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

Hello, and welcome to the presentation of Icelandair Q2 results and thank you for joining us. My name is Bogi Bogason, CEO of Icelandair; and here with me is Ivar Kristinsson, our CFO. We have planned to have this meeting on Friday morning. So we apologize for the delay. The reason is I tested positive for COVID last week and had some symptoms. I needed to stay home for a few days. As you will probably notice, I'm not fully recovered, but much better though. And then to the highlights of the information we published last week, first of all, we're very pleased that the Icelandair generated profit in Q2 for the first time since 2017. Net profit was just a short of USD 4 million. All our business unit showed sign of strength and recovered during the quarter, resulting in considerable EBIT improvement despite the high fuel price. Our liquidity continues to strengthen and was over USD 460 million at the end of last quarter. And our focus on optimizing our network in line with underlying demand and the exceptional revenue management resulted in both load factor increase and yield improvements. From April to June, Icelandair recruited about 1,000 employees. And it is great to see all the new people joining the company, not to mention seeing former colleagues coming back. The outlook for the second half of the year is strong. And based on our current assumptions, we expect to generate a cumulative net profit for the period July to December. And looking at our activities during second quarter, it can be seen that the number of passengers were just the shy of 1 million and the load factor was 79%. The load factor rose from 76% in April to 83% in June. And the capacity was about 76% of what we did in 2019. And at the end of the quarter, the [indiscernible] had recovered following the restriction -- lifting of the testing restrictions into the U.S. and both to and from passenger numbers were the second highest that we had ever seen in the second quarter. Cargo volume increased by 4% where import drove the growth and sold block hours in our leasing operations decreased by 6%. However, the mix change of the block hours had a favorable impact on revenues compared to last year. The CO2 emission reduced by 24% through improved load factor and more utilization of the Boeing 737 MAX aircraft. And as we have announced, we have ambitious goal of reducing our carbon emission by 50% by 2030 compared to 2019 levels and to be carbon neutral by 2050. And now to the Q2 accounts, Ivar will take us through them. And as always, we will answer questions following the presentation, and we encourage you to send them over via the email [email protected]. Ivar, please.

Thank you, Bogi. Let's just start with a high-level overview of the operating results, and we'll start with the revenue development where the increase in passenger demand drove passenger revenues to $298 million. Our disciplined operational planning and successful revenue management resulted in unit revenue rising more than 40% between years on positive development both in load factor and yields. Cargo revenue continued to be strong, and total cargo revenue rose in line with the freight carriage. Profitability of cargo has, in the short term, been slightly negatively affected by the steep increase in fuel prices. Aircraft and crew lease revenue was $14 million during the quarter, increasing on higher revenue from VIP chartered projects that are now live as well as better performance of the long-term leasing projects that we take on. Both cargo and leasing were profitable for the quarter. Other operating revenue includes $7.5 million from tourism, including the packet sales and chartered flights out of Iceland. And that segment more than doubled compared to last year. Looking at the expenses, then total OpEx excluding depreciation amounted to $301 million and increased cost reflect the increase in the production and the higher fuel costs, but also, we had costs related to the ramp-up as we prepared for the peak summer third quarter. The ramp-up costs are somewhat higher this year than they are in a normal year, as we are ramping up steeper. In the second quarter, we, for example, flew around 76% of the 2019 levels, but in the third quarter, we are stepping that up to 83%. In addition to that, we are still transferring flight crews from the 757 to the more fuel-efficient 737 MAX aircraft. We did that in the second quarter. Aviation expenses were $157 million, of which fuel were $106 million, and I will come back to that in a moment. Other operating expenses were $60.6 million, of which booking fees, customer service costs and crew-related travel costs are the largest items. And those are kind of increasing in line with the significantly increase in scope of business. And depreciation amounted to $26 million and rose by a little more than a million from last year. This all resulted in EBIT being positive by $1.2 million and improved by $63 million from last year. And as Bogi mentioned, it's the first time in a while where we saw a positive EBIT in this quarter. Finance costs were negatively impacted by the exchange rates fluctuation where the dollar strengthened towards the Icelandic krona and other European currencies. But finance cost was also reduced due to the less or reduction in liability related to the warrants that will be exercisable in the third quarter. Total RASK, or revenue per available seat kilometer, in Q2 was $0.08 and compared to $0.056 in the same quarter last year. And as mentioned before, we saw both improvement in load factor and higher yield. There was a positive development in the product mix in the passenger network, including Saga Premium where both the number of passengers on Saga and total revenue was at record level during the quarter. CASK, or the cost per seat kilometer, was $0.083 compared to $0.152 last year. If we exclude the fuel, then cost was $0.056 compared to $0.131 last year. And $0.082 was the same figure in the first quarter. We are increasing the utilization of or improving the utilization of our aircraft and all the resources, which partly explained the development. And we do expect that trend to continue into Q3 as the production peaks for the year. Fuel CASK increased by 29%, which is less than the increase in underlying fuel cost assets, but the difference there is explained by a few things, including the impact of hedging compared to previous year and more flights on the MAX aircraft. We saw salary and related expenses rise to $84 million as average number of full-time employees rose to 3,200 and a total of almost thousand employees were added to payroll during this quarter. If we compare the average FTEs, or full-time equivalents, between years, then those rose by 1,400, the majority being cabin crew, flight crew and airport staff. And finally, all salary and training costs for these new recruits during the quarter was expensed and is a part of the total salary cost as presented here. Looking at fuel of $106 million during the quarter. We saw the average oil market price rise to little less than 1,300 per ton, which is an increase of more than 120% compared to last year. Hedging levels in the quarter equaled around 25% of the consumptions at the average price of $664 per ton, and the MAX fleet that we have available had real positive effect on the fuel expenses and saved around USD 21 million, if we compare that to the flights -- the 757 flights that they have replaced. Looking forward, then current hedge levels equal 25% of the consumption in Q3 and Q4 this year. The majority of the Q3 hedge is at an average price of $935 per ton with the remainder and the Q4 hedging being done through a 4-way option collar where the structure provides an upside protection from the fuel price of $1,300 and bears a downside risk from $1,077 per hedged ton. Turning to liquidity, then total liquidity remained very strong at $463 million at the end of the quarter, thereof were cash and marketable securities that amounted to $411 and then on from credit line amounted to $52 million. Net cash from operation was strong and amounted to $122 million during the quarter. Cash in -- used in investing activities totaled $27 million, of which $23 million were net investments in aircraft assets during the quarter. And net cash used in financing was $15 million, which consisted of repayment of borrowings of $6 million and $9 million were repayment of a lease liability. And finally, looking at the balance sheet, then it amounted to $1.5 billion at the end of the quarter, increasing from $1.2 billion from the start of the year. And this increase is largely due to the seasonal built-up of flight bookings for the summer, but nonetheless, operating and right of use assets, they increased by $107 million from the start of the year as we purchased MAX aircraft, leased in 3 and had some overall done on other aircraft and some engines. Equity amounted to $204 million. And the equity ratio at the end of the quarter was at 14%, which is typically a low point for the year compared to 19% at the beginning of the year. Total debt was $580 million and increased during the quarter due to the aircraft investments that I mentioned before. Net debt was $169 million and decreased by almost or little more than $63 million, as cash flow was strong and that more than made that for the increase in the total debt. And Bogi, back to you on the business outlook.

