Icelandair buys WOW air, creates a powerful competitor

Icelandair's purchase of its low cost Icelandic competitor WOW air was a surprise, but reflects considerable industrial logic. Both offer Europe to North America connections via their Reykjavik hub and both have grown rapidly (although Icelandair is slowing this year). Icelandair is a full service carrier, whereas WOW air is a low cost airline (CAPA estimates that WOW air's unit cost, or CASK, is 35%-40% below Icelandair Group's).

The two overlapped on 19 routes, representing 49% of Icelandair's seats and 70% of WOW air's seats this summer. However, overlap based on possible one-stop Europe-North America connections is lower, giving scope for both to continue to grow as separate brands - as they will. They will have a very high combined share of Icelandic capacity but in a European context, Icelandair had only 0.3% of all seats touching Europe in summer 2018 and WOW air had just 0.2%.

Strong competition, rapid growth and rising fuel prices have weighed on both airlines' financial results. Icelandair had one of the highest operating margins in Europe in 2015 but one of the lowest in 2017, and profits are falling again in 2018, whereas WOW air is expected to record a second successive annual loss this year.

This deal should help both to better profitability at the same time as creating a more sustainable competitive force on the North Atlantic.