Transatlantic budget flying gets a reality check

For those hoping for ever cheaper fares on long-haul flights, this month's takeover of Icelandic airline Wow is not good news.

The struggling airline, which specializes in ultra-cheap flights between North America and Europe, was taken over by Iceland's flagship carrier, Icelandair, for just $18 million. Its rescue is a reality check for an industry hoping to apply the budget flying model to long-haul routes.

And for now it means that passengers from, say, Washington will likely have to pay more than the $99 teaser rates previously offered for the six and half-hour trip to the Icelandic capital, which serves as a stopover to mainland Europe.

"It simply costs more than $99 to fly between continents and Wow air has not found ways around it," said Kristjan Sigurjonsson, editor of local travel news site Turisti.

While Wow will continue as a separate brand for now, Sigurjonsson says it's unclear whether Icelandair will have it continue offering such low fares in an attempt to compete with Norwegian Air, which is offering cheap flights at a loss to gain market share.

But for now, the numbers don't add up for budget long-haul flying.

Part of the business model for low-cost flying across the Atlantic depends on getting cheaper airport slots, both by departing at odd hours and by flying to smaller cities in the United States. Wow flies to St Louis and Pittsburgh, for example. The low fares, in turn, mean planes are typically full.

Wow flies across the Atlantic with single-aisle, narrow-body Airbus A321 jets. Being smaller than a widebody plane makes them easier to fill, an important consideration in keeping down costs per seat. They are also cheaper than two-aisle planes. Wow's jets are relatively new, meaning they are more fuel-efficient than some competitors' fleets.

However, those savings have been squeezed in the past couple years as oil prices have risen. The U.S. benchmark for oil has risen 50 percent from late 2016 to a peak of $75 in September this year, before easing back somewhat.

For a budget airline like Wow, where margins are already tight, that means a direct hit to earnings. On top of that, wages have been rising sharply in Iceland, where its employees are based.

Founded in 2012, the airline expanded fast to 37 destinations and reported up to 60 percent annual growth in passenger numbers. Its revenue per passenger, however, has not kept up and fell by about 20 percent in 2017, according to the last earnings report.

About 70 percent percent of Wow's passengers travel between Europe and North America. Combined with Icelandair, the airlines will carry about 3.8 percent of transatlantic passengers, according to analysts at Icelandair.

Experts say that what budget airlines like Wow lack is the big source of money from transatlantic flying: business travelers. The New York-London route is the most lucrative in the world, thanks to the amount of business travelling done between the two financial hubs. British Airways takes in a reported $1 billion a year between those cities alone.

Budget airlines have been trying to tap that market. Wow created a new business-class scheme and in a presentation to investors this year it predicted that would help it make a profit this quarter. Norwegian Air has also offered "Premium class without the premium price," reportedly with modest success.

But it remains to be seen whether companies booking trips will agree to pick budget airlines over established carriers that are often seen as more reliable because they have bigger fleets and deeper pockets.

"The established airlines have loyalty programs that hold tight to the most lucrative clients," said Skarphedinn Steinarsson, former CEO of low-cost carrier IcelandExpress and the director of the Icelandic Tourist Board. "It takes longer to win this group over than the typical bargain-hunter."

For now, it is the flagship carrier coming out on top.

Wow founder and CEO Skuli Mogensen urged his staff Monday to "look at this as an opportunity to continue our journey now as a part of a much stronger group".

The charismatic boss, who has in the past mocked Icelandair as "outdated" and used his image to represent the airline, acknowledge defeat with much understatement: "It was not part of the original game plan."