Icelandair Group hf. (ICEAIR) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of Q4 and full year results of Icelandair. From now on, our investor presentations will be in English as we have more foreign shareholders in our shareholder group. And we also have non-Icelandic Board members within the company and our latest 2 AGMs have been held in English. And for those of you who are attending [Audio Gap] and during the presentation, I encourage you to e-mail questions to us. The address is [email protected]. But before we start the presentation, I would like to say that -- our thoughts here at Icelandair are with the people on part of the aircraft, small aircraft, that is missing here in Iceland and their friends and relatives. Before we go into the financials, I would like to start with or highlight the 4 key points. First of all, we saw a big operational improvements in last quarter 2021, and we have to go back to 2016 to see a better EBIT number. And as before, our balance sheet is very strong. The total liquidity is over USD 400 million. We have ambitious plans for this year, the size of our current flight schedule amounts to circa 80% of 2019. And our goal is to return to profitability with EBIT ratio of 3% to 5%. Of course, the final outcome is subject to external factors as the industry is still facing uncertainty and volatility in fuel prices and so on. And in recent years, we have taken a lot of actions to streamline, simplify and improve our operations. Icelandair, as I see it, a very different, and I firmly believe a stronger company than it was a few years back. But now to the financials, please, Ivar.

Thank you, Bogi, and good morning all. Starting with the fourth quarter, which was surely an eventful quarter following the steep ramp-up of the operations in the third quarter, the development during the quarter was quite impacted by the pandemic with Delta having an impact early on. Then came a period of strong booking inflow fueled by the opening of U.S. borders to European travelers in November. And then setback in the emerging -- with the emerging of Omicron towards the end of November. But let's just dive into the numbers a little bit. Total operating income for the quarter was $193 million and more than tripled compared to last year. Transport revenue was $157 million, of which passenger revenue were $122 million. Cargo revenue were $24 million and revenue from aircraft and crew lease was $14 million. Other operating revenue amounted to $22 million, of which revenue from tourism was $13 million, and other service-related revenue was $6 million to name the biggest items. The sale of Iceland Travel was completed on December 1, and thus the operating income and costs are included until sales date, while the gain on the sale as such is accounted for below EBIT. Operating expenses were $201 million, increasing by $107 million. The increase was driven by the higher production levels and to some extent, higher fuel price. Of the total operating expenses, salary and related expenses were $67 million. Fuel costs were $43 million and other aviation expenses amounted to $42 million. Other operating expenses amounted to $49 million, with most items increasing in line with more production. And for example, with substantial cost increase of the tourism service expense that rose from almost nothing last year to $6 million this year. EBIT improved by $25 million between years and net loss in the quarter was $39 million and decreased from last year by $44 million. Capacity within the route network was around 65% of 2019 in the quarter compared to 50% in the third quarter. We carried around 545,000 passengers compared to only 52,000 last year. The To market was the largest market and accounted for 45% of total passengers. But transatlantic market grew substantially and was at 32% in the month of December. Cargo operation was strong with volumes and revenues exceeding pre-COVID levels. Freight ton kilometers increased 26% between years and exceeded the same period in 2019 by 19%. Volume increased in all markets with the most increase in the transit market of 38%. And revenue from leasing continued to recover, and the number of Sold block hours increased there by 64%. Within the route network, the positive RASK development continued this time driven by higher passenger load factors of 70.3%, which improved by 2 percentage points compared to the third quarter. And despite the -- the unit revenue in the quarter was merely 3% below the same period in 2019. On the cost side, we saw increase in unit costs, both due to seasonal fluctuations in capacity, higher fuel prices and higher salary costs as we are preparing for the growth into 2022. We are, for example, ramping up the 737 MAX capacity this winter, which requires gradual onboarding of pilots as they train for the new type, for example. Fuel price was higher than in the quarter -- same quarter last year and effective fuel price adjusting for hedges was $777 per ton. And the market price was, in fact, 91% higher than last year. Looking at the hedge positions, and the mark-to-market value of the open contracts were at 1.1 million, with the average swap price of $663 per ton. The contract, they covered 29% and 23%, respectively, of the expected fuel consumption for the next 2 quarters. At the end of the year, total cash and marketable securities amounted to $263 million. Additionally, the company had access to uncommitted credit lines from PAX in the amount of $52 million. And the government backstop credit facility was $120 million on top of that. And still excluding the government backline, the liquidity was at a healthy level of $315 million at year-end. The development liquidity during the quarter included a positive $6 million cash flow from operation. And this was, in fact, the third consecutive quarter that we saw operating cash flow being positive. Cash used in investing activities was $10 million and financing activities added another $15 million on top of that. Looking at the full year, the overall operating income increased by $151 million. Operating expense was $88 million higher, resulting in an EBIT improvement of $227 million from 2020. And the net loss improvement between years was at $271 million. The year 2021 was really a tale of 2 halves, with the first half progressing slowly and then came the turnaround in the second half with improvements in terms of operating income, profitability as well as liquidity can be pretty well seen on this slide. Looking a little bit at the deferred income liability year-end. It amounted to $259 million. Of those, there were $140 million of unflown flight tickets, travel vouchers were at $84 million, frequent flyer point liability at $20 million and other prepayments, which include, among other things, group bookings amounted to $15 million. And finally, we are, as Bogi mentioned, ending the year with a strong financial position. Total assets amounted to $1,172 million at year-end, with the increase in current assets, primarily driven by the improved cash position kind of explaining the difference. The noncurrent assets, they increased net by $11 million, with the main addition being the lease assets of 4 aircraft that we added during the year, including 3 new MAX's. But against that were then the reduction of or depreciation in operating assets and sale of operating assets over the course of the year. Equity ratio at year-end was at 19%. But when we exclude the temporary effects of warrants, the ratio was closer to 21%. Total financial liabilities amounted to $496 million, and increased during the year due to the additions of the leased aircraft that I mentioned before. But due to the positive cash development, the net financial liabilities actually reduced slightly over the course of the year. And with that, I give the call over to Bogi.

