Wow Air flew on a purple plane and a promise too good to be true. The no-frills airline debuted in 2011 with rock-bottom prices on transatlantic flights, some as low as $99. With it came the dream of low-cost, long-haul air travel to the masses.
The world just woke up from the dream. Yesterday morning, Wow Air abruptly disbanded its entire operation after eight years, and the result was total chaos. Pulling the plug on an entire airline with no advance notice left upwards of 2,700 passengers stranded on both sides of the Atlantic, left in the lurch without a tangible promise of refunds or a way to get home.
That’s the way an airline fizzles. But now, something bigger is at stake. Other low-cost carriers such as Primera Air and Germania also have bitten the dust in recent months. Norwegian Airlines, considered the standard-bearer of discount long-haul airfare, charts a similarly precarious financial path. Is the era of inexpensive flights across the Atlantic Ocean doomed?
The Cheap Flight Boom
The marketing potential of Wow Air’s rock-bottom rates certainly can’t be denied. The $99 fares to Europe sold themselves and prompted plenty of giddy news coverage about upstarts undercutting the airlines of old. With Wow and Norwegian dominating the market for thrifty travelers looking to hop across the Atlantic with only a backpack and a boarding pass, analysts declared sub-$200 transatlantic flights the new normal in the summer of 2017.
Across the industry, prices cratered for a year. “What used to be four-digit airfares in peak summer are now three digits,” airline analyst Robert W. Mann told the New York Times last year.
Wow truly soared after its expansion into the United States in 2015, when it began peddling its ludicrously cheap flights to Europe, with mandatory connections in Reykjavik, Iceland. A new fleet of wide-bodied jets fashioned it a tourist conveyor belt to Iceland—it ferried 30 percent of the country’s visitors last year alone—and signaled a shot across the bow to old-guard airlines, which had to lower their prices to stay competitive.
For a time, the downward shift in airfare that Wow catalyzed was joyous—for passengers, at least. But soon after the bonanza, it all went kaput.
What Went Wrong?
If the passengers stranded on Thursday had looked beyond the airline’s alluring price points, they might have seen their plight coming. Wow had long been teetering on the edge of financial collapse, and last-ditch attempts to save it from oblivion fell through: Efforts to find a buyer in Icelandair were unsuccessful, and a proposed $90 million capital infusion from U.S. private equity firm Indigo Partners failed, too. The airline laid off more than 100 workers late last year, while the cost of fuel continued to climb.
As former CEO Skuli Mogensen told the Financial Times on Thursday: “We still had too much debt on our balance sheet and, given a very challenging airline environment at the moment, didn’t have the time to secure the funding needed.” Mogenson also cited oil prices as a contributing factor—the rising cost in 2018 made business tough for Wow, especially with its relatively modest fleet of 11 planes.
20 min to board, @wowairsupport cancels the flight. But then sends an email that it’s just delayed until 9pm. Oh but the crew left because it was cancelled. Updates coming from the guy in the middle of this crowd. pic.twitter.com/bRmnQUXvz4
— Mike Wendling (@WendlingMike) March 27, 2019
But those aren’t the only factors at play. Wow’s contagious business model hastened its unraveling. Legacy carriers scrambled to mimic its barebones appeal, offering similar accommodations at a comparable price. For example, both United and American Airlinesexpanded their Basic Economy offerings to international routes last year, while Delta made the switch in 2017. Such arrangements offered discounted fares in exchange for passengers giving up certain perks, like choosing their seat.
For Wow, the imitation was a dangerous kind of flattery.
“The legacy carriers have been really good about matching low-cost carrier products with these new products,” says Judson Rollins, an airline industry analyst with the Leeham Company. He told Popular Mechanics:
“If you’re a passenger you kind of have to ask yourself.. if I can pay the same price as a low cost carrier but travel with a larger airline that’s going to offer me a more reliable experience and potentially frequent flier miles…why am I going to take a chance on an unproven carrier.”
But many of Wow’s issues stemmed from its relative youth compared to the industry’s old guard. Operating a discount airline with transatlantic flights is hard, especially if the competition has a financial edge. Judson cites a litany of reasons why it’s hard for the upstarts to vie with their more established rivals: “The overall costs that are involved in long haul—your crew your, crew pay, your airplane ownership costs—there’s no way you can…be competitive over time with the legacy carriers” he says.
Bigger airlines can take the hit, says airline analyst Scott Keyes, because the crux of their revenue comes from other sources, such as business-class travelers and corporate contracts, as opposed to “price-sensitive leisure travelers” attracted to deals.
The relationship is evident in the decline of several airlines similar to Wow: Latvia-based Primera Air, which also vied to bring travelers across the Atlantic for cheap, called it quits last year, joining a swelling list of 20 other carriers that failed in the last calendar year alone.
In a grim irony, legacy carriers that have adopted Wow’s methods are reaping the benefits, Keyes says. “Just about every full-service airline has shifted their business model to be more like budget airlines by offering basic economy fares, and they’re doing just fine financially,” he says.
To Rollins, it’s all a matter of economics.
“It’s been a rinse and repeat cycle every time there’s been a new crop of long-haul, low-cost carriers,” he says. “The legacies have come in and stomped them flat, especially in transatlantic.”
The Silver Lining
The demise of Wow doesn’t necessarily portend skyrocketing airfare, so don’t dash those dreams of a cheap Euro-trip just yet. In fact, the ill-fated airline’s business model might leave an imprint on the broader airline industry.
Keyes, for one, sees most airlines following the Wow-mandate going forward, even if Wow is extinct. “It’s always challenging starting a new airline—this has been true for decades—but my hunch is the proliferation of cheap trans-oceanic fares is here to stay,” he says.
As for factors keeping costs down in the future, Keyes points to steadily low oil prices over the last five years, plus airlines’ tendencies to cram as many seats as possible into their cabins while expanding their networks. Plus, vacationers are more inclined to save on airfare than they used to be. He told Popular Mechanics:
Basic economy has become the norm for vacationers and I don’t see that changing, but as a result it means that $400 roundtrip flights to Europe are likely here to stay. Even if particular budget airlines go under, their effect will be long-standing.
And while Wow’s collapse is certainly sad, it’s not a bad omen—the airline’s legacy might just save you money going forward.
Originally posted on Popular Mechanics