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U.S. DOT Tentatively Clears Norwegian Air International

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U.S. DOT Tentatively Clears Norwegian Air International

U.S. DOT Tentatively Clears Norwegian Air International
April 18
17:12 2016

MIAMI — The US Department of Transportation (DOT) has tentatively cleared Norwegian Air International (NAI), the Ireland-based subsidiary of Scandinavian ultra low cost carrier (ULCC) Norwegian Air Shuttle, to launch flights to the United States, ending a months-long standoff.

NAI proposes to operate long haul, low cost flights between Europe and the United States with an Irish operating certificate (the parent airline is based in Norway). Ireland has relatively permissive (by European standards) labor laws and regulations, and accordingly, NAI would be able to staff flights from Europe to the United States with crews from an entirely different country (initially planned as Thailand and other Asian countries).

NAI’s plans have been staunchly opposed by an unlikely alliance of management and labor groups at US airlines, the latter of whom object to competition from lower wage nations. Interestingly, however, no such opposition was mounted by European airlines or their notoriously militant employee workgroups.

NAI isn’t breaking any laws

Regardless of the merits of the objections of U.S. workers to lower wage competition, Norwegian’s actions were technically allowed based on the letter of the law (if not the spirit). The United States and European Union have an Open Skies Agreement (inclusive of Scandinavia) that allows for airlines to fly any non-stop route between the two geographies, regardless of which the airline staffs their flights with.

Separate EU rules also allow for Norwegian companies to operate wholly owned subsidiaries in Ireland (and vice versa) and the intersection of these two laws means that Norwegian and NAI were complying with all applicable laws. Ultimately, that is probably what forced the DOT’s hands, regardless of the arguments about protecting American workers, NAI wasn’t doing anything illegal – and it didn’t have grounds to stop them.

DOT Protects Consumer Interests

Another factor that the DOT had to have considered (or at least a beneficial side effect) is the boon to consumers that a viable long haul, low cost airline represents on trans-Atlantic flights. Along with WOW Air in Iceland (which operates narrowbodies on most routes to the Eastern U.S. and Western Europe), Norwegian has made Europe more accessible than ever for American travelers.

Thanks to Norwegian, $300-500 roundtrip fares between the U.S. and Europe are now not only available but common. Even if these fares are only available in limited quantities, they represent a very real opportunity for a new class of customer, perhaps families who would normally travel domestically, to actually reach Europe and have a special kind of experience.

Beyond their direct impact, they have more broadly driven down fares for the market at large by driving a huge response from the traditional legacy, full service airlines on trans-Atlantic flights. Scandinavia has had the most pronounced experience with this effect, as fare sales from the region are routine and frequent. Some of this is of course enabled by the sharp reduction in fuel prices, but Norwegian has absolutely driven much of the decrease.

NAI enables Norwegian to serve more European destinations (particularly London and Paris to start) in a cost-effective manner. In fact, thanks to the reduced labor costs, Norwegian will be able to drop fares even further on those flights, which could create amazing deals for American vacationers.

It comes at the expense of (some) employees

Despite the consumer benefits, the concerns of US airline employees are certainly valid. Competition from lower cost, foreign labor is a problem that has beset many industries, though it was most notably problematic for workers in manufacturing. Airline jobs are particularly painful to lose, given that they are one of the few classes of jobs in today’s economy that provide a middle class wage without necessarily requiring college.

Norwegian’s rise isn’t necessarily going to kill any jobs today—they’re too small—and today’s fuel environment allows airlines to make a steady profit even while having to match Norwegian’s fares on a limited basis. But if Norwegian survives the inevitable onslaught from legacy airlines once fuel prices rise again, its not inconceivable that they could grow to serve 150-200 trans-Atlantic city pairs (this is more than a decade out) and +/- 50-60 daily departures.

That would be a tangible reduction in market share for legacies on both sides of the aisle and could conceivably cause a few hundred airline crew jobs to be reduced. All of this is to say that the airline employees are not necessarily being paranoid. Airline managers and shareholders on the other hand are being nakedly protectionist.

But the truth of the matter is that governments should always move to protect consumers over narrow stakeholders (i.e. employees). In the case of Norwegian, the consumer benefit undoubtedly outweighs the pain that employees will feel, even if the latter is more painful on a per person basis. And if the government’s goal is to improve the economy at large, then it has to choose the path that has the most net benefits for all citizens (not just airline employees).

To get a sense of what this looks like with some back of the envelope math, for Norwegian’s flights to really impact jobs at US airlines, it would need to be offering at least a million to two million seats annually in the Trans-Atlantic market. Let’s take a number of 1.5 million for midpoint’s sake. Even if those passengers just save $50 on average, that is a direct consumer benefit of $75 million. On top of that, Norwegian’s entry has an indirect effect on competitors, and another 10 million passengers save $10 on average. Between direct and indirect consumer benefits, 11.5 million people benefit to the tune of a collective $175 million.

Meanwhile on a 2 million passenger market share (much of it gained by creating new customers and stimulating the market), perhaps 750 jobs might be lost (and this is probably an overestimate). Even if those 750 jobs had an average wage of $100,000 (again a huge overestimate), that would create an economic loss of $75 million.

So when you merge the two, Norwegian’s entry onto US routes benefits the economy as a whole by $100 million, and millions of American citizens benefit. The problem is that the costs to the 750 people are a lot more visible than the silent majority of millions who are better off, and this is usually why protectionist arguments hold water. Despite the very real costs to those employees, it’s a no brainer for the DOT to rule in favor of American travelers.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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