Icelandair Acquires WOW Air For Almost Nothing


There was a big acquisition announced this week north of the 60th parallel when Icelandair said it would pick up its rival WOW Air for very little compensation.  If the price is any indication, WOW was in dire straits, and its owner Skuli Mogensen may have been lucky to get anything at all.  This is a great deal for Icelandair, though fans of unsustainably-low fares won’t be happy.

The deal itself shows just how remarkably little WOW is worth.  In an all-stock transaction, Icelandair will take over WOW Air by giving 272 million shares of its own stock.  That may sound like a lot, but it’s not.  Icelandair has 5 billion shares outstanding, so this is less than six percent of the combined company.  Each share was worth less than a dollar at last check.  In fact, even after the post-acquisition surge, an Icelandair share was only around 11 Icelandic krónur… or 9 US cents.

This means when the deal was announced, Icelandair would have provided stock worth about $18 million.  With the market’s favorable reaction, that value is up to shy of $25 million.  But that is overstating things.  This nugget was from a Bloomberg article:

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.

Holy cow, so let’s pretend the value of the stock is worth $25 million when it can be sold (always a big “if”).  A third of that goes to convert a loan.  That means WOW’s owner (Skuli Mogensen) will keep about $17m.  But even that seemingly paltry sum is dependent upon “conditions that weren’t detailed.”  Presumably those are performance-based conditions, so a failing WOW might earn Skuli nothing at all.  That’s incredible when you think about WOW’s size.

In 2017, Icelandair’s annual revenue was around 148.5 billion Icelandic krónur or $1.23 billion using today’s exchange rate.  Meanwhile, WOW pulled in $486 million in revenue last year and expected to be at $659 million this year and $826 million the year after. If you think about it as a company that was expecting to be about half the size of Icelandair in short order, for the owner to pull in less than 4 percent of the combined company in stock if he’s lucky says one thing… that business was in deep, deep trouble.

And that is no surprise.  WOW had been in something of an arms race with Icelandair to see who could make the most questionable route-planning decisions.  Was it both of them deciding to go into DFW (along with American)?  Or maybe it was a competing effort to go into Cleveland.  It could also be the general overcapacity that hurt both airlines.  There are a lot of places to look, but these guys were both desperately trying to out-run each other.

The results for both airlines have been bad, though we know a lot more about Icelandair because it’s publicly traded.  In the peak third quarter, Icelandair made a 14 percent operating margin.  That may sound good, but there are two things to consider.  First, last year it did about 10 points better.  Second, it needs to make a ton of money in the summer to offset the winter months.  This result doesn’t mean Icelandair was on death’s door, but it wasn’t doing well enough.  WOW was probably doing worse.

Iceland has been a hot market, but it is cooling.  (It had to at some point.)  And it still has a crushing amount of capacity filling every corner of the Keflavik airport.  That’s not just thanks to WOW and Icelandair but also other airlines ramping up on both sides of the Atlantic. 

Both airlines relied heavily not just on local traffic but also on flowing people between North America and Europe.  That’s been a rough place for low-cost carriers as they continue to beat each other with fares that are far too low outside of the peak summer months.  WOW’s demise shouldn’t surprise anyone.

I should be clear about one thing.  This may not technically be the demise of WOW.  Icelandair says it’ll run both carriers as standalones for now, but this is certainly the death of the high-flying, fast-growing disruptor role that WOW liked to play.  I have to assume that next steps will involve slashing capacity on both sides and rationalizing the networks.  If things get dire, Icelandair can just kill off WOW entirely.

The future for Icelandair is strong regardless of its current performance.  It’s an arm of the government of Iceland and it isn’t going anywhere.  But WOW was causing a lot of trouble for the airline.  With that resolved, Icelandair can go back to running a more rational, profitable airline.

[Typo correct 11/8 at 741a PT to reflect that 11 ISK = 9 US cents, not 90 cents]

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24 comments on “Icelandair Acquires WOW Air For Almost Nothing

  1. Am I missing something in terms of the value of the deal? (272 million shares) times (90 cents per share) is $245 million, not $25 million.

