For fans of the low-cost airline system WOW was a marvel. It ran off with Icelandair’s own business model of connecting people through Iceland in 2011. It cut prices to the bone, it targeted European and US cities with single aisle aircraft and quickly carved out a place in the market.
Offering a single connection as the penalty for a low price, adding up to 4 hours to a direct flight time, was worth the cost benefits to thousands of people, especially the younger ‘back pack” travellers on low budgets.
It also brought hundreds of thousands of new customers to Iceland – an expensive country to visit at any time – but made it possible by keeping fares low.
Things were going well. Yet their mistake was in letting their clearly functional strategy of supplying low-cost short-mid-haul flights dissolve before their eyes. They stopped being disciplined and got greedy.
When your strategy has no clearly defined goal, your tactics become a series of random, seemingly good ideas, that are uncoordinated by a strategic framework. Individual ideas may seem good, but they can be expensive, short-term, visually amazing, but have little substance. And the question will always be there: why did we do that? If you can’t explain how it benefits the company as a whole, if you can’t explain its real benefits inside the framework of the company’s strategic vision, it’s a tactical blunder of first class proportions.
WOW stopped having a clear-cut strategic vision because it failed to update its goals, failed to guide the marketing managers and operational staff on its next 5 year objectives.
Once the rot set in, managers became fire fighters, problems arose, finances became difficult and rather than the next 5 years, it was more about surviving the next 5 months, then weeks, then days, and eventually hours.
The mistake was the A330-300’s. The idea that a small airline single aisle operator could suddenly take on an aircraft two to three times the passenger capacity of most of its other aircraft, in such a short space of time was truly audacious, even inspiring to those on the outside and to those who wanted to believe on the inside.
Never underestimate those who want to believe on the inside of any business. Men like Skúli Morgensen, Freddie Laker, Bjorn Kos, Richard Branson, Naresh Goyal, they have a charismatic, absorbing quality that exudes a confidence, a self-belief that inspires those around them, often to follow them blindly down any rabbit hole. The problem then, is if they make a mistake, everyone goes down with them.
Morgensen believed in the A333’s. He saw those aircraft as the way forward, to use the A320/21 series as feeders to Iceland for long haul onward travel. San Francisco, Los Angeles, in the end even Delhi and who knows where else were all ideals. And yet aircraft weren’t full. They weren’t even breaking even. Flight times across Europe weren’t well coordinated to arrive in Iceland to serve the onward flights – something not always in their control from busy slot constrained hubs. How come nobody realised that from the outset? Lack of strategy leads to shoddy tactics.
At peak times, rather than fly the A330’s only on long haul, the airline started operating them on short haul, where they’re much more expensive to operate on a cost per kilometre basis. Here’s an example: A single average A333 costs $9,787 an hour to operate. A typical months ownership cost is around $200,000.
A 345 seat A333 – the total on WOW’s aircraft with a one-way ticket price of $199 per passenger average brings in $68,655 per flight. If it had been full. It’s an 8 hour flight from KEF to SFO. It would have cost the airline $78,296 to get there. Even at $299 one way with a 75% load factor (allegedly quite common), it brings in $75,303.15 which is still less than the average operating cost – and Icelandic crew costs were well above the US average, so was their locally supplied (and imported refined) avgas in Iceland.
Bearing in mind using these aircraft on flights of under 4 hours wasn’t uncommon, the fares on the short-haul were minimal, and if coupled to an all-inclusive $299 cost across a 12 hour flight, they were loosing money hand over fist. If they started to lift prices to the point they were profitable, they undercut themselves – direct flights were suddenly in the same bracket on mainstream airlines.
Like it or not the A330-300’s were a disastrous strategic decision, made from passion and emotion, and self belief, not a real business case.
Add to that the total failure to understand that WOW had almost zero use for them in the November-March period of the Northern Winter, no plans were made to lease them out to other airlines over the Southern Summer at the same time. Costs skyrocketed as the A330’s became a financial sink hole.
In the end there was no option but to return them, pay expensive penalties and stave off disaster. As we know, it was all too little, too late.