British Airways May Try to Kill Low Cost Transatlantic Flights

In the US prices have been driven downward by ultra low cost carriers — primarily Spirit but also Frontier and to a lesser extent Allegiant.

Major US airlines responded by lowering their own prices so they don’t lose business. Then, to try to segment the market and not give too good a deal to customers that aren’t going to buy a more stripped down product, they introduced Basic Economy fares to try to offer a worse product at the lower price, in hopes customers would spend more to keep things like seat assignments and carry-on bags. Basic Economy is a price increase.

Ultra low cost carriers have spread to transatlantic travel. There’s Primera and Wow Air but the biggest is Norwegian, operating new Boeing 787s and now also 737 MAXs for shorter routes.


Copyright william87 / 123RF Stock Photo

Norwegian’s rapid expansion has run into rising costs and limited cash in the face of losses.

However they’ve put pressure on yields, and Delta and its partners followed by American and its partners have introduced new restrictive Basic Economy-style fares on these routes.

British Airways has spun up their own lower cost no frills airline LEVEL. Air France has Joon that they say is for millennials since apparently that means ‘no money, doesn’t care about comfort, and is into marketing buzz’ or something.

The real question is how sustainable is the model both for Norwegian as it bleeds cash, and for airlines operating carriers-within-a-carrier, a strategy that has poor track record of success (in the U.S. that history has included Delta’s Song, United’s Shuttle and Ted, Continental Lite, and US Airways Metrojet).

But what if a legacy carrier could – as Grover Norquist once said — “drag it into the bathroom and drown it in the bathtub?”

British Airways parent IAG has acquired a 4.61% stake in Norwegian and plans to initiate acquisition discussions.

A potential acquisition could value the Norwegian company, which has a market value of more than $1 billion, at about $3 billion including debt, people with knowledge of the matter said, asking not to be identified because the deliberations are confidential.

Of course IAG says they view Norwegian as ‘an attractive investment’. At this point almost no one views Norwegian as an attractive investment.

The question is whether killing Norwegian kills the model. Is there more money that would come in behind Norwegian to scale up a replacement? Or are Norwegian’s losses enough to put the idea to bed, assuming that Wow Air and Primera aren’t going to grow the way Norwegian has — or sustain — and remain a niche part of the market?

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

More articles by Gary Leff »

Comments

  1. This may have a very negative impact on the Transatlantic Cities that Norwegian serves. I almost wonder if Lufthansa and Air France are also rooting for this to happen!

  2. They killed off Laker and they’ll kill off Norwegian also. WOW doesn’t count as most people don’t want to stop en route.

  3. @rusty If IAG were to buy Norweigian, my guess is they will focus on markets in Germany and France to compete against Lufthansa and Air France.

  4. BA isn’t killing off anything which is sustainable.

    Norwegian are hanging on by a wing, a prayer, goodwill and very creative accounting.

    Half empty expensive Dreamliners to Seattle do not make for a viable airline.

    The whole notion of ultra cheap transatlantic fares has been an illusion of fakery.

  5. Cue the soundtrack from the movie “Jaws”!

    Coz it sounds like the sharks (that would be BA/IAG) smell blood in the water and are preparing for the all but inevitable looming demise of Norwegian Airlines (and yet another Low Cost Carrier failed attempt to Long Haul…the graveyard is already full of them anyway, so what’s one more?)

    …so sounds more like BA wants a front row seat so it can be the best positioned shark to pounce when Norwegian is even weaker and there’s even more blood in the water (for ‘Bloody Awful’ 2.0) than there already is now!

    Folks, Norwegian’s CFO bailed last year.

    Norwegian just got a $168 million (desperation) cash infusion, which is basically a ‘Hail Mary’ attempt to prop up the all but bankrupt airline thru the coming peak travel season (which, if already precarious Syria civil war escalates to something larger could make for a sudden downturn in bookings, not to mention already rapidly escalating price of oil, could make for a VERY weak summer for trans-Atlantic travel…).

    The northern hemisphere winter is long known as being a graveyard for financially weak/struggling airlines, especially those that rely on trans-Atlantic markets.

