Icelandair buys WOW

Consolidation strikes again as Icelandair buys WOW Air.

The announcement yesterday is the culmination of both airlines suffering from their own competition, and yet came as something of a surprise to most analysts.

There was no way WOW was in a position to buy Icelandair, the company has no cash and was desperate to find an investor. It was in effect running on the receipt of forward sold tickets, with little cash in reserve and just its corporate overdraft as a back stop.

Icelandair had ditched many of its non-core assets to raise cash, including its profitable hotel chain.

The deal when finally approved by the authorities, will see Icelandair Group fully own WOW but they will continue to operate under their own brands post-merger.

The aim will to be cut duplicated services – head office, booking, ground operations services and so on.

It’s also likely that routes where the two compete will be reviewed to ensure one of the two isn’t damaging the other.

The move will also allow Icelandair to review its product offering – but not necessarily drop its higher-end offering which still has a market.

The combined airlines will have a market share of 3.8% of all Trans-Atlantic flights but a very high percentage of one-stop transfer flights relative to the airline’s combined size.

Longer term the issue of aircraft must come up. Icelandair has a reputation for servicing its own aircraft and is entirely Boeing, while WOW is entirely Airbus.

Ultimately sourcing aircraft are the one source of massive savings, and creating cross-brand synergies are the whole point of the merger, to make the entire group profitable.

It might explain the position of the two airlines when you read that the valuation on WOW is just $25 million. It doesn’t own any aircraft and has few assets.

Compared to that, Icelandair Group was valued at $455 million.