Thank you, Ivar. And as I said in the beginning, if you have some questions on the numbers or something else, please send us an e-mail. The address is [email protected]. [Audio Gap] Within our company and our plans for the year that recently started and the outlook as we see it. And as we have been saying throughout the pandemic, our main focus has been on preserving the infrastructure and maintaining a strong balance sheet, just to be able to ramp up our network when the travel restrictions would be lifted, and demand would pick up. And as Ivar went through, that is exactly what we did last year. We were in a high [indiscernible] keeping the lights on with a strong focus on the liquidity. But in June, we started to ramp up the network. And in Q3, we were up to 50% of pre-COVID levels with 68% load factor. And in Q4, 65% of pre-COVID levels with 70% load factor. Of course, there were some roadblocks on the way, as we have been talking about. The Delta variant in August and September and the Omicron in December. So bearing that in mind, we are very satisfied with the outcome, almost 70% load factor in the second half of the year. We have been ramping up faster and with higher load factor than most other airlines in the Nordic region. And we were the only Nordic airline we know of that generated profit in 1 quarter last year. And during the year, total number of passengers in our network amounted to 1.5 million. 85% of them traveled in the second half of the year. And majority of our passengers were coming to Iceland are 47%. And as I said in the beginning, we have been taking a lot of actions to simplify and streamline our operations and strengthen our balance sheet. Just to name a few actions. We sold the remaining 25% stake of Icelandair Hotels and 100% stake in Iceland Travel, as Ivar went through. Both transactions simplify our operational focus and strengthened our balance sheet. We have been talking about the integration of our domestic operations Air Iceland Connect and Icelandair, that was finalized in the first quarter last year. And by consolidating the networks and the distribution systems, we are strengthening the revenue generation and at the same time, we are decreasing the cost considerably. All support functions were consolidated and the management layer at Air Iceland Connect was removed. And in May, Tenerife destination that has only been served until now at our travel agency VITA was taken into Icelandair's route network. The change has been a success and strengthened Tenerife considerably as a destination. The next step was taken recently when Alicante was added to the network and the plan is to add more leisure destinations to the network that were previously only sold by VITA, the travel agency. By that, the sales and marketing window for those destinations gets much bigger and this change is also in line with one of our core values simplicity. Recently, we finalized the revision of our organizational structure to reflect our simplified operations and also just to be better equipped to implement our strategy and reach our goals. We did split our commercial function to put more focus on the revenue generation on one hand and customer experience on the other hand. And as data and digital transformation will be critical in future customer experience, digital and data now has an increased focus as a stand-alone division represented on the Executive Committee. We have also been putting a lot of effort into reviewing our long-term fee strategy with international aviation advisors joined our team of experts. And in a nutshell, the outcome of the review is the current fleet composition is very well suited for our current network. Therefore, it is most likely that the near future growth of network will be supported by current aircraft types. However, we assume that the circa in the year 2026 last year will be the last year we will operate the Boeing 757 in our passenger network. And this situation provides several options for our long-term fleet, which is a very good position to be in. It could be a MAX fleet with wide bodies or we could start the transition into Airbus fleet in the second half of this decade. And in the next 12 months or so, we will start to lay the groundwork for our long-term fleet, which will most likely include a campaign and a competition between the aircraft providers. And talking about the strategy. Sustainability is there at the center, reducing our impact on the environment -- on our environment is one of our key focus. And for years, we have been working on improving our environmental performance. We have set ambitious goals of reducing our carbon emission in addition to our commitment to reach net zero emissions by 2050, which is in line with the industry. We have set a target of reducing our carbon emission by 50% by 2030 compared to 2019 levels. And from now on, we will start publishing metrics regarding our mission in our monthly traffic data. Reaching these goals will require a combination of measures such as fleet renewal, operational improvements, the implementation of sustainable aviation fuels and as well as carbon