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]
