Business review

Icelandair Group has operated in the international airline and tourism sectors for decades. The Company, however, has been in the process since 2018 of shifting towards a sheer focus on aviation. Its core business is built around Icelandair’s route network and the unique geographical location of Iceland which serves as a connecting hub between Europe and North America. Sustainable value creation for the Company's shareholders and other stakeholders lies at the heart of Icelandair Group's business model. Five strategic initiatives support the Company's vision of “Bringing the spirit of Iceland to the world” and its mission of “Delivering smooth and enjoyable travel experiences”. These are: To ensure a culture of passion and performance, becoming the most customer-focused airline in the Company's markets, achieving excellence in all operations, driving sustainable and profitable growth, and to become an industry leader in responsibility.

Icelandair operates a well-established route network between Europe and North America. The route network is based on Iceland’s unique geographic position making it an ideal central point for an international hub-and-spoke network, connecting the two continents with over 42 destinations and over 500 connection options.

Icelandair is the leading airline for travel to and from Iceland in addition to providing an exciting alternative for passengers across the North Atlantic. For over 80 years, we have brought the spirit of Iceland to the world of experience and our mission is to provide our customers with smooth and enjoyable travel experiences.

The heart of the Icelandair route network is the 24-hour hub at Keflavik Airport. In the morning Icelandair’s aircraft take off towards the east for all the destinations in Europe. They reach Europe at around midday and start the return flights early in the afternoon. The fleet is typically back in Keflavik in mid-afternoon, Icelandic time. The North America operation begins late afternoon and the fleet arrives in the US and Canada in the early evening and returns to Keflavik at the dawn of the next day, just in time to depart again for Europe.

In 2019, a second connection bank was added to the route network during the high season, alongside the current connection bank (1st bank). It included departures to Europe in the latter part of the morning, arriving in Keflavik later in the afternoon. From there, the flights departed to North America around dinner time, arriving at the end of the day. This allowed Icelandair to make better use of the existing fleet and crew, and, most importantly, to offer more options for passengers.

Icelandair’s route network serves three independent and distinct passenger markets: the Icelandic domestic market (from), the tourist market with Iceland as a destination (to) and the international market between Europe and North America (via). Serving these three markets enables Icelandair to offer a higher flight frequency and a greater variety of destinations than the markets to and from Iceland alone would allow. Of the three markets, the “via” market has been the largest in recent years, up to the point where it reached 51% of the total passengers in the year 2018 with the “to” market accounting for 36% and the “from” market 13%.

However, with the above-mentioned shift in focus in 2019 to the markets to and from Iceland, the composition of Icelandair’s passengers changed. In 2019, the “via” market was still the largest, accounting for 43% of the total number of passengers, while the “to” market accounted for 42% and the “from” market for 15%.

The United States is Icelandair’s single largest destination country, while its European network focuses mainly on Scandinavia and Northern Europe, with the United Kingdom as the Company’s second largest destination country.

Icelandair’s flight schedule for 2019 was the largest in the Company’s history, growing by 3% from 2018. The number of passengers in 2019 was just over 4.4 million, a 6% increase from the previous year and the load factor was 82%. One new destination, Dusseldorf, was added to the network and frequency of flights to various existing destinations in North America and Europe was increased as well.

With the focus on strengthening and improving the profitability of the network, flights to 5 destinations (Baltimore, Cleveland, Dallas, Halifax and Paris Orly) were discontinued during the year.

Due to changes in the competitive environment and to mitigate the risk resulting from the suspension of the MAX aircraft, Icelandair put more focus on the markets to and from Iceland instead of the transatlantic market via Iceland than in previous years. This resulted in 25% increase in the number of passengers to Iceland, or around 1.9 million passengers in total. The number of passengers from Iceland increased by 18% during the year while the number of via passengers decreased by 9% in line with this shift in focus.

