Can $75 million in loans and direct investment save WOW Air? That’s the amount Indigo Partners appears set to invest, with a lot of strings attached. Most notably – and almost certainly why the prior investment suggested by Icelandair collapsed – existing bondholders must approve significant changes to their investments for the deal to close. Unlike the Icelandair deal Indigo appears keen to wait out a response from those investors. And WOW is adjusting in the interim, slashing its fleet and routes in an effort to stay airborne.
WOW announced fleet cuts of nearly half its planes. These cuts must be negotiated with the lessors but the carrier expects to successfully return its “other” A330 (the first was returned previously) and some single-aisle aircraft as well. More than 100 full-time employees were laid off and contracts for others are not being renewed. CEO Skuli Mogensen described the cuts as “the most difficult day in the history of WOW” but necessary to “ensure our future and preserve WOW air in the long run.”
Dropping the A330s means the recently launched Delhi route comes to an abrupt and unfortunate halt. Los Angeles service will also be dropped and seasonal San Francisco flying will not resume. New flights to Vancouver will not launch at all. The carrier previously indicated cuts to smaller US markets after the first year of service did not deliver the necessary growing yields to justify continued operations.
Breaking the bonds
Separate from the cuts passengers and staff are seeing the future of the carrier depends in large part on bond investors assuming significant changes to their holdings. More than 60 million euro of bonds issued in September 2018. That investment gave the bond holders a number of rights and secured their debt above other WOW investors. For Indigo Partners to move forward with its deal these bonds would lose out in many ways.
The bonds are set to mature in three years. The revised plan extends that to five years, with a management option to postpone an additional year if a $1 million fee is paid. The initial issuance of bonds included warrants to further project the investors. Those will be canceled if the revised deal is approved. The new agreement leaves the bonds wholly unsecured and subordinated to shareholder debt (i.e. Indigo Partners) in the event of a bankruptcy. Management also regains the right to dispose of any and all assets, including intellectual property rights (i.e. the brand) under whatever terms it deems appropriate.
To secure the Indigo investment bondholders must also concede that financial reports will only be provided twice a year instead of quarterly and that WOW is no longer obligated to keep the bonds listed in public trading markets. And WOW will pay Indigo up to $1.5 million in management fees annually.
For the bondholders neither option appears particularly compelling. They can remain secured creditors but against rapidly dwindling capital or become unsecured and hope that Indigo Partners pull off a miracle.
The company claims that even without the infusion of cash it intends to “return to its roots as a profitable ultra-low cost airline.” The claim of prior profitability seems a specious one. But fuel prices are dropping again after a quick run up in early 2018 that the LCC segment failed to cover as well as legacy carriers. Primera’s bankruptcy, cited by the company as softening its position in the short term, may prove helpful should higher fares emerge with one fewer competitor dumping inventory into the market below cost to capture share.
Increased pricing power with lower costs could buy the airline another season or two as it seeks to right its balance sheet.
A different approach to the transatlantic market
And if the Indigo investment comes to pass there’s a chance that WOW’s lack of aircraft could prove a strategic advantage. The group holds a massive order of aircraft and its member airlines are looking for new routes on which to operate them. Using the WOW brand to market those flights, while Frontier Airlines and Wizz Air operate them, could significantly reduce costs and increase options. WOW would essentially codeshare on a wide range of flights to and from Iceland rather than operating its own.
It is unclear, however, that the WOW brand would be required to accomplish this level of connectivity. Frontier and Wizz Air could both operate under the current EU/US Open Skies agreement and could transfer passengers at any member country airport they choose, so long as they establish the necessary commercial partnerships to perform such. Adding another layer of branding does not seem to improve that situation much. Indeed, adding codeshare complexities often confuse passengers, especially when the offerings differ among carriers.
Indigo Partners like the WOW brand and it certainly has value. It is unclear that $75 million invested and loaned would see a return from that value, but Indigo is poised to wait a month to find out if bond holders are willing to find out.