Ultra low-cost flights to Europe are returning — will they last this time?
When Play launched as a new ultra-low-cost airline based out of Iceland, it made no secret of its ambitions to launch transatlantic service, connecting Europe with parts of the U.S. via its hub at Keflavik Airport (KEF).
Now, on the eve of its inaugural U.S. service — flights from Baltimore/Washington International Thurgood Marshall Airport (BWI) begin April 20, with Boston Logan International Airport (BOS), New York Stewart International Airport (SWF) and Orlando International Airport (MCO) so far set to follow later this year — the environment has created a curious landscape for the airline.
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The high price of oil continues to eat into airline margins, and while much of Europe has lifted pandemic-related entry restrictions, the U.S. still requires travelers to provide a negative test before entering the country by air, deterring some American travelers, fearing being stuck abroad with mild or even no symptoms, from taking international trips.
Fuel costs are especially problematic for low-cost carriers like Play, which tend to operate on narrow margins, and in the case of long-haul travel, often have margins that are razor-thin. The business model Play plans to use is similar to that of now-defunct Wow Air, which also offered cheap travel between the U.S. and Europe by way of Keflavik. Several members of Wow's former management team sit at the helm of Play.
However, even as fuel costs put pressure on Play, the airline couldn't have picked much better of a time to launch low-cost flights connecting the U.S. with cities in Europe.
Fueling growth across the Atlantic
Play CEO Birgir Jónsson is not your typical airline chief executive. A heavy metal drummer who moonlights with various bands including Dimma, Jónsson sports an arm covered in tattoos, was (until recently) the co-owner of a craft beer bar, and briefly ran Iceland's postal service. In addition to stints at a major European printing company and a medical device company, Jónsson was the COO of Wow Air (leaving before the airline's collapse) and oversaw Iceland Express in the mid-2000s, a low-cost airline that was acquired by Wow.
During a recent interview with TPG at the CAPA Airline Leader Summit — a follow-up to a Zoom interview conducted several weeks earlier — Jónsson acknowledged the difficulty poised by high oil prices and the need to pass the cost to consumers. However, he was relatively unconcerned that fuel costs, specifically, would turn people away from traveling.
"We said we will need to raise the prices," Jónsson shared. "We put in place an oil surcharge and we haven't seen any hit on demand."
Rising costs are less of a concern than general instability, Jónsson said. News of consistently fluctuating prices has the potential to shake consumer confidence — particularly as perspective is lost in news reports.
"We put in a surcharge of like $15-$20, and I think the perception of the consumer is that this is a bigger price increase," Jónsson said. "It counts, but it's like the price of a beer when you go on holiday or something, it's not something that will really stop people."
That cost is in line with what Delta and other airlines have suggested they would have to recoup to make up for the price of oil.
Adding a fuel charge, Jónsson said, rather than simply increasing base fares, was a strategic decision to communicate the cause of the price increases.
"It's to communicate it, to point out the total price of the ticket really didn't go up. It's to let people know, in the industry, our investors." Jónsson did not say if the airline planned to pull back the surcharge if fuel prices drop or stabilize.
High demand soaring higher
With the so-called "revenge travel" phenomenon expected to lead to surging demand for travel to Europe — and with high demand causing prices on the legacy carriers to climb — Jónsson sees this summer as full of potential for Play.
"We have some pre-COVID data of how this kind of business model behaved, based on other carriers like Iceland Air and Wow," Jónsson said, "and we can see that we are now almost with the market at the same level as it was before."
About 70% of the passengers booked on flights between the U.S. and Iceland are U.S. based, Jónsson said at CAPA, although he previously said that the seasonal Orlando route is expected to skew more European-focused later. Those U.S.-based passengers are split between Iceland as their final destination and connecting on to Europe, with the majority connecting.
Despite strong stateside demand, Jónsson said that there's still one factor holding potential customers back — the U.S. requirement that anyone entering the country by air, including vaccinated citizens and permanent residents, provide proof of a negative COVID-19 test taken within 24 hours of departure.
He explained that with people worried about the possibility of being stranded abroad after getting a positive result, even while asymptomatic, the unpredictability has blocked some from booking.
"It's the stability that helps," he said. "It's like with the oil prices. The problem with the restrictions is people are never sure about what they were or what they changed. If it would be constant it would be easier."
Still, with the United Kingdom and European Union lifting their testing requirements, Jónsson thinks that the majority of people who want to travel are still going to.
"The rules are clear and I think that people will simply comply, because at the end of the day, we want to travel," he said. "What hoops we have to jump through to do it, we'll do it."
Wow failed — why would Play work?
The elephant in the room for Play, of course, is why anyone should expect it to stick around. The transatlantic market is a notoriously difficult one for ultra-low-cost carriers to succeed in. This was evidenced by Wow, Norwegian and a collection of other upstarts failing to make it work in the 2010s. Although Play has been operating within Europe successfully, that's an entirely different business model for low-cost carriers.
Plus, Play is helmed by many of the same executives who oversaw Wow, including up to its eventual demise.
Jónsson argued that the business model remains sound, with the relatively close location of Iceland to North America offering an ideal hub for an airline to try and make it work. The execution is what's been the problem.
"We're copying a business model that has been in successful operation here in Iceland," Jónsson said, referencing Iceland Air and its predecessor Loftleidir, which was famously referred to as the "hippie airline" for offering relatively cheap connections between the U.S. and Europe in the 1960s. "In fact, Wow was successful until it broke that business model."
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Wow introduced service to the West Coast of the United States using leased Airbus A330 aircraft, instead of the narrow-body aircraft it launched with, as well as New Delhi.
"They basically broke the utilization-focused model of using the aircraft 20 hours a day," Jónsson said. "Their whole operation became more complex and more expensive."
"It grew too fast," he added.
Play, on the other hand, has been operating with a more disciplined approach, he said.
"We are listed on the NASDAQ stock exchange in Iceland, we have about 4,000 shareholders, we are extremely well financed, and the whole kind of approach to the business is much more disciplined."
"Wow was really growth-focused. They just wanted to add as many aircraft and be as big as they could," he added. "We actually want to be small and lean and flexible to be ultimately profitable."
Play's success remains to be seen. But should jet fuel costs stabilize — which they appear to have begun to do — and if demand returns as strong as it's expected to, the environment just might be right.