Report: Business Model and Financial Performance of Norwegian Air

This report provides a comprehensive analysis of Norwegian Air Shuttle's business model, exploring its historical background, cost-focused strategies, and operational principles. It delves into the company's adoption of a low-cost carrier model, examining how it achieves cost reduction through fleet management, airport selection, and dynamic pricing. The report also investigates Norwegian Air's business strategy, including its objectives, corporate values, and key business principles. Furthermore, it assesses the financial performance of the company, comparing it to its competitors and highlighting its strengths and challenges in the airline industry. The report concludes with an overview of Norwegian Air's market position and future prospects, providing a detailed understanding of its operational and financial dynamics.

BUSINESS MODEL OF
NORWEGIAN

Table of Contents
INTRODUCTION...........................................................................................................................1
Industry Overview..................................................................................................................1
Introduction to Business Models............................................................................................1
Historical background of Norwegian Air Shuttle Airlines (ASA).........................................2
Cost Focus of of Norwegian...................................................................................................3
Norwegian Business Model....................................................................................................5
Norwegian Business strategy.................................................................................................5
Financial Performance of Company.......................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

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
(Klophaus, Conrady and Fichert, 2012). 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.
Introduction to Business Models
The business model (BM) concept is a process adopted by companies that contains a set
of elements and their relationships which tend 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 (Daft and Albers, 2015).
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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 (de
Wit and Zuidberg, 2012).
(Source: Business Model, 2018)
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 (Nair and et. al., 2013). 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
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Illustration 1: Business Model

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 (Berghöfer and
Lucey, 2014).
(Source: History of Norwegian, 2018)
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:-
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Illustration 2: History of Norwegian

(Source: Norwegian Cost Focus, 2018)
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 (de Wit and Zuidberg,
2016). 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.
Also, the “free seating” philosophy aims at eliminating the delay by fostering the quick
boarding of passengers into the flight. Small airports being less congested, often charge lesser
than bigger ones. They possess the will to co-finance the promotion of new routes. Probably,
some other ways considered by Norwegian to reduce the unit cost are promotion of high density
seating structure, removal of in-flight services and online sales of tickets.
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Illustration 3: Norwegian Cost Focus

Norwegian being a Low Cost Carrier (LCC), benefits in relation to the aspect of demand
and supply. Company adopts a dynamic pricing policy ranging with the fluctuations in demand
and supply. For instance: If passengers book tickets long time prior to the actual date for which
flight is booked, company offers heavy discounts (Belobaba, Odoni and Barnhart, 2015). These
discounts often create demand from those passengers who otherwise would not have considered
Norwegian for travelling. Also, company earns additional revenue in the form of sales by selling
products and services onboard and on their website. These include taking charges for check-in
luggage and at times, credit card payment also.
With new Air Shuttle Airlines coming up in economy every single day, competition in
this industry has largely increasing reaching a point where it is no more feasible for Norwegian
to stick to short haul services. Thus, company has extended their existing structural framework to
medium haul services. The increasing competition from rival companies has thus caused benefits
for customers. Also, the presence of low cost carrier at regional airports free from congestion
gives a boost to the overall economic condition of that region.
Norwegian Business Model
Airline business models into four distinct groups, namely, 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 (Daft
and Albers, 2012). 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'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 (Stott, Stone
and Fae, 2016). Moreover, NAS’ business and behaviour is affected by three corporate values;
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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 (Daft and Albers, 2015). 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 (de
Wit and Zuidberg, 2012). 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 strategically become the only
independent European LCC with single and twin aisle operations, as well as establishing
operating subsidiaries in multiple jurisdictions. Norwegian's innovation has encouraged legacy
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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 (Klophaus, Conrady and Fichert, 2012). 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 economically stabled years, its margins have been modest.
Norwegian is expecting to get better outcomes in the year 2018. The major constraint in
this is high concentration of debt and low marginal profits for company which makes it
vulnerable to any change that arise in an economy like change in demand and supply and hikes
in oil prices or interest rates. Norwegian Air Shuttle ASA has been the worst-performing share
among bigger European airlines over the past five years (Norwegian’s massively disruptive
business model, 2018). Still the company is capable of growing by modifying its business model
so that company gets back on track as well as earns high revenues and profits ahead of its
competitors.
CONCLUSION
From the above report, it can be concluded that Norwegian Air Shuttle Airline is a low
cost carrier that primarily focuses upon the cost structure of entity to deal with the cost of
operating the airline. Also, it has been analysed that it follows a low cost business model wherein
the company emphasize upon strategies like free seating, dynamic pricing structure and some
other key ways to decide pricing for the airline. Also, it can be observed that company has been
experiencing losses since some time but is expecting a positive outcome this year by adopting an
effective strategy and modifying its business model.
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REFERENCES
Books & Journals
Belobaba, P., Odoni, A. and Barnhart, C. eds., 2015. The global airline industry. John Wiley &
Sons.
Berghöfer, B. and Lucey, B., 2014. Fuel hedging, operational hedging and risk exposure—
Evidence from the global airline industry. International Review of Financial
Analysis. 34. pp.124-139.http://www.vanharen.net/blog/general/best-practice-model-
framework-method-guidance-standard-towards-consistent-use-terminology/
Daft, J. and Albers, S., 2012. A profitability analysis of low-cost long-haul flight
operations. Journal of Air Transport Management. 19. pp.49-54.
Daft, J. and Albers, S., 2015. An empirical analysis of airline business model
convergence. Journal of Air Transport Management. 46. pp.3-11.
de Wit, J. G. and Zuidberg, J., 2012. The growth limits of the low cost carrier model. Journal of
Air Transport Management. 21. pp.17-23.
de Wit, J. G. and Zuidberg, J., 2016. Route churn: an analysis of low-cost carrier route continuity
in Europe. Journal of Transport Geography. 50. pp.57-67.
Klophaus, R., Conrady, R. and Fichert, F., 2012. Low cost carriers going hybrid: Evidence from
Europe. Journal of Air Transport Management. 23. pp.54-58.
Nair, S. and et. al., 2013. Service orientation: Effectuating business model innovation. The
Service Industries Journal. 33(9-10). pp.958-975.
Stott, R. N., Stone, M. and Fae, J., 2016. Business models in the business-to-business and
business-to-consumer worlds–what can each world learn from the other?. Journal of
Business & Industrial Marketing. 31(8). pp.943-954.
Online
Norwegian’s massively disruptive business model. 2018. [Online]. Available
Through:<https://airinsight.com/norwegians-massively-disruptive-business-model/>.
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