Taking off: WOW Air
Steve’s breakdown: Sometimes you just see a company doing it right. WOW is like that and as far as I can see, there is no Agency of Record. Here’s some contact info:
Main Line: +354 590 3000
Skúli Mogensen – President/CEO: email@example.com
Marketing movers & Sales shakers Department: firstname.lastname@example.org
Svanhvít Friðriksdóttir – Director of Communications: email@example.com tel: +354 695 9359
Below is an interview of the CEO regarding expanding in the USA.
REYKJAVIK, Iceland: WOW Air will announce its schedule and fares for its new routes from California on Tuesday morning (Jan. 12). The discount carrier says it will sell seats on those routes for as little as $99 one-way to Iceland and for $199 on connections to Europe. Ahead of that news, WOW founder and CEO Skúli Mogensen took time for a phone interview with Today in the Sky editor Ben Mutzabaugh.
Ben Mutzabaugh: You are announcing fares for your two new California routes on Tuesday (Jan. 12). But WOW has now been flying to the United States since last year, when your airline launched service from Baltimore/Washington and Boston. What’s your early take on how it’s doing?
Skúli Mogensen: It’s exceeding our initial expectations, which were still very high. Since launching Boston and Washington, our load factors have been around 90% on every single flight, which is our goal. And of course it’s a key element in enabling us to continue to offer these super-low fares, is to fill the planes.
Mutzabaugh: Industry analysts now use the term “ultra low-cost carrier” to describe the new breed of discount airlines like WOW. How do you feel about that label?
Mogensen : We actually have started to use more of the “ultra low-fare” model. Because to talk about “ultra low-cost,” it might sound like you’re compromising on some other elements. But we have the newest fleet. We’re getting two brand new Airbus A330 for San Francisco and L.A. We believe that one of the reasons we can offer the lowest fares possible is that we have a new more-efficient fleet.
Another very important point comes to customer satisfaction. The ultra-low-cost carriers squeeze the pitch (a measure of leg room) as much as possible. And I think this is acceptable on short-haul flights.
But when you are flying nine hours between Iceland and L.A., I don’t think you can get away with that in the long run. I’ve studied Spirit, and I think they’re doing a great job on many fronts. We have studied Ryanair, and I think they’re doing a great job on many fronts. But there are certain elements that if you apply … to the long haul, you need to do some changes.
Mutzabaugh: So you’ll be offering extra-legroom then on your new flights from California?
Mogensen: It’s from 35 to 30 (inches). The majority of seats will be between 32 and 35 inches. Of course, as is standard, you can purchase the extra legroom and purchase the preferred seating.
Mutzabaugh: Will WOW will add more U.S. destinations this year?
Mogensen: We expect to announce at least one more destination in 2016. Certainly there will be a lot more in ‘17 and going forward.
Mutzabaugh: Talking about your U.S. flights that you launched in early 2015, you’ve said that WOW has seen more business traffic from Baltimore and Boston than you originally expected.
Mogensen: It’s actually very interesting. Travel historically has often been a large-budget item for a lot of businesses. We see that small medium-sized businesses where the owner is still involved, that there’s an increasing demand among businesses to shop around for the best option. I think that makes sense. It’s very hard for a business to justify to spend thousands of dollars on a ticket when they might be able to spend say $300.
Mutzabaugh: Fares that can be as low as $250 on trans-Atlantic flights have the potentially to be very disruptive in a market place that’s currently dominated by traditional carriers like American, Delta, United, Lufthansa and so on. But you’re also seeing Norwegian Air – another “ultra low-cost carrier” — expand aggressively in the United States. Which side do you view as your bigger competitor?
Mogensen: There are two sides to this question. Of course we come in and we will compete against the existing airlines who are flying across the Atlantic. That’s clear. However, what we’re also seeing is (that we) enable a lot more people to fly. Flying 20 or 30 years ago was a luxury item.
Since then, domestic flying became more affordable and allowed more people to fly domestically. International travel, still is a luxury today. That creates the opportunity for us and others to come in and do better.
We are really hoping to stimulate the market significantly. So, sure, while we will definitely have an impact on some of the legacy carriers, there’s still significant room to grow the total pie. We will first and foremost do that. But I also think the legacy carriers will get smarter themselves over time and the gap will narrow.
Mutzabaugh: When you say legacy carriers will get “smarter,” do you mean that you think they’ll figure out how to become more cost-effective and compete more on price?
Mogensen: I think over time they will have to. Some will obviously not be able to do that. But if you look domestically in Europe, the low-cost carriers now have some 30% to 40% market share. Currently the low-cost model has maybe 2% market share in trans-Atlantic airfares. Should it be 30% to 40%? I don’t know. But it certainly should be 10% to 20%. I think the low-cost carriers will grab significant share in the next 5 to 10 years.
I would expect a significant increase in travelers across the Atlantic with these reduced prices. So the impact on legacy carriers will not be as much as you would think, at least not during the initial years.
Mutzabaugh: When you entered into Baltimore and Boston, you began selling connecting itineraries to Europe that overlap with big players like American, Delta. United and the big European carriers. Have you noticed any competitive response?