Thank you, Ivar. Here's a few slides on the second half of the year and the future. First of all, as has been seen in the media and probably many of you have experienced, the industry is facing challenges caused by lack of manpower at the international airports. There have also been supply chain problems, resulting in aircraft maintenance delays. The situation -- that situation has negatively impacted our network, the on-time performance and our passenger experience. However, our extensive flight schedules with many destinations and high frequency has helped us a lot dealing with the disruptions, and our employees have been going the extra mile to minimize the impact on our customers. And I'd specially like to thank them all for their hard work. I'd also like to thank our customers for their by patience and the cooperation during the last few months. And most likely, the industry will face challenges for the remainder of the high season. And we at Icelandair, we will, of course, continue to do what we can to provide the smooth and enjoyable travel experience for our customers. And as Ivar mentioned, the MAX aircraft saved us millions of dollars just in quarter 2, and they have actually been a game changer for our operations. And to support our growth and sustainability targets, we will continue to add the MAX aircraft to our fleet. This year, we have already taken delivery of 3 new MAXes, and the fourth one will be delivered to us before the end of this month, taking the MAX fleet up to 14 aircraft. And at the end of June as we announced, we signed a sale and leaseback agreement for 2 new Boeing 737 MAXes with delivery planned in the fall of '23 after the high season. And additionally, we recently signed a LOI for purchase of 4 additional MAXes with delivery this winter. So those transactions will bring the total number of the MAX aircraft in our fleet up to 20 planes, MAX aircraft. Then to our production plans for the remainder of the year. In Q3, we plan to produce 83% of 2019 capacity and go up to 90% in Q4. So we are slowly but surely getting back to pre-COVID production levels. And the bookings for the months ahead are strong in all our markets. As we see it now, the load factor in July will be higher than it was in June when it was over 83%. We also expect to see unit revenues continue to improve in quarter 3. The booked load factor now is higher in all months in the second half of the year, and it was at the same time in 2019. Our cargo and leasing operations are also performing well. And we expect both businesses or business segments to generate profit on a whole year basis, even though high fuel prices impacting margins. And as we have said before in Q4, we will increase our cargo capacity when 2 767-300 freighters will be added to the fleet. So to sum it up, the outlook is good and has been improving. Q3 profitability is expected to be stronger than last year, and we expect to generate accumulated net profit for the second half of the year. However, external factors such as unrest in Eastern Europe, inflation, volatility and fuel prices and potential new COVID waves are creating some uncertainty in our environment, especially for the last few months of the year. But even for that, even for the uncertainty, external uncertainty, at Icelandair, we're very optimistic and excited for the future of our company. And together, we, the employees of Icelandair, we will seize the opportunities ahead of us and face the challenges ahead as well. So this concludes the presentation, and now we would welcome your questions via the email, [email protected]. Nothing coming in. We will wait for half a minute. No questions are coming in. And I'm feeling a bit under the weather. So I think we just wish you all best rest of the summer. And we hope -- we look forward to go through the Q3 results with you in October. Thank you very much.