Norwegian Air has won dozens of awards and loyal fans over the last five years, but Best Office is one honor it won’t be competing for anytime soon. During a tour of the premises before my meeting with Bjorn Kjos, the chairman and CEO, an employee shows me their briefing room in the basement. She immediately regrets it. “Does it smell funny to you?” she asks. I tell her it smells like a dead animal, and we quickly hike back upstairs. Kjos admits the office isn’t much. But he tells me that it’s a step up from the renovated military barracks that he and his team occupied previously.
The Oslo headquarters are a physical manifestation of the strategy Kjos has employed to get to this point: In 25 years, he has built Norwegian up from a small regional airline to the third largest low-cost carrier in Europe, worth just shy of a billion dollars. But the corner-cutting has led to controversy: Critics say he has gone out of his way to skirt Norway’s strict regulations and high taxes, lowball foreign workers, and shrink the number of union workers on his payroll.
And more recently, Kjos has been facing a stockholder revolt as shares in the company have plunged amid concerns over lagging profits, the sudden resignation of CFO Frode Foss, and the cost of the very strategy that put Norwegian on the map in the first place: A rapid expansion of trans-Atlantic service, cheap tickets, and the costs of buying new fleets of jets.
Kjos, of course, is confident that his strategy of taking on legacy carriers like American, United, and British Airways is a winning one: With transatlantic fares frequently offered for less than $500 round trip, Norwegian is opening up Europe to middle class Americans and vice versa, he says.
Recently the company announced that it would fly between small airports like Providence, Rhode Island, and Belfast, Ireland. Kjos has even been attacked by some for “Wal-marting” the airline industry. One thing that his detractors and backers agree on: The ex-lawyer from a small Norwegian village has built one of the most disruptive and controversial companies in the airline industry.
A Big Risk That Paid Off
Before sitting down with him for our interview, I watched a half dozen videos of Kjos on-stage at conferences and other public events. In each, I saw a 70-year-old man with child-like enthusiasm work the crowd, making self-deprecating jokes and blushing. You can’t help but like the guy while watching. He even managed to deflect the economist Thomas Piketty’s attacks on his wealth in a debate in 2015 by making a joke about Norwegian’s stock price falling that day. It’s this charisma (and his success) that make Kjos a sort of national hero in Norway, despite some of his actions that run counter to traditional Norwegian business culture.
On my first night in Oslo, I find myself bleary-eyed and jet-lagged at a bar. When a woman asks why I’m in town, I mention Kjos. Then I ask: “Have you heard of him?” It’s a silly question. It’s as if I’d asked if she’s heard of Bill Gates. “Of course!” she replies.
In all my chats with the locals, Kjos is revered as a mythical figure. “Bjorn negotiated a 50% discount on his fleet of Dreamliner airplanes,” my Airbnb host tells me. “Bjorn wrote a crime thriller novel,” another person reports. “‘Bjorn’ translated into English means ‘bear.'” When asked which of these are true, Kjos confirms the second and third, but can’t comment on the specifics of the Boeing deal. He does, however, give me a wide grin, suggesting the discount was hefty.
Standing at more than 6 feet tall, Kjos has an imposing presence. He’s dressed as smartly as every other Norwegian I’ll meet on this trip: black suit, blue tie, and a pin on his chest with the company’s logo. Each time I ask Kjos a question, he leans back in his chair, looks out the window and smiles. I get the sense that he likes telling his story. But there are chapters that he seems to like more than others.
One of those moments came in 2007 when Norwegian bought 42 Boeing 737s for $3.1 billion. It was a bet-the-house moment. Oil prices were rising, the economy was tanking, and Norwegian was flying cost-conscious customers on some of the least fuel-efficient planes. One day, the now-departed Foss told Kjos that if the current trajectory continued, the company would go bankrupt. Kjos needed to shell out the cash to buy new planes or figure out a way to cut costs on the old ones to hang on for a few more years.
In a story that gets Kjos more animated than any other, he tells me that he asked Foss, “‘Would you rather go bankrupt on old planes or brand-new ones?'” They both agreed that it’d be better to go down in style. “If we hadn’t placed that order, we wouldn’t be alive today,” he says.
“He’s not afraid of taking risks. But of course, the risks should be very calculated,” says Thomas Ramdahl, the company’s chief commercial officer.
