Has Iceland's tourist bubble burst?

A couple of weeks ago, an Iceland-based budget carrier suddenly ceased operations, stranding thousands of travelers:

In an unfortunate turn of events, low-cost Icelandic airline PLAY ceased operations without warning on Monday, September 29, 2025, leaving nearly 1,750 passengers stranded across Europe and North America. The airline, known for its budget-friendly transatlantic routes, issued a brief but jarring message on their website:

“Dear passenger, Fly PLAY hf. has ceased operations, and all flights have been cancelled. We kindly advise you to check flights with other airlines. Some carriers may offer special ‘rescue fares’ considering the circumstances.”

For travelers caught mid-itinerary, the announcement was both confusing and infuriating. With no prior warning, flights bound for cities like Baltimore, Barcelona, Lisbon, Paris, London, and Copenhagen were canceled, and inbound planes to Reykjavik never took off. Many travelers were left scrambling for last-minute alternatives at their own expense.

This isn't the first time an ultra-low-cost carrier based out of Iceland has folded without warning: WOW Air collapsed in 2019. Both WOW and PLAY were centered around a similar business model: connecting budget travelers in Europe and North America through Icelandic capital of Reykjavik, effectively making that city's airport a transatlantic hub. However, as both the demise of WOW and PLAY indicate, this business model is fraught with risk.

PLAY’s shutdown is a reminder of the fragility of ultra-low-cost carriers, especially in smaller markets like Iceland where operational margins are razor-thin. For travelers, it’s also a cautionary tale about the risks of booking with new or financially unstable airlines.

The Telegraph claims that PLAY's demise is proof that Iceland's tourist bubble has burst:

While Iceland’s tourism numbers boomed in the 2010s, things have slowed significantly in recent years. The country’s tourism bureau says international visitors have dropped 6 per cent in the last year. And it wasn’t like they were thriving before then: visitor numbers in 2023 were still lower than they were before the pandemic.

As for what’s causing the slump, analysts point to a drop-off in demand from Iceland’s two largest tourism markets, namely visitors from Britain and the United States. The two English-speaking countries usually account for almost half of all international visitors to Iceland – but it looks like travellers are increasingly getting cold feet.

The data doesn’t shine any light on what might be causing that reticence. But it seems sensible to assume that the ongoing cost-of-living squeeze – particularly on this side of the pond – may have played a part. After all, Iceland is frequently named as one of the world’s most expensive destinations, with a pint of beer often costing well over £10 in Reykjavík.

The Telegraph's claim drew the ire of Icelandic media, which claims that "data from the Icelandic Tourist Board shows that the number of visitors rose by 2.2% in 2024 compared with 2023, with further growth forecast this year." Left uncontested is the observation that fewer visitors are visiting Iceland than before the pandemic, or the likelihood that the sudden collapse of PLAY will have at least some negative effect on tourism to (and through) the country. 

From a purely anecdotal standpoint, I'm no longer being flooded with advertisements for Iceland like I was back in 2018, when the volcanic island was at the peak of its tourist popularity. It's also worth noting that some airlines that were flying to Iceland during that boom, such as American Airlines, are no longer doing so.

For those who still want to travel to Iceland, Icelandair remains operational and serves multiple North American and European destinations from Keflavik Airport. It also offers stopover packages for travelers who want to spend a few days exploring on their way between continents. As for me, my attitude regarding using Iceland as a stopover to Europe remains the same as it was in 2018: until there are direct flights between Houston and Reykjavik, there's no point in me doing so.