WOW Air – The Spectacular Crash Of The Purple Airline

WOW Air has ceased to operate after a long and tiring battle with its debt collectors for almost 12 months. Incredibly, the shareholder took over the operation yesterday, Wednesday, and it appeared that the company was out of the woods. But this morning it became apparent: the company was not operating anymore and hundreds of stranded people were left stuck in airports all around the world.

The fall of an airline is of course, always a dramatic event. But it’s even more dramatic in Iceland, for the country only has two airlines; Icelandair, and now the bankrupt WOW Air.

You Feel Lucky? Establish An Airline

The company was founded by the billionaire Skúli Mogensen, who made his fortune in the Icelandic tech business. He sold his company, OZ, to the Finnish phone-giant Nokia in the year 2008, just moments before the banking system crashed in Iceland. His money was not in Iceland when that happened, so when the Icelandic króna fell, well, his dollar stayed the same. He found himself as one of the wealthiest people in Iceland overnight. At least, that is how the story goes.

So, what to do when you feel lucky and have billions? Of course you set up an airline.

Perfect Timing

Skúli founded WOW Air in 2011, just around the moment of the eruption of the notorious Eyjafjallajökull volcano, which became a blessing in disguise for the travel industry in Iceland. That and of course the Icelandic króna, which was so low that tourists actually afforded to come to Iceland for the first time and buy a pint or two while they were at it.

In short, the travel boom was around the corner. The timing was perfect.

Lets Go PURPLE!

But this airline was quite different from what Icelanders had seen before. It was more about the image although they were budget airline. Airlines of course have always had their appeal through the decades, and it looked like Skúli was determined to restore the romantic view of the airlines.

The color purple was chosen for its logo and merch, and you could not see a picture of Skúli in the media without two or more of his beautiful flight attendants around him smiling like it was the 50s and feminism was just an odd idea that nobody really cared about.

The image of the company also emphasised a new and glamorous lifestyle and cunningly playing with the notorious FOMO feelings related to social media.

Good Start

The first year of WOW Air was a mild success. Over 110,000 customers flew with the airline their first year. In 2014, they were just under half a million; in 2016, 1.6 million; and in 2017, about 3.5 million people flew with the airline. It looked like an amazing success, but some could see that there was turbulence in the air.

WOW Air lost 330 million ISK in 2013, but all in all they lost around 1.1 billion ISK (8 million Euros) the first two years. At that time, the company’s shares were solely in the hands of Skúli himself, so it was hard to see exactly what was going on within the company. But it was obvious that they were losing money, and to quote of Sir Richard Branson, owner of Virgin, echoed in the sky:

“If you want to be a millionaire, start with a billion dollars and launch a new airline”.

You Wanna Go Faster!

The fast growth of the company became a real problem when, in 2015, WOW Air flew the same number of travellers in July as they did in the whole year of 2012. The EBITDA of 2015 was -536 million ISK.

The next two years were surprisingly calm and successful for the purple airline. The flight attendants, who looked like they got lost in time, smiled like they had never smiled before, and the airline announced that the profit for 2016 was 4.3 billion ISK. But that changed quickly.

Bad Decisions

Skúli had made a bad deal connected to the fuel price. A credit card company, Korta, that WOW Air had close ties with, got into trouble after the bankruptcy of the budget airline Monarch went bust. And to add to that problem, there was a contraction in the travel industry. Things were not looking good for Skúli and his smiling stewards.

In 2018, it became apparent that something drastic needed to be done if WOW Air was going to survive this storm. Media reported that the company owed a state run company, ISAVIA, 2 billion ISK in landing fees. To be exact; the company owed the tax payers in Iceland 2 billion ISK.

The situation was grave. So Skúli had to walk the gauntlet of humiliation and talk to Icelandair about a possible buyout or some kind of a form of saving the company. Keep in mind that Icelandair is the oldest airline and a very established airline in Iceland. The government has even vouched for its debts at one point, after the 9/11 attacks.

These WOW Air/Icelandair negotiations happened last November. Nothing came out of it in the end, although many were hopeful that this would be the solution. And everybody had this same feeling; something was wrong.

Kung-Fu Finance

But Skúli did not give up. He ended the negotiations with Icelandair and suddenly the owner of Wizz Air, Indigo Partners, was on the other end of the negotiation table. They crunched the numbers for weeks, and it was said that the time they took to look over the finances of Wow Air was unusually long. After crunching the numbers, Indigo Partners said there was no deal. This was of course before the public heard that WOW Air lost 22 billion ISK just last year.

Things were not looking good for Skúli, but he did not give up there, either. It’s safe to say that he pulled out some serious financial Kung Fu-tricks to keep afloat. And on Wednesday, the shareholders announced that they had taken over the company, from the Crouching Tiger-Hidden-Dragon-Kung fu grips of Skúli.

But like with all tragedies, this was too late. The owners of the airplanes that WOW Air used demanded 300 million ISK last night for them to continue using the planes. WOW Air tried to convince the owners of the plane to give them more time. But because of the Airbus scandal with Boeing, airplanes are in high demand right now, and with the shaky state of things, the answer was a hard no.

We Eat Crisis For Breakfast

So, what happens now?

Well, there are at least 1,100 hundred employees without a job. That is a number Iceland hasn’t seen since the collapsing of the financial system in 2008. The effects will have a heavy impact on hotels and restaurants in Iceland, and the whole travel industry in the country is upset because of this. The timing could not be worse. Banks have forecast that there will be some contraction in the Icelandic travel boom, and to add on that, there are complicated wage negotiations going on and the unions are threatening strikes.

It is expected that this will affect Iceland’s economy, possibly resulting in a contraction of about 2%-3% of the GDP, and the króna could weaken by as much as 13% in the next year.

But there is not only bad news. Experts say the travel industry will get back on its feet within 9 months. Also, keep in mind Iceland has gone through an unprecedented failing of the banking system. We eat crisis for breakfast.