Wow Air: The Story of a Bankruptcy That Threatens an Entire Economy
Last March the Icelandic company Wow Air canceled all its flights and announced the cessation of its operations. The company, founded in 2011, transported 3.5 million passengers annually and connected three continents: North America, Europe and Asia. The breakdown means the loss of more than a thousand jobs, and, according to the country’s Central Bank, may greatly impact the nation’s economy.
To understand the wider economic consequences that may emerge in Iceland because of Wow Air’s collapse, we have to acquaint ourselves with some of the characteristics of the country’s economy. In the early 2000s, the Icelandic banking sector had grown rapidly but also recklessly, accumulating a gross foreign debt of over 700% of GDP by September 2008. After the Great Recession and Financial Crisis of 2008, the three main banks in the country declared themselves bankrupt; thus, the Icelandic króna—the island-country’s currency—suffered a devaluation of 700%. What managed to save Iceland from the brink of sustained economic collapse was, surprisingly, tourism.
The 2.5 million people who visit the country annually generated great benefits to the economy. According to the Organization for Economic Cooperation and Development (OECD), tourism represented 8.3% of Iceland’s GDP and employed 14% of its workforce in 2016. During the same year, tourism accounted for 39% of total income in foreign currency, even more than the income generated by the historically vital fishing industry. This phenomenon has some explanations. First, the devaluation of the currency cheapened consumption for foreigners and made Iceland a more attractive tourism destination. In addition, the emergence of low-cost airlines such as Wow Air facilitated travels and made the country more well-connected. Also, the breathtaking Iceland landscapes that served as scenarios for the famous TV show “Game of Thrones” attracts millions of fans to the small northern country.
At the start of 2019, the Central Bank announced that the GDP would grow at 1.8%. In the last eight years the economy has maintained steady and positive growth. But with Wow Air having declared bankruptcy, forecasts are now for a contraction of 0.4%. This is because as many as 30% of the country’s visitors used the services of Wow Air. Despite the existence of other airlines, the Wow Air collapse could trigger a 16 percent drop in tourists this year.
The population in Iceland (estimated at 330,000 people in 2018) should affront the consequences; 1,500 employees of the company lost their jobs in what is perhaps the biggest mass dismissal in the history of the country. Likewise, other impacts have already begun to emerge: the Icelandic króna is down 3.7% this year. While not nearly as devastating as the 2008 financial crisis, the airline’s collapse could have ripple effects across the economy.
However, there is hope: the Central Bank has already announced that while the economy will suffer damage, it is strong enough to withstand the hit. “Although the economic contraction will be challenging for households and businesses, the economy is much more resilient than before,” it said in a report. The Icelandic government must take precautions and seek the least damage to the population. Meanwhile, this is a perfect opportunity for airline companies in Iceland and Europe to fill the void left by Wow Air and maximize their benefits. For the time being, Iceland remains of Europe’s most exciting destinations, and this is sure to buoy its economy for the time being.