- Struggling Wow Air has seen its breakneck growth backfire.
- Bill Franke, whose private equity firm owns Frontier Airlines, has agreed to buy a minority stake in Wow.
- Wow has slashed its fleet and its destinations, facing a cash crunch.
Wow Air spent six years drawing shoe-string travelers aboard a growing fleet of magenta jets with fares that sometimes dipped below $100 for a flight across the Atlantic.
Founded in 2012 and owned by Icelandic entrepreneur Skuli Mogensen, Wow has watched its rapid growth backfire in recent years. Customer service complaints piled up. It expanded too rapidly and had to fill planes with ever-more expensive fuel, sapping its cash. Things unraveled after aircraft leasing companies asked for stricter payment terms for planes in September. Wow posted losses for the past two years. The situation became more dire last year when rival Icelandair, which looked to be a savior for Wow, backed away from a takeover offer.
Enter 81-year-old airline investor Bill Franke.
Franke, a lawyer by training, is managing partner at private equity firm Indigo Partners, which owns Frontier Airlines. He's a long-time proponent of low, bare-bones air fares and fees for everything else.
Franke has earned a reputation for aggressive cost-cutting and a track record for turning around ailing airlines over his more than two-decade career in airlines. Late last year, Indigo agreed to buy a 49 percent stake of Wow for up to $75 million — a deal Franke expects to close as early as this quarter.
Turning Wow around would be a new challenge for Franke, but it's a familiar place for him.
"I had become something of a 'Mr. Fix It,'" Franke said in an interview. He had been tapped to run America West when it was in bankruptcy in 1993. He said he planned to stay for six months but that turned into nine years. Some of the top-ranking airline executives in the U.S. worked under Franke, including American Airlines CEO Doug Parker, who took the reins from Franke at America West in September 2001, as well American President Robert Isom and Scott Kirby, who is now president of United Airlines.
Franke has long been adamant that what travelers are truly after is cheap airfare. Indigo had owned ultra-low cost carrier Spirit Airlines — a rival of Frontier, which Indigo bought in 2013. Franke, who was Spirit's chairman, helped the carrier grow profits by slashing costs and charging passengers more fees for things that used to come with the price of a ticket, like overhead baggage and seat selection.
That model is in Wow's DNA and it has been successful at getting more travelers on board. In 2013, it said it carried 400,000 travelers, which grew to 2.8 million in 2017. Last year, Wow flew 3.5 million passengers.
But while short-haul, ultra-low-cost carriers like Spirit and Europe's Ryanair and easyJet have been offering no-frills service for decades, airlines like Wow Air are a relatively new breed. They offer low-cost, long-haul service, routes that can be costly to operate and that go up against entrenched larger rivals.
These airlines are uniquely challenged because leisure travelers are their primary customers, not high-paying business travelers. Low-cost airlines had 14 percent of the capacity on trans-Atlantic routes last year, according to consulting firm ICF.
Some low-cost airlines have had a rocky couple of years. Primera Air, an Icelandic-backed carrier that had a similar model to Wow's, suddenly ceased operations last fall, informing travelers by email it was shutting down. In late 2017, U.K. leisure airline Monarch Airlines collapsed, prompting the largest-ever peacetime repatriation — 110,000 travelers stranded abroad.
Perhaps the most closely watched, Norwegian Air Shuttle, the largest of the low-cost trans-Atlantic operators, has struggled to turn a profit. Last month, it said it would try to raise $350 million in a share sale after British Airways' parent International Airlines Group ruled out a bid for the airline and said it would sell its nearly 4 percent stake in Norwegian.
If the Wow deal with Indigo goes through, Franke will try get Wow on better footing.
"The history of low-cost, long-haul airlines is pretty ugly and we make sure we do it right," said Franke. "We obviously see potential here or we wouldn't [invest]."
Wow Air is already taking some steps to stop the bleeding from higher costs.
It cut its U.S. destinations by more than half, leaving just four routes from Iceland: to Newark, Boston, Baltimore and Detroit. Wow slashed its fleet, including its expensive wide-body Airbus planes and routes that went along with it like service from Iceland to San Francisco and New Delhi.
"I think essentially we lost focus," Mogensen said.
Mogensen said he is trying to simplify the operation. Wow will get rid of premium seats on its planes to fit more regular economy seats and it will only operate narrow-body Airbus aircraft. Franke also uses Airbus for the rest of his growing global empire of investments in discount airlines, such as Mexico's Volaris, Chilean airline JetSmart and Hungary-based Wizz Air.
Wow's cuts sparked layoffs, and the airline doesn't expect to grow its capacity again until 2020, Mogensen said.
"It's so important to keep things simple," he said. Mogensen admitted the airline needs to improve in customer service. Wow ranked last of 72 airlines worldwide in a ranking released last June by AirHelp, a company that helps passengers get compensated by airlines when travel is disrupted. The Reykjavik-based airline got low marks for punctuality, service and how quickly and fairly it processes claims from travelers.
Franke declined to detail his plans for the airline, but Ben Baldanza, former Spirit Airlines CEO when Franke was chairman and briefly a board member at Wow, said he's likely to have a lot of influence. Franke made headlines last year when Indigo Partners placed the largest-ever Airbus order, for 430 narrow-body jets.
"I'm sure Bill would not put $1 if he couldn't control things like the fleet, the schedule," said Baldanza, now a board-member at New York-based JetBlue Airways. "Bill's a taskmaster but a good one."