Iceland Facing Economic Challenges Due To WOW Air Collapse

Filed Under: WOW Air

In late March, Icelandic low cost carrier WOW Air ceased operations. While I feel bad for the people who lost their jobs as a result of this, the company was badly mismanaged. Like all too many companies nowadays, the focus was on market share rather than profitability, and that backfired when it became tougher to get financing.

Icelandair was the first airline to build up the North America to Europe via Iceland business model, and WOW Air simply tried to replicate that, though they took more of an ultra low cost carrier approach to it, by charging for everything.

To some extent it sure seemed like a zero sum game. Icelandair responded to WOW Air’s unsustainable growth by adding more routes themselves, and in the end this cycle negatively impacted the financial performance of both airlines. I imagine Icelandair is happy to have eliminated a competitor.

How WOW Air’s collapse has impacted the economy

What’s interesting is the impact that WOW Air’s collapse has had on Iceland’s economy. It’s quite rare to see a single company going out of business having a truly negative effect on a country, but that’s exactly what’s happening in Iceland.

As reported by Bloomberg, today the Central Bank of Iceland has lowered interest rates by half a point. This is largely as a result of WOW Air’s collapse, and the impact that has on the country. It’s now believed that:

  • Iceland’s economy will contract by 0.4%, rather than the previous estimate of 1.8% growth
  • The unemployment forecast has been adjusted from 3.1% to 3.9%
  • Inflation is expected to peak at 3.4% in 2019, and then slow to 2.5% over the next two years

Airlines can lead to economic growth, even if they don’t make money

We often see government owned airlines launch routes that seem unprofitable. For example, look at Kenya Airways’ lack of success on their New York route, and RwandAir’s plans to launch flights to New York.

Are either of these flights likely to make money anytime soon (or ever)? Probably not. But they have the potential to positively contribute to the company in a way that could be a net positive.

In the case of WOW Air we’re not even talking about a government owned airline. But the way I see it, the airline had both a good and bad impact on the country:

  • WOW Air’s growth hugely expanded tourism in Iceland, and that’s good for the economy (though many would argue Iceland got to the point where it had too many tourists)
  • It was inevitable that either WOW Air or Icelandair would face significant problems, given that there simply isn’t enough of a market to support two airlines of this size operating similar business models

Bottom line

I’m certain Iceland is more resilient now than they were during their last economic downturn, though I’ll be watching to see the impact this has long turn. Maybe we’ll finally see some slightly more reasonable prices in Iceland again.

Are you surprised by the impact WOW Air’s collapse has had on the Icelandic economy?

Comments
  1. Thank god WOW is gone now. I wish they would do what Bhutan does…. limit hoards of tourists.

  2. Yeah, it’s interesting, but for a country with as minuscule a population as Iceland, this is to be expected. As a rule of thumb roughly half a country’s population is in the labor force, but fewer are actually employed — some may retire early, spend time as househusbands/wives, or pursue further education. Iceland actually has an unusually high labor force participation rate of about 80% (in the US it’s ~60%). So one would expect that out of a population of ~350k, only 140k work. So, yeah, losing 1100 direct jobs plus all the contractor staff (catering, etc.) has a huge impact on a small economy.

  3. People always talk about how expensive Iceland is but my experience last summer doesn’t really support this. Yes the car rental was outrageous (and you have to add all the insurances to avoid getting screwed at turn in) and I paid $275/night for a 3 star hotel (although location and bar were incredible). There are ways to minimize alcohol costs since practically every bar has a happy hour with half priced drinks (understand regular price is $12-$15 a beer and $15-$20 a drink so this isn’t a bargain by US standards – just gets it down to a more reasonable amount). Food was, IMHO, reasonably priced for the quality of the restaurant. Yes I paid $75-$125 a person but would pay the same in NY or LA for what I got. Tours were reasonable and there was a lot to do with little, if any, cost so a trip to Iceland doesn’t have to be a budget breaker. On the other hand if everyone things it is outrageously expensive maybe more will stay away which is just fine with me.

  4. resiliency ? i’m not so sure. Sure, Landsbankinn was financial and this was over-tourism (and Wow being the first domino to fall from the end of the musical chairs that promised “sustainable growth”) so nothing related…… on the surface

    generalize the 2 constructs and it’s apparent both times it’s a supposedly lean and mean economy that doesn’t have a large buffer of anything (space, labor, resources, hotel rooms, you name it)….

    dabbles into a space that was initially showing more growth than their own infrastructure could keep up (regulatory framework for banking is also type of virtual infrastructure), and threw all their eggs into a single basket, while forgetting they’re both at the transatlantic crossroads but also extremely geographically isolated of a nation (lets not pretend the 33k living next door in Greenland would be their white knight).

    (they can all be superstars and there’s only a finite amount sustainable by any nation of merely 350,000 when comparatively EVERY single one of the 5 boroughs of NYC having a larger population, including Staten Island)

    what can they do ? for starters, figure out how to deal with a dual-hub situation of KEF+RKV for such a small island and nation, and enabling more seamless connections to the other side of the island instead of both boom and bust being so extremely concentrated on the southwest part of the island.

