search.noResults

search.searching

dataCollection.invalidEmail
note.createNoteMessage

search.noResults

search.searching

orderForm.title

orderForm.productCode
orderForm.description
orderForm.quantity
orderForm.itemPrice
orderForm.price
orderForm.totalPrice
orderForm.deliveryDetails.billingAddress
orderForm.deliveryDetails.deliveryAddress
orderForm.noItems
MANAGEMENT


WOW BOWS OUT: LESSONS FROM THE DOWNFALL OF A BUDGET AIRLINE


THE COLLAPSE OF ICELAND’S WOW AIR, WHICH ABRUPTLY CEASED OPERATIONS AND STRANDED PASSENGERS THIS MARCH, CAME AS NO SURPRISE TO EXPERTS WHO WERE WATCHING THE DISCOUNT CARRIER’S OPERATIONS AND SAID IT WAS ON AN UNSUSTAINABLE PATH.


An ambitious business model,


rising oil prices and competitive pressure all contributed to WOW’s dramatic nosedive. The airline failed to raise enough money through corporate bonds and was banking on subsidies from Iceland’s government, but that help never came. After eight years in operation, WOW posted a notice on its website on March 28 that all flights were cancelled and advised ticketed passengers to look for “rescue fares” with other airlines. “For the last six to 12 months, they


were trying to play too big to fail. They were trying to be too big for the Icelandic state to ignore their demise,” said Thorolfur “Toti” Matthiasson, an economics professor at the University of Iceland. “They almost got lucky with that strategy. But in the end, the government was not willing to put their money on that.” Matthiasson joined Kerry Tan, associate economics professor at Loyola University Maryland, and Mar Wolfgang Mixa, assistant business professor at Reykjavik University, to analyze the airline’s woes on the Knowledge@Wharton radio show on SiriusXM. WOW Air launched in 2011 as a discount regional carrier that offered cheap, no-frills fares designed to undercut legacy players. Along the way, it decided to compete with the bigger airlines, specifically Icelandair, by offering transatlantic flights. That decision required WOW to upgrade its fleet with larger jets capable of making longer trips.


38 DOMmagazine.com | june 2019 “I think WOW might have tried


to grow a little bit too quickly,” Tan said. He compared WOW Air, which had about 10 planes servicing 30 destinations, to Texas-based Southwest Airlines, which has about 750 planes for 100 destinations. “With the small fleet size that WOW Air had, if there were any problems, mechanical issues or otherwise, it was really hard to bring in a new plane to service the flight. So, they might have grown a little too fast for safety.”


RISING FUEL COSTS Volatile oil prices were another factor in the airline’s ruination. While airline stocks benefited from falling oil prices last year, crude rebounded by more than 20% early this year, according to Barron’s. And prices are now rising faster than analysts predicted. In a statement, WOW Air said increasing fuel prices were partly to blame for a $33.7 million loss in the first three quarters of 2018. “Competition is certainly one aspect of the issue, but it’s not the only one,” said Gerry Tsoukalas, a Wharton operations, information and decisions professor who studies the airline industry. “I think equally important is the fact that the business model is very sensitive to exogenous market shocks, and only the most well-funded and efficiently run budget airlines are able to survive. If oil prices continue to rise, it wouldn’t be surprising to see more budget carriers have to cease operations.”


Mixa agreed, saying WOW’s move


toward transatlantic flights coincided with rising fuel costs to become the “nail in the coffin” for the airline.


“For the last six to 12 months, they were trying to play too big to fail. They were trying to be too big for the Icelandic state to ignore their demise.” –Thorolfur “Toti” Matthiasson


“They were simply going on a bookshelf that they didn’t belong on, so there was really no room for mistakes,” he said of the airline’s growth strategy. “To my best knowledge, WOW Air did not hedge themselves against those oil prices. Once the oil prices began going up, they were left vulnerable. Even though they would have been at full capacity, simply the changing oil prices would have put their business under pressure.”


A LACK OF EQUITY According to The New York Times, WOW sought an injection of cash through bonds and had reached a preliminary agreement with Indigo Partners, a private equity firm in Phoenix, Arizona. Those talks quickly fell apart, along with discussions about a potential acquisition by Icelandair. “A big problem for WOW was a lack of equity,” Matthiasson said.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68