    So, methinks, BA is more likely seeking to:

    1.) check out just how much (as in LITTLE) cash Norwegian has;

    2.) how fast Norwegian is burning thru (any) remaining cash;

    3.) what other operating metrics are such as fares paid, yield, load factors, advance bookings;

    4.) determine how long Norwegian can continue to fly on fumes;

    5.) figure out what BA (and its anti-trust immunized oneworld alliance pals like American, Iberia, Level, Aer Lingus) need to do to push it over the cliff by aggressively “competing” by offering fare “sales” (that are really nothing more than “predatory pricing” that is dressed up as the always illusory ‘how nice the airline is being now and of an even better future filled with low fares to come’ since we’re offering such great fares now that [wink, wink] are really being done to kill off Norwegian and go back to our cozy arrangement with the other two members of our industry cartel, SkyTeam and Star);

    6.) be best positioned to swoop in and cherry pick the best slots (especially at London Gatwick) and its other best assets (Norwegian’s aircraft, aircraft leases and/or future deliveries/production slots at the OEMs for Boeing 787s and 737-8 MAXes plus the white hot Airbus A321neo/neoLR ordered by Norwegian in recent years) for itself, and the other airlines in the IAG group, Aer Lingus, Iberia, etc.;

    7.) “catch and kill” off once and for all a pesky low fare/lower cost competitor that has been increasingly challenging it across the Atlantic, so it and the other two airline cartels, SkyTeam and Star, can go back to ripping off flyers with their insanely high, monopolistic airfares like they have been doing ever since they figured out a way to exploit loopholes in “open skies” treaties by creating anti-trust/anti-consumer “immunized” joint venture alliances/operations thst does nothing more than carve up markets and divvy up the spoils like gangsters – while these three (syndicate behaving like Leviathans) alliances/joint-ventures laugh all the way to the bank with their high fare operations across the Atlantic from impenetrable fortress hubs on BOTH sides of the Atlantic Ocean (just like they’ve always done to airlines like Laker’s SkyTrain or PeoplExpress, just to name two examples of low cost airlines that attempted to break up the high airfare party of the big name airlines…like the Geico commercial says: it’s what – the big airlines – do).

    Bloody Awful 2.0 (nb: BA was commonly referred to as “Bloody Awful” during the 1970s/mid-1980s when its service was better than it is now…) just wants to be first in line when Norwegian fails, so it can get first dibs on Norwegian’s choicest assets – or even have a hand in all manner of dirty tricks all cleverly masked, yet principally intended towards accelerating its demise especially now that the higher (and climbing);price of oil makes Norwegian’s chance of hanging on that much shorter…

    …whether it’s in the next few months due to spike in oil price (for any reason, but Syria looms large, too), or certainly after the onset of the always brutal for airlines’ winter season later this year…

    …Norwegian looks like its days are numbered…

    Nothing more. Nothing less.

    It’s in BA’s DNA to be a slick, ruthless, trickster to inflict harm on its competitors…

    …I mean seriously, we’re only talking about the airline best known for the infamous “Dirty Tricks” it used to try and bring down Virgin Atlantic in that airline’s early years… 😉

    …but my, oh my, those slots at Gatwick, and maybe some/many of its newest planes/delivery slots sure do look VERY, VERY NICE to have – especially if they come all gift wrapped at pennies on the dollar/pounds!!!

    3.) how

  6. PS:

    After Norwegian is gone, does that mean the “excuse” (fig leaf for abject greed) previously offered for the now underway Boeing 777 densification to the 10 (hated and loathed) teeny tiny, no legroom seats from the far more passenger preferred nine no longer is no longer valid?

    Yeah, yeah, even if that bs excuse/“rationale” that was used when the threat of Norwegian loomed large no longer applies, I think we all know they’ll come up with other bs “excuses” to make their 777s as horrible as they think they can get away with for economy class flyers…

    Once upon a time, the concept of “open skies” really was pretty to think would work for consumers…

    …but with just three overpowering, super dominant alliances ruling the skies, each with fortress hubs on both sides of the Atlantic, and each now figuring out how to maximally exploit loopholes with government blessing to coordinate on pricing, capacity and frequency whereby one airline all but owns its home market on the other side of the pond (BA/AA in the UK; AF/DL in France & the Netherlands; LH/UA in Germany, Austria, Belgium & Switzerland, etc.), while on our side AA, DL & UA have virtual locks on the best airports, even breathtaking dominance over entire regions…

    …with all the classic, indeed textbook symptoms of an out of control, not to mention very comfortable and smug OLIGOPOLY taking root and only deepening with each passing year…

    Maybe the time has come (if it’s not “ripe” now – it will be within the next decade for sure) to rethink:

    1.) what’s working?

