In Focus: WOW air Goes Bankrupt
Words by Larissa Kyzer
Iceland’s airline industry is the backbone of the island nation’s tourism sector, and yet, it has struggled amidst increasing financial woes and uncertainty. While Icelandair has been able to weather rising oil prices, decreasing profits, and the resignation of its CEO last year, that venerable airline’s scrappy kid brother, WOW air, didn’t fare so well. On the morning of March 28, 2019, WOW air unceremoniously ceased all service, stranding thousands of passengers on both sides of the Atlantic, prompting the largest mass layoffs in Icelandic history. Observers both in Iceland and abroad are left wondering what the company’s downfall will mean for the future of Icelandic tourism.
WOW air was an incredible success story when it launched in 2011. The airline transported 110,000 passengers in its first year and had quadrupled that number only five years later. In 2017, 2,800,000 passengers flew with WOW. By the following year, the airline commanded a fleet of 20 planes, employed over 1,000 people (not to mention the hundreds of individuals employed by other companies that provided WOW with support services), and was operating routes to 35 cities internationally. But this rapid expansion took its toll and WOW announced a loss of ISK 4.8 billion ($39.3m/€35.3m) between July 2017 and July 2018.
Taking the bad news in stride, CEO Skúli sought bonds investors in the hopes of raising ISK 12 billion ($98.3m/€88.1m) to get the airline back on track. Provided he was successful in this endeavour, Skúli said, WOW had “[…] never been in a better position.”
In the fall of 2018, WOW’s bondholders invested ISK 8.2 billion ($66.9m/€60m) in the airline – not enough to restore the company to solvency. WOW began discontinuing routes. Cincinnati, Cleveland, Pittsburg, San Francisco, and St. Louis, fell by the wayside in the US; Edinburgh, Stockholm, and Tel Aviv were suspended indefinitely.
A possible life raft, in the form of a merger with Icelandair, appeared in November. The proposed union would benefit both parties: Icelandair would purchase all of WOW’s stock and thereby solve its debt problems; joining with WOW would help Icelandair become more competitive on the international market and lower its ticket prices. Both airlines would operate under their existing brands, and together, they’d control 3.8% of the Atlantic aviation market. Invigorated by the prospect, WOW expressed a desire to expand by 15% and increase flight frequency on popular routes.
Alas, Icelandair shareholders were wary about approving the deal and the merger fell through, a decision that was said to be mutual and amicable.
Just a day after the Icelandair merger was called off, WOW announced that it had made a temporary investment agreement with Indigo Partners, a US-based asset management company. WOW would have to jump through a number of hoops to transform into the kind of “ultra-low-cost airline” that Indigo wanted, but Skúli would, per a statement on the WOW website, remain its primary owner.
Over the next months, WOW radically streamlined its operations. There were layoffs: 15 WOW employees at the airport, 237 employees of an airport support services company, and then, just weeks before Christmas, 111 additional WOW employees were let go. WOW reduced its fleet from 20 to 11 short- to medium-range aircraft. It sold its flight times at Gatwick, making Stansted its only destination in the UK, and lastly, extracted itself – at substantial cost – from a contract with an Irish aircraft rental company. Having fulfilled the purchase requirements, WOW was set to sell a 49% share to Indigo before the end of February 2019.
And then, Indigo changed the terms of the deal: shareholders would have to wait longer to recoup their investments, they said, and their returns would be dependent on the airline’s financial success. Indigo also demanded that Skúli’s stake in WOW be linked to the airline’s success over the coming years, meaning it could end up being full ownership, but he could also lose it entirely. This last-minute demand came as a real shock to the CEO.
Carrots were dangled: Indigo suggested, for instance, that it would invest even further in WOW – up to ISK 10.9 billion ($89.2m/€79.9m), an amount almost double their initial offer. At first, it looked like a deal would be struck, but as the month dragged on, doubts arose.
The last gasp
On March 21, Indigo Partners walked away from negotiations, seemingly at the same time that Icelandair returned to the table. The two Icelandic airlines set a negotiation window of three days. These talks came to nothing, however, and WOW was left no option but to convince its creditors to convert its debt into shares. Tensions ran high: industry observers said WOW’s downfall could lead to a 15% drop in tourism in 2019 and Iceland’s labour unions, embroiled in a contentious contract dispute, postponed negotiations while the fate of the airline, and thus, its employees, was determined.
On March 26, WOW’s creditors agreed to convert 49% of the company’s debt into shares in the company. With this, Skúli ceased to be WOW’s sole owner. A buyer was still needed for the remaining 51% of the company. One day later, Indigo Partners re-entered the fray. Representatives said that if negotiations were successful, WOW could expect a positive liquidity of more than ISK 1.1 billion ($9.03m/€8.09m) by the middle of 2020. They were not. On March 28, WOW air ceased operations. Its last flight, the WW121 from Reykjavík to Detroit, landed early in the morning and after that, all its aircraft were grounded.
In the following weeks, there were mass layoffs – close to 2,000 people lost jobs as a direct or indirect result of the company’s failure. The social response was prompt: the government allocated an extra ISK 80 million ($656,820/€588,366) to the Directorate of Labour to respond to the crisis and unions worked to ensure that laid off employees receive unemployment immediately.
Previously, burnout in the healthcare and education sectors had seen high numbers of teachers and nurses turning to new jobs as flight attendants. Since WOW’s downfall, these individuals have returned to their former professions in droves. Many airport services employees are still unemployed, but 205 of them were offered new contracts in Keflavík.
The Sónar music festival was cancelled as a direct result of the airline’s bankruptcy, but this is, perhaps, a unique casualty. For now at least, the tourism industry is remaining stable. According to hotel owners in South Iceland, for instance, there haven’t been nearly as many cancelled bookings as were feared.
Ready for takeoff
And the story doesn’t end here. Only a week after WOW’s demise, Skúli announced that he’s planning to resurrect the airline and currently searching for up to ISK 4.9 billion ($40m/€35.8m) in financing. According to his plan, WOW would immediately take lease projects for larger European airlines and then the brand would be sold. WOW could, Skúli claimed, be back in operation by June.
In mid-April, a group of concerned citizens started a crowdfunding site to raise money for a new, as-yet-unspecified Icelandic airline. The site was shut down overnight, out of concern for investor protections.
Most recently, businessman Ástþór Magnússon and partners claiming “more than 100 years of aviation experience and access to a fleet of Airbus aircraft,” launched a website for FlyICELANDIC. The brand could grow into an entirely plastic-free airline, say organisers, or –barring that – a frequent flyers club. It’s currently trying to attract subscribers with incentives such as free second suitcases and VIP upgrades, but no actual business plan exists yet.
This article appears in the latest issue of Iceland Review Magazine. Subscribe here to get the magazine delivered to your door.
Iceland Review is the longest-running English-language magazine, presenting Iceland’s community, culture, and nature since 1963.