  5. Lucky, RwandAir launching flights to Tel Aviv . I can’t understand why. Any thoughts?

  6. @Jordan
    Israel has a huge middle class that loves to travel and it is a free country with no limits on travel. This contrasts with neighboring Counties that do not have a middle class nor the freedom. There are also entry restrictions requiring Visas to enter the USA or EU and they are very strict on withholding these from Israelis. Africa sounds like an interesting trip!
    There also might be loads of business travel, Israel actually has a major high tech industry as well as construction. If I remember correctly, Israel had the blueprints of the Entebbe airport because they helped build it.

  7. @Jordan, I am certainly not privy to RwandAir strategies, but I do know that the market for African Christian pilgrimage to Israel is growing fast, and, looking in the other direction, Israelis are among the world’s most dedicated international travelers. Rwanda has over 12 million people, of which 90% are Christian. Many could not afford to fly, but some can, and to offer three flights a week marketing to both Rwandan pilgrims and Israeli tourists (and a certain sprinkling of connecting passengers traveling to and from other places on RwandAir’s route network) may not be completely absurd. It will be interesting to see how it works out.

  8. “This contrasts with neighboring Counties that do not have a middle class nor the freedom.”

    What does this have to do with anything?

    “There are also entry restrictions requiring Visas to enter the USA or EU and they are very strict on withholding these from Israelis”

    Israeli citizens have visa-free access to all of Europe (not just the EU).

  9. @AC: So Iceland is no more expensive than New York, London, Zurich or Singapore. Therefore it’s ‘not that expensive’?

    It seems to me that if a destination is on par with the most expensive cities of the world, it’s an expensive destination.

  10. I got good lodging deals in Iceland with Radisson Points and Airbnb. Meals were typical Northern Europe prices, and day tours were not out of line. Sure you can spent a lot in Iceland, but it is really cheap to get to in the first place, which makes up for part of that, and if you manage well you can have a moderately priced trip.

    I think some people’s glee about WOW going out of business is misplaced. That’s a lot of jobs that people don’t have now. It was a poorly managed effort to make great destinations available at prices more people can afford (I know there are some who seem to think international travel should just be for the wealthy like it was a couple of generations ago, but I differ), and its departure reduces the number of options for avoiding the airline cartels that dominate much of travel to Europe today.

  11. The main difference with WOW and loss-makers like KQ, Rwandair (I live in East Africa), Air Tanzania, the soon to be Air ugana is that:

    1. WOW is far as I know is a wholly private company that is not subsidized directly by Icelandic taxpayers.

    2. Many countries in sub-saharan Africa (and maybe in South Asia or Central America? just don’t have the revenue base to make this as clear a decision as Iceland. Kenya, the regional powerhouse, has a GDP of about 100 billion USD. While KQ is only 50 percent Government owned, tossing state resources at this running an inflated, chronically loss making airline for somewhat nebulous economic benefits isn’t really justifiable in the same way. Air Uganda just announced that they are going to spend 155 million USD, not break even for 10 years (if ever), and the Parliament subsequently announced there’s no money for teacher raises in a country that desperately needs to improve primary education and secondary education. Theres the additional issue that in Rwanda for example (you remember the Arsenal FC sponsorship quasi-scanadal) where is seems clear it’s donor country tax payers that are indirectly subsidizing these losses from Rwandair which are never really publicly reported.

    In short, it makes me a little annoyed that these countries with terrible basic infrastructure and services for 98% of its population that doesn’t fly, spend tons of money on Jets as quick and easy development and grandiose vanity projects while claiming there are ancillary benefits, which never seem all that concretely explained.

  12. I visited Iceland for 4 nights/5 days last September on a quick anniversary vacation with my wife. It was a beautiful country. It was very expensive, but the best part was getting there. I live in Cincinnati and took WOW’s non-stop flight from CVG to KEF. Booking less than 3 weeks in advance, my wife and I flew there for less than $500 total round trip, including baggage fees. Without that flight, I would have never even considered traveling Iceland for that short period of time. It’s too bad it didn’t work out. The plane was nice and the experience for the price was excellent. The fact that I was enjoying the Blue Lagoon less than 12 hours after departing Cincinnati was truly amazing.

  13. I liked WOW because I could fly from Dublin to the states really cheap. Iceland was just a layover. I did spend the night there once at a former US military base turned hostel. Everything there was so expensive so I’d say tourism is discouraged. The pros…cheap flights for people who frequently travel overseas. Cons….budget airlines are awful when you have to travel such long distances. And you end up buying the bigger seats, luggage allowance and food so it ends up costing as much as an AA or Delta flight.

  14. In 2010, there were fewer than half a million visitors to Iceland. In 2017, there were 2.1 million, six times the population of the country. Of course the economy has overheated, and that has been reflected in prices. It always is.

    I’ve been there five times. My kids constantly clamor to go back.

    If you want to save money, bring a paper copy of the outstanding Lonely Planet guide, rent a car instead of going on tour, eat at the gas stations (excellent bacon-wrapped hot dogs), stay in people’s homes, not in hotels, and go at any time other than in July and August. For instance, if you go in December, the place is utterly deserted, it’s dark 21 hours a day, and if you’re lucky, you’ll see the Northern Lights.

  15. @Grant: I was literally laughing at this “not expensive, except for the hotels, and the drinks, and the food, and the car rental” post. AX just completely argued against their own “point”.

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