Sunday, 4 November 2018

Clouds of uncertainty hanging over the Icelandic aviation industry.

Keilir volcanic mountain in Hafnarfjorour Photo
There is a cloud of uncertainty hanging over the aviation industry in Iceland at the present time, the years of continuous growth has, it seems rather abruptly come to an end. The new keyword on the lips of Icelandic aviation managers and commentators is 'consolidation'. This rapid downturn in business has been aptly demonstrated by the latest figures released from the national carrier, Icelandair, showing a massive 32% drop in net profits during the third quarter. 

Load factor for the airline fell by 2% over the last quarter compared to the same period last year, surprising considering that the cost of flights has reduced somewhat over the year, mainly due to increased competition. The North American routes saw loads drop from 87.5% during the third-quarter in 2017 to 81.3% this year, however, the European routes saw increases, up to 89% from 84.4%. The carrier has also axed a number of routes, such as those from/ to Birmingham, Belfast and Glasgow as well as delaying the restart of a seasonal route to Cleveland, by at least two months. There is little doubt within the aviation sector that Icelandair will cut some more routes before this winter is out.

Another cloud over the Icelandair Group is the crash of the Air Niugini  Boeing 737-8BK aircraft, registered P2-PXE, on Friday 28 September 2018, that claimed the life of one of the male passengers on board. The aircraft was leased to the Loftlieder part of the group who in turn subleased it to Air Niugini.  Whilst there should be no financial liabilities for Loftlieder or the Icelandair Group as a whole, it could prove embarrassing if the current ongoing investigation finds any long-term mechanical or maintenance issues with the aircraft.

Photo Icelandair
Icelandair's interim President and CEO Bogi Nils Bogason admitted the results were not great but were in line with previously published expectations: “Our third-quarter results declined between years, but are in line with the EBITDA guidance published at the end of August.  EBITDA amounted to a total of USD 115 million, USD 41 million short of the figure for the third quarter of 2017.  Higher fuel prices, low average airfares and a less favourable passenger load factor are the principal reasons for the decline in performance."

As Bogi Nils Bogason says, the rising fuel prices have had an effect on the airline's bottom line, despite the attempts at fuel hedging the airline's management has done. However, next year this situation may very improve as Icelandair is due to receive six Boeing 737 Max aircraft which use 27% less fuel than the airlines current Boeing 757 planes.  Yet, this may be outweighed by increased leasing charges as the airline moves away from owning some aircraft in favour of operating leases.

The airline is undergoing a period reevaluation and consolidation as it seeks to cut costs and streamline the business to maximise profits. This programme has seen a number of routes being axed, such as those listed above, as well as the Icelandair Group putting its hotel operation up for sale. Other cost-cutting measures have already been implemented or are planned for the near future include a more effective yield control system, automation, integration, better utilisation and that dreaded word for any employee 'outsourcing'. However, whether these changes will improve the groups' performance and help reduce the debts of over $400 million the Icelandair group currently has remains to be seen.  Bogi Nils Bogason thinks it will, "Our task is clear: to improve Company’s year-round performance. There are numerous opportunities available, both on the revenue and expenditure side.  We are confident that the measures that have already been taken and further measures ahead will return improved performance for Icelandair Group for the future.”

Photo Wow Air
WOW Air, the budget carrier, founded by the charismatic and handsome Skúli Mogensen, has also been feeling the effects of a shrinking market with having to axe some routes, including Cincinnati, Cleveland, Dallas-Fort Worth, St Louis and New York JFK in the USA. Even the once popular route to San Francisco is also being thinned out, for the airline that has grown to become the second largest at Keflavík International Airport in Reykjavík.  Plans for a daily New Delhi service have been dropped in favour of keeping the schedule at three times a week, despite belief senior management have that India is a key growth market to target for both Icelandic destinational traffic and via passengers en route to US cities.

The niche market that gave Icelandair and latterly WOW air such a big boost was the ability to offer really low fares from Europe to the USA, albeit with a stop and change of aircraft in Iceland, is changing. Norwegian, the long-haul low-cost specialists are offering the same low fares yet on direct flights with, as some might argue, better planes and better service, service at a level that is impressive for a budget type carrier.  The North American legacy carriers have also stepped up their game with regard to lower fares and increasing regional routes to Iceland.

Whilst Iceland has seen more visitors from the USA arriving on its volcanic shores in recent times, visitors numbers from a raft of European countries, including the UK, France, Germany, Norway and Sweden are falling, some by as much as 13 or 14%. It is a trend that is likely to continue, Icelandic is still seen by many as an incredibly expensive country to visit, perfect for a stopover and less than perfect for a vacation. 

One of the growth areas in Icelandic business during recent years is the world of cryptocurrency mining. Which, despite its name, isn't about a team of workers going down the pit to dig up a bitcoin or two, no it is vast warehouses of computers scouring data to find the all elusive bits of currency. Iceland is home to one of the largest such mining operations in the world, that also uses the vast majority if the country's natural energy supplies. Yet, whilst this is mining is a great and lucrative business, it employs relatively few people, which in turn means fewer visitors to the country and less of a boost to the local communities that the extra tourism would bring. Perhaps, it is the cryptocurrency mining businesses that is the cause for Chinese visitor numbers to Iceland increasing so much recently. or maybe that's more to do with the increased number of flights to both Europe and North America by Chinese airlines.

The future for the Icelandic aviation industry may be a little uncertain at the moment and those dark clouds of concern hang in the air, we should perhaps expect some further consolidation of operations from both main airlines before the summer sun of 2019 returns.
Icelandair hope better fuel efficiency of the Boeing 737 Max will cut costs
Photo Icelandair