With WOW Air no more, Iceland has become a one airline nation. How can full service carrier Icelandair pick up the slack left by the competition and secure a more profitable future?
With the demise of low cost carrier WOW Air still painfully fresh, Iceland now has to face the prospect of being a one airline nation. Rival full service carrier, Icelandair, have an amazing opportunity to pick up some of the capacity left by WOW’s departure. And, frankly, they could do with a helping hand right now.
Posting ever decreasing profits and some of the slowest growth in aviation right now, Icelandair have had a tough few years. Clearly, there was only ever room for one airline in Iceland, and now that the competition has been eliminated, Icelandair have a gift wrapped opportunity to turn their fortunes around.
The Icelandic aviation market
Iceland has been one of the fastest growing transatlantic markets in recent years. In 2017 and 2018, they experienced double digit growth in airline seats, provided for jointly by WOW and Icelandair. The route, appealing to both Europeans heading to the US and vice versa, offers a unique opportunity to enjoy a multi-day stopover in Iceland between the two legs of the journey.
As a result, both airlines had been adding capacity and new routes to their schedules. Last summer, Icelandair began services to five new US destinations, and WOW to six. However, the relentless growth of WOW has been squeezing profits at Icelandair, and the group was losing market share to the smaller, budget carrier.
The state of the aviation market in Iceland has changed beyond all recognition. In 2009, it was at rock bottom, with just 1.66m passengers travelling through Keflavik. By 2015, this had risen to 4.8m passengers, never growing less than 11% in any year since 2009. Keflavik Airport has seen massive improvements, with gates expanded from 11 to 18 and a master plan to grow it to a 10 million a year passenger hub by 2040.
The WOW Air impact on Icelandair
There’s a great deal of overlap between the services offered by Icelandair and those from WOW. In fact, 19 routes had a direct crossover between the two airlines, with 70% of WOW Air’s seats being on these routes.
The impact of WOW Air has, historically, hampered growth at Icelandair. While WOW was growing at a CAGR of 28% per annum over the last five years, Icelandair grew at just 11%. In terms of seats, the difference was even more marked, with Icelandair adding 4% capacity in 2018, while WOW added 28% to give them 3.8m annual seats.
This slower growth at Icelandair meant it was losing market share to WOW Air. Figures from OAG showed that Icelandair held a 47.1% share of all seats to and from Iceland in 2018, down from 51.4% the year before and 80.4% in 2012, when WOW Air launched. WOW Air, on the other hand, held a 31.3% seat share in 2018, up from 27.6% the previous year.
The consequence of this was that the Icelandair Group saw a major reduction in its operating margin, dropping to 3.5% in 2017 compared to 9.2% in 2016. Higher fuel prices and an inability to raise fares due to competition meant the group, once the most profitable in Europe, was feeling the pinch.
WOW weren’t immune to these pressures either, posting losses for the last two years. And we all know how that ended.
Opportunities for Icelandair
The loss of all that capacity at WOW presents a clear opportunity for Icelandair to step in. Despite being a very different type of airline, full service as opposed to LCC, they have the potential to increase their capacity to fill in the gap that WOW Air have left behind.
70% of WOW Air’s seats were on routes already operated by Icelandair, so they already have much of the infrastructure in place to pick up these passengers. On European routes, nine overlapped representing 50% of WOW Air’s 18 routes. 70% of WOW Air’s European seats were on routes Icelandair already serve.
In North America, 10 routes overlapped between the two carriers, representing 67% of WOW Air’s transatlantic routes. For capacity, 72% of WOW Air seats were on routes operated by Icelandair.
As well as the potential to secure new business from these existing routes, Icelandair could also look to expand into new markets. WOW Air briefly launched a highly anticipated service to Delhi but had to abandon it shortly after due to financial issues. At the time, WOW’s CEO Skúli Mogensen said that, eventually, WOW could serve as many as 15 Asian destinations.
Icelandair have mooted a service to India this year, as a starting point to breaking into the lucrative and fast growing market in Asia. Simple Flying hope that Icelandair will seize the opportunity presented to them and return to the strong position they once had both in Europe and the world.