In 2019, Icelandair’s fleet was comprised of 24 Boeing 757 aircraft, four Boeing 767 aircraft and six Boeing 737 MAX. However, the Boeing 737 MAX aircraft was suspended from March 2019 and were therefore not used in the Company’s route network for the main part of the year. In order to minimise the impact of the suspension on the route network, replacement aircraft were leased for the high season. With one Boeing 757, three Boeing 767 and one Airbus A319 added to the Company’s fleet during the peak summer season, Icelandair was able to operate a large portion of its route network and thereby minimise the impact on its passengers. The number of weekly departures from Keflavik International Airport was 377 during the summer’s high season. It should be noted that in 2019, hourly turnover improved largely year to year, by 12 percentage points overall.

Icelandair operates flights simulators for Boeing 757, Boeing 767 and Boeing 737 MAX aircraft at a training facility in Iceland. The facility is well utilised year round, for Icelandair and other airlines.

Focusing on profitability and sustainable growth, the number of passengers is projected at 4.2 million in 2020. Icelandair will continue to emphasize on the markets to and from Iceland and has set up its flight schedule for 2020 and is focusing its sales and marketing activities accordingly. The flexibility of Icelandair’s route network allows the Company to respond quickly to changes in the environment, meet increased demand in certain markets and seize new opportunities.

The route network in 2020 will comprise 24 European destinations and 17 North American destinations. Barcelona will be introduced as a new destination and the frequency of flights will be increased for selected destinations, such as New York, Copenhagen, Oslo, Bergen, Billund, Milano and Madrid.

Icelandair expects the Boeing 737 MAX aircraft to return to service in the latter part of the year 2020. For the high season of 2020, Icelandair has already leased three Boeing 737-800 aircraft, two of them on short term lease.

Icelandair’s airfreight and logistics operation focuses on air freight services to and from Iceland by leveraging the passenger route network with scheduled air cargo flights to and from North America and Europe, operating two B757- 200 cargo aircraft in addition to the passenger fleet. Carried freight measured in freight tonne kilometres (FTK) amounted to 134 million FTKs in 2019, a 6% increase from previous year. Fresh fish is the most essential product for the export part of the operation. The Icelandair route network places the Icelandic fishing industry in a unique position to distribute its fresh fish products to key markets, which in turn continues to strengthen the market position of the cargo operation.

In 2019, Icelandair Cargo entered into an agreement with FedEx and TNT for the logistic of all their products to and from Iceland. The three-year agreement comes into effect in early 2020. Due to the agreement there will be some changes in Icelandair Cargo's flight schedule to Europe. Flights to Liege in Belgium will increase significantly, given that Liege is one of the main hubs for FedEx and TNT in Europe. Icelandair Cargo will fly seven times a week to Liege in Belgium and three times a week to the East Midlands in the UK.

With unsatisfying financial results in 2018, the company was restructured in 2019. Capacity adjustments where made by revising the number of flights to destinations and the amount of seats offered. Decision was made to cease the operation of the trial route between Akureyri and Keflavík as the results were not improving. By optimizing the frequency and by balancing out the number of flights between Q200 and Q400 aircraft, increased load factor was reached with improved yields. Number of employees was reduced across the company accordingly. Contracts with all suppliers where renegotiated and automatization was introduced with new service to customers, like booking unaccompanied minors online, offering carbon offset as part of the booking process and enforcing online check-in. The call centre was eliminated by directing all calls to our stations in Iceland which led to improved call service with over 90% calls answered. Renegotiated maintenance contracts led to significant changes in maintenance costs as well as changes in shift setup led to reduced number of FTEs and improved efficiency.

All those measures led to a swift turnaround in 2019 with revenues kept at a level compared to 2018 but cost was reduced by 12% leading to a positive financial result.

Air Iceland Connect's fleet currently comprises three Bombardier Q400 and three Bombardier Q200 aircraft.

The deployment of Q200s with their 37 seats and Q400s with their 76 seats, preserves the company’s flexibility to meet differences in market demand, while at the same time streamlining operations by focusing on a single aircraft manufacturer, which in itself results in economy in addition to the economic advantage of being able to offer the same training for all cockpit crews.

In order to adjust the required number of aircraft in line with the chances in the regional market, Air Iceland Connect entered into a dry lease contract of one of its Q400 to LAM Mozambique Airlines. The aircraft was delivered in December and the contract is for 5 years.

