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* Dreamliner a game changer due to fuel efficiency
* Norwegian has just two Dreamliners, six more to come
* Norwegian CEO sees 4-5 year head start to make long haulwork
* Asian carriers the biggest likely challenge
By Balazs Koranyi
OSLO, Oct 3 (Reuters) - Norwegian Air CEO BjoernKjos was on his way to Thailand last month to celebrate theopening of his budget airline base but instead got a lesson inwhy many low-cost carriers have failed in the long-haul market.
As mechanics beavered away to fix his brand new $212 millionBoeing 787 Dreamliner, he watched the hours tick by,knowing he would miss the party in Bangkok.
Norwegian's first two Dreamliners broke down more than adozen times in September, forcing it to lease planes or cancelflights. A full-service long-haul rival, typically part of a bigalliance, could have called for back-up from its allies.
The Nordic carrier this year became the only European budgetairline to take on long haul, arguing that the Dreamliner, witha 20 percent fuel saving, made it possible.
Others, including carriers who have made a success oflow-cost long-haul in Asia, doubt the business model for Europe,and are waiting to see how the experiment turns out beforefollowing suit.
Even without direct low-cost competitors, it will be a stiffchallenge.
"It takes more to succeed in the Champions League than inthe local top league," says Per Arne Villadsen, the CEO ofBerg-Hansen, a top Norwegian travel agency. "On (long-haul)overseas destinations the company faces an entirely differentcompetitive situation; its largest competitors arewell-functioning alliances, with each company holding anadvantage in its home market."
Norwegian, Europe's third biggest budget airline, operatesat a 44 percent lower cost than its biggest Nordic rival, SAS, but that advantage can be cut in half over longerflights because fuel is a much higher proportion of the cost.
The small size of its long-haul fleet - currently two,rising to eight - will also strip away some of its costadvantage, and while it might have stolen a march by hiringcheaper cabin staff from its Bangkok base, rivals can beexpected to use similar tactics.
HEAD START
Attempts to fly cheap long-haul routes date back to the1970s, when Laker Airways flew from London to New York. It wentbankrupt in 1982 when rivals cut fares and squeezed it out ofthe market.
Malaysia-based Air Asia X recently tried flyingbetween Asia and Europe but gave up, arguing that the low-costmodel cannot work until it gets more fuel efficient planes.
While the more fuel-efficient Dreamliner changes theeconomics, Norwegian's early advantage will evaporate as rivalsget their own, or the Airbus A350.
"Eventually the Airbus A350 will come with similar fuelconsumption, so in five to six years everybody will have theplanes with similar operating capabilities," says KennethSivertsen, an airline analysts at Arctic Securities in Oslo.
Qantas unit Jetstar, arguably the most successfulbudget carrier in long haul, will get the first of itsDreamliners this year and has already signalled plans to fly toEurope from Asia. Within Asia, budget long-haul has gainedtraction as flight distances are shorter, crew costs are lowerand the overall market is growing much faster, giving newcomersa chance to quickly carve out market share.
Still, Norwegian won't face a low-cost challenger in theNordic market for years, and SAS, which is struggling tocomplete another round of restructuring, doesn't get its A350suntil 2018.
"We have a four to five year lead on the rest of the pack,"Norwegian CEO Kjos says. "That's the timeframe we envisage thatwe can build up a strong operation on long haul."
Kjos dismissed doubts about the business model, saying hebelieved in it even more now, because the Dreamliner's operatingcosts were actually less than advertised, and the reliabilityissue was temporary.
"Oh, 99 percent of the people said the exact same thing whenlow-cost airlines started flying short-haul," Kjos said. "Theysaid Ryanair and EasyJet were a joke. Now thelow-cost carriers have 50 percent of the market in Europe."
Compared with full-service carriers, some of Norwegian'sadvantages will persist even after its head start has beenclawed back; Norwegian will fly Dreamliners up to 18 hours aday, 50 percent more than rivals, it will opt for cheaperlanding slots, and its operations will remain leaner.
Norwegian is now offering round trip tickets to Bangkok fornext month as low as $580, well below prevailing fares of $1,200for Thai Airways and $1,400 for SAS. Its long-haulplanes are currently flying 98 percent full, analysts say, wellabove expectations for 90 percent.
There will be further cost savings when its other six 787sare in service by 2015.
Some say that is still far too few.
Michael O'Leary, the CEO of Ryanair, Europe's biggest budgetairline, recently said flying long-haul with two to six planesmade no sense. He thinks 30-50 are needed.
Investors seem to be siding with Kjos. The stock is up 105percent in the past 12 months, outperforming a 22 percent risein the travel and leisure sector index. Over the pastmonth it has held steady, despite headlines about its Dreamlinertroubles.
"Norwegian is clearly increasing the risk with long haul,but investors pay management to take calculated risks," ArcticSecurities' Sivertsen said. "I don't think it's time yet toquestion the model."
