Icelandair Group on Thursday scrapped a plan to acquire its Icelandic rival WOW Air, calling into question the next steps for the struggling budget carrier.
Icelandair said the conditions for the share purchase were "unlikely" to be filled by the company's shareholder meeting, slated for Friday.
"This conclusion is certainly disappointing," Bogi Nils Bogason, Icelandair Group's interim president and CEO, said in a statement. "We want to thank WOW Air's management for a good cooperation in the project during recent weeks. All our best wishes go out to the owners and staff of the WOW Air."
WOW Air's flights first took off in 2012 and it has expanded rapidly, adding trans-Atlantic service from several U.S. cities. The airline is a no-frills budget carrier, that offers low airfares, some below $100 one way, and charges passengers for everything else, such as seat assignments, carry-on baggage and food and beverages.
But WOW Air said it has faced escalating financial problems since its bond issuance in September, including higher fuel costs.
Aircraft lessors and the company's creditors have "demanded stricter payment terms than before, putting further pressure on the company's cash flow," WOW air said in a statement Tuesday.
The airline reduced its fleet by four planes earlier this week.
It is not immediately clear what WOW Air's next steps are.
The airline, which expanded rapidly and helped fuel a tourism boom to Iceland, has grappled with other problems as well, including accusations of poor customer service.
"We have to do better," CEO Skuli Mogensen told CNBC in an interview in June in Reykjavik. "It's obviously in our interest to fix it." He said such problems as canceled flights, delays and other problems cost the airline in lost passengers and the money they have to pay to compensate them.
Mogensen was not immediately available for comment on the scrapped Icelandair deal but said in a statement that it "was clear at the outset that it was an ambitious task to complete all the conditions of the share purchase agreement in this short period.
"We thank the Icelandair Group's management team for this challenging project, and also wish the management and staff of Icelandair Group all the best."
WOW's problems come amid struggles of several other airlines. Budget carrier Primera Air abruptly ceased operations in October, leaving passengers stranded. A year earlier, the collapsed U.K. carrier Monarch Airlines stranded more than 100,000 travelers abroad.