Is 2016 Norwegian Air Shuttle's Breakout Year?

by Josh Lew
Last updated: 4:00 PM ET, Thu February 11, 2016

Photo courtesy of Norwegian Air Shuttle

Norwegian Air Shuttle announced a return to profitability in 2015. The upstart low-cost carrier has found a niche in the budget long-haul marketplace, and it is also ready to compete directly with Ryanair, easyJet and other European LCCs during the upcoming summer vacation season in Europe.

Advantages and roadblocks

A winning fuel hedging strategy has given the airline an ideal playing field on which it can compete with its budget rivals. Norwegian was not heavily invested in fuel futures when the huge drop in oil prices occurred. The airline's CEO, Bjorn Kos, is optimistic about the coming year, but he is concerned about one particular road block that could become an issue in his airline's home country.

"We enter 2016 with favorable fuel costs and one of the youngest fleets in Europe, which presents a significant competitive advantage. We see a good demand for quality flights at affordable fares, but the unpredictable political decision to introduce passenger tax in Norway is creating an uncertain situation in this market," he said in an interview with Buying Business Travel.

A passenger tax

The passenger tax Kos is referring to, for flights originating from Norway, is meant to be a kind of environmental tariff. Norway is one of the most active countries when it comes to fighting global warming and air pollution, so this tax comes as no surprise. However, the fees proposed by Oslo are quite steep: 80 Norwegian kroner, which is about $9 per passenger. If there is no change, the fee will go into effect on April 1.

The tax could stunt Norwegian's profits going forward. However, Oslo will impose the tariff on all flights by all airlines taking off from Norwegian soil. This means that the decision will also affect Ryanair and other competitors. In fact, the Irish budget airline has come out on the same side as Norwegian when it comes to the tax. Both airlines are strongly opposed to the idea and are urging Oslo to reconsider before April 1.

Everyone has reason to be optimistic

Norwegian would certainly be hurt by the tax more than its competitors. However, the carrier has spread itself out quite a bit, with bases in Spain, England, Sweden, Denmark and Finland in addition to its hubs in Norway.

Despite the worries about taxes, in an interview with Bloomberg, Kos said that he expected fares to be lowered on certain routes going forward. Ryanair is planning to cut its fares by six percent on popular routes into Spain. Kos said price cuts made by his airline will vary "from region to region… [In some regions], our competitors have extremely high prices, so there is a lot of room for lowering the prices."

Norwegian has created the low-cost long-haul niche, so it remains in good position despite carriers like WOW Air stealing headlines late last year. A superior hedging strategy has given the Oslo-based carrier a leg up on the competition on European routes, but legislation could put a damper on what could otherwise be a banner year.

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