Will Icelandair's acquisition of Wow mean slower growth for both?

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The airline capacity expansion that fueled Iceland's tourism boom appears poised to slow following the announcement that Icelandair had reached an agreement to purchase its discount competitor, Wow Air.

Closing of the deal is subject to approval from the Icelandair board as well as from Iceland's antitrust authorities. 

In announcing the acquisition, Icelandair said it would continue to run Wow as a separate entity. 

"There are many opportunities for synergies with the two companies, but they will continue to operate under their own brands and operating approvals," Icelandair interim CEO Bogi Nils Bogason said. "The tourism industry is one of the cornerstones of the Icelandic economy, and it is important that flights to and from Iceland will remain frequent."

Nevertheless, analysts postulate that an Icelandair/Wow merger will dim the overall growth in Iceland airlift. 

"Although both will continue to operate as separate brands with a different market positioning, this may lead to some route rationalization and a more rational and segmented approach to route expansion," the Australia-based CAPA Centre for Asia-Pacific Aviation wrote in an analysis.

Airline Weekly editor Seth Kaplan said a merger would likely lead to capacity reductions on some routes that Icelandair and Wow both service. With the launch of Wow's Orlando service next month, both airlines are slated to fly from their Reykjavik hubs to Newark, New York JFK, Boston, Dallas, San Francisco, Baltimore, Chicago and Orlando. The carriers also competed directly last summer on two Canadian routes and nine European routes, according to CAPA. 

Wow's 2015 entry into the U.S. was a game changer for service between the U.S. market and Iceland. Between that summer, when Wow began flying to Boston and Baltimore, and this past summer, the carrier built its U.S. network to 13 cities, offering fares to Reykjavik for as little as $99 one-way. Wow currently serves 10 U.S. destinations, not counting the upcoming Orlando flights. 

Wow's growth prompted Icelandair to quicken its network expansion, as well. This summer, Icelandair flew to 18 U.S. destinations, up from just nine in 2014.

The sudden availability of cheap flights to Iceland from a growing number of cities both in the U.S. and continental Europe, including midsize U.S. markets such as Cleveland and Pittsburgh, played a major role in Iceland's recent rise as a tourism market. 

Visitation to Iceland grew by 40.1% in 2016 and by another 24.2% in 2017, with almost all of those travelers arriving via Reykjavik's Keflavik Airport. Through October of this year, the number of North American travelers who entered Iceland via Keflavik was up 18%, according to the Icelandic Tourist Board. Iceland's overall  tourism growth, however, had slowed to just 5.9%.

Even before the merger announcement, further slowdowns were likely on the way as rising fuel prices and the impact of rapid expansion took a toll on profits at Icelandair and Wow. In August, Icelandair CEO Bjorgolfur Johannsson resigned on the heels of the company having reduced its 2018 earnings forecast by half. In the meantime, Wow, which is privately held, revealed in July that it lost $22 million in 2017, following profitable years in 2015 and 2016.

Kaplan said that an Icelandair/Wow merger would likely spell the end of $99 fares to the Icelandic capital. But he also said the merger could spare consumers the consequences of a potential closure of Wow. 

"Fares are going to rise in some markets," Kaplan said. "Narrowly defined, that's not good for consumers. But one way or another this wasn't going to last. I think you'd rather have it this way than to have an airline going out of business."

Along with direct service to Reykjavik, Icelandair and Wow key much of their route strategy on providing connecting service between North America and Europe. 

Combined, the two carriers will account for 3.8% of the transatlantic air market, according to Icelandair. Wow, meanwhile, is the second-largest ultralow-cost carrier in the transatlantic behind Norwegian. 

"It's yet another low-cost, longhaul experiment that hasn't really worked out," Kaplan said, citing the recent closure of Nordic low-cost carrier Primera Air.

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