Words by

Colin Arnold Dalrymple

WOW Air is a young, innovative Icelandic airline with an impressive growth record over its short life. Though it was only founded in 2011, WOWnow challenges the well-established Icelandair for the distinction of Iceland’s largest airline. Last month the carrier announced losses for the fiscal year of 2017 and a presentation for potential investors was leaked, showing even larger losses and financial woes. This gets a bit numerical, but stick with it.

The airline lost US$45 million before interest and taxes from July 2017 to June 2018. The total for 2017 was US$13.5 million and is expected to be US$28 million in 2018. The presentation also included estimated earnings before interest, taxes, depreciation, and amortization (EBITDA) of positive US$4 million in 2017 and expects a loss of US$6 million. EBITDA is an accounting measure used by investors to gauge if companies will be able to manage debt over the near term, but it tends to portray companies in too positive a light, ignoring potential cost.

The leaked information also shows that WOW’s owner’s equity has fallen from $40 million to $14 million over the first half of the year. Equity is a measure of assets minus liabilities. Many young companies have low equity because they have not had time to build capital and WOW’s has been compared to Icelandair’s equity—not a particularly useful comparison because Icelandair is an decades-old airline. Meanwhile, WOW’s owner has personally invested significant sums in his company.

There have been warning signs and speculation about WOW for much of the past year. In November 2017 the airline sold two of its aircrafts and then leased them back. Skúli hinted earlier this year that the company needed funding, and the July announcement had been long delayed, spurring much speculation about the company’s financial fitness.

Fast Cash

The use of accounting tools to woo financiers suggests the company is in even more financial trouble than its July statement indicated. The company hopes to find investors by the end of August and may need an injection of funding soon to stay operational. WOW is hoping to raise between US$54.5 and US$109 million by issuing three-year bonds. This will finance the company as it transitions to a publicly traded company—WOW hopes to be on the stock market within the next year and a half. Many of the amounts shown in the presentation were in Nordic currencies, indicating where the company is looking for investors. The Norwegian investment bank, Pareto Securities, will handle the initial public offering. It is one of the Nordic region’s leaders in this area and previously has helped raise funds for Icelandair and Norwegian.

The company predicts a 16 percent increase in revenue from ticket sales this year and 22 percent next year. Much of this growth is predicted to come from raising prices. WOW has made this prediction before, but market conditions would not allow it and competition is only increasing. Icelandair hoped to raise prices too, but could not due to ever-increasing competition. Increased fuel prices also ate into both companies’ earnings.

Local Complications

Icelandic pension funds have been major shareholders in the local stock market, claiming around a 40 percent stake now. They also own Icelandair. Pension funds had to invest domestically while capital flows were restricted for many years after the financial crisis. However, they appear to be divesting from local industry. The króna is hovering around record highs and the state lifted almost all capital controls last year, which allowed them to invest abroad. A more diverse portfolio will help them to withstand turbulence in the economy. The exodus of capital and unexpectedly large losses of Icelandair have pushed the Icelandic stock exchange down by more than 10 percent in the last year. Most other western markets have increased. Pension funds are cautious and unlikely to take a risk on WOW Air. After the carrier announced its losses, Icelandair’s stock price recovered partially. Icelandair would be well placed to take back WOW’s market share if it failed. The carrier has also professionalized its management in recent years and hinted at its restructuring plans, both of which have been well-received.

WOW Air and Icelandair have both partially blamed their troubles on volatility in the local economy, namely a strong but fluctuating currency and labor disputes. There is a long history of such issues throughout Icelandic history. Iceland is a small state and small economies are more vulnerable to shocks. Many small states try to mitigate this vulnerability by adopting a larger, more stable currency. Iceland proudly resists this strategy and is the smallest economy to have its own currency. It increases costs for industry such as WOW. There are arguably good reasons to have an independent currency. In 1981, economic problems led to such high inflation that a new króna was issued at a rate of 100 to 1. Instability can also be seen as flexibility. In 2008 the exchange rate crashed along with the banks and helped kick-off the current tourist boom by lowering prices for foreign visitors. It was a great moment for a budget airline like WOW to enter the market. It is often said “what goes up, must come down”. WOW must be hoping it’s the króna and not it.

Echoes of ’08?

The timing of these revelations is ominous, October will mark the tenth anniversary of the spectacular collapse of all major private banks in Iceland. Those banks also grew incredibly fast after privatization and collapsed in less than a decade. There have been fears amongst residents of the island that the tourist boom would be as fleeting as the banking bubble. These fears are generally overstated, however the utter lack of state and industry planning could undermine the industry in the long-run.

WOW’s growth is impressive and steady, it started with one route in 2012 and now has dozens of destinations. The airline has been profitable at times in its short life. This is a better record than many new companies. Ultimately WOW Air’s destiny depends on whether it can convince enough investors that the company is capable of long-term profitability.

The reader can draw their own comparisons to Icarus.