News

Announcement of the Icelandic Competition Authority – WOW air ceases its operation

Instructions – The importance of competition, moving forward

4/1/2019

In the morning of March 28th 2019, the Icelandic Transport Authority issued a statement that the airline WOW air had ceased its operation and turned in its operating licence. The company, WOW air, issued a similar statement on its website. In light of the aforementioned, the Icelandic Competition Authority (ICA) wishes to communicate the following information to the relevant public bodies, stakeholders and general public; as well as to direct the instructions found at the end of this statement, to any public body and those who come to be responsible for any material and/or immaterial assets previously held by WOW air.

The importance of WOW air for competition in commercial flight to and from Iceland

Both consumer welfare and economic efficiency is enhanced by active competition. This holds true for commercial airline operations to and from Iceland. Such operations are of a great socio-economic importance for Iceland. Increased competition in flights to and from Iceland has proven to lower airfare prices and increase the frequency of flights, resulting in increased levels of services to the benefit of consumers. Competitive market conditions for commercial airlines are furthermore a fundamental prerequisite for a continuous growth in tourism in Iceland.

WOW air has been an important competitor in commercial airline services to and from Iceland, ever since the company began operations in 2012 and by the subsequent take-over of the commercial airline, Iceland Express. By the entry of Iceland Express, in 2003, into the market for commercial flights from Reykjavík to and from London and Copenhagen, prices decreased by some 30-40%. By the entry of Iceland Express into the market for flights from Reykjavík to and from Boston and New York in 2010, prices on those routes decreased by nearly 50%. Independent price comparison studies have illustrated that prices were kept down by the entry of WOW air on the aforementioned routes. This increase in competition has led to savings for both companies and the general population in Iceland. The increase in flight frequency, accompanied by lower prices, has furthermore played an instrumental role in the increased number of foreign visitors to Iceland. This, again, has resulted in the tourism industry becoming one of the main pillars of the Icelandic economy.

Increased concentration as a consequence of the departure of WOW air

In 2018, WOW air held a market share of 25-30% in commercial flights to and from Iceland, measured by number passengers. In the same period, Icelandair held a market share of 40-45%. Market shares held by foreign competitors were far smaller and more dispersed. WOW air’s departure from the Icelandic market will therefore leave a gap in the market, leading foreseeably to an increased concentration of market power in the near future.

Importance of WOW’s airport slots

As regards competition in commercial airline operations to and from Iceland, the airport slots previously held by WOW air may prove to be of paramount importance. The ICA wishes to take this opportunity to make the distinction between airlines whose operations are flights from Iceland, and those whose operations are flights to Iceland. Airlines flying from Iceland adjust their schedule in accordance to Keflavik airport being their base of operations. Their flights therefore start at Keflavik airport in the morning and they use Keflavik airport as a hub for connecting flights. WOW air and Icelandair have both, until recent events, belonged to this category of airlines flying from Iceland. Their demand for airport slots is therefore greater in early hours and the afternoon, rendering these, peak-hours for Keflavik airport. Airlines flying to Iceland are however foreign airlines, whose base of operations or connecting hubs are located in airports in other countries. Due to the difference in economic attachment to Iceland, airlines in the category of flying to Iceland can decide on a relatively short notice to change their route services, excluding Iceland as a destination.

Since airlines flying from Iceland have tailored their services largely to meet the needs of Icelandic consumers, such services are of a substantial importance for Icelandic consumers. Consequently, the airport slots held by WOW air, both at Keflavik airport and foreign airports, may be of value and importance for any party interested in entering the Icelandic market by commencing flights from Iceland with Keflavik airport as home base. Said airport slots may furthermore be of importance in establishing trans-Atlantic flight routes, utilising Keflavik airport as a connecting hub. WOW air’s airport slots may therefore be the competitive advantage needed for a new market entrant, wishing to commence commercial airline services to and from Keflavik airport.

Airlines’ assets

Notwithstanding that WOW air has ceased all operations, the company and its subsequent estate, may be in possession of material and immaterial assets, which may be of value to operations in the Icelandic air services markets. Trademarks and other intellectual property, employment agreements, aircraft lease-agreements and licences held by the airline, which may be upheld for a period of time, may be of such value. In this context, airport slots, being a scarce commodity held only by licenced airline operators, are of material importance. According to EU/EEA law applicable in Iceland, a company that has ceased operations, even entered into bankruptcy, may hold airport slots whilst potential buyers are found. Reference on this point is made to foreign precedents and jurisprudence.

WOW air has handed in its licence as an airline operator, to the Icelandic Transport Authority. Airport slots are contingent upon such an airline operation licence. It is of paramount importance that the authorities ensure that WOW air’s licence and/or rights attached thereto, are preserved to the extent needed for the estate of WOW air to sell or otherwise alienate the airport slots, so they may be used to uphold competitive market conditions in the markets for airline operations in Iceland.

Property transactions may constitute a merger

According to Icelandic and EU/EEA competition law, a transaction involving the purchase of property from bankruptcy estates may constitute a merger. Foreign precedents illustrate that when airlines’ estates sell, or otherwise alienate material or immaterial assets, due care must be taken not to infringe competition law.

It is therefore of importance that administrators of bankruptcy estates act within the confines of competition law and take due care to competition policy.

The Icelandic Competition Authority issues the following instructions/recommendations

With reference to the above, the ICA pleads the relevant authorities and those parties commissioned to allocate WOW air’s assets and resources, to pay due care to the competitive effects of their decision-making pertaining to the halt of operations of WOW air. The ICA furthermore issues the following instructions/recommendations:

· That those who take part in the resolution of the pertaining matter, exercise their authority in order to ensure that immaterial and/or material assets remain realisable or otherwise alienable, and that they furthermore take any possible action to ensure that competition is maintained in the Icelandic markets for airline operations.

· That Icelandic aviation authorities and other relevant authorities, including airport slot co-ordinators, facilitate to the furthest extent that immaterial and/or material assets held by airline operators whose operations have been ceased, can benefit market entrants. This is of special importance due to the nature of Iceland being an island state and thereby a geographically distinct market, whose economy is substantially reliant upon the tourism industry.

· That liquidators of bankruptcy estates exercise their discretion in order to ensure that assets remain realisable or otherwise alienable, so as to maintain to the furthest extent possible competitive market conditions in the Icelandic markets for airline operations. 

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