Wow Air and the thin line of airline profitability

What is Wow Air?

Wow Air is an ultra-low-cost carrier based out of Reykjavik in Iceland.

I am sure most of you have heard the recent news that Wow Air will be offering flights from U.S./Canada to Iceland for $99. Furthermore, they will have $149 flights from U.S./Canada to Europe via Iceland. Obviously, this sounds like a very good deal for travelers going from a major city in one continent to a major city in the other. The rest might just have to take a 2+ stop flight, which might not be so bad considering the price. But Wow Air knows how to make their passengers smile.

Deep Dive 

Network: Wow Air has been operating to and from Europe since 2011. They use a hub-and-spoke model. As of late 2014, they had a substantial reach into Europe with Dublin, Amsterdam, London-Gatwick, Copenhagen, Paris, Barcelona and more as destinations. It began operations to USA this year with Boston and Baltimore. Adding to their network, they will start flights to Montreal and Toronto in 2016. Not bad for an ultra-low-cost carrier in terms of progression.

Fleet: Wow Air operates 3 Airbus A320 aircraft to Europe and operates 2 Airbus A321 aircraft to North America. As of today, they do not have any more aircraft on order.

Schedule: A fleet of 5 aircraft is not too difficult to manage in terms of schedule optimization. Wow Air operate out of Keflavik airport close to Reykjavik and not surprisingly, slots are not a problem.

Pricing: As most ultra-low-cost airlines do, Wow Air has very low base price on all tickets which include absolutely no frills. They charge fees for luggage, seat preferences, in-flight meals and other extra benefits. The most important aspect of pricing that is noteworthy is the dynamic pricing model. The prices increase based on the proximity of the travel date.

Outlook

Although the business model has had a turbulent history in North America with the demise of airlines like JetsGo and Canada 3000, discount airlines like Ryan Air, Aer Lingus, EasyJet and others have had success offering short-haul flights between destinations in Europe.

Only recently have discount carriers started expanding their reach across oceans.

Canadian carriers WestJet and Air Canada have both announced plans to offer more and cheaper flights to European destinations.

With a strong start and the required financial baseline, Wow Air has the momentum to transition from a startup to a stable business. But will they? That depends on their medium-term and long-term strategies. Their competition with respect to network and pricing will get stronger in the next 2 years. After that, it’s about value proposition and competitive product placement. At that time, it will be critical that they have consistent net profits in every quarter in order to survive.

Strategy

Wow Air’s strategy, like most airlines trying to operate on an ultra-low-cost business model, will have to be centered on optimal pricing and revenue management. Their flights obviously seem attractive for travelers that like to plan their trips well in advance. But for those who need to plan their trips 2-3 months in advance, the prices will be comparable to most other (probably more direct airline fares)

As they add more routes, they will also have to keep a very close eye, and I cannot stress this enough, on scheduling. With 4-5 destinations in each continent, it is very easy to optimally align schedules to minimize travel duration for customers. But once those destinations increase, so do the routes, which lead to slot management issues and scheduling headaches.

In 2016, they will absolutely need to focus on obtaining high load factors. Why? Because that’s the only way they will come close to being profitable. Pricing models cannot be altered in 2016 after months of advertising for rock-bottom prices. Once they achieve high load factors, most airlines make the mistake of expanding and adding more routes. This is a big no-no for Wow Air because it will not only increase their debt but it will also increase their market competition. At this point, they will need to focus on customer retention, customer service and optimal pricing adjustments. After a consistent performance in 2017, they should have travelers in other cities begging and wishing for them to start operating from there. That’s when they should expand, very cautiously and only to cities where demand is on the higher side. This is the easy part. The hard part is their medium-term strategy, and that can only be well-defined once they actually have some initial numbers coming in after they begin operations.

With current momentum, largely driven by somebody’s deep pockets and endless PR initiatives, Wow Air should be successful in North America in the operational months of 2016. But the word successful is a very relative term in this case, especially since it could range from achieving high-load factors to meeting investor expectations. It is in 2017 that Wow Air and the rest of the world will realize on which side of the line they are treading on – the thin line of airline profitability for an ultra-low-cost airline.

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