WOW Air Hopes for a Miracle

Update: Just before this published,

After a series of failed attempts to find a lifeline, things are looking grim for Iceland’s WOW Air. It’s hard to imagine how the airline can survive… unless the Icelandic government or a risk-loving investor feels compelled to act.

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WOW is one of those typical stories of a company with a rapid rise and equally quick fall. The airline burst on to the scene with plans to be a more modern, lower-cost version of Icelandair. Icelandair was the original low-cost carrier. It shuttled people from the US to Luxembourg to provide low-fares in a highly-regulated world. Icelandair no longer has to fly into Luxembourg to bring low fares. It can bring people between the US and Europe with a single stop in Iceland using efficient narrowbody aircraft. WOW thought it could do the same thing but with a more modern low-cost structure.

The airline started with Airbus narrowbodies and quickly benefited from the massive increase in tourism thanks to people looking for something different. Both Icelandair and WOW grew quickly, bringing tourists to Iceland but also connecting them on both sides of the Pond.

WOW got hungry, and then it got greedy. It decided that it needed scale, and it grew incredibly fast. It strayed from its model, soon acquiring Airbus widebodies for longer-haul flights. It also found itself competing with Icelandair to find the next market that could fill an airplane. Pittsburgh? Sure. Cleveland? Why not. One of three airlines flying to Iceland from Dallas/Fort Worth? Oh yeah. Then it added cities like Delhi, a market that was never going to work since Iceland doesn’t provide the geographic benefit it does between the US And Europe. WOW was getting desperate.

This story had the feel of a modern tech miracle. WOW was growing fast, it garnered a lot of attention, and it served a ton of people. But like many a tech company, the airline wasn’t making money. It was focused on scaling up to eventually achieve profitability. To the surprise of nobody, that didn’t happen.

Last August when the airline came out looking for investors. It hoped to issue bonds to raise cash, but things turned south very quickly.

Three months later, in November, there was a deal for Icelandair to purchase WOW. What I found most striking was how little WOW was worth. The airline was obviously skating on thin ice. WOW’s founder, Skuli Mogensen was clearly trying to salvage something, anything, before the whole venture collapsed on itself. But that tentative deal fell apart when WOW’s financial fortunes turned even worse. It even started having airplanes repossessed.

Next up was Indigo Partners, the airline-focused private equity firm run by former America West CEO Bill Franke. Indigo wanted to strip the company down to its roots and make the original, simple low-cost strategy work. I scratched my head with this one, but I figured Indigo had a plan. It turns out that if it did, we’ll never know. That plan never saw the light of day. This deal fell apart as well.

Last week a last-ditch effort to make Icelandair and WOW couple took flight… for a few days. Talks ended on Sunday without any progress. That door now appears shut.

WOW seemed to be out of options, though creditors are going to make any effort they can to salvage their money. On Tuesday, WOW’s bondholders agreed to . With that debt erased, the company hopes the remaining 51 percent can be sold to an investor. In the meantime, the airline continues to shrink and cancel flights. What remains of the company isn’t entirely clear.

Now the question is… who would be interested in taking over the company? The most obvious answer to that is the Icelandic government. Iceland stands to benefit the most from the continued existence of WOW. It has spent the last decade or more building up a thriving tourism industry, and it needs as much air lift into the country as possible to that beast. This is presumably why Icelandair was pushed to enter into negotiations with WOW twice. But it’s also a bad idea.

If WOW sticks around, it may bring more people into Iceland, but that’s not sustainable. As we’ve seen time and time again, governments propping up carriers never ends well. The best plan is to let those that aren’t viable die and others will replace them. Iceland isn’t like it used to be, where Icelandair provided the vast majority of service to the country.

In the summer, Air Canada, American, Delta, and United all fly from North America. All the big northern European airlines serve their hubs. And European low-cost carriers have flourished with Wizz serving ten cities, easyJet serving nine, Norwegian serving eight, and several others like Vueling and Eurowings serving one.

If WOW is left to die, other airlines will step in to serve the markets that make sense. It could even open up new opportunity for low-cost carriers in the US. (Anyone want to take bets on Sun Country trying it?)

So who else might save the airline? Well, you’d need to find a risk-loving investor who doesn’t understand the airline industry. This would be a prestige purchase, the way it used to be when famous investors put money into airlines and promptly lost everything. The airline has shed a bunch of debt, but that doesn’t mean it’s going to make money. At this point, it’s hard to imagine a white knight stepping in, but this is the airline industry. Stranger things have happened.

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