'We have to do better.' WOW Air’s CEO faces angry customers—and readies an expansion

Key Points
  • WOW Air's first flights took off in 2012.
  • The airline's CEO is considering a public offering as early as 2019.
  • WOW is addressing customer service problems with increased staffing.
Here's what it's like to fly to Iceland on WOW Air
What it's like to fly to Iceland on WOW Air

Skuli Mogensen launched WOW Air six years ago with two planes. He drew passengers aboard with rock-bottom fares, and charged fees for nearly everything else.

Do you like to select your seat ahead of time? That’s $7. One with a bit more legroom adds $40 to $50. A carry-on bag costs $45. A bottle of water on board? That will be $3.29. There is no in-flight Wi-Fi or seat-back entertainment, to keep costs and fares low.

The Reykjavik-based airline has expanded to serve three-dozen cities on a fleet this year of 20, mostly leased, Airbus jets, attracting passengers in cities like Boston, St. Louis, New York and Cleveland, with sub-$100 fares for flights to Iceland and under $200 to continental Europe.

However, amid all the rapid growth, troubles have sprung up. Travelers have complained that WOW offers poor customer service, including extensive delays, difficulty getting a refund, and a lack of communication from the airline. These are problems Mogensen said he wants to address, just as he plans to test the ultra-low-cost model on longer flights. WOW is planning to launch a 10-and-a-half-hour flight between its Reykjavik base and New Delhi in December. The bad feedback is yet another problem for the carrier to contend with on top of rising fuel and labor costs, and a host of competitors who have recently launched service to its home in trendy Iceland.

“We have to do better,” Mogensen said from his seventh-floor office in Reykjavik, overlooking Faxafloi Bay. Mogensen is a former technology entrepreneur and is also WOW's owner. “It’s obviously in our interest to fix it.” Such hiccups cost the airline in lost passengers and the money they have to pay to compensate them, he said.

WOW ranked last of 72 airlines worldwide in a recent study by AirHelp, a company that helps passengers get compensated by airlines when they mess up — lose their bags or cause them to miss connections. The study took into account claims processing, on-time arrivals and customer service. Yet while the airline received more "terrible" reviews on TripAdvisor than "excellent" ones, taking into account "poor" and "very good" reviews, the feedback was more positive than negative. TripAdvisor's scores take into account in-flight entertainment and Wi-Fi. (Mogensen is not ruling out offering Wi-Fi but he said he wants to make sure it works.) The negative feedback is familiar to any airline executive, however, especially in the era when incidents go viral on social media immediately.

A recent WOW flight to Iceland left about two hours late from New York's John F. Kennedy International Airport because of the late arrival of the aircraft. Such a delay is common on any carrier, especially one that deals with the erratic weather of the U.S. East Coast and Iceland. Having a relatively small fleet can worsen this problem. Larger airlines have better access to backup aircraft and crew to step in when things go wrong. Mogensen said as the airline grows it could have more spare aircraft to avoid delays' "domino effect."

Mogensen said he takes such criticism to heart and is trying to improve the situation. He has increased staffing at its New Delhi customer service center and has held meetings with his staff about the issues. Another solution is to collect better information from passengers. Mogensen said some travelers don’t give their actual email address so it becomes difficult to communicate with them and offer options when a flight is delayed or canceled.

Piling in

Despite the customer-service trouble, passengers are still buying tickets on WOW, which offers some eye-popping fares. The airline’s fleet of bright purple Airbus jets fly about 90 percent full, said Mogensen. The global average is about 80 percent. WOW offers stopovers in Iceland, and the airline has both fueled and benefited from Iceland’s popularity with tourists who flock to visit its volcanoes, hot springs and other attractions. Last year, WOW carried 2.8 million passengers, a four-fold increase from 2015, according to a company presentation. The airline had about 1,100 employees last year, up from 290 in 2015, said the presentation.

The airline industry worldwide is set for its ninth consecutive year of profits, thanks to strong demand, even though pricier fuel is eating into bottom lines, according to industry group the International Air Transport Association. That strong travel demand has helped WOW grow at a fast clip, generating $484 million last year, up from $306 million a year before and $129 million in 2015. Mogensen said revenue will likely top $1 billion next year, when the airline could have a potential public offering. (Mogensen is also considering an outside investor.)

