To my knowledge, EVERYONE flying to Iceland from the USA is doing it with their own funds and NOT gov't subsidies. Unless you're going to go the Gary Leff route and argue that in 1933 American got some money from the post office, etc. or Icelandair has a contract for gov't bureaucrats to travel.

You can certainly argue that AA is entering the market to drive out competition, and I think that's right. You can also argue that the folks running WOW and Iceland Air have a business model that doesn't work either, and I suspect that's also right. AA's actions really aren't any different than what Amazon does everyday (Amazon being the world's largest non-profit, throwing it's weight against smaller companies that actually have to sell above their costs to stay in business). Big business can be brutal.