Yesterday WOW Air finally collapsed. The Iceland-based airline was founded in 2011, and their business model has been based around connecting people between North America and Europe via their hub in Keflavik, Iceland.
In many ways this is similar to Icelandair. Iceland is a geographically advantageous stopover point, so they could offer one-stop service between lots of cities at attractive prices. WOW Air was an ultra low cost carrier, meaning they charged for just about everything.
Perhaps the intriguing icing on the cake is that both Icelandair and WOW Air offered free stopovers in Iceland when booking roundtrip tickets, which was a unique opportunity for people to visit a country that’s increasingly on peoples’ bucket list.
I’ve received several questions from readers about why WOW Air failed, so I figured I’d share my thoughts, and also share what the CEO has said. And no, unlike the pilots of WOW Air, I don’t blame journalists.
Why WOW Air failed, according to the CEO
The Financial Times has an interview with WOW Air CEO Skuli Mogensen about why the airline failed. Essentially he blames their failure on the decision to order widebody A330s.
The airline was already connecting the US and Europe, but they wanted to add a third continent. At one point he even said that they wanted to fly to as many as 15 destinations in Asia. So the airline ordered widebody planes, and that was their fatal mistake.
As he explains, as oil prices rose for most of 2018, “it was clear that we needed to change course fast. In retrospect the wide-body decision unfortunately turned out to be fatal.”
They returned their A330s and tried to restructure, but it turned out to be too late. As he explained, “we still had too much debt on our balance sheet and, given a very challenging airline environment at the moment, didn’t have the time to secure the funding needed.”
The airline had $150 million in interest bearing debt.
My take on why WOW Air failed
In my opinion there are two separate issues to address here — why WOW Air didn’t make money, and why WOW Air couldn’t stay in business (because with the way the economy works nowadays, you don’t actually have to make money to be a valuable business/attractive acquisition target).
Why WOW Air didn’t make money
For the past several years the airline has lost money. With low oil prices there’s a chance the airline could at least break even, but of course that’s not a guarantee. The airline had so many things standing in their way.
For one, there’s tons of competition on transatlantic routes. Not only from ultra low cost carriers, but the reality is that nowadays even legacy airlines have incredibly low transatlantic fares, because they know they have to compete. $400-500 roundtrip fares on major carriers are the norm in the off season.
When fares are that low, it really makes you wonder what the point is of flying an airline like WOW Air. Even if they charged $200 roundtrip (which is way lower than their usual fares), you’d end up paying more by the time you paid for baggage, food, drinks, seat assignments, etc.
How are other airlines able to charge these fares? Because the major airlines aren’t making money off economy transatlantic fares in the off season. Think of those cheap fares as paying a bit of gas money, but the reality is that airlines make their money off the handful of people on each flight who are spending $10,000 for a full fare business class ticket. That’s where the money is, and the rest is only working towards breaking even. Ultra low cost carriers don’t have those lucrative passengers.
The further issue is that WOW Air was using a hub and spoke system. In order for this to work, you need to fly to a lot of places, or else you won’t have sufficient connectivity. The problem is that you then go from identifying a few lucrative markets, to entering just about every market out there, in hopes of building a global network.
If you expand too much, you’ll start loss-making routes. If you don’t expand enough, you won’t be able to fill planes based on the hub and spoke model.
So if there’s one thing we’ve seen lately, it’s that the transatlantic ultra low cost business model doesn’t work that well anymore.
Add in the fact that WOW Air was essentially replicating Icelandair’s business model (so they weren’t actually unique), and the fact that US to Europe leisure travel is highly seasonal, and the business model was destined to fail.
Why WOW Air couldn’t stay in business
So, what fundamentally changed that caused WOW Air to go out of business? They weren’t making money for years, but stayed in business. Well, there’s value in having market share, and a lot of companies do seem to think they can make up for losses with volume.
Just look at companies like Lyft and Uber, which are worth tens of billions of dollars, yet realistically can only ever turn a profit if driverless cars become a thing.
Similarly, it seemed to me like WOW Air was focused purely on market share rather than profitability. So what went wrong?
- The airline got way too aggressive, and had the moronic idea of launching flights between Asia and Iceland; this is so incredibly stupid when you consider that there are also $500 economy fares on other airlines between the US and Asia, so that’s no way to make money
- It has been much harder for airlines to secure financing in Europe after we’ve seen several airlines collapse in the past year; investors don’t just care about market share anymore, but also profitability
Bottom line
Fundamentally Skuli is probably right that ordering the A330 and the debt that came along with it was the nail in the coffin for WOW Air. However, that’s not why the airline wasn’t making money.
They weren’t making money because they had an unprofitable, highly seasonal, business model. The question is how much longer investors were willing to fund that. The A330s were definitely the end, though I also question how much longer they would have been kept alive without that decision.
One has to wonder what all of this means for Norwegian. The airline has been losing a lot of money and they’re restructuring, but with WOW Air having just gone out of business, one has to wonder how much more patience Norwegian investors will have. Add in the 737 MAX issues, and things get even more complicated.
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