Mogensen: I think fares to and from Iceland have definitely come down. So we have seen reaction on those routes. But trans-Atlantic routes, we have seen prices come down in some areas. Now is it a seasonal response? Or is it a response to us? We’ve been in the market for such a short period of time, it might be premature to say. But, overall, there is no huge reaction as of yet.
Mutzabaugh: Historically, attempts to add discount service across the Atlantic have failed. Do you see something different about the market today?
Mogensen: I think it’s all about the Internet. Twenty or 30 years ago, you had to rely on intermediates to sell and interact with the customer. There’s a huge change in how you currently market and sell yourself to your passengers, which is fascinating to me how you can really be selling up to the last minute prior to the flight. This is the key in filling up the planes.
We have load factors (that …) go up to 100% loads on an incredible amount of flights. I think the selling, the pricing has changed dramatically from how it was a decade ago. It also means that your competitors have a much harder time in positioning themselves against you. Some of the legacy carriers are still relying on the old schemes, the old pricing structure, the old revenue model, the old class structure. This is one of the advantages that we have.
Mutzabaugh: Customers may have gotten used to paying extra for luggage, food and other items on domestic discount flights. But, so far, that’s been rare on long-haul trans-Atlantic flights. WOW will charge for carry-ons weighing more than 11 pounds, as well as for advance seat-assignments and other items. Have you had to educate customers in this market about how you are different than other airlines that fly across the Atlantic?
Mogensen: Not really. I’ve spent a lot of time in North America. I’m always fascinated by how efficient the U.S. market is. In many ways, North America was late into the ancillary revenue business model in charging for the extras. But today, even what we would call the legacy carriers – American, United, etc. – have become extremely efficient in selling and finding the extra charges.
This is really what has changed the North American airline industry, which is now again very profitable. I think in just the last five years there has been an incredible change in how they (the airlines) are interacting with the consumer. They are using every possible opportunity up until you board the flight to sell you that extra legroom, to upgrade your seat, to charge you for the bags and everything else along the way.
I think the consumer has largely been educated already.
Mutzabaugh: Your fares have obviously drawn a lot of attention among U.S. consumers, who are not used to seeing fares to Europe for as little as $99 one way. During a fare sale last year, flights from Baltimore and Boston were available to Europe for less than $250 round trip.What are the value of these rock-bottom fares? You can’t make much money on them. Is it a marketing tool? Just a way to fill up the plane and sell seats that would otherwise go empty?
Mogensen: I think they are clearly a way for us to fill the planes up above 90% on average. And I think this is really one of the big differentiators from how the airline industry was operating a decade ago. (It) is something we can do because we are in a direct relationship with our customers. So instead of having planes flying at 70% utilization, we’re now up to 90% plus. And these extra seats — that otherwise would have been empty — it is better to sell them at these kinds of prices than not at all.
So, it’s a combination of many things. But I don’t like to think (of it as) a marketing scheme as such because it is something that we consistently try to offer – these kind of low fares. I can’t promise you that you will find such fares on every single flight. Clearly there’s a difference between high and low season, week of the day, time to departure, etc. But overall, if you are willing to shop around a little bit – be a little bit flexible – book in advance, you should be able to get these super-low fares.
Mutzabaugh: Obviously, you are bullish on WOW’s hub in Reykjavik.
Mogensen: People ask us, “Why would people want to stop in Iceland?” One interesting statistic is that currently you have about 60 million annual passengers going across the Atlantic. And half of those already need to make one or more stops to get to their final destinations. So taking all that data into account, and we look at the competitive landscape. Based on that, we make our route selections.
To use an old technology comparison, we definitely see the network effect. We used to talk about the “fax machine effect.” You know, the more people that have it, the more valuable it becomes. So we certainly see that, as we have continued to grow frequency and more destinations in Europe, clearly our Iceland hub becomes more valuable for any North American destinations. And vice versa.
The more frequencies we can add into our network – the more destinations we can add – the stronger the whole network effect becomes. And it becomes increasingly easy for us to add a smaller destination.
I can give you an example. We recently added Bristol in south England as a destination. It’s a great destination in itself. It has a lot of great attractions. It has close proximity to Cardiff and Swansea and Wales. But there are no direct flights from Bristol to the U.S.
So anybody that wanted previously to go from Bristol would probably fly to London and then from London onward. What I think is a great opportunity for us to grow is to find more cities like that in Europe and North America that are interesting destinations in itself but might not be large enough to justify direct flights.
Mutzabaugh: Of course, there is already another airline – Icelandair – that has long ago made a big bet on having a hub in Reykjavik. How do you stack up to them?
Mogensen: They have been around for a long time. They have all the symptoms of a classical legacy carrier. Of course they are a competitor on the point-to-point. They are also using Iceland as a hub. They have some good people. But, overall, I don’t really see them as a competitor. And I certainly do not see them as a long-term competitor.
Mutzabaugh: You don’t see them as a long-term competitor?
Mogensen: I would not want to trade places with them.