Air Iceland Connect domestic operation has historically shown a strong correlation with the underlying performance of the local economy. With the Icelandic economy slowing down and some key tourism markets being challenged, the outlook for 2020 is moderate. Adjusting the production according to market conditions is the key to the sustainability of the operation. Proposal to support air travel for the local population in remote regions in Iceland, which was developed by a committee appointed by the Icelandic Minister of Transport, has got positive feedback and if implemented can have positive effect on the demand for Air Iceland Connect services.

Although mining and oil exploration in Greenland are currently at a low, the demand for Greenland as a tourist destination in the long run is growing, and revenues on routes to and from Greenland are expected to increase in 2020. Air Iceland Connect’s long-term focus on the tourist market to Greenland will be further extended as the demand for travel to Greenland continues to grow in both existing and new markets. With new and extended airports in Greenland, scheduled to open in 2023, the accessibility to Greenland will be improved giving Air Iceland Connect exiting opportunities for both passenger and cargo operation between Iceland and Greenland.

Icelandair Group offers capacity solutions to international passenger airlines and tour operators under the Loftleidir-Icelandic brand. Loftleidir-Icelandic is a capacity solution provider concentrating mainly on AM (Aircraft, Maintenance) projects, VIP services, ACMI (Aircraft, Crew, Maintenance, Insurance) and consulting services. Loftleidir-Icelandic operated five B757 200s, two B767 300s, one B737 800s and one B737 700 aircraft in 2019.

In 2019, Loftleidir-Icelandic continued its strong foothold in the VIP market segment and with customers in Europe, North America and Oceania and the reputation of an excellent service and seamless operation is growing. The second VIP B757 aircraft was added to the fleet in the fall and went into preparation for its inaugural flight in January 2020. The new B757 aircraft’s configuration consists of 82 seats and will mainly serve one customer over the next three years. One more customer in Asia was added to the portfolio this year with operations due to start in 2021.

Loftleidir-Icelandic growth stabilised in 2019 with emphasis on the AM market as ACMI projects played a lesser role on the company’s operations. Loftleidir-Icelandic founded a subsidiary, Loftleidir CV, holding a 70% ownership, with an Icelandic investment group holding the other 30%. In March, Loftleidir CV purchased a majority share (51%) in Cabo Verde Airlines from the Cabo Verdean State with the State holding on to the other 49%. Loftleidir-Icelandic had served the airline with a couple of B757 aircraft in 2018 but during 2019, the number of aircraft in operation has grown to five B757, with four aircraft on AM contracts and one on ACMI.

Loftleidir-Icelandic maintains a strong partnership with Air Niugini with two B767 and two B737 on AM contracts. One contract for the B737 that was due to expire mid-year 2020, has been extended.

In February, Loftleidir-Icelandic took a strategic step in the direction of extending its range of services by adding a trading department, focusing on aircraft parts and procurement, teardown projects and commission-based sales for third party, to provide its customers with an even wider range of solutions.

The commercial climate for airlines is unstable with demand slowing, costs rising and the weakening of world trade. The effect on the leasing market is unknown but the long-term outlook is positive with the overall long-term demand for travel increasing. The market outlook for the aircraft leasing market in 2020 is still volatile and price sensitive. The uncertainty surrounding the B737 MAX returning to service is pushing up lease prices and led to shortage of other aircraft in the same aircraft segment. As more airlines are struggling to be profitable, trying to cut costs and streamline their operations, Loftleidir-Icelandic will continue to offer potential customers plethora of consulting services as a total capacity solution provider. Leveraging Icelandair Group’s resources of extensive aviation experience, the services provided include operational optimisation, network development, revenue accounting, ticket sales, market strategy, etc. There will also be focus on the AM product, as well as continued marketing efforts in the VIP, ACMI and full charter markets.

Icelandair Hotels provide hospitality services through a cohesive mix of international and local brands. The company’s brand portfolio has never been more extensive, catering to a more versatile target group than ever before.

Innovation and outstanding hospitality characterise the services of the various hotel brands operated under the Icelandair Hotels’ umbrella. Emphasis is put on giving the hotel guests a good insight into the local culture and way of living, through innovative approaches in services and design. The operations of Icelandair Hotels continue to evolve, but several structural changes took place in 2019.

