Published August 14, 2018
After years of strong growth and profitability, the slowdown in the growth of the tourist industry appears to be hitting the airline industry hardest of all. In recent weeks Icelandair and WOW Air have both announced losses and subsequent restructuring efforts. They are attributing the troubles to increased fuel prices, more foreign competition and the effect of the strong króna on overseas consumers. Together, the two airlines hold almost three quarters of the market in Iceland, with WOW now carrying more passengers than its legacy competitor.
Icelandair is the country’s oldest airline, dating back to 1937, and has long been the country’s dominant carrier. Last month Icelandair Group, the airline’s parent company, had its stock price plummet by nearly a quarter in one day—and then tumbled another ten percent a few weeks later—after a series of announcements showing losses and uncompetitiveness. The carrier lost $25.7 million USD in the second quarter of 2018 alone.
In response, the company intends to shift its business model. However, many consumers search for flights based on price, making Icelandair an expensive option. Currently, baggage is included in Icelandair’s fare, although that perk may be discontinued to make flights appear cheaper. This measure follows Icelandair’s decision to sell its substantial hotel business.
Earlier this year, Icelandair Group’s domestic airline, the recently rebranded Air Iceland Connect, announced that it would be cutting four routes. The routes include domestic flights from Keflavík international airport to Akureyri. Tourists who want to fly to the north of Iceland will once again have to transfer to the Reykjavík’s domestic airport. They are also cutting one route to Greenland, and two to the United Kingdom. The carrier will also sell off one of its six new aircrafts.
WOW Air also recently announced its first loss of $13.5 million USD for the whole of 2017—significantly smaller than its main competition. It did see a large increase of revenue, taking in $486 million USD in during the financial year. This is nearly a sixty percent increase over 2016. The company also blames increasing oil prices and the strong but unstable local currency for their losses.
The airline was founded in 2011 by Icelandic entrepreneur and sole owner Skúli Mogensen. Its first flight was to Paris the following year. Earlier this year, Skúli hinted at trouble by stating that the company was thinly capitalised, in what some saw as an attempt to attract investors. WOW will also be ending its Tel Aviv route this winter. According to Haaretz, the route will open again next year.
It was hoped that tourism would be spread out around the country in coming years, prompting international airlines to try flying to other destinations within Iceland. However, tourists are taking shorter trips to Iceland and spending their time in the southwest, due in part to the exchange rate and high prices. Flights from the UK to Akureyri and Egilsstaðir have been reduced or canceled. The króna has reached near record strength against foreign currencies since capital controls were lifted last year.
Moreover, both Icelandic airlines are facing increased competition from foreign competitors. The number of airlines serving Keflavík International Airport has grown substantially, with thirty carriers flying in from nearly a hundred destinations. United Airlines is the latest US carrier to enter the Icelandic market, with daily summer service from its hub at Newark, and other airlines are adding new routes. British Airways recently announced it would start flying a Pittsburgh-Keflavík route. WOW started flying there last year.
Things are tough all over
There are also concerns about the growth of the low cost airline market. This has fostered intense competition between airlines—and caused warning signs the Icelandic companies should heed. UK based Monarch Airlines went out of business suddenly in 2017, leaving over 100,000 passengers stranded. They chalked the failure up to stiff competition from other low-cost airlines, low prices due to excess capacity and the depreciation of the pound due Brexit, which increased its costs.
The Icelandic króna has a long history of instability and has already hurt both airlines. Having limited capital is a danger to WOW Air, and could mean the airline would have trouble weathering a crisis. Icelandair, however, is capitalised, and has survived other crises.
Norwegian Air Shuttle (NAS) has also been having trouble. NAS’s story is similar to WOW’s—it began as a small regional airline and over the last ten years has expanded considerably. The airline has been having both labour issues and recurring issues with its modern fleet of Boeing aircrafts. The company’s CEO and largest shareholder has tried to circumvent Norwegian labour costs by incorporating a subsidiary in low-tax Ireland, resulting in strikes and disrupted service. Frequent maintenance and repairs required of their 787 Dreamliner’s engines is also increasing costs and hampering service. The lack of redundancy means that if one plane is out of service the whole route is shut down. Passengers cannot be shifted to another flight and must wait. The cost savings that work well on shorter flights do not always work for on longer ones. For example, fuel costs on long-hauls are significantly higher. More discerning customers will opt for a more traditional airline.
The two giants of the Icelandic market have issued optimistic public statements about the futures of their companies and believe they will overcome their current financial troubles.