Iceland’s airlines: is the party over?

 

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Iceland, one of the most dramatic and volcanically active nations in the world, with a tiny population barely the size of central Manhattan, has been at the centre of a massive aviation renaissance.

Legacy carrier Icelandair recognised its unique position, able to offer Europe to North America stop-overs at reasonable prices, and was the joined by low-cost carrier WOW, which has grown at a frantic pace given the size of the supporting country, and has now exceeded Icelandair in numbers of passengers.

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Both airlines have taken on new aircraft – WOW with its A330’s and A320 series fleets, Icelandair with its older 757’s, 767’s and now brand new 738Max’s. So much traffic transits through Iceland it’s created a small economic boom, never mind the tourist attention as more people find it attractive for short – if frequently very expensive visits, in a country where pretty much everything but fish and geothermal energy is imported.

Icelandair has just announce painfully high losses, at $25.7 million in the second quarter of 2018 alone and is projecting as high as $75 million for the year’s end, a simply unsustainable rate.

The problem is primarily jet fuel – for Iceland it’s even more expensive than anywhere else because its refined abroad and imported by sea. The Icelandair Group has had to sell one of its domestic airline’s six aircraft, cut routes to the UK and Greenland and reduce its domestic destinations to four from the International airport, forcing transfers to the smaller domestic airport, rather than internal transfers on site.

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Icelandair Group is also selling off its substantial hotel business to raise funds for the core airline, and it looks almost certain it will change its business model too.

The whole Europe-Iceland-North America route structure is based on price. Icelandair is always more expensive because it’s a full service-all inclusive airline. That looks sure to end. Baggage will almost certainly end up as an extra cost and on board catering for sub-four hour flights  is likely to move to a pay on demand service.

WOW lost over $13.5 million in 2017 despite a 60% increase in revenue to almost half a billion USD. It too is suffering from drops in tourism, with the Icelandic currency so strong it’s priced itself out of the market as a short break destination. (The currency value is often supported by Bitcoin mining – almost half the country’s energy is used in the “mining” of Bitcoin with special data centres being built to cope with it).

WOW and Icelandair are not only competing with each other. British Airways, easyJet, RyanAir, Norwegian, SAS, Lufthansa, and recently United have all upped their frequencies rather than let the Icelandic airlines take the full share.

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WOW has another problem, whereas Icelandair is well-financed and can sustain short-term losses, and counts big investors in its shareholdings, WOW doesn’t. It’s heavily under capitalised and lives on its day-to-day cash  – Norwegian is in a similar boat and not long ago Monarch collapsed for the very same reason.

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Can the pair survive? Almost certainly, but they may have to face some hard choices, indeed Icelandair already has – can WOW? It, like Norwegian, needs constant cash to get by, reducing aircraft numbers reduces cash earning opportunities, but there’s only so much to go around. The last thing European aviation needs is another Norwegian style house of cards.

 

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