It’s not often that an entire economy is thrown off course by a single corporate event. But that’s what appears to have happened in Iceland. The recent bankruptcy of budget airline Wow Air has delivered such a blow to the Icelandic tourist industry, and the wider economy, that the central bank on Wednesday cut its main interest rate by half a point to 4%, Bloomberg News reported. It also said that the economy is now set to contract 0.4%, compared with a previous estimate for growth of 1.8%.
The collapse of budget airline WOW Air last month will dent Iceland’s economic growth this year and cause some losses in the banking system, the country’s central bank said in a Financial Stability report on Thursday. WOW Air, which had 1,000 employees, halted operations and canceled all future flights on March 28 after efforts to raise more funds had failed, Reuters reported. It was the latest budget airline to collapse as the European airline sector grapples with over-capacity and high fuel costs.
The chief executive of Iceland’s low-cost Wow Air, which collapsed on Thursday, has said his “fatal” mistake was trying to turn the airline into a global business, the Financial Times reported. Speaking to the Financial Times, Skuli Mogensen said Wow, which offered cheap flights between Europe and the US via Iceland, had started off with narrow-body planes, but “we wanted to use Iceland as a global hub connecting three continents” so the airline ordered expensive wide-bodied jets, which can fly further, in late 2016. Wow briefly flew a route between India and Iceland.
Wow Air Hf has gone out of business, stranding thousands of passengers and creating potentially huge risks for Iceland’s tiny economy and its growing reliance on tourism, Bloomberg News reported. The discount carrier is the eighth European airline to have failed since the summer as margins are pinched by fluctuating fuel costs and over-capacity that’s sparked a continent-wide fare war. Wow’s demise should bring short-term relief to local rival Icelandair Hf.
Iceland is living up to its reputation as a land of fire and ice. Burnt fingers and cold shouldering are risks for bondholders in Icelandair. The ratio of debt to earnings has risen, and with it the risk of default on more than $200m of borrowings. With the flow of tourists that powered the airline’s growth slowing down, it is time for Iceland’s oldest airline to scale back its ambitions, the Financial Times reported. What apter way to commemorate the tenth anniversary of the financial crisis than with debt restructuring talks? Three Icelandic banks collapsed back then.
The Lehman Brothers bankruptcy threw the United States into an epoch-defining financial storm. Imagine 300 of them going bust at once. That, in relative terms, is what Iceland endured a decade ago during its banking crisis, which on this rugged island steeped in myths of gods and giants is now known as "hrunid" — the collapse.