offsetting. This is, of course, a very important journey and we see great opportunities for Iceland in being at the forefront in the development of sustainable aviation, and we should start here domestically. Then to our 2022 flight schedule. We are planning for circa 80% of pre-COVID levels with 50 destinations. The connections within the network are just shy of 700 and during the high season, we will have 420 weekly departures from [ Keflavik and Reykjavik]. To fly this schedule, we will have a fleet of 35 aircraft, there are 5 Turboprops serving the domestic and Greenland markets. We will have 14 Boeing MAX's and the 757 fleet is now down to 13 aircraft. In addition, our leasing business roughly has 9 aircraft, and the cargo fleet will go up to 4 aircraft later this year. So in total, the fleet is going up to 46 aircraft for the whole year. During the high season, we will operate 2 banks out of [ Keflavik ] our first bank and the bigger of the 2 is operated throughout the year with departures to Europe between 7 and 8 in the morning, and North America have departures in the afternoon are around 5 p.m. The second bank will start around the middle of May and we will operate the second bank onto mid-September. It includes selected European and North America gateways, which are also operated in the first bank. But with the departures around 3 hours later than in the first bank. And going forward, our plan is to build up and strengthen the second bank with more frequency, more destination and extended season. And on top of those 2 banks, we have connecting flights that are not part of a specific bank. That is day flights to Boston that connect to night flights to selected European destinations, which further diversifies our product offering in all markets. The Boston flights -- daily Boston flights or the day Boston flights are also a very good product for the Icelandic market. And as we have announced, we have 4 new destinations this year. Raleigh Durham fits perfectly into the first bank with both strong Y and To potential. Rome connects between the first and second bank, displaying the potential of the 2 bank structure to add European destinations further away from Iceland to our Y offering. With Nice and Salzburg, we are focusing mostly on To and from leisure markets. All the new destinations have been well received by our customers and bookings are in line with our expectations. And further on the bookings, in recent months, our booking flow has developed in line with the pandemic and positive news come out, our bookings pick up and vice versa. Late November, bookings started to slow down because of the Omicron variant and that downturn lasted on to middle of January. When bookings started to pick up again and daily bookings have been strong ever since. In general, it applies to all markets and all destinations. There is definitely a pent-up demand and we have a very strong network and a strong product to capture the demand. Our cargo operations have been able to seize opportunities in the market and returned strong results in recent years. The outlook there is still very positive, and we have laid out plans to strengthen Iceland as a cargo hub and we have made considerable new investments in that respect. Two 767 cargo aircraft will be added this autumn, taking the cargo fleet to 4 aircraft, as I mentioned before. And regarding our leasing operations, the operational environment there has been improving. And the goal is to return to profitability this year after 2 challenging years. And then to our financial guidance for the year 2022. The numbers are, of course, subject to development of various external factors, such as the pandemic, fuel prices, currencies and so on. We are assuming a rather high fuel price that the average fuel price will be around USD 800 per ton throughout the year and that the airlines will have to at least partially absorb the fuel price increase in the short and the medium term. Omicron is also having a negative impact on the traffic flow now in the first quarter, and therefore, the profitability in third quarter. But however, even for these headwinds, our goal is to return to positive net results for the year and with EBIT ratio of 3% to 5%. We can say that our financial guidance for the year reflects that we are optimistic that we have reached a turning point, and we are going into some kind of normalcy in our operations and environment. But what a ride the last 2 years have been. We, at Icelandair, we can be extremely proud of what we have achieved by being able to navigate successfully through the most serious crisis that the airline industry has ever experienced. And coming out of the situation out of the pandemic with a strong balance sheet, clear focus, streamlined operations and as always, excellent team of employees, we firmly believe we have all the opportunities to create value for our stakeholders. Thank you. Now I hope we have some good questions. Everything still quiet on that front. Maybe on the fleet strategy -- you are responsible for that. Can you maybe give us a bit more insight on -- while we wait for some questions.

