Tourism made up one-third of Iceland’s economy in 2015.
The Icelandic budget airline Wow Air abruptly shut down in March, leaving passengers stranded around the world — and now it appears the airline’s demise may have tanked Iceland’s economy.
Wow Air’s bankruptcy has had such a negative effect on Iceland’s tourism sector that the country’s economy, which was previously estimated to grow by 1.8 percent, is instead on track to contract by 0.4 percent, Bloomberg reports. The Icelandic central bank, which released those figures on Wednesday, said the “deterioration in the economic outlook has caused the inflation outlook to change markedly in a short period of time.” The country’s unemployment rate is now expected to hit 3.9 percent in 2019, the bank revealed, and Bloomberg reports that the Icelandic krona’s value has declined by 3.7 percent so far this year.
The aftershocks of Wow Air’s bankruptcy highlight how reliant Iceland has become on tourism. More than 2 million people visited the country last year, and during the height of Iceland’s traveler boom in 2015, the tourism sector made up one-third of the country’s economy, according to the travel site Skift. Experts were predicting the country’s tourism boom would end even before the Wow Air collapse — 2018 only saw a 5.5 percent uptick in tourists from the previous year, compared to a 24 percent increase in 2017 — but the airline’s shuttering seems to have made things worse.
In March, the airline ceased all operations because it had effectively run out of cash. Earlier that week, it claimed it was in the “final stages” of a funding round and told passengers flights would be delayed until “documentation with all parties involved has been finalized.” But the money never came, and hundreds of passengers around the world had their flights canceled.
“We have run out of time and have unfortunately not been able to secure funding for the company,” the airline’s chair Skúli Mogensen said in a letter to employees that was obtained by Bloomberg at the time. “I will never be able to forgive myself for not taking action sooner.”
Wow Air’s collapse may have had devastating effects on Iceland’s economy, but it also isn’t too surprising. Wow was the eighth European airline to have failed since the summer of 2018. Budget airlines have long struggled with a combination of fluctuating fuel costs, overcapacity, and a continent-wide fare war. As Aditi Shikrant explained in October, after the Danish budget airline Primera Air shut down and declared bankruptcy, low-cost carriers become more precarious as they expand their customer base, since their margins are lower than those of pricier carriers.
For now, the Icelandic central bank seems cautiously optimistic about the country’s economic future. “Although the economic contraction will be challenging for households and businesses,” the bank announced, “the economy is much more resilient than before.”
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