeles. It will start flying in Spring 2022 with tickets on sale three months before the first flight.
The airline has leased 15 aircraft—six Boeing 787-9 aircraft and three Boeing 787-8 aircraft from Irish lessor AerCap Holdings, and another six Boeing 787-9 aircrafts from BOC. Both Boeing Dreamliner aircrafts have a two-class system. Without a business or first class, the aircraft will target budget travelers, leaving only premium economy for customers who want to spring for a little extra leg room. “Others make their money in perhaps a bit more sophisticated manner if I might say that. We are quite simple people,” said Larsen.
This simplified operation will be lean, Larsen says. The company has gone out to the market once, raising NOK1,275 million ($150 million), with no plans to leverage debt beyond its aircraft lease agreements. “The fact that we only operate one type of aircraft and only do long haul and as much as possible point-to-point, makes it easier to manage,” said Larsen.
Still, Norse’s business model is not a new one, and many have noted the business looks eerily similar to another airline—one that retreated from the U.S. “It’s a replica of Norwegian. It’s going to be using the same aircraft type, with a new paint on the outside,” said Gardner from GlobalData.
For obvious reasons, Norse does not want too many similarities drawn between itself and its predecessor, despite using jets formerly used by Norwegian and having Norwegian founder Bjord Kos holding a 1% stake in the new company.
A couple things differentiate it from its Norwegian peer, however. Norse will employ all its employees in-house, with little outsourcing of staff—a labor strategy Norwegian Air did not receive favors for. And the aircraft will sport a different coat of paint on the outside, with markings of a swirl found on the bow and stern of the Viking Oesberg ship.
One thing that Norse hopes to achieve quickly is profitability.
“For us profitability is much more important than growth,” says Larsen, in reference to the leanness of his operation. “It’s about really managing costs and having flexibility when it comes to taking delivery of aircraft and also phasing in growing gradually but in a controlled manner.”
The forecast for profitability is rocky without restrictions fully lifted, but Larsen appears bullish: “We think we will be profitable year one when we are in full operation. And we will be in full operation once the pandemic is behind us.”
Some analysts are wary of having too much confidence in the path to profitability, however. Sivakumar at Citi notes that Norse “are starting at an advantageous position,” and it is a good time to start an airline but, “the question is whether you’ll end up making money or not.” It will depend on whether new customers stick around because they like Norse Air’s offering, he says.
One thing is for certain, says Gus Gardner from Global Data: “They are definitely going to be a disruptive force.”
Correction September 23, 2021: This article has been updated to correct Norwegian founder Bjorn Kjos’s stake in Norse.
More must-read business news and analysis from Fortune:
- Chipmakers to carmakers: Time to get out of the semiconductor Stone Age
- The real reason everyone is quitting their jobs right now
- This chart shows why the housing market may see an end-of-September shock
- 3 things you should know about the timeline for kids’ COVID vaccines
- Samuel Adams Utopias, illegal in 15 states, goes on sale next month
Subscribe to Fortune Daily to get essential business stories straight to your inbox each morning.