For most of its history, Norwegian has been a company on the brink. In 1993, when he was a lawyer, Kjos heard about Busy Bee, a small regional airline that had filed for bankruptcy. “The revenues were larger than the cost. They went bankrupt because they had way too many people [on staff], making it an inefficient operation,” he says. He immediately saw an opportunity but few people he approached were interested in buying Busy Bee. His friend and fellow lawyer, Bjorn Kise was an exception. A week after partnering, they were the proud owners of a company they rebranded as Norwegian Air Shuttle. (Today, Kise is the company’s chairman.)
Kjos grew up in Sokna, a tiny village of less than 500, but he had a major influencer who inspired big thinking. In 1953, when Kjos was just 9, his father started the airline Norsk Skogbruksfly. Before that, a sawmill. “He was constantly asking ‘What was the cost of business?’ and so forth. I think it’s very much about common sense… He was fighting all the time to make ends meet, to get revenues larger than the cost,” he says.
His predilection for flight emerged in other ways. Kjos enrolled in the Norwegian Army as a paratrooper and later in the Norwegian Air Force. It was the peak of the Cold War, and Russian planes were flying over Norwegian airspace nearly every day to intimidate the smaller NATO country. After training in the United States for two years and flying in the Norwegian Air Force for another six years, Kjos applied to work at Scandinavian Airline Systems (SAS), the government-owned airline monopoly. He was rejected and decided to attend law school shortly afterwards. Decades later, he had the last laugh when Norwegian Air Shuttle beat out SAS to become Scandinavia’s largest airline.
When Kjos and Kise—”the two Bjorns”—purchased Busy Bee, they didn’t envision building a low-cost carrier, let alone an international airline. For Kjos, it just seemed like a good investment. In fact, neither of the men were involved in the day-to-day operations for the first decade. After cutting costs, the company made $10 million in revenue and $350,000 in profit in 1995. Four years later, those numbers jumped to $20 million and $1.5 million in profit. In 2000, Norwegian bought Lufttransport, a helicopter transport company that serviced Norway’s oil and mining industry. The idea was to hedge against the volatile airline industry. It turned out to be a smart decision, if not a lucky one.
On September 11, 2001, Kjos was on vacation, hunting grouse in northern Norway, when his son called to tell him about the attacks in New York. “I said to myself, ‘Jesus Christ, what is happening?'” he recalls. “It couldn’t be an accident, it had to be a terrorist attack. So, I started to pack all my things together and head down [to Oslo]. I thought it might even be war.”
After 9/11, passenger travel dropped by 7.5%, and the world economy fell into a recession. “I knew this would collapse the airline industry,” he says. So Kjos and his executive team went into survival mode, cutting the cost to do business as much as possible.
In 2007, as bankruptcy loomed, the leap of faith moment arrived. “There was a possibility to start a low-cost [Boeing] 737 operation,” he says. “But the only way to compete was to get the cost down as fast as possible, and in order to get the cost down, scale was essential.”
Scaling an airline from just a regional is no easy task, due to the capital required and sensitivity to external factors like oil prices. Doing so in Norway following 9/11 was about as difficult as it gets. Norwegian had started flying between some EU countries in 2002 but the company had no real brand recognition outside Norway. With the 737 deal, Kjos began the dizzying transition to an international low-cost carrier.
Looking At The Math
Norwegian is not the first airline to try out the low-cost model in the transatlantic market. It’s been attempted four times in each of the last four decades. The most notable was by entrepreneur Freddie Laker, with Laker Airways in the 1970s. Five years after launching no-frills flights from New York to London though, the global economy went into a recession, interest rates hit double digits, and oil prices skyrocketed. Laker was hit by the perfect storm in a capital-intensive business that relies on high consumer spending and low fuel costs. The company went belly up in 1982.
When I ask Kjos if the Freddie Laker analogy scares him, Kjos laughs and shakes his head. It’s a question that he obviously fields frequently. He’s bored by it. “[Laker] didn’t have access to the internet. He had to rely on aircrafts with high operational costs and travel agencies which were owned by his competitors,” he says.
Early in its expansion, Norwegian invested in a website where customers could easily buy tickets. One of the few benefits of starting an airline in Norway was the country’s high internet penetration rate (at last count it ranked #2 in the world with 98% of the population using the internet in 2016). This made it the perfect country to start selling e-tickets. The strategy meant they didn’t have to pay gate agents or travel agencies, which enabled them to reduce prices further and attract more customers.
