Just hours after Icelandair abandoned plans to buy struggling domestic rival Wow Air, Indigo Partners, the private equity firm that controls Frontier Airlines and owns stakes in several other ultra-low-cost carriers in Europe and the Americas, agreed in principle to invest in the carrier, potentially ensuring it remains a viable enterprise.
It is far from a done deal, however. In a release late Thursday, Indigo said it will make its investment — the amount of which it did not disclose — after “successful completion of due diligence.” Indigo said Skuli Mogensen, Wow Air’s founder and CEO, would remain a principal investor if the deal closes. The two companies said they would would work to close as soon as practical.
Indigo Partners is perhaps the best known and most successful private equity firm focusing on airlines, with a slew of successes, including Spirit Airlines, Mexico’s Volaris and Hungary’s Wizzair, among its investments over the past decade. But Wow Air, which has delighted customers with its cheap one-stop transatlantic fares, if not its service, is in rocky shape.
On Tuesday, before the deal with Icelandair was called off, the airline said it fourth quarter results would be “materially worse than originally anticipated,” and also warned investors that its creditors, who were closely monitoring the news about the airline’s fiscal crisis, had “demanded stricter payment terms.”
As a result, it said, it was returning four aircraft to lessors, a move that almost certainly will require it to slash some flying. It also said it was “working diligently to seek additional funding.”
It its statement Thursday, Icelandair didn’t saying exactly why it was pulling out, merely telling investors that all of the conditions in the share purchase agreement could not be met by a Nov. 30 deadline, and that the board did not want to extend the deadline. Icelandair, which had been losing share to Wow Air, had planned to keep the upstart, operating it as a separate, lower-cost brand.
Mogensen, a former telecommunications executive who has mostly been funding the airline with his own money, had agreed to sell the company for 272 million shares of Icelandair stock, worth only about $18 million when the deal was announced earlier this month.
Indigo, led by former America West Airlines CEO Bill Franke, tends to be a hands-on investor, and usually puts its imprint on its airlines. Franke is known for being fanatical about costs, and for being a shrewd negotiator.
Last year, he worked with Airbus to order 430 narrowbody aircraft, allocating them to four airlines under his control — Frontier, Volaris, Wizzair and JetSmart of Chile. The deal was unusual, because while Indigo owns stakes in all of them, the airlines are independent entities with few commercial relations among each other.
Indigo usually favors short-haul, low-cost airlines, with its carriers operating with a Ryanair-style ethos. The airlines often turn their aircraft quickly, ensuring little ground time between flights, and they usually charge for almost everything onboard, from food to sodas. They often also use contractors, rather than airline-employed staff, at airports, to save money on labor.
Assuming the deal goes through, it will be interesting to see how Indigo changes Wow’s strategy, and whether Mogensen’s save-the-company idea — he wants fly frugal U.S. travelers to India after a stop in Reykjavik — will remain.
Indigo may tweak Wow’s network, perhaps focusing its on shorter routes where low-cost carriers usually have more of a cost advantage, rather than longer ones like Los Angeles to Reykjavik. It could also also renegotiate contracts with suppliers and vendors, taking advantage of economies of scale to drive down prices.
Analysts also may watch to see whether Wow Air, with Indigo’s backing, keeps its twin-aisle Airbus A330s, or whether it returns them to lessors in favor of the Airbus A320 series aircraft Indigo usually prefers.