If Indigo takes a stake in WOW, what happens to Icelandair?

WOW was in deep trouble for a while. Being an LCC airline is a tough business, with low margins. Then adding long-haul to this complicates the business more and shrinks the margins even more. To further complicate things for WOW, their market share growth did the worst thing possible - it attracted the attention of the network carriers. These airlines have much bigger margins, even in a low margin business. The traffic growth through Reykjavik caught the attention of the big US airlines and they decide to take a bite out of that flow. WOW was no longer just facing off against local competitor Icelandair, it was competing with the largest airlines in the world. Low margins were a problem – now there was also no margin for error. Time was not on the side of WOW after Primera collapsed and Norwegian stumbled. The move by Skúli Mogensen, the WOW CEO and majority shareholder to sell his company to Icelandair seemed like a reasonable move by him. It also seemed plausible for Icelandair to simplify local competition. But then things unraveled quickly. Icelandair Group issued a stock exchange release on 26 November stating it estimated it would be unlikely that all of the conditions in the share purchase agreement would be fulfilled by a meeting of its shareholders on 30 November. Then WOW said it was returning four aircraft “in co-operation with its lessors” in a bid to reduce costs – two Airbus A320s and two A330s. “This is a part of a necessary restructuring of the airline and to ensure maximum utility of its remaining fleet. This restructuring will not impact WOW air’s current plans to fly to India” it added. Then WOW added that the collapse of Primera Air in October created further negativity “which has further worsened an already challenged situation. The company was until recently making progress with finalizing a sale-leaseback agreement, which has since been cancelled resulting in US$25 million less inflow than originally planned.” Icelandair’s walking away from this growing uncertainty was rational. Airline managers abhor risk. But just as everyone was expecting the demise of WOW, Skúli had another card up his sleeve. Ultra-low-cost airline specialist Indigo Partners concluded a preliminary agreement with WOW within hours of the abandoning the potential acquisition by Icelandair Group. Phoenix Arizona-based private equity firm Indigo was a lead investor in Singapore-based Tiger Airways and Florida-based Spirit Airlines. It has ULCC lead investments in Hungary’s Wizz Air, Colorado-based Frontier Airlines, Mexico’s Volaris Airlines, and Chilean JetSMART. There is no other firm in the world with an ULCC experiece level to match Indigo. Encouraging words from Indigo’s boss: "Skúli and Wow’s management and employees have done a remarkable job in creating a well-regarded, successful ULCC brand,” said Bill Franke, managing partner at Indigo. “We have a strategic vision for the airline and look forward to working with its employees and agents to deliver that vision.” Skúli and his team will probably be facing very tough terms from Indigo. But what are the options? Everyone at WOW would rather the company continue. The biggest fallout other than Skúli’s lost capital is, in our view, Icelandair. Icelandair now might face WOW being guided and supported by the world’s best ULCC team. Indigo will bring new insight in terms of operations and vendor negotiations. Bear in mind Indigo has a blockbuster 400+ order for single-aisle aircraft from Airbus. If WOW needs any re-fleeting, Indigo has what is needed. Indigo also has a deep bench of management skills to help WOW make a comeback. Icelandair could be facing a much stronger WOW as well as foreign competitors. The risk of failure at WOW diminishes with Indigo’s investment and competitive pressure at Icelandair ramps up accordingly. Bob Mann from airline consultancy RW Mann & Co has this view on the news: "I am expecting the next phase of airline consolidation to occur in the ULCC space. This could take the form of a horizontal merger among ULCCs, an alliance between Indigo-led carriers, or both. Reliability and punctuality improve operating margins and ROIC, as Ed Bastian, Gil West and Delta, and Bob Fornaro, Ted Christie, and the Spirit teams have demonstrated. The airline category killer would be a reliable, punctual, global ULCC. If any one individual can put the global ULCC pieces together and make the sum of the parts work better than the individual components, it is Bill Franke and his Indigo team."

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