The Icelandic Tourism Industry Is Running On Hot Air

“Wow Air á fáar veðhæfar eignir og eigið fé hefur rýrnað hratt”

The article is in Icelandic but the gist of it is that Wow Air (the leading budget airline flying to Iceland) is losing 45 million dollars a year and has very little in terms of assets or funds. It’s a badly capitalised company in a highly competitive area that’s arguably demonstrating the early signs of a downturn.

Normally these sort of details aren’t public for a privately owned company like Wow Air. But the CEO of Wow Air has been touring Europe to find investors to keep the company afloat and the investor presentation leaked to Kjarninn.

(Kjarninn is without a doubt one of the best Icelandic news sites available today.)

Most of the major companies involved in the Icelandic tourism industry today are privately held so the extent of the financial shenanigans surrounding the tourism bubble is hard to guess.

Commentators who are experienced in covering Icelandic financial bubbles (which have been numerous) have pointed out that this lack of transparency could mean that Iceland may see a bubble bursting and ensuing economic crash happen more quickly and with less warning than last time:

But man-made havoc may be a cause for greater concern. The two Icelandic airlines, Icelandair and Wow Air carry between 70 and 80% of tourists coming to Iceland; this figure was 73.5% in April. The rest was shared by 13 international airlines with EasyJet having the largest market share among the foreign ones.

Icelandair is a listed company; Wow Air is privately owned. Icelandair has often had a bumpy ride in terms of profits and profitability. With new management and some new board members there is good reason to believe it will be better run now than in the past.

Wow Air is a different story. Early last year it published some financial indicators, which were not great. This year, so far – a total silence. Quite remarkably, its CEO and main owner Skúli Mogensen mentioned in a recent interview that the company was thinly capitalised – a statement that had some wow factor to it. It’s unlikely it was just a slip of the tongue, more likely a message but to whom is less clear.

In general, budget airlines have been experiencing problems; the demise of Monarch and the troubles of Norwegian are two cases in point. It’s difficult to see why Wow Air would be doing that much better. An under-capitalised company in a market of fewer customers and diminishing returns sounds ominous though they claim their sales went up this winter when Icelandair sold fewer seats.

The three largest property companies – Gamma, Heimavellir and Almenna leigufélagið – are all privately held. Again, the question is how well capitalised they are, how leveraged and how prepared for a down-turn in property prices, demand and rental prices. Gamma has recently shed its CEO and founder, shrunk its foreign operations (which seemed more based on dreams of 2007 than reality) but claims it is otherwise doing well.

(From “Iceland: from fishing to tourism / 10 years on”, by Sigrún Davíðsdóttir)

If, as is likely, both Wow Air and the tourism-oriented property companies are under-capitalised, there is a good chance that an actual downtick in Icelandic tourism could cause a chain reaction of bankruptcies and another economic collapse.

Baldur's Notes @baldur