Kjos frequently rationalizes his decisions with the same line: “I looked at the mathematics and it made sense.” This is how he rationalized taking on SAS, a move that proved successful. It’s also how he rationalized his company’s entrance into the European market. In both instances, he saw monopolies that were charging customers too much, and decided to compete.
“Lower operating costs are very important but so too are aircraft ownership costs,” says John Strickland, an independent analyst in the airline industry. In 2007, a bad economy actually helped Norwegian. Kjos told me that the 42 Boeing planes he bought were only available because another airline withdrew from negotiations and the recession allowed him to buy the fleet at a discount. When unemployment rose and wages dropped, passengers became more price sensitive and Norwegian—thanks to its new fuel-efficient fleet—could offer lower prices than the big guys. As most of the industry suffered in 2008 and 2009, Norwegian managed to grow—and even made a small profit.
In 2010, Norwegian entered negotiations with Boeing to purchase more planes. At the same time, the executive team began looking at how they might expand beyond Europe. “We looked at which area we could compete [in] without going head-on with all the low-cost carriers, and we started to look at how people would travel in the future,” Kjos says.
By that point everyone was predicting that Southeast Asia and China—already large markets—would soon be bigger than markets in the West. Yet there were no low-cost carriers offering tickets from Asia to Europe to the growing middle class. “We also saw legacy carriers unable to compete with local carriers in Europe making heavy losses from their long-haul earnings,” he says. Legacy carriers, Kjos continues, were so entrenched in old ways of thinking that they couldn’t compete on a low-cost long-haul operation. Many airlines relied on high-margin business class tickets, but that market had flat-lined by 2010, thanks to communication technology, which had reduced the need for business travel. Norwegian’s small size was suddenly an advantage: They quickly built hubs in fast-growing tourist markets like London and Paris and began offering low-cost long-haul flights to North America and Asia.
On January 25, 2012, Norwegian Air Shuttle announced the largest aircraft deal in European history: It purchased 222 airplanes with options for 100 more, a move that made little sense to anyone outside the company. Norwegian wasn’t even the biggest airline in Europe, and here it was acting like the biggest in the world. To Kjos, it was an obvious decision. “If I have the scale, nobody can take me on cost. If I buy 200 Airbuses, I definitely will have a much better price than if I buy 20. If I don’t need them, I can sell them out or lease them.” In effect, Kjos figured out a way to punch above his weight class. But 2012 also marked the beginning of a controversy that has surrounded the airline for the last five years.
No decision has been met with more controversy—in Norway and abroad— than the decision to set up their Irish subsidiary, Norwegian Air International. The company says it did so to be compliant with the Open Skies Agreement, the deal that allows American and European airlines to fly in one another’s airspace. Norway isn’t in the EU and can’t fly to the United States without receiving permission from the US Department of Transportation. Anders Lindstrom, Norwegian’s director of communications, says the Irish subsidiary was created to solve this problem: “In order to expand globally as planned, we need to be based in an EU country to access EU aviation rights not available in Norway.”
Critics argue that there’s more to the story. The Air Line Pilots Association (ALPA) is one of the most vocal. In a statement sent to Fast Company the pilots union wrote, “NAI has been established in Ireland to take advantage of these countries’ less-restrictive labor and regulatory laws.” They argue that, if allowed to continue operations, NAI will trigger a race to the bottom that will hurt the 151,000 people employed in the United States airline industry today.
Lower Labor Costs
Shortly after Norwegian announced its new Irish subsidiary, the Norwegian Broadcasting Company reported that the company’s Thai-based crews would receive base pay of $500 per month. By contrast, an entry level flight attendant in the United States makes, on average, $3,100 per month, according to PayScale. Norwegian defends the move, noting its crew salary is well above average in Thailand.
The report confirmed just how far Norwegian was going to lower its labor costs. But when I asked Kjos about the Asia-based crews, he says wages aren’t the main issue. “It’s not the salary from different places that will kill you, it is the transitioning from the different time zones for the crew, and the accommodation cost (for putting up crews in hotels).” He argues that it was a practical decision, and had nothing to do with outsourcing labor.
