The Atlantic Update – Wednesday 7 November 2018

The Atlantic Update is a weekly bulletin on transatlantic travel, published every Wednesday at 06:00 GMT.

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Iceland (Image Credit: Icelandair)

Welcome to the The Atlantic Update for Wednesday 7 November 2018, our weekly bulletin on transatlantic travel.

Why does Icelandair want to buy WOW air?

Icelandair surprised the press on Monday by announcing it is to buy its sole Icelandic rival WOW air.

It’s an all share transaction which values WOW air at around $18m. The transaction is subject to the approval of competition authorities and Icelandair’s shareholders.

WOW air was founded by Skuli Mogensen in 2011. Its initial ambitions were to carry visitors between Iceland and the UK and mainland Europe. In recent years it has been engaged in an aggressive expansion to capture connecting traffic between North America and Europe, which now accounts for around half of its passengers. Passengers have increased five fold over the past three years to reach an estimated 3.6 million this year.

WOW air was catching up Icelandair – which traces its routes to 1937 – in market share at Keflavik airport and had ambitions to overtake it in 2019. Approximately 80% of WOW air’s routes overlap with Icelandair.

However, this had all come at a cost. Aggressive fare competition, rising fuel prices and expansion costs had hit its yields. It had been losing money and had already suspended a number of North American routes, some just months after launch.

It had no fuel hedging strategy and so was exposed to rising fuel prices. North Atlantic traffic is seasonal and a difficult winter lay ahead. Whilst Icelandair is in a much stronger financial position, it has not been immune to competition and has reported falling revenues and yields.

Just two months ago WOW air’s founder announced its ambitions to raise $200-300m in an Initial Public Offering. However, that plan now lays in ruins.

The plan is for both airlines to retain their separate brands. “Dual brand” strategies are far from unusual. However, there are some aspects of this transaction that do not quite make sense. It’s unusual to retain separate brands where two airlines are in overlapping markets, albeit WOW air does target a younger demographic than Icelandair. There is also relatively limited scope for synergies. Icelandair operates a fleet of Boeing aircraft. WOW air operates exclusively Airbus aircraft, all under finance or operating leases.

It has to be said the idea that Reykjavik can become the Dubai of the North Atlantic is not wholly convincing. About a third of the city pairs offered by WOW air are served by direct flights. There has to be a very good reason to take a connecting flight over a non-stop one. There is also a reassurance in taking a connection at hub where you can be confident there are alternative options should you miss your connection. What Emirates did to brilliant effect in Dubai is create swathes of new one-stop connections that did not previously exist.

Airlines do not ordinarily buy struggling rivals out of charity. IAG CEO Willie Walsh, in characteristically blunt fashion, once described airlines going bust as the best form of industry consolidation there is.

By buying WOW air, Icelandair has eliminated a local rival that could have fallen into the hands of a larger group. However, the quality of execution and moving quickly and decisively to eliminate loss-making capacity will be critical.

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