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

Good morning, and welcome to the presentation of Icelandair's Q1 Results. I'm Bogi, the CEO, and with me is Ivar Kristinsson, our CFO. And following our presentation, we will answer questions. And you can send them over to the e-mail address [email protected]. And you can also send them in Icelandic if you want. But then to the highlights of the information we published yesterday. The EBIT result of the quarter, first quarter was mostly in line with our expectations. We saw a strong load factor improvement and revenues more than tripled year-on-year. Spike in fuel prices, of course, had a negative impact. And the quarter was also impacted by cost related to the high season like onboarding and training and training cost of employees. And in January and February, we had the Omicron variant affecting demand. And we needed to cut down the flight schedule a bit or by 50% from our previous plans. Our leasing and cargo business both returned profit during the quarter, and the same goes for VITA, our travel agency and our domestic operations was on a good track in the quarter. Our balance sheet was very strong at the end of the quarter. Total liquidity amounted to over $380 million without the government guaranteed credit line, which was terminated in February without ever utilizing it. And there are clear signs of pent-up demand and the outlook for the high season is strong. But I will talk more about the outlook and our plans a bit later during the presentation. So Ivar, over to you.

Thank you, Bogi. Let's just start with the high-level overview of the operating results. As we announced yesterday then, EBIT in the quarter was negative by $58 million compared to $46 million last year. Total operating income was $159 million and more than tripled year-on-year. There were many positive trends on the revenue side. And we saw good momentum both in revenue and forward bookings as the quarter progressed. On the route network or in the new route network then the overall revenue improved significantly. And in fact, despite the Omicron impact, then our unit revenue exceeded the numbers we had in the years pre-COVID. Cargo revenues continued to be strong and the leasing business improved year-on-year. Both leasing and cargo were profitable during the quarter, as Bogi mentioned. On the operating cost side then, we can see that the cost increased on the significantly higher production output that we produced as well as we had rising fuel costs with the operating expenses rising to $190 million for the quarter. Interest expense net of interest income was $4.1 million. And the resulting earnings before tax was negative $62.5 million. Looking at the capacity then the total capacity in the route network nine-folded compared to previous year. And we reached 58% of the Q1 2019 capacity levels. Total number of passengers were 422,000 of which close to 200,000 were on the 2 markets. And now the transatlantic market represented around 21% of the total. But last year, that market was more or less nonexistent. In the domestic market, the market within Iceland, then, we had 52,000 passengers and had a good increase between years. Cargo that we moved was more or less the same as last year. We had some export -- or the export of fish from Iceland decreased somewhat as a consequence of some -- a few weather disruptions in the quarter. But to counter that, we had important transit freight that increased. Block hours sold in the leasing operation increased 4%. And we saw good improvement there despite that we are still relatively low there compared to pre-COVID levels. On the emissions that we have started to report on a regular basis and we saw the CO2 emission reduce 43% year-on-year. And this was achieved through improved passenger load factor and more flying on the 737 MAX. Let's talk a little bit about the revenue and the cost within the route network. We saw a positive development in the unit revenue, the RASK in the quarter. And typically, Q1 is a low quarter within the year. The unit revenue was $0.065 and it improved steadily month by month within the quarter as we saw the demand grew as evidenced by the increase in the load factor. The load factor was 67% for the full quarter. But it developed quite positively from 59% in January to 74% in March at the same time that we increased the capacity by 30% within the quarter. We saw good revenue trend in fare premium with higher load factor compared to pre-COVID years. And yield improvements as well in the economy with better fare family mix with proportionately less sale of economy light fares. And the unit revenue was in fact higher than both in '20 and 2019. On the cost side, we do see that fuel price had a significant impact on the unit cost and per unit increased 34% between Q4 of '21 to Q1 '22. Looking at CASK ex-fuel and that increased by 18% over the same period. And there are a few points to mention there. One is that we -- as Bogi mentioned, we did cut our planned capacity in the quarter due to the Omicron, which resulted in around 20% less production in Q1 than in Q1. And that puts the pressure on the unit cost, but was at the same time done to preserve the RASK development. And as in the previous quarters, we are seeing higher impact of the continued ramp-up of our -- on our operation than in a normal year. And as can be see there on the chart in the middle, the planned growth for Q3 versus Q1 is almost double what we have been planning or doing in the past few years. And for that reason, we, for example, hired close to 200 employees during the quarter, both pilots, cabin crew and ground handling personnel, which will become more productive as we progress into Q2 and Q3. We had also some weather-related incidents in the month. And in fact we had 9 severe disruptions. And we had to cancel around 100 trips due to that, thereof 80 were on the domestic market. On the salaries then, they amounted to $66.2 million in the quarter and increased by $31 million year-on-year as the number of full-time employees rose by 935 as we continue to grow the operation. And when comparing the markets, we have to also take into account the general rate increases in the Icelandic market at the beginning of this year. For the quarter, fuel price was much higher than what we've seen in recent quarters. And it was, in fact, 75% higher than last year. Our fuel consumption was 29% hedged for the quarter at $664 per ton, which resulted in the average effective fuel price of close to $900 per ton. The cost of EU carbon increased in the quarter. And the total expense for the quarter was $2.8 million for that category. We are increasing the flights on the MAX aircraft. And if we just look at the flights that we flew on the MAX, then we managed to save around USD 7 million compared to what it would have been without the MAX. And finally, the mark-to-market value of our hedge contracts at Q1 were around $8.3 million with an average swap price of $700 -- or close to $800 per ton. Liquidity at the end of the quarter was strong. We had cash and marketable securities in the amount of $331 million compared to $263 million at the start of the year. And in addition, we had access to undrawn credit lines in the amount of $52 million, taking the liquidity to $383 million. The development in the liquidity in the quarter included a very positive $84 million cash generation from operation, which was helped by the strong inflow during the quarter, the booking inflow. We also invested quite heavily in the quarter. Gross CapEx was around $166 million, 3 MAX is included in there and one 767 aircraft that we will convert into a freighter later this year. The funding of that conversion is through a sale on leaseback that will happen later this year. But against that gross CapEx, we sold and leased back 2 of those 3 MAX aircraft. So the net CapEx was around $64 million. Financing amounted to net $39 million with debt financing for the one of the MAXs, we had $18 million in proceeds from the issuance of new shares in February to warrant holders and repayments of borrowings and lease liabilities in the quarter amounted to $21.5 million. Looking at the balance sheet, we can see that we have a seasonal development there. Total assets were around $1.47 billion at the quarter end. And that is explained by the increase in noncurrent assets, those aircraft acquisitions I mentioned. And on the current assets, we are also seeing increase in cash and cash equivalents, trade receivables as we are building up the bookings. And you can also see that impact on the liability -- current liability sides, where deferred income rose by $145 million compared to the start of the year. Equity ratio was at 15%. But if we exclude the temporary effects of the warrants that are exercisable in the summer, then we are at 16%. And finally, financial liabilities amounted to $578 million increased due to those aircraft acquisitions. And net financial liabilities were $247 million, rose by $40 million from the start of the year, helped by the good development in the cash position. So with that Bogi, over to you.

