It was good while it lasted, as cheap flights between the US and Europe could soon be a thing of the past due to airline consolidation. First, at its investor day last week, British Airways announced that it was still interested in purchasing Norwegian Air. BA already holds 4.6% of their stock. And yesterday, we learned that Iceland Air is buying WOW Air, a carrier that connects passengers through Iceland for cheap flights over the Atlantic.
Why You Should Care
Norwegian and WOW air are the two Ultra-Low Cost Carriers (ULCC) that could fly you over the Atlantic for less than $100 each way. Of course, you pay for everything else, including bags, seat assignments, etc., but if you are traveling lightly and don’t care where you sit, they’re a bargain. Think they are too small to matter? Think again. In the year ending July 31, Norwegian carried more passengers to New York City than British Airways did.
Here’s what’s important: Iceland Air and British Airways aren’t trying to buy these carriers because they want to run a low cost operation. Rather, the bigger carriers will likely shut the smaller carriers down, or at least reduce them in size to a point where they can’t affect the legacy airlines. Sad but true. The two ULCCs are eating up passengers at much lower prices, putting pressure on the fares of all the other airlines. But the ULCCs are discovering what all of their ilk discover: Rising fuel prices puts more pressure on them than it does on their competitors, since fuel makes up a larger percentage of total costs.
As for Iceland Air, they’re ecstatic to be forking out a mere $18-25m for the carrier That’s pocket change compared to the benefit that Iceland Air will see to its ticket prices. Wanna know how I know that? Because their stock price was up 40% yesterday, and has been up 60% over the past week. Norwegian probably wouldn’t mind a buyout, either. The stock price of the highly indebted carrier jumped 50% earlier this year when BA announced that it was taking a stake in the carrier. Considering that Wall Street analysts expect Norwegian to lose $50m in operating income in 2019, BA may not have to buy them. They may go under on their own.
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