The number of hotels within the Icelandair Hotels chain were reduced by one when Icelandair Hotel Vik exited in December. The chain now consists of seven hotels in total, out of which two hotels are operated in a franchise agreement; Fludir and Hamar. The completion of the chain ‘s most recent addition by lake Myvatn was finalised in June, but this quirky newcomer has been well received during high season, while winter sales remain a challenge.

Five Edda hotels completed their last year of operation during summer 2019, after providing both international and local guests alike with classic Icelandic old school hospitality since 1961. Only three Edda Hotels remain within the chain in 2020; Edda Akureyri, Hofn and Egilsstadir. The elimination of outdated Edda properties is fundamental in order to meet today’s modern traveler’s needs, and to guarantee consistent quality services throughout the company, across all brands and price range offered.

Alda hotel by Laugavegur in Reykjavik completed its first whole year as a member of the Icelandair Hotels’ portfolio. The small boutique hotel has maintained its individuality within the brand portfolio.

The new Reykjavik Konsulat, the first of two signed up Curio Collection members of the company, raised the bar of accommodation choices in Reykjavik, during a successful first year of operation. In 2019, annual occupancy (OCC) of this newcomer reached 86%, at a higher average daily rate (ADR) than most hotels in Reykjavik.

Canopy Reykjavik remains another top performer, with 97% annual OCC in 2019 at an outstanding ADR. Canopy and Konsulat are two out of soon four hotels which are run in a franchise agreement with Hilton Worldwide. Adding more variety of higher end hotels in collaboration with this international hotel giant, has played a vital role in Icelandair Hotels’ strategy, and served as a fundamental step towards positive development of Reykjavik’s hospitality infrastructure. Likewise, the Hilton Reykjavik Nordica remains the flagship hotel for meetings, conferences and events in Reykjavik, receiving outstanding reviews and Hilton scores in 2019.

Another upscale hotel is in its final design stages and anticipated to open in Q1 2021. The 145 key property is in a location second to none, at the doorstep of democracy by Austurvollur and the Parliament of Iceland. The new Iceland Parliament Hotel will also be a member of the distinctive Curio Collection by Hilton. The hotel will feature first class conference and event venues, an exclusive lounge with views over the city, spa & fitness facilities, artistic bar and coffee house, and a restaurant. This new addition will further enhance the synergies of already existing inhouse operations as well as sales and marketing efforts of the company.

The loyalty scheme of Hilton worldwide continues to grow from one year to another. Hilton Honors club currently consists of 80 million loyal members and rising, out of which many prefer the top-quality hotel categories available, securing our Hilton franchised hotels in a league of their own. While the differentiation of the Hilton related hotels remains undisputed, all Icelandair Hotels now benefit from a much-improved joint exposure via unified online platform launched in 2019, where cross selling from one hotel to another is maximized.

While Icelandair Hotels highest ranking properties outperformed competition in 2019, several external factors had a negative impact on the 2019 EBITDA. Domestic union strikes were a costly exercise both in terms of revenue loss and compensations. Following new national wage agreements in April, salary cost increased from 2-8.2% at the Icelandair Hotels, depending on departments.

Measures to meet rising labour costs include reducing number of FTE’s LFL. Flexible shift process has been implemented at all outlets. Shared finance service agreement has been terminated and replaced with an extended inhouse team, new and enhanced processes and technical solutions, resulting in greatly reduced costs. Continued cost cutting actions and focus on streamlining processes will play a big role in 2020, while further increased labour cost is foreseen, due to both shortening of the work week as well as confirmed salary increase in May 2020.

Simultaneously to increased salary costs in 2019, reduced flight supply to Iceland affected the revenue per available room (RevPar) of the Icelandair Hotels. Continued reduced seat capacity remains a concern for 2020.

In 2019, Icelandair Hotels acquired Hljomalindarreitur, which serves as one platform for all real estate previously belonging to Icelandair Group but are now in the ownership of Icelandair Hotels. Properties in the ownership of Hljomalindarreitur are: Canopy Reykjavik, Icelandair Hotel Akureyri and Myvatn, as well as Reykjahlid hotel by Lake Myvatn and some employee apartments in Egilsstadir.

Icelandair Hotels completed refinancing in December 2019.

