The Wow Airline Debacle

The Icelandic budget airline “Wow airline” became the latest airline to go bankrupt in Europe. Of late, Europe has seen a lot of airlines go bankrupt due to multiple reasons. No less than eight airlines have suspended their operations in Europe in the past year.

Price wars, rise in fuel prices, and overcapacity have been blamed for the fate of these airlines. However, the reality is that these airlines have did not really have an impact on the economy of an entire nation. This is not the case with Wow airlines.

The entire economy of Iceland seems to have tanked because of the bankruptcy declared by Wow airlines. In this article, we will have a closer look at the Wow airlines debacle and its effects on the wider economy of Iceland.

Why Wow Air was Important?

Wow, air was one of the super low-cost airlines operating in Europe. The company could offer a trip within Europe for as low as $60. The international trips being offered started from as low as $100. By reducing the prices to such low levels, Wow air created a new breed of tourists.

The lower middle class demographic around the world was not used to international travel. Wow air brought these tourists to Iceland’s shores which helped scale up a dying economy after the 2008 crisis.

The fall of Wow Air

Wow Air had been facing cash flow issues for a long time. However, in the past few years, the company has managed to survive despite these problems. Firstly, even though tourism is the biggest industry in Iceland, it was slowing down in the past few years. The industry was now growing in single-digit growth rates. Up until 2017, the growth rate was closer to 25% per annum!

Wow Air was hopeful of receiving a cash inflow from investors. It had announced to its investors and customers that the airline is poised to continue operations since it was about to receive funding. However, finally, the funding did not materialize. Therefore, thousands of passengers all over the world ended up stranded as the airline simply stopped its operations. Since several tourists were not able to reach Iceland for their vacations, other industries such as hotels and restaurants also ended up being severely impacted.

Iceland’s Dependence on Tourism

The economy of Iceland is heavily dependent on tourism revenues. Wow air was a pioneer in bringing international tourists to Iceland. The airline was instrumental in keeping up the revenues of the country during the 2008 crisis as it prepped up tourism revenues in the country.

At the present moment, more than a third of Iceland’s total revenues are derived from tourism. Since Wow Air’s collapse has negatively affected tourism, it has also negatively affected the entire national economy. The bankruptcy of Wow air has become a unique case where the economy of an entire nation was affected by the bankruptcy of a single company.

Impact on Iceland Economy

A couple of important things have gone wrong for the Icelandic economy at the same time. Apart from poor growth in tourism, the country is also facing a bad fishing season. Since fishing is the biggest economic activity after tourism, the economy of Iceland has been badly hit by the recession in both these industries.

As a result, the government of Iceland has changed its growth forecast. Instead of the economy registering a positive growth of 1.8%, the economy will now register a negative growth of 0.4%.

The central bank of Iceland is also trying to come to the rescue of the people of Iceland. The interest rates have been cut down by 0.5% and are now at 4%. This is being done so that the economy can be stimulated and the impact of the fallout of Wow airlines can be reduced.

Effects of the Wow Air Fallout

The fallout of Wow airlines has impacted the economy of Iceland in several ways. Some of these ways have been listed down in this article.

  • The Icelandic Krona has fallen by as much as 13%. With the inflow of tourists reduced, the amount of foreign exchange flowing into Iceland has also taken a hit. This lower demand for the Krona has translated into more supply which has led to this fall in prices.
  • Surprisingly, the exports of Iceland have also fallen down by 10%. This may be due to the fact that inflation (which is increasing at 6%) has caused the krona denominated prices of goods to increase. The price rise, along with a recession, has led the people to curtail their purchases in anticipation of poor economic results
  • It is uncertain whether other airlines will be able to fill in the boots of Wow air. For instance, the demise of Wow air means more business for Icelandair. However, Icelandair offers comparatively expensive tickets. Hence, it needs to be seen whether Iceland will continue to draw tourists in large numbers despite the rise in air ticket prices.

Hence, the wow air fiasco has not only affected a single company but an entire economy. Hopefully, the country will be able to come out of this crisis unscathed thanks to supporting by the government and international investors.

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