I served on the Board of Directors of WOW Air from early 2016 until August 2018. During that time, I learned what a dedicated, smart and energetic guy Skuli Mogensen is, and how interesting the WOW business model was. Iceland’s interesting geography gave WOW a real advantage that initially worked well. But WOW faced five key challenges that ultimately caused the company collapse:
- Lack of Cost Discipline.Airline costs tend to rise because both people and airplanes get more expensive as they get older. Over WOW’s first few years of operation, they should have seen big drops in their unit cost of production due to their fast growth. By spreading fixed costs over a quickly increasing base of operations, total costs would rise less than rate of capacity growth. But WOW continued to add costs at the rate of their growth or greater, effectively squandering the cost benefit from the fast growth.
- Not Diversifying from Iceland Labor.Iceland’s geographic advantage is great as I will define later, but Iceland is also a very high-cost labor country. With only about 330,000 people in the entire country, labor is priced at a premium and labor laws heavily favor worker premiums. Skuli is a patriot for sure and loves his country, and there is nothing but respect for that. But an unwillingness to take activities that didn’t require the high cost of Iceland labor and moving them elsewhere created even further cost pressure for an airline that needed low costs to succeed.
- Not Diversifying from Iceland Seasonality.Iceland has a highly season tourist season, even greater than Europe as whole. By keeping a single base in Reykjavik, WOW could not easily manage this seasonality in terms of profitable capacity deployment. Finding counter seasonal, or even less seasonal opportunities through a second base of operation would have allowed more months of profitability to subsidize the cold, cold winter.
- Not Managing Cash Flow for the Future.Airlines can create a lot of cash but also use a lot of cash. Certain aspects of running an airline can be effectively financed, while others can’t. When WOW was relatively flush with cash, rather than continue to build cash to be able to handle unforeseen environments, WOW used too much cash to pour into new fleet decisions that could have been very efficiently financed because of the strong collateral value of the Airbus A320 family.
- The A330 Guaranteed the Collapse of WOW.The Airbus A330 is a great airplane when used efficiently. WOW’s introduction of this airplane started a downward spiral that ultimately killed the airline. Wide-body aircraft, like the A330, are significantly more expensive to purchase or lease, and more expensive to operate. The A330 allowed WOW to serve markets that the A321 could not, like Los Angeles and San Francisco. But filling such a large plane from those markets to highly seasonal Iceland and connecting points in Europe, proved disastrous. Yet Iceland’s geography initially allowed WOW to serve major traffic flows from Europe to North America with only narrow-body equipment. This is the huge advantage of Iceland’s geography, and WOW was successful when it initially used this strategy. While other carriers need the high costs and higher risk wide-body equipment to serve Europe to North America, WOW could do it with lower cost A320s and A321s. By bringing in the A330, WOW added markets that could not generate annual profitability while effectively giving up one of their key competitive advantages. In addition, for such a small airline with a small total fleet count, the A330 created enormous operating challenges and distraction, taking WOW’s eyes off the core ball. This issue more than any other on this list is the reason that WOW did not survive.
But the media likely will instead focus on two things that had little to do with WOW’s collapse:
- Competitive Pressure. Yes, airlines compete and excess capacity in the North Atlantic markets has kept pressure on prices. But this is an environment where well run and disciplined carriers like RyanAir excel. WOW drove prices down, and shouldn’t have been dependent on the pricing that other higher cost carriers needed.
- Consumer Gripes about Uncomfortable Seats, Excessive Fees, or Unfriendly Policies.WOW was good to passengers but their small fleet and broad network made any operational misstep into a consumer nightmare. But passengers are very willing to forgive airlines when the price is right, and WOW’s aggressive trans-Atlantic prices were the driver of their demand. Had they kept with their initial operating model, using Iceland as a well-positioned gateway with low-cost A320 and A321 equipment, their consumer issues would have been easy to address quickly and effectively. The huge number of people affected by their sudden shutdown is proof of this.
With its shut down, WOW adds another tombstone to the long-haul, low-fare graveyard. SilverJet, MaxJet, Eos, Primera, and more have all failed, and Norwegian is struggling to be profitable while other airlines are doing very well and Air Asia X is not generating the profits of its short haul parent. So is long-haul, low cost service doomed? The answer is that while consumers like low fares in all markets, this is a challenging question that will be addressed in a future article soon.