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Wow Air’s bankruptcy, a blow to Iceland’s economy?


  • Wow Air’s bankruptcy, possible repercussion and government’s response
  • Importance of tourism for Iceland

 

Iceland is more susceptible to busts and booms with a mere population of 350,000. Tourism is the largest export sector for the country and it accounted for more than 10% of the GDP in 2017, it also accounted for c. 42% of the export revenue, which was followed by seafood (17%), aluminium (16%) and others. The tourism sector employs a whopping 30,000 people, backed by the country’s scenic views and huge popularity of its TV shows such as Game of Thrones.

Wow Air, Iceland’s now extinct low-cost carrier helped in boosting Iceland’s economy a decade ago (2008-11 financial crisis) and turned its tourism sector into a big cash cow for the country. The now defunct airline commenced its operation in 2012 and ceased in March 2019, which left thousands of passengers stranded and struggling to receive the refund on their tickets. Leveraging on Iceland’s rather convenient geographical location, Wow Air offered flights between the US and European states airports for fares as low as US$99, with connecting flights at Reykjavik-Keflavik airport. According to Arion (an Icelandic bank), Wow Air flew in c. 30% of tourists visiting the ocean locked island in 2018. Furthermore, during those days, it attracted price-sensitive travellers by offering dirt cheap long-haul flight options between the US and the European states.

Wow’s rock bottom travel pricing options, both enabled and encouraged a typical younger and price-sensitive generation to travel both on the US and European routes, though it was a financially straining model to operate on for Wow Air. Wow Air cited financial issues as the reason for its demise, which stemmed from its incapability to deal with fluctuating fuel prices, overcapacity issues in the industry and an aggressive continent-wide price war. These factors were similar to the other failed European airlines.

Wow’s demise is bound to hit the economy, which generates approx. 10% of its GDP from tourism and employs around 30,000 individuals. The impact can be seen in the revised forecasts, the economy that was previously estimated to grow by 1.8% is now expected to contract by 0.4%. Identically, inflation estimates have been revised upwards to peak at 3.4% in mid-2019 and then slow down to 2.5% over the next two-year horizon. On similar lines, the forecast for unemployment has been revised upwards to 3.9% from 3.1%. Further, with the bankruptcy of the airline, the count of non-Icelandic tourists travelling to the country fell by 18.5% in April 2019 YOY. Analysts expected Iceland’s tourism sector to slow down even before the collapse of Wow Air, while 2017 registered an uptick in tourists at 24%, 2018 saw just a 5.5% increase. Though Wow Air’s actual collapse has only exacerbated the situation for the Icelandic economy.

The airline’s demise has also impacted Iceland’s employment rate as Wow Air directly employed c. 1,000 employees; it indirectly provided a number of employment opportunities to its related sectors. Moreover, with the airports expecting a drop in the inflow of passengers, this will result in less staff being employed to maintain the airport as well as lesser staff to clean hotel rooms.

In order to grapple with the situation, the nation’s Central Bank recently cut down the interest rate by half point. The government in its statements continue to say that it remains optimistic despite the unfortunate situation and the effects of Wow’s failure will be felt only in the short-term. It would be highly unlikely for the country to go through another financial crisis as Iceland has over the years managed to reduce its debt while also build up reserves to rough out tough times.

Is Wow’s demise going to be one-off those events that is going to disrupt an entire economy? Iceland’s tourism share of export revenue grew to 42% in 2018 vis-à-vis 26% in 2013, this clearly shows how dependent the country’s economy is on tourism. Even though Wow had not been raking in profits, the airline was clearly a boon for the economy, which once relied on tourism to rebound from its financial crisis about a decade ago.

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