The Collapse of WOW Air
WOW Air was an Icelandic Airline company that breathed its last breath on the 29th of March 2019. It started back in 2011 as one of the most successful low-cost airline companies providing cheap flights between Iceland and Europe. However, what caused the demise of the apparently successful company was its wish to transform into a more prominent global business.
Financial Evolution of WOW Air
WOW Air was founded in 2011 and was doing reasonably well in terms of revenue and financial stability. In 2016, the company aimed at expanding into a global airline and decided to order bigger jets to be a part of its fleet. However, in 2017, the company faced net financial losses of approximately $59 million. It was further reported that the company’s owner equity dropped from a previous value of $40 million to $18 million.
Given the company’s financial records and instability, many speculations circulated regarding WOW Air’s financial health. Finance specialist predicted after the financial report of 2017 that the company was in hot water (a much worse state than claimed by the company).
Major Reasons for Collapse
After the company ordered big jets in 2016, fuel prices began to rise. The high fuel prices forced the airline to return and cancel some of the big planes they had ordered earlier, but despite these desperate efforts to keep the company afloat, a senior company executive stated that the company had excessive debt on their balance sheet and was unable to arrange and secure the funding needed. This failure was partly because of the challenging and competitive airline market and partly because of their lack of foreseeing the future.
The company executive also stated in an informal interview that WOW Airline had approximately an interest-bearing debt of $196 million. However, the CEO of the company blamed the unstable financial health of the company upon:
- Bad reputation;
- High fuel rates; and
- Inflexible terms imposed by the creditors.
Financial Collapse and Bankruptcy
After the company was visibly collapsing and approaching total shut down, many last moment desperate attempts were made to rescue the company. A private US equity firm offered an investment of $118 million, and there was the talk of a potential takeover by a local rival firm. The stakeholders of the firm decided to transform the debt into equity (assets-liabilities) after all other last-ditch attempts failed. Unfortunately, even this last attempt by the company did not work because of inadequate funding and financial assets. The collapse of Iceland’s leading airline may result in a blow to the country’s GDP of almost 3%.
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