Rapidly Descending: Icelandic airline Wow Air goes bust

April 8, 2019

2 min read

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What's going on here?

Following its failure to secure funds from investors, Wow Air ceased operations and cancelled all its flights on the 28th of March.

What does this mean?

Despite Wow Air grounding all of its aircraft and talks of a cash lifeline falling apart, the airline continued to sell tickets until 8 am of the morning when things went south. Wow first cancelled all flights temporarily, before eventually ceasing all operations. This left 10,000 passengers stranded. Passengers have since been advised to seek refunds via their credit card providers or to seek compensation from their insurance or the airline itself.

What's the big picture effect?

It’s been a bad time for airlines, particularly in Europe (Alitalia, Air Berlin and Monarch Airlines have all fallen into financial troubles). Wow Air’s founder, Skúli Mogensen, attributes the company’s collapse to high company debt, rising fuel prices in 2018 and moving away from its original “no frills”, ultra-low-cost business model.

The aviation industry is stiffly competitive. Wow Air offered ultra-low fares for competitive transatlantic routes – including a free stopover at Iceland with roundtrip tickets. However, “legacy airlines” (such as British Airways) also started offering ultra-low fares to match.

The low-cost carrier business model succeeded with short-haul flights. With this strategy, the company avoid being excessively impacted by high and increasing costs of planes and fuel. But, pressured to succeed, Wow Air began expanding into routes to Asia and ordered a number of A330 airbuses (which cost £240 million each!). It also developed a new “Premium Cabin” option which saw the airline move away from its original low-cost business model. These ambitious decisions left the airline with a fatal £115 million debt.

With Wow Air’s collapse, its users will think of turning to their insurance policies for any remedy. But, recent analysis has found that only 48% of travel insurance policies offered airline failure cover as standard. Those individuals with unfulfilled past compensation claims against Wow Air are now considered among its creditors (entities that the company owes money to). This means that they will have to file their losses with the appointed liquidators or administrators in charge of sifting through the airline’s assets. However, because of the company’s huge debts, after Wow Air’s carved up and divided among creditors with higher priority, there will probably be nothing left for consumers.

Report written by Heerim H

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