The Airline Collapse That Decimated A Country

Iceland’s central bank cut interest rates this week in the hope of jumpstarting an economy which is feeling lasting effects from the sudden bankruptcy of budget carrier Wow Air. In addition to absorbing considerable bad debt, the country’s tourism industry took a huge hit when the airline abruptly ceased operation in March.

There are increasing indications that the hasty shutdown of Wow Air in March of this year has had a long-term detrimental effect on the island nation’s economy. In addition to causing a precipitous decline in tourism, the Reykjavík–Keflavík Airport (KEF)-based ultra-low-cost carrier’s bankruptcy, in some cases, left Icelandic banks holding substantial debt. The company’s failure also left hundreds unemployed and is said to have been responsible for a notable drop in the country’s GDP.

The airline stopped flying in March after last-ditch efforts to negotiate a takeover by Iceland Air failed to materialize. In a blow to Iceland’s fast-growing tourism industry, the unexpected grounding of Wow Air airplanes left passengers stranded around the globe. At the time, there were indications that Wow Air investors would also find themselves left high and dry. “A majority of Wow Air Bond Holders and other creditors of Wow Air are in advance discussions with the aim of reaching an agreement on a voluntary restructuring including an agreement of converting current debt into equity and fund the company towards long term sustainability,” an airline spokesperson told reporters just hours before the company ceased to exist.

Now, according to a new Bloomberg report, Wow Air’s demise may have been even more damaging to the overall economy than initially understood. Iceland’s central bank has slashed interest rates in response and the economy, which has grown steadily since the 2008-2011 financial crisis, is expected to contract by nearly 2% this year.

“It’s not often that an entire economy is thrown off course by a single corporate event,” Bloomberg’s Ragnhildur Sigurdardottir writes. “But that’s what appears to have happened in Iceland.”

Although government officials admit that the high-profile airline bankruptcy has had a chilling effect on economic indicators, experts say the notoriously boom-and-bust Icelandic economy is better positioned to weather the disruption than in the past. “In this context, it matters greatly that we are now more resilient and better able to cushion against the blow than perhaps at any time in our history,” Central bank Governor Mar Gudmundsson told political leaders in March.

[Image Source: Wow Air]