In 2015 a European Commission report on atypical employment revealed: “Less than half of the total cabin crew of Norwegian is now permanently employed.” Its author, Yves Jorens, a professor of law at Ghent University in Belgium, tells Fast Company, “What you’re seeing more and more is that airline companies will work through an interim agency, which is basically a company that hires or looks for employees to put them at the temporary disposal of an airline.”
He continues, “The advantage for the airline is that the agency is the employer of the pilot. Then the airline and the agency have a service contract. The positive thing is that they aren’t the direct employer meaning they don’t have the employer’s obligation.” In other words, they aren’t required to provide benefits or pay social security taxes.
When asked about the report, Lindstrom dismisses it as having been commissioned by labor activists. The report appears in full on the website of the European Cockpit Association (ECA), a union that represents 38,000 pilots. “All Norwegian’s pilots are hired under permanent contracts by Norwegian, one of Norwegian’s subsidiaries, or one of our partner recruitment companies,” he says, and “Norwegian partners with or partly owns the recruitment companies it works with.”
“One of these firms has an office in Singapore, which allowed us to get access to great pilots in Asia. They are European pilots, living in Asia, paid almost identical to what our European or U.S.-based pilots make,” he continues. Safety has not been compromised, he says, noting Norwegian’s strong safety record: “We have carried more than 200 million customers the past 15 years without any accidents or major incidents.”
With their hiring strategy, Norwegian is using a similar tactic to one used by gig-economy companies like Uber. Just like demand for rides ebbs and flows with the time of day, passenger volume changes with the season. When travel between Europe and North America peaks in the summer, Norwegian can hire pilots through one of its partner agencies. When demand drops in the winter, they don’t have the burden of idle employees. Jorens says low-cost carriers like Norwegian had up to 60% less labor costs than legacy carriers that hire employees directly. Due to stricter labor laws, airlines in the U.S. are unable to apply the same hiring strategy.
Strategy As “Living Document”
Thomas Ramdahl, the company’s chief commercial officer, tells me that it’s this willingness to experiment that define the culture at Norwegian. He believes a company’s strategy must be a living document. “It’s not a document that you create and take out each year. It’s something that is happening each day. And I think that’s one of the successes of Norwegian. Strategy is old the day after it’s written. It’s always being played around with. If we see an opportunity we’ll take it. Then we take a 90-degree turn.”
One week after I visited Norwegian’s headquarters, on February 23, the company announced a $65 fare from North America to Europe. Immediately, competitors came out saying that the fares were financially unsustainable. In a recent press conference, Willie Walsh, the CEO of International Air Group—which owns British Airways and Iberia— said, “The fares that they’ve launched are clearly just designed to get some headline media coverage.” Shortly afterwards, Lars Sande, Norwegian’s SVP of sales, confirmed Walsh’s comment saying, “That’s how we do it, instead of spending huge amounts on marketing.”
They also do it by added “optional” charges that don’t seem to irk their fans—everything from in-flight snacks and meals to reserved seats and checked baggage. There is even a $25 fee if a passenger wants to book a flight by phone, instead of online. “We believe in just paying for the things you actually want,” the NA website says.
According to Kjos, Norwegian can offer substantially cheaper fares because of its fleet strategy. Of the 200 planes that Norwegian purchased in 2012, half were Boeing’s new 737 MAX 8. The plane is 17% more fuel-efficient than the old model, but most importantly, it is the first narrow-body plane built with enough range to fly across the Atlantic. “That means we can fly into smaller airports,” he says. For example, Norwegian will be able to offer a transatlantic flight between small airports like Providence, Rhode Island, and Belfast, Ireland.
One of the often-overlooked expenses is the price airlines pay airports to land on their runways. While fuel prices usually make headlines, they are only about 4% of your typical airfare. About 20% of your fare goes toward gate fees, which is why low-cost carriers fly out of smaller airports that have lower fees. But while small airports charge less, they rarely have large enough runways for planes that have enough range to cross the Atlantic. That goes a long way in explaining why transatlantic fares have remained so stubbornly high despite falling oil prices. It also explains why Norwegian is poised to be the first airline to break the trend. Because it was one of the first to place an order, it was the first airline in the transatlantic market to receive the new Boeing 737-MAX in May. But their advantage won’t last long.
