Wow Air's Demise Is Latest Threat to the Land of Booms and Busts

(Bloomberg) -- Wow Air Hf helped turn tourism into Iceland’s biggest cash cow, fueling a boom that dragged the nation out of its financial collapse more than a decade ago.

That all came to an end on Thursday, when Wow was forced to cease operations after it was unable to find backers to cover its losses. Icelanders are now assessing the damages and the most dire forecasts predict a potential plunge of as much as 2.7 percent in gross domestic product.

The crisis in 2008 resulted in a drop in GDP of more than three times that magnitude, but it would still be a terrible hit for an economy that’s already experiencing a sharp slowdown and is further threatened by restive labor unions.

“This will be a blow, especially over the next months,” said Kristofer Oliversson, owner of the hotel chain Centerhotels. “It’s happening at a very bad time.”

The currency plunged as much 1.4 percent on the news, prompting the central bank to intervene on the currency markets.

Growing Popularity

Fueled by spectacular nature and the popularity of television shows like Game of Thrones, tourism now accounts for 8.5 percent of the economy, employing 30,000 people.

Wow Air was founded by Skuli Mogensen, a former tech businessman, in 2011, just as the country was recovering from the collapse of its banks. By the end of last year it had become a player to be reckoned with in the market for cheap flights between Europe and the U.S., while at the same time denting into its most established local rival, Icelandair Hf.

Like other failed European carriers, the company had been struggling amid pinched margins due to fluctuating fuel costs and over-capacity in the industry. Mogensen tried but failed to save the airline, holding talks with potential rescuers including Icelandair and U.S. private equity firm Indigo Partners.

The grounding left thousands of passengers stranded, with other airlines such as Icelandair, EasyJet, Norwegian and Wizz offering to help. Plane leasing firms to Wow had pulled the plug as they sought to place their aircraft elsewhere ahead of the start of the high season.

Job Losses

The government also activated contingency plans and issued a statement seeking to offer reassurances about the consequences for the local economy. A total of 1,100 Wow employees were dismissed -- representing the biggest number of jobs lost in a single day in recent Icelandic history -- and many more employees operating in the tourism sector are now expected to be out of work as a result.

Visitors to Iceland were already set to drop this year for the first time in a decade, according to the operator at Keflavik International Airport.

Stefan Broddi Gudjonsson, head of research at Arion bank, now says the Wow Air debacle could cause tourist numbers to drop by as much as 16 percent.

“We expect this may put pressure on the krona, inflation, employment, housing prices and so on,” said Gudjonsson.

Booms and Busts

With a population of just 350,000, the same as Honolulu’s, Iceland is particularly exposed to booms and busts. But after a recovery from the financial crisis in 2008 that draw praise from the International Monetary Fund and paved the way for years of strong growth, the government insists that the country isn’t about to experience another emergency.

The government has been able to reduce debt over the past years and the Icelandic central bank has built up large currency reserves, which give it firepower.

“Our tourism sector has untapped opportunities for the future and we are capable of reacting to this kind of a blow,” Finance Minister Bjarni Benediktsson told local television network RUV. “I am just happy we have been saving up for the future in recent year. We are much more capable of reacting to this kind of disruptions than before.”

Central bank Governor Mar Gudmundsson on Thursday acknowledged that developments at Wow would likely cause a “shock” to the economy, with the impact dependent on how fast other airlines can “step into the breach.” But the governor also stressed that the economy was strong enough to withstand the turmoil.

“In this context, it matters greatly that we are now more resilient and better able to cushion against the blow than perhaps at any time in our history,” he said in a speech.

To contact the reporters on this story: Nick Rigillo in Copenhagen at nrigillo@bloomberg.net;Ragnhildur Sigurdardottir in Reykjavik at rsigurdardot@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net

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