Offering flights from Europe to the US and vice versa for less than $150? Iceland’s based WOWAIR does it and has expanded hugely on both continents! In an extremely saturated transatlantic market, Wow has been able to show tremendous growth and yes, in 2016 they made a nice profit! How can this airline exist? And how do they stay profitable in an extremely competitive market?
As a fast-growing airline; wow air has amazed me with their business model and growth. An interesting development to start an ultra-low-cost airline.
Why they have succes
The location of the home base
WOW is based in Iceland which has a huge geographic advantage for its operations. The routing between Europe and the USA is often taken quite northernly, usually passing close past the island of Iceland. Not a bad idea to put a hub there (Read more about Hub airports here)
Also, main competitor (and “semi”service carrier), Icelandair pulls this practice and has been operating in a hub structure since the 70’s from Keflavik. This allows both airlines to connect a huge amount of dots on both sides of the Atlantic to create a hub system. As a positive extra, it also supports the Icelandic tourism industry since both airlines offer an interesting and attractive stopover program!
One of the basic rules in aviation is the practice of high aircraft utilisation; “Every second an aircraft does not fly, it’s not making any revenue“. Low-Cost airlines such as Ryanair and easyJet have perfected this practice and can perform turnarounds in less than 30 minutes which results in a high utilisation. However, Wowair flies much longer flights and is still able to have a huge utilisation. How?
Basically very smart scheduling is what is done by WOWAIR; flights to Europe depart early and arrive before lunch. After lunch, departure takes place and flights arrive back in Iceland a bit after lunch (mind the time difference). Then, after a short stop, flights to the USA depart which, due to time difference arrive at dinner time and fly back before midnight. Then they arrive in the early morning in Iceland again after which this repeats itself.
This ensures a high usage of their aircraft. Longer flights, Miami, Los Angeles and their proposed India services however might suffer from lack of utilisation. Considering their planes to and from Miami are staying on the ground for 9 hours indicates these services might lack profitability.
They are ultra low cost (and transparent about it)
As I wrote earlier; I expect low-cost airlines to be the new normal and light fares to become the norm in the future. WOWair is a clear example of the above and charges for basically everything on top of the base price:
“Want to take a suitcase? Or even a normal sized carry-on? Want a cup of coffee? Glas of water? Hungry? Select a seat in advance?” Make sure to pull out your credit card!
They fly very young planes
Flying young planes has a big advantage when it comes to a reliability factor! Parts are cheaper; planes require less maintenance and can fly more. A quick look on the fleet list shows planes with an average age of only 2 years.
Competitor Icelandair is flying Boeing 757 planes that are older than I am (delivered in 1990).
Challenges and problems:
So, looking at an airline that seems to be able to connect many dots on the map, has collected all the best practices in the industry, is profitable and is looking to expand towards India sounds like a 100% success story?
Not yet! In an article by CNBC, CEO Skulli Mogensen was quoted sharing there are plenty of problems and “they have to do better“. Because yes; being low cost doesn’t mean you are low care!
Challenges for WOW!
The whole fleet is leased
An airline can choose to lease or buy planes. Leasing is usually cheaper because it saves the airline the investment to buy and own planes. However, leasing also means a monthly recurring cost that has to be made back by the plane. Low turnover might incur a high operational loss for wowair due to monthly charges.
Meanwhile, competitor Icelandair has an almost 100% owned fleet; allowing them to operate on a cheaper cost basis.
Keflavik Airport is at 100% capacity
The Icelandic capital is reported to operate at 100% and many complaints are because of the queues in the airport. Having been there I can confirm this is true; especially during the peak timings of the connecting flights, Keflavik Airport is not convenient nor enjoyable.
This also means Wowair has to work around these peaks. This, in turn, has a negative impact on their “high utilisation and offering connections” business model.
No planes back-up planes available
When planes are running in time, the day-to-day operations must work like clockwork at wowair. Until there is a major disruption; the whole schedule and network might be compromised which may result in many missed connections, rebookings and overnight stays. Because the tightly packed schedule does not allow any time margin; any delay has a big effect.
Something that European low-cost airlines can fix by having their planes overnight every night.
The big problem is that wowair has no backup capacity available; that’s too expensive. The result is; a lot of problems if something goes wrong!
Increasing fuel prices
A big challenge for any airline that flies long stretches with limited capacity (A321 with 180-200) is quite an inefficient plane compared to a fully loaded Boeing 787 on the fuel perspective). What will happen to wowair when the fuel prices go up again?
A very very interesting case to see a privately owned airline jump into the hole that’s called the “Transatlantic Battlefield” using a smartly developed hub system. Growing too fast might give them more problems than expected and I am curious to see any developments in the near future for this young airline!
What are your thoughts? Will transatlantic low-cost flying survive or consolidate towards what we call the “standard” these days?