Icelandair-Wow Marriage To Challenge Conventional Wisdom

 - November 13, 2018, 11:54 AM

The proposed tie-up of Icelandair with Icelandic competitor Wow Air could prove a “very smart growth move” as a means for the combination to provide seats more cheaply and segment the market further, according to airline industry analysts. Some, however, caution against underestimating the challenges of operating as a stand-alone, long-haul LCC over secondary hubs, particularly in the transatlantic market.

“We see it again and again over the decades that maintaining a connecting hub where there is very little local traffic is always a challenge, whether it was Sabena in Brussels, Swissair in Zurich, or US Airways in Pittsburgh,” Samuel Engel, head of ICF's global aviation consultancy practice, told AIN. Major capacity hikes by Icelandair and Wow, both connecting over Keflavík Airport, have compounded the situation, added Engel. “Together they have set themselves up for a situation that is going to be hard to sustain,” he said. Iceland’s population totals only 340,000.

Emerging just over five years ago, Wow this year scheduled an average of 20.6 daily departures and 4,481 daily seats between Iceland and the U.S. The totals amount to almost 80 percent of the capacity put in the market by Icelandair, which itself increased production from on average 13.4 daily departures and 2,517 daily seats in 2013 to 29 daily departures and 5,698 daily seats in 2018, according to OAG data.  

As a result, Icelandair’s average fares fell from $381 in 2013 to $291 in the 12 months through August, which, Engel asserted, is “actually a big decline” and likely unsustainable with fuel and labor costs rising and the airline moving into equipment with much higher capital cost.

Icelandair acquiring Wow gives back control of the market to Icelandair; at the same time, it gives the original backpacker’s airline a new lower cost structure and down-market brand with which to expand. “Of course, they will have to rationalize capacity,” Engel said. The companies have not yet released details of how they intend to streamline Icelandair’s all-Boeing fleet and Wow’s complement of Airbuses. The buy-out still needs approval from competition authorities and Icelandair shareholders, who also will have to authorize a capital increase to pay for the Wow purchase. Icelandair has called a shareholders’ meeting for November 30.

The sale of WOW follows the collapse of Primera Air last month and comes amid questions over Norwegian Air Shuttle’s future as a stand-alone, long-haul LCC. “The long-haul low-cost experiment will survive in some form but it is not yet clear exactly the form it will survive in,” Engel noted. The long-haul low-cost model that accounts for part of a legacy airline or group—like IAG’s Level, Lufthansa Group’s Eurowings, or Air Canada’s Rouge—benefits from a wider network in which aircraft can move around to balance ups and downs, he said, adding that such flexibility represents a particularly important element in the “tremendously seasonal” transatlantic market. “[The long-haul low-cost model works as] one arrow in a larger airline’s quiver,” he said. “This does not mean you want an entire backpack full of that one kind of arrow.”