WOW! Icelandair takes control of its LCC rival, but mixed fleet is among reasons why both are retaining their individual identities

WOW air founder and CEO Skúli Mogensen has acknowledged that the sale of the business to Icelandair Group “was not part of the original game plan” for the LCC. Despite indications that there was room for two in the market, it has become abundantly clear over the past year that the market was not big enough for both carriers especially with them increasingly competing head-to-head in so many markets in both Europe and North America.


Summary:

  • Iceland’s flag carrier Icelandair has agreed to buy low-cost rival WOW air in an all share deal, but it will retain its own identity and operating licence;
  • Despite indications there was room for two in Iceland, it has become abundantly clear over the past year that the market was not big enough for both carriers;
  • There are obvious network synergies – there is considerable overlap between Icelandair and WOW air in terms of the destinations served from Reykjavik.

Icelandair has been acknowledged as one of the most innovative airlines having quickly developed a hub and spoke model to support its limited home market and offer connections between Europe and North America. WOW air has replicated that with a LCC model, growing aggressively over the past couple of years and becoming a real threat to the country’s flag carrier. But, the marketplace has changed significantly as Iceland became one of the world’s hot new markets and competition intensified from foreign operators.

In correspondence with staff this week he said news of Icelandair’s deal may have come as a surprise to its personnel, but it had become clear that a marriage of the two rivals would be the logical and sustainable solution for Iceland. In fact, CAPA – Centre for Aviation suggested that such an option was possible in a SWOT analysis on WOW air last year (see: ‘WOW air SWOT analysis: WOW factor shows in Tel Aviv launch, near doubling of passengers in 8M2017‘).

WOW air’s greatest risks were identified as being associated with growing too fast and its recent decision to significantly cut capacity into some of its smaller North American markets suggests that may be the case. Another concern was the central importance of Mr Mogensen to the business. The entrepreneur remains in that role as under the terms of the merger both airlines will continue to operate under separate brands, but he and other WOW air shareholders will now hold the equivalent of 5.4% of Icelandair Group shares once the transaction completes.

There are obvious network synergies – there is considerable overlap between Icelandair and WOW air in terms of the destinations served from Reykjavik on a point-to-point basis. WOW air is exposed to Icelandair on a higher proportion of its network than the other way around, and the exposure of both to the other is higher to North America than to Europe. In terms of capacity overlap, around half of Icelandair’s seats this summer were on routes also operated by WOW air, while more than two thirds of WOW air’s seats were on routes also operated by Icelandair.

Of course, point-to-point routes from Reykjavik is not the only way to look at the overlap between Icelandair and WOW air. Both airlines operate strategies aimed at using the hub to offer connections between Europe and North America and a CAPA analysis this summer showed the overlap is lower when the number of possible one-stop connections is considered. The ‘Icelandic aviation: Icelandair vs WOW air’ insight showed that for the week commencing 30-Jul-2018 the number of overlapping airport pairs was just 90 out of a combined 774 one-stop options.

While frequency cuts could be anticipated in some markets in both Europe and North America, there is a clear value to retaining the two separate brands. Icelandair and WOW air could continue to operate alongside one another in some markets, but like Air Canada and its Air Canada rouge leisure business, you could see the different brands targeting different markets based on traveller demographics.

The dual operation will also eliminate the fleet issue. Icelandair is an all-Boeing operator and a customer for the 737MAX, WOW air is an all-Airbus customer with a fleet based around the A320 and A330 families, including neo versions of both types.

CHART – While Icelandair is an all-Boeing operator (top), WOW air is an all-Airbus customer (bottom) Source: CAPA – Centre for Aviation Fleet Database