Case 20.2Norwegian Air Shuttle Continues to Climb with Low Costs and Low Prices

In 1993, Norwegian Air Shuttle was a tiny airline with three small planes flying to local destinations. Within a decade, the company had changed marketing direction and was beginning its ascent into the top tier of discount carriers with an ambitious new strategy that led to lower costs, lower fares, and longer-distance operations. Today, the award-winning company, based just outside Oslo, Norway, has become Europe's third-largest budget airline, serving 30 million passengers every year.

Norwegian's dramatic growth was fueled by its decision to buy dozens of new jets. These longer-range, fuel-efficient aircraft could carry more passengers to more destinations at far lower costs than the company's old fleet. Whether fuel costs went up or down, Norwegian's new aircraft could keep operating costs under control. This enabled the airline to promote low airfares, attract price-conscious business travelers and vacationers, and build its brand beyond Scandinavia. Now Norwegian has a fleet of 200 jets flying to New York, London, and hundreds of other international destinations, with more jets on order to support the airline's future expansion plans.

Investing in new aircraft also helped the company enter new markets and manage costs on the ground. Norwegian's young fleet has a longer range, giving the airline new opportunities to compete in the busy and lucrative trans-Atlantic market, among other popular international routes. What's more, the new planes are capable of landing on shorter runways in smaller airports. This is important because larger airports generally charge higher landing fees than smaller airports. So, although Norwegian flies to major hubs like New York, Chicago, and Los Angeles, it also flies to smaller, less-expensive airports such as Providence, Rhode Island, and Orange County, New York. These airports are less centrally located than their big-city counterparts, but millions of passengers are willing to put up with a bit of inconvenience to save a lot of money.

Another way Norwegian keeps costs low is by steering customers to its website to buy tickets. In fact, the airline charges more for tickets purchased via phone or at the airport. Rather than bundling everything into the price of the ticket, it says it wants to give customers control over the decision of which options they will pay for. Therefore, Norwegian sets a separate price for every extra, from checked luggage and reserved seating to inflight snacks and meals. This means passengers who want to reserve a seat in advance or check a suitcase at the airport can choose those options, for a fee. On the other hand, Norwegian has a frequent-flyer program that rewards loyal customers with points for choosing to travel with the airline and book with its hotel and rental-car partners. And whenever the airline inaugurates a new route, it offers a limited number of seats at bargain prices to build awareness and boost demand.

With a large number of businesses and households trying to stretch their travel budgets, Norwegian has to navigate in global skies increasingly crowded with no-frills, low-fare airlines. In addition to European market leaders like Ryanair and easyJet, other budget airlines flying European routes include Wizz Air and Wow Air. Long-established full-service airlines are getting into the budget business, too. Germany's Lufthansa, for example, operates Eurowings as a low-price subsidiary, and the parent of British Airways operates Level as a low-price subsidiary.

U.S.-based airlines like American Airlines and Delta have unbundled pricing to give price-sensitive passengers the option of paying only for services they need. Then there's Texas-based Southwest Airlines, well known for its low-cost, low-price positioning. Southwest doesn't yet fly to Europe, but it does serve Mexico and the Caribbean, and its bundle pricing includes two pieces of checked luggage per passenger. As the airline refreshes its fleet with newer jets, will it expand to destinations in Europe? Norwegian Air Shuttle is continuing to watch closely for signs of new competition as it expands its fuel-efficient fleet and adds new routes, year after year.

1. Given Norwegian's positioning as a no-frills, low-fare airline, how much weight should its marketers give to competitors' pricing when they set prices? Explain your answer.