“Norwegian has leading edge aircraft technology but now so do many other airlines, thus first mover advantage is reduced,” Strickland, the airline analyst, tells me. The Boeing purchase, he continues, “was a really smart decision. But at the same time, there is a lot of supply of aircraft coming into the market.” In total, Boeing has sold 3,000 of its 737-MAXs. After I spoke with Strickland, United Airlines announced that it placed an order for 100 of the new planes.
Norwegian Hits Turbulence
According to Strickland, Norwegian also faces increasing competition in the low-cost long-haul market. In addition to young companies like WOW Airlines in Iceland, legacy carriers like International Air Group (IAG)—which owns British Airways—want in. On March 17 of this year, IAG announced a new low-cost long-haul airline, LEVEL. “We decided to launch LEVEL because the low-cost market is expanding from short-haul into long-haul and we believe this market segment will see a significant growth,” an IAG official told me. “It is clear from Norwegian that passengers are prepared to pay for the services that they want. This is a business model that we believe is profitable.”
Added pressure from competitors and increases in operating costs has led many investors to start short selling Norwegian’s stock. By the end of July, five million of the company’s shares (15% of total capital) had been taken out by investors as shorts according to Reuters data. Since the beginning of the year Norwegian’s stock price has dropped 38%. This has led to tension between Kjos and investors. Large shareholders like Leif Eriksroed, head of Norwegian equities at asset manager Alfred Berg, the 11th largest investor in the airline, have spoken out against the company’s strategy. After a pilot shortage at the beginning of the summer that led to numerous delays, Eriksroed told Reuters, “They should improve their backup plans to avoid the enormous extra costs when they experience delays on new planes and technical or personnel problems.”
But the company’s executives remain confident. When asked about the increased competition Ramdahl says, “It’s difficult to come from a high cost side and then make a low-cost model.” He continues, “I think they will struggle on the low-cost long haul. Renaming some part of your fleet you don’t get to be low cost. You need to be thinking cost every day.” Kjos echoed the sentiment. “We have a completely different setup from the other legacy carriers.” They both point out the example of United’s failed effort to enter the low-cost market and compete with Southwest, a strategic error made famous in Michael Porter’s seminal paper “What is Strategy?” IAG declined to comment further when I shared what Kjos and Ramdahl told me.
Norwegian’s biggest threat might in fact be political, however. “If there are moves toward greater protectionism and fewer liberalized air service agreements globally, then traffic rights could be more difficult to obtain or even to retain,” Strickland says. The analyst was referring to the rise in populism in America and Europe and the accompanying protectionist trade policies. Norwegian’s Irish subsidiary, Norwegian Air International, was granted the right to fly from Ireland to the United States by Barack Obama’s administration in December of 2016, just before he left office. But Trump’s administration reserves the right to revoke that at any time which, right now, seems unlikely.
Asked about Obama’s move, former White House Press Secretary Sean Spicer said “there is a huge economic benefit that lies in that deal right now.” He pointed out that Norwegian’s relationship with Boeing has created thousands of jobs. He also reminded the audience that Norwegian had committed to hiring U.S. pilots and crew.
“No other foreign airline invests more in the American economy or creates more American jobs than Norwegian. We currently have almost 600 U.S.-based cabin crew, which is more U.S.-based cabin crew than any other foreign airline. Norwegian’s goal is to have 1,000 U.S.-based employees by the end of this year,” Lindstrom tells me.
Airlines are constantly threatened by volatile oil prices, consumer spending, terrorism, and another half dozen variables that are completely out of their control. But each time I bring one up, Kjos shrugs. The man who figured out a way to invent scale in a country as small as Norway, who bought more planes than any company on the European continent, and who somehow found the time to write a crime thriller novel in between, doesn’t seem fazed.
“I think one of the main things is he doesn’t think about this as difficult,” Ramdahl says of his boss.
But clearly some things do bother Kjos. In the debate with Thomas Piketty there is a moment after he cracks his stock price joke that Kjos tenses up. Piketty berates him with questions about his personal wealth and tax rate. Finally, after a few of these jabs the towering Norwegian goes quiet. He stops playing the game, stops answering questions in full, and looks down. When I ask him about that day he shrugs again, but his voice goes a little quieter. “Obviously they like to shoot at you,” he says of his opponents. Then a couple minutes later he gets animated again telling me a story about his days as a fighter jet pilot, and imagining what artificial intelligence will do to the world.
Michael Thomas is a writer based in Denver. He writes about economics and business history on his blog, Insatiable Fox.