    – and –

    2.) what’s NOT working?

    …about airline deregulation in general here in the USA – and especially these hideous monopolies that are called “alliances” where our governments LITERALLY are LEGITIMIZING collusion and all of the toxic, destructive anti-competitive/anti-consumer behaviors airlines who enjoy nominal, if any, competition, are now engaging in.

    The symptoms and manifestations of oligopolistic pricing models, rapidly degraded and continuing to degrade products, and the breathtaking degree of arrogance and indifference that is very essence of what an oligopoly is and how companies in oligopolistic industries think, act and behave.

    Anyone who says otherwise is either directly benefitting from the windfall profits and therefore has no reason to admit this…

    …or should take a little time out to read up about what oligopolies are, and why when we’re thinking about the future, how dangerous and destructive it is to allow them to continue their chokehold over us as consumers, and our economy in general unchecked and unabated.

    The seats are too small, our legs are crunched, the toilets are too small for most adults, and the overall misery that most of us experience when we now fly are EXACTLY what one would expect to happen in industries where meaningful competition does NOT exist (think cable tv/internet providers or your local DMV, etc.) – and when these types of “bad products” are encountered, it’s with cable tv/internet companies or at the DMV because these, like our airlines, are instances where meaningful competition, in fact, does NOT exist.

    Fios is as sleazy and horrible as Spectrum with their low ball come ons that end up being far more expensive once equipment fees, and “options” (hilarious) are included, and their service is equally atrocious most of the time becuase these two behemoths are often the only “choices” available.

    As for the DMV? Seriously…does that even need further discussion about how customer friendly that is?

    And the word for such (so not) great customer “service”/experience in examples like these, and airlines, is: OLIGOPOLY (or at the DMV its evil twin, MONOPOLY).

    And as applies to our airlines ask ourselves:

    1.) is THIS really what we want even more of?

    2.) are things “Racing to Fast and Too Far to the Bottom” at our oligopolist behaving airlines?

    3.) Is deregulation working as well as envisioned with just four airlines ruling more than 80% of capacity, with some having virtual locks at major hubs where competition is non-existent?

    4.) are those government sanctioned anti-trust immunized monopolies/oligopolies where collusion is LEGAL really working as passengers were promised?

    Coz I’m NOT sure if we knew originally what we’re seeing now if THIS is what the architects of airline deregulation and open skies had in mind?

    The makings of an ugly, callous, arrogant, abusive, even at times sadistic, small group of non-competitive oligopolist domestic airlines, and just three large super dominant airline “alliances” that LEGALLY collude in many/most of the most lucrative air transport markets that in all but name think, behave and act like a cartel?

    For these skies are only free FROM competition and anything but “open” to entire cities, regions and countries…

    …and hardly what one would expect to see ocurring in markets/industries where real competition exists, and skies are truly “open” to all comers…

    …and as such, it’s time to recalibrate things to restore a healthier balance to the now desperately non-competitive industry that is our (awful for most passengers) airlines here at home, or to/from cities and countries across the Atlantic…

    When one can fit in the bathroom, much less their seats, something is wrong… and HORRIBLY WRONG at that. And that’s just for starters.

    Do we really need more sensational headlines about the abuses paying passengers experience or our pets dying in overhead bins to tell us just how ridiculous and out-of-control things have already become?

  7. CORRECTION:

    When one CANNOT fit in the bathroom, much less their seats, something is wrong…

    (With apologies for the omission/error of that critical word from the above…)

  8. @Scott Fraser “Not a bad strategy.”

    A very bad strategy.

    They are trying to preserve pricing higher than competitive marginal cost so new competitors just come in to fill the void. BA will own $1Bn of assets that they paid $3Bn for. Again, not bright at all.

Leave a Reply

Your email address will not be published. Required fields are marked *