Only a few short months ago we were reporting on the sunny possibilities open to WOW Air, and how fast the low-cost carrier grow. A little later in the year, the company was speculating that it would be looking to go public in about two years time. Since then things have taken a big turn for the worse, and even at this moment, the long-term viability of WOW is in Question.
After the positive days of the summer, the last few months have been a disaster for WOW Air; the bad news started with an announcement that the airline would be axing three of its US destinations. This was followed by the news that the airline would be reducing capacity on its New Delhi route by up to 40% due to reduced demand.
Fuel Hedging is Key
The key to understanding WOW’s financial woes is the company lack of fuel hedging. Most airlines purchase fuel up to a year in advance. The price is fixed and is protected from any market fluctuations. WOW, air has decided to operate without a fuel hedging strategy. This policy means you pay a lower price for your fuel when prices are low (less than the competition, since hedging involves a slightly higher than market price) however you are subject to the volatility in oil price. Unfortunately for WOW crude Oil has skyrocketed from $50 a barrel in July 2017 to close to $85 a barrel. Since fuel tends to be one of the biggest costs of a low-cost carrier, a 70% increase in fuel costs is very hard to absorb and wipes out your profits or worse.
Another problem with WOW’s strategy is increased competition. The company bet the house that budget travelers would be willing to stop in Iceland to get cheap fares. However, the company faces stiff competition from both low cost and traditional carriers. Norwegian is slowly eating away at WOW’s market from its bases in Scandinavia, and even Oneworld Carrier Finnair is offering some outstanding deals for both economy and business class travel, especially on transatlantic routes to Asia.
One development that may help WOW survive is the demise of Icelandair. The company is also struggling financially, and in August the CEO was replaced. What we may be seeing with Icelandic aviation is the ultimate airline survival of the fittest game, were the weakest die off and the most resilient survive.
The million dollar question is can the airline survive, it is on the brink of a financial disaster, can it turn itself around? Measures have been put in place and restructuring is underway, but there is no magic solution in sight. Turning WOW air around is going to be a big task, the company needs cash investment and need to start turning a profit fast. Can it do it? With no fat to trim in its operations probably not!