The Icelandair Group has announced today, Monday, November 5th, it is going to buy out its low-cost Icelandic competitor WOW air, in a deal that values WOW at about $18 million.
The deal won't involve vast cash transfers or big loans for Icelandair, that already has debts in excess of $400 million, to afford to buy out its rival, its all about a share deal swap, Icelandair will take all the shares of WOW and WOW’s founder and sole owner Skuli Mogensen, will receive just over 272 million shares in Icelandair - that will be around 5.4% of the company.
Both Icelandair and WOW air will continue to operate under separate brands, at least for the time being and the arrangement has to receive have both Icelandair shareholders and regulatory approval. before it can be completed. If those approvals are granted, as many in the industry believe it will, the combined market share of both airlines on the transatlantic market will be around 3.8% and could see the reintroduction of a number of services that both airlines have axed in recent weeks.
"WOW air has in recent years built a strong brand and enjoyed great success in the company‘s markets to and from Iceland and across the Atlantic." Said Bogi Nils Bogason, Interim President & CEO of the Icelandair Group, adding "There are many opportunities for synergies with the two companies but they will continue to operate under their own brands and operating approvals. The tourism industry is one of the cornerstones of the Icelandic economy and it is important that flights to and from Iceland will remain frequent.“
Many in the aviation industry believe that keeping both airlines running under their own individual brands may prove to be a costly exercise. The back-office functions and behind the scenes operations will need to be merged into one operational and managerial structure, in order to keep costs down and make the savings needed to keep afloat.
Whilst the two brands seem quite different, one being a more full-service type of airline the other more of a low-cost carrier, yet fares are similar and in actual fact, Icelandair has moved more towards the low-cost model in recent times. The carrier charges for food, extra legroom seats, aircraft Wi-Fi and also for checked baggage for those on the lowest fares. It may prove more cost effective to operate under one core brand in the future, one leading commentator told us that she believes the WOW brand will be dropped within two years.
SkĂșli Mogensen, CEO and founder of WOW air: said, "I am very proud of the success and development that we at WOW Air have enjoyed in the past few years and I am thankful for the response we have received since our very first flight. We have created a strong team that has reached remarkable success and has been a pioneer in low-cost flights across the North-Atlantic. A new chapter now starts where WOW air gets an opportunity to grow and prosper with a strong backer like Icelandair Group that will strengthen the foundations of the company and strengthen its international competitiveness even further.“
When I predicted yesterday for more consolidation within the Icelandic aviation sector, I didn't expect it to come so soon, or in the way, today's announcement has delivered. However, it isn't such a huge surprise, the industry has changed in recent times, the introduction of direct low-cost transatlantic flights from the likes of Norwegian, excess competition from both Icelandair and WOW as well as from North American airlines, plus rising fuel and other operational costs have all had an impact on the financial viability of routes where profit margins are relatively thin, so perhaps it was inevitable there would be big changes.
(Images WOW air / Icelandair)
