Icelandair to buy Atlantic discount rival Wow
Wow CEO says deal will shock employees, not part of original plan
Icelandair Group hf. reached a surprise agreement to buy discount rival Wow Air, bringing together the island nation’s two financially embattled airlines.
The carriers will continue to operate under separate brands while aiming to better compete on routes linking Europe with North America, they said Monday. Shares of Icelandair surged on the deal, which will create a combined company with about 3.8 per cent of that market.
Both airlines have struggled with slumping tourist visits to Iceland, higher oil prices and direct low-cost trans-Atlantic flights offered by rivals, which have made changing planes en route less appealing. Icelandair, which dates back to the 1930s, said last week it had breached debt covenants and asked bondholders to grant a waiver. Unprofitable Wow, founded in 2011, had targeted a listing while seeking a partner to see it through the winter slump.
“This year in particular has been extremely challenging compared to the incredible growth and success that we enjoyed during prior years,” Wow’s founder and chief executive officer, Skúli Mogensen, said in an email to staff obtained by Bloomberg. “External conditions have continued to deteriorate and the outlook for many airlines has gotten extremely rough.”
Wow has been working to improve the outlook, but was faced with tough decisions, he said, acknowledging that the sale to Icelandair would come as a shock to many employees and “was not part of the original game plan.”
Bogi Nils Bogason, CEO of Icelandair, whose shares closed 39 per cent higher at 11 krona ($1.22 U.S.) in Reykjavik, said in a statement that he sees “many opportunities for synergies” between the carriers.
Wow investors, primarily sole owner Mogensen, will get a 5.4 per cent stake in Icelandair, which has a market value of 55 billion krona ($455 million) after Monday’s gains. That suggests a valuation of about $25 million for Wow.
Sigurdur Ingi Johannsson, Iceland’s minister for transport, said the government had been monitoring developments and wasn’t surprised. He said the step was positive in guaranteeing the survival of Iceland’s tourist economy, while adding that the country is served by 25 other airlines, so that there shouldn’t be a huge impact on competition.
Wow’s equity will account for about 3.5 per cent of Icelandair, a figure that could fluctuate between 4.8 per cent and zero depending on conditions that weren’t detailed. A subordinated loan will be converted to about 1.8 per cent of the equity in the buyer, the remainder of the purchase price.
Icelandair developed a reputation as a “backpackers’ airline” in the 1970s, when direct trans-Atlantic trips were focused on the business market and cost far more than they do today.
More recently, the carrier has sought to link cities on either side of the Atlantic that don’t have direct flights, through its Keflavik hub. Now, that market is being eroded as major operators such as British Airways expand their networks and newer discounters led by Norwegian Air Shuttle ASA launch routes with more efficient planes.
Wow Air also serves the transAtlantic market, but has tended to focus on major destinations, relying on its low-cost structure to attract cost conscious, timerich travellers.