Thank you, Ivar. And as we have been saying, the Omicron variant impacted our operations in January and into the first half of February. But fortunately, the COVID situation has improved a lot since then. And to meet the increased demand, we are constantly bringing more destinations and frequency back to our schedule, and all our aircraft are now being operated. And it is such a nice feeling to be close to normal operations again after 2 years of COVID, seeing colleagues coming back and some of them that have been out for those 2 years. And during the high season, we expect to have around 2,500 full-time employees. And it was our great team that brought the company through the pandemic. And I just can't thank them enough because Icelandair has now a very strong platform to grow in a sustainable way. And that is exactly what we are going to do in the coming months and coming quarters. As you can see here, our current plans for Q2 is to be at 77% of 2019 capacity and 85% in Q3. On May 12, after a few weeks, we will start to serve [ Araletura ] for the first time. We will serve at the destination 4 times per week until middle of September. And later in the summer, we will have the inaugural flights to both Rome and Nice. The total number of destinations during the year will be 49. That means with the network effect, we will have over 600 connections, which clearly depicts the strength of our network. And we will definitely continue to utilize that strength and further out the frequency and destinations to the network in the coming years. And on to the demand that we are seeing, April is almost over now. And the load factor is improving compared to previous months. So we will see better load factor in April than in March. And the demand on the to and from markets is very strong. Via the [ Via ] market is lagging a little bit behind, most likely because of the testing requirements into the U.S. And we expect to see that improve when the requirements will be lifted. And we are still seeing the late booking trend, more late booking trend than in previous years. So our customers are booking closer to departure than pre-COVID. And therefore, it's very positive that the current booked load factor for the coming months is almost as high now as it was at the same time in 2019. Talking about the other businesses within the group, the operational environment for Loftleioir, our leasing business has been improving. And we expect to see that development continue over the next quarters. And as the passenger network recovers, the freight is moving back to the [indiscernible] space, partly at least, of the passenger aircraft. And in Q1, just shy of 50% of the freight was transported with the passenger aircraft. In [ 2001 ], we had the COVID situation and the passenger network was in hiatus. All our cargo was transported via the freighters. So that is changing again. And to meet the demand, the cargo demand, we are investing in our cargo fleet, as Ivar mentioned, and 2 767 passenger aircraft will now in May go into cargo conversion. And we assume to have them operational in our cargo fleet in Q4 this year. And then about the outlook. The outlook for the high season is strong. The bookings are strong, as you saw on the previous slide. And we expect to generate a cumulative net profit in quarter 2 and 3 with Q3 considerably stronger of the 2. But because of all the geopolitical unrest in Europe affecting fuel prices and so on, and are just generally causing uncertainty in our markets, especially after the high season, we are not publishing a full year guidance now as we did when we published our Q4 2021 accounts at the beginning of February this year. But even for the uncertainty, we are very optimistic for the future. And we see a lot of opportunities for our business model and route network. And we have built very strong foundations to seize those opportunities. And by that -- or that concludes the presentation. But now to the questions, we hope that we will have some questions from you.

I may be start, Ivar. We were talking now -- you said that our domestic operations were on a good track in Q1. Can you tell us a bit more about that?

Sure. I think in general kind of we have seen a good bounce back of the domestic market. As I mentioned, we saw good improvement in March or in the quarter year-on-year. [Technical difficulty] system and we are seeing kind of finally starting to reap the benefits of the merger of the domestic operation into the mainland service as we could say. And we do see further opportunities there kind of connecting the networks betters. We are also seeing good synergies from the merger. And -- but at the same time, we also see a lot of opportunities to do better. Greenland is opening up now, so that's good.

Maybe another question for me regarding the fleet for the summer. People are always interested in our fleet. And then I'm talking about the passenger network international.

Yes. Yes, the route network. So for the summer, like you might present of the peak -- the capacity in the peak about 85% of 2019. And for that, we need around -- we need 30 aircraft to operate that schedule. And we have the fleet all in place. We are still awaiting deliveries of 2 MAXs from Boeing. We know that there are, in general, just supply chain issues. There is some uncertainty on if those will be delivered on time or not. But we are prepared for that and have contingencies in place in case that we have some delays in that.

Some questions coming in. So everything must be very clear. So we just thank you for attending. And I wish you a enjoyable weekend. Thank you very much.