Yes, sure. Like I think you mentioned the most important points. We were quite satisfied with the result of the work we did that kind of supported our belief that the current fleet that we have is quite -- it's a good mix for our business at the moment. Of course, we know that the workhorse, the 757 is coming to the end of its life. And I think for us as a company, the most important point is that we have a few options to work with going forward. And as you mentioned, we will be preparing this year kind of to have a dialogue with the OEMs and see where that takes us. And in the meantime, we are renewing the fleet. I think the MAX's, 5 MAX's this year, which is, of course, a big issue for Icelandair. So we are looking forward to it.

No questions. Obviously, very clear. Everything. Maybe 1 additional point regarding the fuel price -- we have been getting some questions from analysts regarding that. And as I said during my presentation, we are assuming that the fuel price will be rather high this year, around $800 per ton on average. And we are also assuming that airlines and us, we have to absorb the fuel price partially, we are not -- we will not be able to pass it fully on to the fares, and we account for that in the guidance that we just disclosed.

No questions from the audience? One brave person came with a question.

Here is 1 question from Halto Christensen at [indiscernible] regarding the company's strategy regarding hedging.

Ivar, if you take that hedging strategy.

Yes. As we went through in the presentation, we have -- we do have hedges in place for the -- and those hedges are all hedges that were in place before the financial restructuring back in 2020. There is a bit of a change in the market for hedging, I would say. I mean airlines are starting to take cautious steps towards more hedging. And what we will be doing in the coming weeks is that we will be building up a gradual hedge position for the Q3 and the Q4 as the bookings start to come in. But for now, those steps will be conservative, and we will not be going up to the hedging in line with the policy we had before, but some steps will be taken in that regard in the coming weeks and months.

But as the presentation stated, the hedging that we have in place are helping us a bit assuming that the fuel price will be around $800, the strike price in our -- of average are below 6 -- 700. So that's positive, at least.

We have one question from Christian [indiscernible] He is asking about the airfare developments.

We have been seeing the -- as Ivar went through the RASK has been improving. And of course, we are focusing a lot on that. We are seeing inflation in a lot of our cost items. We have been talking about the fuel. And RASK develops in line with the many variables. It's how you manage the network. It's how you sell. So it's not just about the competition, of course, the competition plays a big part there. But it's also, for example, if you compare our RASK or yields to last quarter 2021 to 2018. In 2018, we sold more of our seats as Economy Light seats. We have been focusing more on selling seats with better products and so on. We have been able to get better utilization on the Saga Class seats and so on. So there are many variables there. But -- and we are, of course, rather quite optimistic for the year and the guidance that we have in place. So -- and we have published reflect that there is a pent-up demand. And we have a very strong network and -- but the competition will be there. So Ivar, would you like to add something to this?