In July 2019, a share purchase agreement was signed with Berjaya Property, whereby Berjaya will acquire a majority share in Icelandair Hotels and related real estate. Following the transaction, Icelandair Group will hold a 25% equity stake for a minimum of three years. The completion of the transaction is set for the end of May 2020.

The company’s biggest undertaking in 2020 will be the continuing development of the new Curio hotel by Austurvollur. Building progress is now in accordance to updated plans and the hotel is set to open in Q1 2021. Icelandair Hotel continue to put emphasis on handling all debate about the site with utmost respect for conflicting views. The company’s ambitions are to create a new city landmark which will be a sought-after venue for both international and local gatherings. The hotel concept promises a new, different take on what the company has already accomplished in its recent developments.

Icelandair Hotels foresee gaining economies of scale when opening the Iceland Parliament hotel. Several new properties are confirmed in the pipelines of Reykjavik. Forecasts of future growth still indicate that there is room for additional keys, despite current setbacks. Icelandair Hotels remains the first refusal point for new developments.

Last few year’s tremendous increase is expected to continue slowing down in 2020, in accordance to 2019 results. Much relies on how the flight availability to the country will develop in the coming months.

Now that established older brands have been reconsidered, Icelandair Hotels will put focus on further streamlining processes, and enhancing consistent quality services across all subsidiaries. Moreover, the company will prioritise continued digital development. The goal is to automate the predictable so that the exceptional may be personalised. At the end of the day, hospitality lies at the heart of our business, and will not be compromised or substituted. Our emphasis will remain on introducing services that are aligned to current trends, thereby attracting a new and more affluent target group to Iceland.

The hotel’s business environment is certainly a dynamic one, but the end target remains the same, and that is to create a valuable long-term investment for shareholders, in balance with the destination and our natural resources.

Every day, Iceland Travel’s local experts craft once-in-a-lifetime travel experiences and take guests on extraordinary Icelandic journeys.

Iceland Travel takes pride in its diverse product portfolio, high-level services, and deep connections to the community of businesses and travel providers in Iceland. Iceland Travel’s longstanding history is built on the extensive experience of its team and commitment to preserving Iceland’s natural environment.

Last year was characterised by changes in every aspect of the business. With uncertainties in flight supply, Iceland saw the first decrease in incoming travellers since 2010. It was however countered partly by travellers staying for a longer duration. Market conditions in Iceland were otherwise positive with a more stable ISK, but at its weakest during the high season, and lower prices from service providers.

New organisational structure strengthened the business as well as more efficient allocation of resources and better control. Changes were made to the management team last year.

The year 2020 is expected to be similar in size to the previous year regarding revenues and passengers. Iceland Travel’s main focus remains on markets with direct flight connections to Iceland but with continued support elsewhere.

Iceland Travel has been on a digital transformation journey over the last few years and has focused on developing a strong platform to build on. Now every aspect of our organisation is operating through this platform and the company’s focus is to better optimise processes and external connections through this platform.

VITA offers a variety of leisure tours to Icelanders travelling abroad through high-quality services supplied at competitive prices.VITA takes advantage of opportunities that arise through the company’s partnership with Icelandair, thereby offering a secure and attractive option for Icelanders seeking services and assistance for organised groups and individual tours, such as vacation tours, golf and ski trips and city breaks. VITA also offers specialised business solutions in partnership with Carlson Wagonlit Travel, serving large companies, institutions and small businesses alike.

The year 2019 was the biggest yet in the company with 28% increase in revenues from previous year with 93% occupancy on average. Market conditions were unfavourable during the year compared with 2018 with a weak ISK and sunshine during the whole summer for biggest part of Iceland. Therefore, the EBITDA was down 68 million ISK. Improvements on the online booking process with seat only options, seat plan functionality and online check-in for outbound that was aimed at improving ancillary revenues have been well received.

In 2020 VITA aims to increase EBT by 20%. As of January 2020, bookings were up 26% compared to previous year. The outlook for 2020 is optimistic and the management is constantly looking for opportunities for healthy growth on the market. Alicante and Tenerife will remain the main destinations with 69% of capacity. Digital developments will be focused on improving the customer journey and growing online and seamless bookings.