  2. Yes, I thought the competition in Cleveland was a real head-scratcher. It’s not like the subsidy was THAT much.

  3. A sensible move all around. Means that Icelandair can offer more connecting routes and frequencies where required, improves the scope of the hub and its competitiveness. Secures the future of Icelandair keeping the bigger players honest with their economy pricing. And avoids the mess of a transatlantic bankrupcy/stranding situation

  4. Wow may be operated as a separate brand but it will be shrinking very quickly until it doesn’t exist anymore. Icelandair bought Wow to eliminate it – because neither could survive in their current form. Icelandair just had better finances and business sense.

    Another transatlantic low cost carrier bites the dust.

  5. Cranky, Something is wrong with your math or you have the wrong number for something in your post. By my simple arithmetic the value of the shares WOW gets is $250 million not $25 million. 90 cents multiplied by 272 million shares is $245 million. If those numbers are correct, you have reduced the value by 90% compared to actual in the entire post. Please check your math. Your stuff is always great but I think something went wrong here.

    Roger Teal

  6. I used to fly Icelandair across the pond as they were well cheaper than the US based alternatives and the layover at KEF wasn’t too bad. Even did the weekend layover to checkout Reykjavik in March 2002. (No it wasn’t that cold and yes that town knows how to party.) Assume that WOW just leases their planes but they have all Airbus and Icelandair is loyal to Boeing. Will those Airbuses be going back to the lessors??

    1. The airbuses are much newer than Icelandair’s Boeings I believe, so may be preferred on age grounds.

    2. A – Funny, I did the same thing in March 1999. Loved it, but it was pretty cold. I would assume Icelandair will keep flying both fleets until it decides it’s done, and then it’ll get rid of the Airbuses. That would be easy to do if it just walks away from WOW as an entity.

  7. Wait… you mean running crazy low fares on long haul flights don’t make money the second the price of oil goes any higher than the 2 decade low? Especially with head to head competition on most routes…I’m shocked.

  8. J.P. Morgan once observed that too much competition destroys all competition. This is a case in point. This, as would be the case with an Emirates/Etihad merger, makes a lot of economic sense.

  9. What routes do they have that both Wow and Icelandair compete on? I counted BWI, BOS, EWR, and ORD. Do they rightsize capacity in all? If so, maybe they can then use the leftover capacity to expand a new bank into Europe or into the few markets left in North America?

    1. Add SFO, which looks seasonal for WOW but year round for Icelandair. I haven’t looked to see what markets overlap on the Europe side.

    2. HH – Icelandair has already been working on another bank, but really what they need is just less capacity. Some of the competitive routes have already been culled, including DFW and Cleveland. I expect we’d see more rationalization and market elimination.

  10. it’s really a mixed bag here. It might’ve saved both airlines from endless fare wars, but as consumers we can also kiss $280 roundtrip US-KEF flights goodbye. (the same reason why US-Aus/NZ flights are sky high all the time – lack of competitive rival hubs in the middle – no one in their sound mind would be flying ATL-CDG-KEF unless they have toooooo much time)

    1. NAN is perfectly positioned as a stopover point between SYD and LAX; Great Circle Mapper puts it right on the line. The time I flew it Fiji Airways was a few hundred dollars less than the nonstop options (but still pretty pricy compared to what WOW and friends offer over the North Atlantic).

      HNL comes to mind as a possibility too, a bit out of the way but not too bad (PPT would be worse for example), but Hawaiian isn’t interested in being a low-fare transpacific competitor; their mission is to bring people to and from Hawaii and any connecting traffic they get is a nice extra.

  11. I don’t think WOW was ever designed to be a viable business. Their goal was to get big and get acquired, just like many Silicon Valley startups. Gain a customer base and reputation, and then sell it to somebody who can make money with it, or who can make more money by getting rid of it.

  12. It was amazing at KEF this summer how stacked and squeezed the entire tarmac was between all of the Wow and Icelandair planes. Flew through KEF on way to/from Norway and no hope of getting a jet bridge, just a bus ride and a lengthy one on the return. I’ve flown Icelandair 3 times in the last 5 years to or through KEF from the west coat and I remember pre-Wow days when it was relatively uncrowded. Honestly, there is too much tourism in Iceland and I’m glad for the sake of the tourism infrastructure and the preservation of the environment that it’s declining and this consolidation. The country was never built to handle this many people and all the resultant strains on services and the environment. Hopefully things will calm down now and a return to a bit of normalcy.

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