No. I think this was a fair presentation of the situation. But markets are very competitive and we are participating in those.

But as we have been saying throughout the pandemic and now, our main focus is to return to sustainable operations. And that means we are not going to sell a lot of seats below cost or the cost of production. So that is our main focus or main strategy to return to sustainable profitability and our revenue management strategy and everything that we do in our sales and marketing activities will reflect that and also on how we manage the network.

Here's a question from Gretar Axelsson from Almenni Pension Funds, asking about how do you view the near-term demand for the To market in Iceland.

As we have been saying, there is a pent-up demand. There is a strong interest from tourists in all our markets to visit Iceland and the booking flow is strong. So the near-term outlook for that is just positive and the capacity into Iceland into Keflavik during the summer is quite -- so lot of capacity coming in. And -- but the outlook for the Iceland tourism market is in that respect, quite good. The question is about the infrastructure and so on. We are having a dialogue with people in the industry and there is some concerns there, but there is definitely a demand for -- from tourists in all our markets to visit Iceland.

And the follow-up question, has the duration of prepayments shortened with increased bookings? Or is the maturities still related to early bookings?

Ivar, please.

I'm not sure that I understand the question. So with regards to the -- could you repeat the question? Yes, please.

Has the duration of prepayments shortened with increased bookings? Or is it the -- or is the majority still related to early bookings?

Booking advance.

Okay. So the booking advance. It's -- I mean we are seeing the booking advance kind of increasing now as more of the inflow at the moment is for the summer bookings. So in that sense, yes, we are seeing the advanced bookings kind of increasing.

Here, we have a question from [ Kurt Hoffman ]. He is a correspondent for ATW in Washington and Aviation Week in Hamburg. Of how many new aircraft in the future, what do you think is necessary to order? How many? Are you thinking about A321XLR and maybe how -- wide bodies like 787 or the A330neo. When do you think it is possible to -- when do you -- will you announce your decision?

Maybe I'll start there and then you take over. First of all, we are not able to disclose any number regarding the future fleet, as I said, we are still facing a lot of uncertainty. We are planning to operate 30 aircraft in the passenger network this year. And of course, our plans for the future is to grow the network and grow the fleet, but we are not able to disclose any number regarding the second half of the decade. I have been looking at the Airbus A321LR, and that is definitely an option for us in the second half of the decade and one of the options I mentioned. We also have the option going forward to operate our MAX fleet alongside with, for example, 767, which we have in our fleet and we have a great experience of and lastly good transition into 787. So we have quite a lot of options in front of us, which is a great situation to be in.

And here's a follow-up question. Many airlines are focusing on the transatlantic business this summer. Do you think there will be too much capacity on the North Atlantic markets? And secondly, does Icelandair have any plans to join a global alliance?

Regarding the second question first, we have analyzed that option quite thoroughly quite regularly as well in every 3 or 4th year, so to say. And the conclusion has been so far to we can say, we on our own, but our strategy has been to partner up with airline quite closely. So like we are doing with JetBlue on the East Coast in North America and Alaska on the West Coast and with some airlines into Europe. And that is still our strategy, and I don't see any changes there near term regarding the competition on the Transatlantic, that's right. There is a lot of capacity coming in. Asia is still quite weak, and some airlines are putting their capacity from there to the transatlantic market. But that is just the environment that we are in. So we have to just to optimize our network and we can say, manage the network based on how the competition is moving and so on.

So there are no further questions through e-mails at least.

Okay. Thank you for good questions. And we are very excited for the next few months. As I said, we believe that we have reached some kind of a turning point, and we are into some kind of a normalcy. So it will be very interesting to meet you again when we go through the first quarter and the outlook at that time in around 3 months' time. So thank you very much for today.

Thank you.