The Icelandic budget airline Wow Air has cancelled its morning flight from Gatwick to Reykjavik as fears grow of its imminent collapse.

Last week a US investment group broke off talks about a rescue for the financially troubled airline.

Talks resumed on Wednesday with Wow Air’s rival, Icelandair, about a takeover. A previous rescue, valuing Wow Air at about £13m, was abandoned in November 2018.

When talks were revived last week the Icelandair Group announced: “The discussions will be based on the doctrine of competition law regarding the failing firm defence.”

The “failing firm defence” is a legal term which indicates that, if the deal does not go through, the weaker party is likely to cease trading.

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But on Sunday evening the potential rescuer announced: “Icelandair Group has decided that its possible involvement in Wow Air’s operations, as announced on 20 March 2019, will not materialize.

“Therefore, all discussions between the parties have ended.”

Later, the chief executive of Icelandair Group, Bogi ​Nils Bogason, said: “The financial position and operations are such that we did not see any reason to continue.”

Wow Air then issued its own statement heralding a debt-for-equity deal for bondholders and other creditors, saying they were “in advance discussions with the aim of reaching an agreement on a voluntary restructuring including an agreement of converting current debt into equity and fund the company towards long-term sustainability”.

Within hours, Wow Air started cancelling flights – including the early morning trip from Reykjavik to Gatwick, due to leave at 6.20am on Monday.

One passenger, Amy Bellety from Hertfordshire, tweeted: “Had to rebook onto another flight with another airline as only alternative flight in 2 days time.

“No help on reimbursement of food/flight.”

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The return leg to the Icelandic capital, due to leave Gatwick at 9.30am, was also grounded.

A passenger booked to fly from Gatwick, Shari Handley, tweeted: “You’ve canceled our flight home later this morning!”

She was due to fly via Iceland to her home in Detroit.

“We filled out your form, and a customer service person was supposed to contact us ‘very soon,’ but haven’t heard anything. Help! We need to get home.”

The airline responded: “My sincere apologies for all the inconvenience caused to you. Kindly share your booking number for assistance.”

Other customers complained about delays paying compensation for flight disruption.

“I have been looking for a response for a week with no luck,” wrote Graham Munro. “Can someone respond to my request for a firm date on when my compensation will be paid?

Wow Air has also cancelled trips from Reykjavik to Chicago and Pittsburgh on Monday, with links to Brussels and Barcelona grounded on Tuesday.

The airline was founded by an Icelandic entrepreneur, Skúli Mogensen. It first flew to Paris on 31 May 2012 and later that year took over an existing airline, Iceland Express.

In 2018 Wow Air carried 3.5 million passengers. It employs around 1,000 people and flies an all-Airbus fleet.