Icelandair agreed to buy local rival WOW Air Nov. 5 in a move that could end a battle for dominance at both carriers’ Keflavik home base.

The airlines will maintain their brands and operate as separate entities following different models, according to the takeover agreement. The combined group will control more than 80% of the capacity offered at Keflavik Airport, but only 3.8% of transatlantic capacity.

“There are many opportunities for synergies with the two companies,” Icelandair interim CEO Nils Bogason said, adding that “the tourism industry is one of the cornerstones of the Icelandic economy and it is important that flight to and from Iceland remain frequent.”

Combining Icelandair and LCC WOW will require approval by Icelandair shareholders as well as competition authorities.

The sale of WOW is a departure from recently announced plans by the airline to go public by 2020. Founding CEO Skuli Mogensen, praised for taking the risk of entering the transatlantic long-haul LCC market in 2011, originally envisioned an initial public offering (IPO) to finance WOW’s operations and growth, and in September the airline closed a €60 million ($70.4 million) bonds issue in anticipation of an IPO.

“We have created a strong team that has reached remarkable success and has been a pioneer in low-cost flights across the North Atlantic,” Mogensen said in a statement. “A new chapter now starts where WOW Air gets an opportunity to grow and prosper with a strong backer like Icelandair Group that will strengthen the foundations of the company and strengthen its international competitiveness even further.”

It is unclear in what capacity, if any, Mogensen will stay on.

Icelandair and WOW Air have experienced financial difficulties over the past few years as a result of fast growth and competition, with significant route overlap. Icelandair issued a profit warning and told bondholders it may be in breach of bond covenants. CEO Björgólfur Jóhannsson resigned Aug. 27 and was replaced by Bogason on an interim basis. WOW discontinued services to Cleveland, Cincinnati, Dallas/Fort Worth and New York in October. WOW will pull out of St. Louis in January 2019.

That Mogensen sold under pressure is illustrated by the fact that Icelandair could potentially get WOW at no cost “in accordance with certain conditions set forth in the share purchase agreement,” according to the agreement. Should those not apply, WOW will receive up to 5.4% of Icelandair Group stock as part of a share purchase agreement. Icelandair will buy all of WOW shares. The two sides did not specify details of those conditions.

Icelandair has been operating in the transatlantic market for decades, offering one-stop connections through Keflavik between Europe and the US. The carrier’s business model focused on the use of Boeing 757s, which feature a relatively small seat count and long range. WOW is pursuing a low-fare version of the Icelandair model, which is heavily reliant on ancillary revenues.

Both carriers have benefited from the tourism boom in Iceland over the past several years, which has pushed the local hotel and airport infrastructure to its limits. However, both also face the risk of increasing low-cost transatlantic competition by the likes of LCCs Norwegian and Eurowings, which connect markets nonstop. The advent of the Airbus A321LR is another threat to the business model as it enables European and North American carriers like Aer Lingus and JetBlue Airways to operate in secondary long-haul markets.

Potential future synergies include the airlines’ fleets, but only in the long-term. Icelandair is an all-Boeing operator while WOW only flies Airbus. According to the Aviation Week Network’s Fleet Discovery database, Icelandair operates 36 aircraft: three 737-8s, 28 757s (757-200s and -300s) and five 767-300ERs. The airline has 13 more 737-8s and one 787 on firm order.

WOW operates 17 A320 family aircraft as well as three A330-300s, and has four A330-900s on firm order.

Jens Flottau, jens.flottau@aviationweek.com