Iceland holds a special place in my heart. Three years ago Stephanie and I went to Iceland for our honeymoon.
While not a typical honeymoon destination, Iceland truly is a magical place. It has glaciers, the aurora, volcanoes, geyers, waterfalls, and hot springs.
This small island contains everything that is beautiful about nature. Given this, it is not surprising that iceland’s tourism has almost doubled in the past 4 years. While people go to Iceland for its natural beauty, it has never been easier to visit. This is largely in part due to the rise of low cost carriers based in Iceland.
WOW Airlines and Icelandair both call Iceland’s Capital, Reykjavik home. They promote icelandic tourism by offering extremely cheap flights to Europe with free stopovers in Iceland. With prices as low as $145 dollars round trip, these airlines made it dirt cheap to visit a bucket list travel destination. However, this all may be coming to an end.
The Rise of WOW Airlines
In business since 2011, WOW airlines took over the former Iceland Express Airlines operating flights from Iceland to Europe. In 2015, WOW Airlines began making a name for itself. WOW started major expansion. It introduced transatlantic routes from Iceland to the east coast of the United States. It became a go to airline for families and east coast millennials alike as their extremely low fares made travel to Iceland and mainland Europe extremely affordable. Their expansion continued through 2018 expanding into Canada and the West Coast. By the end of 2018 WOW Flew to the following North American destinations:
- Los Angeles
- New York City
- San Francisco
- St. Louis
The Effect of WOW Airlines
Regularly offering round trip flights in the $200s quickly made WOW a major player in transatlantic aviation. Icelandair suffered the most from WOWs rise. Traditionally, Icelandair controlled a vast majority of market share on flights to Iceland. In 2012 Icelandair controlled 80.4% of passengers flying through its Keflavik base, but by 2018 its market share had reached an all time low of 47.1%. While WOW, on the other hand, controlled 31.3%. As a result Icelandair had to make drastic changes to drop their price and compete with WOW.
Among these changes was the transition to a true low-cost carrier. Prior to 2016, Icelandair allowed all of its passengers 1 carry-on, 1 personal item, and 2 free checked bags. However, with the introduction of its Economy Light, base fare those days are long gone. Icelandair now offers its passengers only one carry-on bag. Checked bags will now run you a minimum of $69 each way. While it dropped meals long before WOW, WOW forced this transition. This allowed it to offer fares that could compare, but were not quite as low as WOW.
Traditional Carriers have also dropped prices and services to Europe to compete with these low cost carriers. They are now offering “basic economy” international fares. These fares mirror those offered by WOW with no checked bag allowance and no advance seat selection. The rise of carriers like WOW has made it one of the cheapest times to fly to Europe. But will it last?
WOW’s Financial Struggles
When you are offering transatlantic flights cheaper than most domestic flights, it should come at no surprise that this is not really sustainable. From July 2017 to June 2018 (the peak of its expansion) wow airlines lost a total 45 million USD. This is about three times what it lost in the prior year. So WOW began cutting routes. Now, WOW only flies to 4 of 15 United States destinations that it offered less than a year ago. Needless to say, Wow is circling the drain and is not long for this world if its financial struggles continue.
So it is looking for investors and selling assets to keep itself afloat. In November of 2018 Icelandair announced that it intended to purchase WOW Air for a 5.4% ownership of the new combined company. This however fell through by the end of the November. Shortly there after it was announced that Indigo Partners, a US investment firm that has significant stakes in low cost airlines like Frontier and Volaris, would be investing in WOW. But after 4 months of negotiations, Indigo Partners also pulled out. However, a savior was still on the horizon for WOW. Icelandair announced a renewed intent to buy WOW, but changed its mind within 4 days.
If you thought things couldn’t get worse for WOW you were wrong. This morning WOW had one of its leased Airbus A321 aircraft repossessed, and due to their financial hardship has begun cancelling flights with little to no notice.
What does this mean?
In the short term, WOW Airlines is still selling tickets at absurdly low costs, but I would be wary of booking with them due to the cancellation risk. The long term is what really scares me. It is not only WOW Air that has been having financial difficulties, Transatlantic low cost carrier Norwegian, also needed a significant investment to continue operations. Icelandair Also reported losses in 2018. The financial struggle of the largest international low-cost carriers shows one thing, sub $300 pricing to europe is not sustainable. If and when WOW Collapses, how will flight prices react. With a major low cost player dropping out of the air race, there will be less need to compete on flights to Iceland. The failure of WOW Airlines is the sign of something bigger, the end of the extremely cheap fares to Iceland and potentially to the end of low fares to Europe.