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.
I'm really not surprised they failed. WOW always had terrible/non-existent customer service. Was on a direct flight to LAX-KEF, I checked in early and then me and 20 other passengers bags didn't get there. My first solo trip and I was in Iceland during the Winter with literally the clothes on my back. Spent 4 hours shopping for clothes, boots, toiletries, travel, adapters etc. Cost came to $400 including getting taxis to the stores- Iceland...
I'm really not surprised they failed. WOW always had terrible/non-existent customer service. Was on a direct flight to LAX-KEF, I checked in early and then me and 20 other passengers bags didn't get there. My first solo trip and I was in Iceland during the Winter with literally the clothes on my back. Spent 4 hours shopping for clothes, boots, toiletries, travel, adapters etc. Cost came to $400 including getting taxis to the stores- Iceland is very expensive. In talking with one of the workers at the store- she stated WOW air did that all the time with passengers and she always saw them in the store shopping for everything like I did. Because Wow only flew every other day- on my 4 day trip in Iceland, I got my clothes 3 days in- the night before I left. I went down to the WOW HQ office to inquire about reimbursement (the office wasn't very nice and was run down). They just told me to keep receipts and file and claim with them.
Once I filed for reimbursement- they first stated I had to prove I didn't get any travel insurance reimbursement from my credit card- I had to call my credit card company and get a custom letter made- that took about six weeks. Then after I converted all the receipts converting them from Icelandic currency to the US rate and re-filing- the offered me $200. They stated that I got to keep the clothes for future use so they only would pay for half. No consideration for the time I spent out of my vacation either. This was all done via e-mail/web with a team in India- there was no one I could call into to speak to about it.
I appealed and they told me tough luck. Anyway, upon a great suggestion from a customer service supervisor- I ended up disputing the actual cost of the airfare with my credit card with Wow- suddenly they were open to negotiating. Long story my credit card, which was a basic card from Chase, ended up getting me $350. I got the funds after 6 months.
So when I hear that Wow air has stranded passengers- I'm not surprised. They really never cared about customer service. Good news is, that made me find travel blogs such as this- so that I would never be in that position again. Lesson learned- I got the Chase Sapphire Reserve immediately thereafter.
Regarding FLYBE: I recently booked a flight on Virgin Atlantic with a connecting flight on Flybe. They could only give me a departing time, but no flight number or plane details. Do we know any more about details of the acquisition?
I was just wondering, would a new LCC that uses Anchorage as a central connecting point work?
Low-cost long-haul flights are notoriously tough - the same is happening on the other side of the world with AirAsia X. I think it all boils down to the passengers preference of wanting a bit more comfort and less hassle on the add-ons.
@AZ: I think until the demise WOW only had narrow body aircraft with much lower operational cost than 777, accordingly. Revenue might be low, but so as the operational cost.
@EV: You need to compare that legacy-carrier revenue vs. one from an all-economy cabin. Replace the 65 premium seats with 200 economy seats and recompute revenue under the same assumptions. You'll see that it's drastically lower.
When WOW started, it literally was WOW! But the business model was unsustainable. I'm surprised more airlines do not focus on customer service from booking to flight attendants and pilots. For me, when I am booking a flight and it's a $100+/- difference I will go with the friendlier airline for the experience.
Southwest's FA's tend to be a bit friendlier although it seems like maybe it's changing a bit, I enjoyed their smiles...
When WOW started, it literally was WOW! But the business model was unsustainable. I'm surprised more airlines do not focus on customer service from booking to flight attendants and pilots. For me, when I am booking a flight and it's a $100+/- difference I will go with the friendlier airline for the experience.
Southwest's FA's tend to be a bit friendlier although it seems like maybe it's changing a bit, I enjoyed their smiles and their sometimes funny way of announcing emergency procedures. I used to fly AA for First class/business class but just got tired of unfriendly and uninviting FA's.
Friendly customer service do matter and for some reason, airlines do not focus on this.
"Because the major airlines aren’t making money off economy transatlantic fares in the off season. [...] 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."
Really? How many people are actually paying 10,000 $ in a flight?
I'm not trying to be pedantic, but let's assume on typical 777 TATL flight:
5x F @ 10,000...
"Because the major airlines aren’t making money off economy transatlantic fares in the off season. [...] 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."
Really? How many people are actually paying 10,000 $ in a flight?
I'm not trying to be pedantic, but let's assume on typical 777 TATL flight:
5x F @ 10,000 $ = 50,000 $
20x J @ 5,000 $ = 100,000 $
40x J @ 2,500 $ = 100,000 $
100x Y @ 800 $ = 80,000 $
200x Y @ 400 $ = 80,000 $
I might be wrong on the number assumption, but based on such calculation, I believe the airlines are still making a significant revenue from low-season economy fare. Without those 2x 80,000 $ income from economy fare, their total revenue will drop by 40% and I think in terms of total amount (not fare per passenger) it's still quite significant and probably more than merely "the major airlines aren’t making money off economy transatlantic fares"
I’d add poor strategic network planning to the list...they essentially just copied Iceland Air’s network in many respects.
Now OMG Airlines
Interesting article. It would have been interesting to see your thoughts on why Germania and Flybmi collapsed as well, though. WOW did get much more articles from you...
Step 1. Collect underpants.
Step 2. ????
Step 3. Profit.
I feel like South Park saw this one coming.
I agree with @AJ Montana. Something that did strike me as odd about WOW's business model was the atrocious aircraft utilization. The whole story of Southwest was how they build tight turn-arounds and fast boarding because they needed to make the most out of their planes. As you noted in the article about WOW's Orlando service, the planes were scheduled to sit empty for 20 hours every rotation.
I was looking through some of their...
I agree with @AJ Montana. Something that did strike me as odd about WOW's business model was the atrocious aircraft utilization. The whole story of Southwest was how they build tight turn-arounds and fast boarding because they needed to make the most out of their planes. As you noted in the article about WOW's Orlando service, the planes were scheduled to sit empty for 20 hours every rotation.
I was looking through some of their original investment fluff and part of the plan had been a target of cities on either side of the atlantic that were within 6 flight hours of KEF. The idea was that this allowed better aircraft utilization than their competitors. If they had just stuck to that plan, they could have gotten by with cheaper aircraft, less fuel, better utilization.
Why no mention that Iceland is literally one of THE most expensive places in the world to live? Because of the cost structure and extremely high fixed costs you had to be somewhat delusional to think that you'd make money...ever,
A couple of years ago they were threatening the entire trans-atlantic system with their fares, but they ran out of money. Sad.
Very good article, Lucky. I was also very puzzled when they started announcing Asia flights. Didn't' make any sense.
also another big thing that isn't mentioned is that WOW Air based all their flights around connecting passengers from North America to Europe and vice versa. To do this, they had very short connecting times between their European and American flights, but those flights had to sit in their destinations for hours, losing a vast amount of money
I noticed Virgin Atlantic is also offering to help Wow pax.
Unfortunately it’s a lot more complicated than just saying they “didn’t make money”.
It should be noted that Wow leased the A330s. Possible additional lease payments or simply additional losses incurred lowered theIr EBITDA which caused them to miss bank convenants in their debt agreements. I.e. Debt/EBITDA ratios.