The ultra-low cost model is not new. Spirit Airlines and Ryanair in Europe have been offering cheap fares with plenty of add-on charges for years. But WOW is one of a handful of carriers, like Malaysia’s AirAsia X and Norwegian Air Shuttle, which itself has drawn takeover interest from Lufthansa and British Airways parent IAG, who are putting it to long-haul routes.

Even with its brisk growth, WOW still a tiny player. It accounts for only 1.6 percent of the seats flown from North America to Europe, according to aviation consulting firm ICF. But it is still betting that it can take on big network carriers from Lufthansa to Delta Air Lines.

WOW Air gets passengers in the door with its cheap fares. Then its plan is to grow revenue with lots of add-on fees. There's a belief that passengers are becoming more comfortable with paying these fees or travel with bare-bones amenities for long distances. The larger, older airlines, with impatient investors to please, are taking a page out of that book, too.

About that legroom — and those fees

Mogensen, a sandy-haired 49-year-old and avid art collector, stands 6’2". Most seats on WOW’s planes have 29 to 30 inches of pitch, the approximate measure of legroom.

“Of course I have” sat in the seat, he said, adding that he doesn’t mind on trips that are less than three hours and that he flies on budget carriers about five times a year for research.

Skúli Mogensen, founder and CEO of WOW air
Source: WOW air

But he’s betting travelers will pay up for more space, especially if the airfare is low.

“If you’re 6'2", you probably should purchase extra legroom,” he said. “Are we punishing you because you’re tall? That’s not the idea."

About a third of WOW's revenue comes from ancillary revenues, the fees for bags, seats and other add-on services. Mogensen would like to grow that to 50 percent of the airline's revenue, boosting sales of other parts of travelers' plans like hotels, tours and car rentals. Based on WOW’s sales last year, ancillary revenue was about $145 million.

Here come the fee police, with help from a Spirit veteran

Two years ago, Ben Baldanza, who led and grew low-fare and fee-happy pioneer Spirit Airlines for a decade until 2016, joined WOW as an independent director.

WOW needs to address what's known as "leakage," Baldanza said. That is when the airline doesn't enforce its own fee policies, such as allowing passengers with bags for the overhead bin on board without checking to see if they've paid for it. On a recent flight, a seat neighbor of this reporter said he "just sat down" in an extra legroom seat, which had cost $50, without paying for the upgrade.

Airports often use contract workers at check-in counters, and they may not be as familiar with WOW's policies compared with its full-time employees, Baldanza said.

He also encouraged the airline to segment the cabin, adding large, comfortable seats at the front of the plane, which cost about $250 extra for the privilege, something he initiated during his tenure at Spirit.

To keep costs down, WOW operates one of the youngest fleets in the world. Its mostly leased fleet of Airbus planes are about three years old, compared with a worldwide average of about 10 years old, according consulting firm Oliver Wyman's's most recent data.

Fares need to stay low, too

The airline is facing other challenges to its model, such as more expensive fuel. That is now its second largest cost after labor and the airline is not hedged. They also need to hire more pilots. Unfortunately, "Iceland is sold out of pilots," said Morgensen, who is looking in Europe and elsewhere for new hires.

Also a host of large-airline competitors like American and United have raced to serve its home and hub in Reykjavik, which Mogensen views as a connecting point he calls "the Dubai of the North."

While WOW has some cheap fares, they often sell out quickly and the entry of other airlines has made the market competitive. A recent search of flights from New York to Reykjavik in July showed Delta offered a roundtrip for $384, while WOW was $450.

Passengers who think they can escape the fees charged by low cost carriers by flying more traditional airlines may be disappointed, however. Airlines including Delta, American, Air France-KLM, Lufthansa, and even Icelandair have recently started charging trans-Atlantic travelers to check a bag.

WOW also does not have the business-traveler traffic that generally prefers to fly nonstop, not connect in Iceland or some other city, said Samuel Engel, who heads the aviation practice at consulting firm ICF. That means it has to keep planes full with competitive airfares, and a focus on leisure travelers.

"You have to grow or else it doesn't work," he said.

Mogensen now has two goals: to improve the carrier's reliability without sacrificing its expansion, which he sees in both North American and in Asia.

The airline "has to" raise more money to continue to grow at this fast pace, Mogensen said. "I’m a growth guy."