The Juice
Well-Known Member
http://www.thestreet.com/story/1353...r-path-for-new-transatlantic-competition.html
The U.S. Department of Transportation on Friday dealt a blow to domestic airlines, granting tentative approval to a plan by Norwegian Air International to serve the U.S. after more than two years of debate over the discounter's plan.
The regulator, in a statement, said that Norwegian "appears to meet DOT's normal standards for award of a permit and that there appears to be no legal basis to deny NAI's application." The department invited comments within 21 days from those who object, and is sure to hear from plenty in the U.S. airline industry who have warned that granting the Norwegian airline's application would create a "race to the bottom" in transatlantic flying similar to the havoc discounters caused in the U.S. following deregulation.
Norwegian Air first applied for a foreign air carrier permit in 2013 for a subsidiary based in Dublin, hopeful of taking advantage of the European Union's liberal airline treaty with the U.S. to operate discount service across the Atlantic. The plan was controversial from the start due to Norwegian's attempt to locate the unit outside of its home territory, and because the concept posed a threat to traditional transatlantic operations.
A unit of the AFL-CIO quickly blasted the decision Friday, calling the application "a job-killing flag-of-convenience airline that perverts the transatlantic airline market and violates our nation's aviation trade agreement."
While the immediate impact of the ruling is expected to be muted as Norwegian slowly builds up a modest schedule, the long-term implications for U.S. carriers could be troubling. U.S. airlines in the years since deregulation have relied on international service, which faces less discounter competition, to offset margin erosion on domestic flights.
Shares of Delta Air Lines (DAL - Get Report) , United Continental Holdings (UAL - Get Report) and American Airlines (AAL - Get Report) traded down modestly Friday afternoon.
The extent of the damage an upstart like Norwegian can do is a matter of debate. Companies like Southwest Airlines (LUV - Get Report) in the U.S. and Ryanair (RYAAY - Get Report) in Europe have established that discounters can soak up travel growth that might otherwise go to incumbents by offering vacationers lower fares and make at least some gains among business travelers. But large corporate contracts that are the most lucrative for airlines have largely stayed with the legacies because of their greater reach and more flexible schedules.
Skeptics will also note that Norwegian is far from the only threat the airlines face on international routes, noting the rapid growth in Gulf State carriers including Etihad Airways, Emirates Airline and Qatar Airways.
Airline bulls argue that the recent round of consolidation in the U.S. has strengthened balance sheets and cut into competition at home, making domestic flying more lucrative than it once was and better preparing the airlines for upcoming international skirmishes. The routes that Norwegian will attack will likely be high-volume ones that are already the subject of intense competition between the incumbents, likely limiting damages to margins.
In the near term, domestic airlines could actually be helped by a commodity trend that usually works against the industry. Barclays analyst David E. Fintzen in a note Friday said that higher fuel prices could be a near-term catalyst for the industry if it reassures investors that companies will not make short-sighted decisions to increase capacity.
Fintzen said that airlines have been "surprisingly rational" during this period of low-fuel costs, but fears remain.
"The reality of slow economic growth, low oil and (the resulting) higher aircraft utilization means fares go down even as margins go up," the analyst wrote. "If oil prices do move higher, we think that pricing pressures reverse, and suspect the market could put a disproportionally higher multiple on lower earnings."
The U.S. Department of Transportation on Friday dealt a blow to domestic airlines, granting tentative approval to a plan by Norwegian Air International to serve the U.S. after more than two years of debate over the discounter's plan.
The regulator, in a statement, said that Norwegian "appears to meet DOT's normal standards for award of a permit and that there appears to be no legal basis to deny NAI's application." The department invited comments within 21 days from those who object, and is sure to hear from plenty in the U.S. airline industry who have warned that granting the Norwegian airline's application would create a "race to the bottom" in transatlantic flying similar to the havoc discounters caused in the U.S. following deregulation.
Norwegian Air first applied for a foreign air carrier permit in 2013 for a subsidiary based in Dublin, hopeful of taking advantage of the European Union's liberal airline treaty with the U.S. to operate discount service across the Atlantic. The plan was controversial from the start due to Norwegian's attempt to locate the unit outside of its home territory, and because the concept posed a threat to traditional transatlantic operations.
A unit of the AFL-CIO quickly blasted the decision Friday, calling the application "a job-killing flag-of-convenience airline that perverts the transatlantic airline market and violates our nation's aviation trade agreement."
While the immediate impact of the ruling is expected to be muted as Norwegian slowly builds up a modest schedule, the long-term implications for U.S. carriers could be troubling. U.S. airlines in the years since deregulation have relied on international service, which faces less discounter competition, to offset margin erosion on domestic flights.
Shares of Delta Air Lines (DAL - Get Report) , United Continental Holdings (UAL - Get Report) and American Airlines (AAL - Get Report) traded down modestly Friday afternoon.
The extent of the damage an upstart like Norwegian can do is a matter of debate. Companies like Southwest Airlines (LUV - Get Report) in the U.S. and Ryanair (RYAAY - Get Report) in Europe have established that discounters can soak up travel growth that might otherwise go to incumbents by offering vacationers lower fares and make at least some gains among business travelers. But large corporate contracts that are the most lucrative for airlines have largely stayed with the legacies because of their greater reach and more flexible schedules.
Skeptics will also note that Norwegian is far from the only threat the airlines face on international routes, noting the rapid growth in Gulf State carriers including Etihad Airways, Emirates Airline and Qatar Airways.
Airline bulls argue that the recent round of consolidation in the U.S. has strengthened balance sheets and cut into competition at home, making domestic flying more lucrative than it once was and better preparing the airlines for upcoming international skirmishes. The routes that Norwegian will attack will likely be high-volume ones that are already the subject of intense competition between the incumbents, likely limiting damages to margins.
In the near term, domestic airlines could actually be helped by a commodity trend that usually works against the industry. Barclays analyst David E. Fintzen in a note Friday said that higher fuel prices could be a near-term catalyst for the industry if it reassures investors that companies will not make short-sighted decisions to increase capacity.
Fintzen said that airlines have been "surprisingly rational" during this period of low-fuel costs, but fears remain.
"The reality of slow economic growth, low oil and (the resulting) higher aircraft utilization means fares go down even as margins go up," the analyst wrote. "If oil prices do move higher, we think that pricing pressures reverse, and suspect the market could put a disproportionally higher multiple on lower earnings."
