Icelandair to buy no-frills Wow, marrying ailing Atlantic rivals

Bloomberg

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. Shares of Icelandair surged on the deal, which will create a combined company with about 3.8 percent of that market.
Both airlines have struggled with slumping tourist visits to Iceland, higher oil prices and the introduction of direct low-cost trans-Atlantic flights by rivals, which have made changing planes en route less appealing.
Icelandair, which dates 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, Skuli 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.”

Not Planned
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 percent higher at 11 krona 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 percent stake in Icelandair, which has a market value of $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 by the merger announcement. 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 percent of Icelandair, a figure that could fluctuate between 4.8 percent and zero depending on conditions that weren’t detailed. A subordinated loan will be converted to about 1.8 percent 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 focussed 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. That market is now 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 trans-Atlantic market but has tended to focus on major destinations, relying on its low-cost structure to attract cost conscious, time-rich travellers.
With that edge disappearing and vacation visits to Iceland also stagnating after a tourism boom, Mogensen has more recently turned to the US-Asia market for expansion.