Aviation: The rise and decline of an Icelandic airline

November 29, 2018

Just over six years ago a new airline took off from Iceland and was soon wowing the travelling public with its ultra-low fares and lurid purple colour scheme.  Things went pretty well and routes to many major cities across Europe were opened.  In its second year of operation (2013) the fledgling firm carried 400,000 passengers while just a year later it welcomed its 1,000,000th guest.  Expansion to North America followed in 2015, still using the Airbus narrowbodies on which the fleet was founded, and in 2016 the firm welcomed its first two Airbus A330s and launched links to the US west coast.

 

WOW air operates a fleet of Airbus aircraft to Europe and North America (photo: Marvin Mutz)

 

 

Connecting the continents

 

WOW air’s success was built on connecting Europe to the Americas, with its hub in Iceland proving ideal for passengers to change planes, even if it became rather congested with Icelandair's traffic in the mix too.  The very low fares on offer, with no frills unless they were paid for, helped mitigate the need to get on and off an aircraft half way across the Atlantic en route.

 

In 2017 the airline ordered seven more aircraft, including four A330-300neo widebodied jets and three additional A321s.  Roll the calendar forward to the summer of this year and WOW air was running a fleet of three A330ceos, and 15 A320/A321s including some newer neo derivatives.  However, the airline has often been the subject of criticism over to delays and meagre on-board service, and despite best efforts the ever more crowded conditions at Keflavik Airport weren’t everyone’s cup of tea.  By September it had managed to generate EUR60m in refinancing from a EUR100m bond issue with Skuli Mogensen, CEO and owner of WOW air saying: “The positive outcome is a great motivation to continue to do our job and strengthen further the travel industry.”

 

Clearly though not everything was going well in Reykjavik.  A vicious fare war broke out between WOW and Icelandair which, in addition to connecting Iceland to the world, also promoted Keflavik as a connecting hub.  The two carriers competed on a number of routes, albeit with Icelandair placing more emphasis on frills.  Downward pressure on revenue came from budget transatlantic carriers such as Norwegian that flew direct – if a wouldbe traveller didn’t have to pay more to fly direct, why should they break their journey on an island in the mid-Atlantic?  There were persistent rumours – but only rumours – that WOW air was not doing well financially and its load factors certainly weren’t always stellar.  There are only so many $99 fare sales that an airline can run before it needs to generate more serious revenue.

 

 

Merger

 

On November 5 this year news broke that the two Icelandic airlines were to merge: “Icelandair has entered into a share purchase agreement to purchase all shares in WOW air.  The share purchase agreement contains certain conditions for the completion of the acquisition that will need to be satisfied before the end of November 2018.”  WOW air shareholders will get little more than 5% of the combined company, pointing to the low-cost's precarious financial position.

 

As more details emerged it became apparent that the intention is to retain the two brands, with a suggestion that Icelandair might focus on business routes while WOW concentrates on leisure markets.  The suits beavered away with the aim of gaining support from stock holders and the Icelandic competition authorities ahead of a shareholders’ meeting on November 30.  Even while that was going on though there were more clouds on the horizon for WOW.  On November 27 the airline published financial projections that were much weaker than forecast earlier in the year.

 

A number of additional obstacles had emerged and Mogensen explained that there had been: “significant bad publicity about the financial health of the company which ended up having a more negative impact on the sales and credit position.”

 

He continued: “When Primera air collapsed in October the negativity escalated” and he added that a sale and leaseback arrangement expected to generate $25m had been cancelled.  Further compounding the problems: “the company's lessors, creditors and authorities… demanded stricter payment terms.”  Finally he pointed to a surge in oil prices and: “while this has since retreated the impact on the company's position during these weeks has not recovered accordingly.”

 

WOW air has announced that routes to Tel Aviv, St Louis, Cincinnati, Cleveland, Pittsburgh and New York JFK  have been or will be dropped, while frequency to Los Angeles, Orlando, Berlin, Dublin, Brussels is to be reduced over the winter.  On the same day as the airline announced its financial position had worsened, it reached agreement with lessors to return two Airbus A330s, and two A320s.  They have already left the fleet reducing it to 16 and leaving only one widebody.  Meanwhile, earlier in the week trading in Icelandair’s shares was temporarily suspended after it announced it might not be able to fulfil the conditions of the takeover and obtain agreement from shareholders and the competition authorities before month end.  Then came the bombshell - on the morning of November 29, Icelandair announced that its acquisition of WOW air would not go ahead.  In a statement is said that it could not meet the conditions necessary to proceed and that it did not intend to recommend an extension of the deadline.  

 

Tough times ahead

 

It’s said to see an airline in a situation like this.  It's going to be more difficult for WOW air to stand alone now with many of its US routes stopped or ceasing in the new yare, as its business proposition revolves primarily around Europe-North America travel.  No doubt some uncertainty has also been spread among potential customers by the acquisition process and the statements about the firm's financial position, and that could adversely impact bookings.  Let’s hope things work out well.  Iceland is a wonderful place to visit and it needs at least a vibrant airline – one that is able to support tourism and business, as well as transatlantic travel.

 

Text © The Aviation Oracle

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