WOW loses Icelandair as suitor and savior, future uncertain

Thus begins the death spiral of WOW Air.

Icelandair will no longer purchase its struggling neighbor after indicating it “unlikely that all of the conditions in the share purchase agreement would be fulfilled by the shareholders’ meeting on November 30th.” With WOW unable to sort out the conversion of its recently issued bonds and warrants into a form that Icelandair can purchase (for pennies on the dollar) the deal is off. This leaves very little chance of a positive outcome for WOW Air.

---

---

“The planned acquisition of Icelandair Group of Wow air will not go through. The Board of Directors and management of both companies have worked on this project in earnest. This conclusion is certainly disappointing. We want to thank WOW air‘s management for a good cooperation in the project during recent weeks . All our best wishes go out to the owners and staff of the Wow air.” – Bogi Nils Bogason, Interim President & CEO of Icelandair Group

Read More: Icelandair gobbles up WOW

Facing a cash crunch, the carrier returned four aircraft – 20% of its fleet – to lessors earlier this week. A fifth aircraft is operating in the Americas under a lease agreement. Winter demand and fares drop significantly across the Atlantic but the fleet cuts put WOW in a tough spot. It no longer has sufficient aircraft to operate its published schedule.

Most at risk are the Los Angeles and Delhi routes. Due to flight distances both destinations require an A330 for service. Moreover, the Los Angeles service includes the aircraft spending the night rather than returning straight to Iceland. This allows for optimal connections to European destinations but significantly reduces aircraft utilization.

Read More: WOW wins as it faces mounting troubles

Following the lease returns the company operates a single A330 and publishes a schedule that requires at least three frames. Flights must be cut. LAX service appears to be the choice, with inventory removed from sale for many flights, but the carrier remains quiet on an official schedule update.

---

---

Shrinking to survive rarely works in the aviation industry. And WOW’s cash flow challenges are significant. Earlier in the week the carrier highlighted these issues, citing Primera’s bankruptcy and generally higher fuel prices as two external factors that further negatively affect its financial status:

During and following the Bond Issue, the Company had significant bad publicity about the financial health of the Company which ended up having a more negative impact on the Company’s sales and credit position than anticipated. As a result, the Q4 results are materially worse than originally anticipated.

Secondly when Primera air collapsed in October the negativity escalated which has further worsened an already challenged situation. The Company was until recently making progress with finalizing a sale lease back agreement which has since been cancelled resulting in USD 25 million less inflow than originally planned.

Thirdly and due to the continuous negative events, all the Company’s lessors, creditors and authorities have been monitoring the situation even closer and demanded stricter payment terms then before further putting pressure on the Company’s cash flow.

Last but not least oil surged to new heights in the weeks and months after the bond issue which at that time also put pressure on the Company’s financial outlook. While this has since retreated the impact on the Company’s position during these weeks has not recovered accordingly.

This is a vicious circle of cash restrictions that rarely ends well for the airline. Given limited financing options available to WOW currently, and the inability to restructure the recently issued debt, the carrier’s future appears a very short-term proposition.

Even with the Icelandair deal the end was near for WOW. Without that deal the end will likely come even sooner.