Iceland's Airline Sector Struggles to Emerge From Its Slump

It’s not quite a done deal yet. Indigo Partners, the ultra-LCC specialist looking to invest in Iceland’s Wow Air, said a few outstanding issues remain before it can sign the final documents. One is agreeing on Wow Air’s future network plans. Another is negotiating changes to contracts with aircraft lessors and other suppliers. Indigo also wants to be sure Wow Air’s bondholders—in other words, those who lent it money—are willing to relax some of their covenants.

And so passed another week in Iceland’s drama-filled, plot twisting, loss-stained airline sector. Wow Air, remember, had a deal to be acquired by its hometown rival Icelandair. What happened? For one, some of those same conditions Indigo was seeking—renegotiation of aircraft leases and bond covenants—were not satisfied. In addition, Icelandair wanted to ensure certain aspects of its own pilot contract would not apply to Wow Air pilots—this was likely the reason why Icelandair wanted to maintain the Wow Air brand despite other inefficiencies of doing so. In any case, this condition too was unmet. Icelandair also said it discovered a larger cash flow deficit at Wow than previously assumed. So the two airlines mutually agreed to scrap the transaction.

Icelandair, meanwhile, is itself asking bondholders to temporarily waive certain covenants, specifically regarding its gross debt levels. The fact is, the airline has not had a happy 2018, at least through the year’s first three quarters. Losses were larger than usual during Q1. It uncharacteristically lost money in Q2 too. And Q3 profits fell far short of what’s necessary to ensure a healthy full year. Sure enough, Icelandair’s results for the 12 months through September are firmly in the red—$38m in net losses and an operating margin of negative 2%. That’s not supposed to be, not during a time of booming transatlantic demand and strong inbound tourist flows to Iceland. Wow Air, although privately held and tight-lipped about its finances, surely suffered losses of its own in the past year.

Why are Iceland’s two major airlines struggling so badly? Because Iceland now has two major airlines. As they’d say in the U.S. western movies, this town—Reykjavík—ain’t big enough for the two of them. It’s a market heavily dependent on North America-Europe connecting traffic, which both Wow and Icelandair were simultaneously chasing. In one notorious battle, both began flying to Dallas-Fort …

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