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

Good morning, all, and welcome to the presentation of Icelandair's Q3 results and thank you for joining us. My name is Bogi Bogason, CEO of Icelandair; and here with me is Ivar Kristinsson, our CFO. And as we go through the material, we encourage you to send us questions. Our e-mail regarding that is ir@icelandair.is. But first, few key points from the information we published yesterday afternoon. And bearing in mind the high fuel price and other headwinds, we are very pleased and proud of returning EBIT of USD 93 million and net profit of USD 58 million during the quarter. And the financial position of the company was very strong at the end of the quarter with cash and cash equivalent at a record level at September end. The international route network capacity was 82% of what we did in 2019, but the company has never generated as high passenger revenue number in 1 quarter. And on the outlook, the capacity in this quarter, quarter 4, will be around 98% of 2019 levels and the booking flow is strong into the quarter and we are expecting a full year EBIT margin to be in the range of 1% to 3%. And looking at some key metrics in the quarter. Number of passengers more than doubled from last year and it's great that our via market has recovered to a normal level almost accounting for 43% of the total number of passengers in the third quarter. And passengers on the to market were almost 600,000 or 41% and from passengers were 11% of total passengers. Our cargo business saw some decline in demand especially in the export market, but continued to contribute positively into Icelandair's operations. Sold block hours in the leasing operations increased by 18%. However, the revenue increase was higher. And we reduced our CO2 emission by 20% per operational ton kilometer compared to the same quarter last year. That was mainly driven by more flying on the MAX as well as an improved load factor. And our company Icelandair has set clear and ambitious goals of reducing the carbon emission and the goal is to reduce it by 50% per operational ton kilometer by 2030 compared to 2019 and the decrease now is 18% from 2019. So we are on a good track in that respect. And as I said earlier, we are extremely proud and pleased with the results of the third quarter. It's a clear sign of this progress that we are making towards becoming a financially sustainable company after quite a few turbulent years. And I want to use this opportunity to thank every employee at Icelandair for the great work and contribution. It's not just about the operational result. Our people have also delivered our service and product to our customer as best as they can in often very challenging conditions. But Ivar, now take us -- please take us through the financials.

Thank you, Bogi. And as I start it, I just would like to start with echoing your words and congratulate our people on achieving these good results. But now to the numbers. We certainly had some very strong numbers for this quarter, I will go through in some detail here and make some comparison to the same quarter last year. If we start with the revenue, then transportation revenue was $452 million, of which passenger revenue was a record $408 million increased by $236 million on 110% increase in revenue passenger kilometers. Cargo revenue amounted to $18 million, down by 16% on less freight carried mainly due to less demand for fish exports. Revenue from aircraft and aircrew lease was $14 million increasing by 40% on the 18% increase in sold block hours as Bogi mentioned earlier. Other operating revenue was $22 million, decreased by $18 million from last year and the main reason there was that revenue from tourism was less due to the divestment we did at the end of last year of the Iceland Travel business. That all sums up to a total of $487 million for the quarter, a $230 million increase. On the cost side then, the operating expenses. Total operating expenses were $360 million. Aviation expenses were $206 million and went up by $115 million driven by a 64% increase in the route network capacity and close to 80% increase in the market price of fuel. Total salaries and related expenses were $75 million. Average number of full-time employees was almost 3,500 increasing by 900 year-on-year and by around 270 on average from the previous quarter. Our other operating expenses amounted to $80 million increasing by $14 million. Most of the costs included there are costs that rose in line with more production apart from the tourist related expenses that has significantly reduced due to the divestment of Iceland Travel as mentioned before. There was an increase in customer service cost this summer that was driven by more passengers of course, but also the disruption that we had in the operation this summer especially at European airports. EBIT for the quarter was this positive $92.7 million. We had a 19% EBIT margin. And the EBIT improved $84.5 million from last year and this was the strongest performance in the third quarter since 2017. Finance costs, they were negatively impacted by the exchange rate development with the U.S. dollar strengthening towards the ISK and European currencies, but also finance cost was impacted by fair value changes due to the exercise of warrants during the quarter. And that resulted all in earnings before tax being $74 million and net profit $58 million. Looking at the unit revenue then. The unit revenue in the route network was $0.092, improved by 38% year-on-year. Load factor was 19 percentage points higher and we had in fact a record load factor this quarter with North America load factor being 89%. Load factor on Saga Premium continued to improve as well and was well above the pre-COVID levels this summer. And then finally, yields they improved in all markets and in both cabins this summer as well. The unit cost ex fuel decreased 8% and was $0.047 compared to $0.051 last year. The decrease was helped by more production, improved resource utilization and as well the FX rate development of the dollar against the ISK and the euro. This summer we had kind of the first full scale summer where we are seeing the impact of the changes that were made to the labor agreement during the financial restructuring 2 years ago and resulted in improved pilot and cabin crew productivity. The improvement was in line with our expectations. But going forward, our team will use this, the experience gained this summer to make improvements to the work schedules for the benefit of our pilot and cabin crew colleagues, but at the same time with the aim to maintain the improved efficiency. Fuel CASK increased 75% and that kind of resulted in all-in CASK of $0.074 or 12% increase compared to last year. The total fuel cost was $137 million and was helped by our larger 737 MAX fleet, which this summer produced 50% of the flying compared to around 33% last year and this contributed positively to lower fuel expense. And the MAX flying in total saved approximately $24 million compared to if the flight would have been on a 757 for example. Our effective fuel price was little more than $1,200 per ton. And our hedging positions if we look at them kind of forward-looking, we are around 35% hedged in Q4 at average price of $1,043 and little less than 30% in the first quarter next year at $1,035 per ton. Looking at the liquidity. Then cash and marketable securities were $321 million, up by $58 million from the beginning of the year. And on the cash flow, the net cash from operation was negative $49 million. The negative cash flow from operation is kind of a norm in this quarter as deferred income typically peaks as we lead into the quarter. Net CapEx was $54 million. That included purchase of 1 737 MAX aircraft that we financed through own funds and also in net CapEx was overhaul of engines and other major components. The positive cash flow from the issuance of new shares in relation to the exercise of warrants was $34 million and that's kind of all warrants that were granted as part of the restructuring back in 2020 and issued as part of the sale of equity to Bain in 2021. They have now been exercised. Repayment of borrowings and lease liabilities was $22 million and that resulted in liquid funds being $373 million. Including the undrawn committed credit lines, that amounted to $52 million at the end of the quarter. And to conclude the finance or the financials, here is an overview of the main balance sheet numbers. And total assets were $1.4 billion, increasing by $263 million. Operating assets increased by $74 million due to the addition of the 2 MAX aircraft, overhaul engines and other heavy maintenance on the owned fleet. And then right-of-use assets or leased assets, they increased by $105 million and those include new lease agreements for 4 new MAXs and 1 767 freighter. Equity was at 20% or equity ratio at 20%. And financial liabilities were at $612 million. Net financial liabilities at $291 million at the end of the quarter. And back over to you, Bogi, to take us through the key takeaways.

Thank you. As has been in the news and even as you know, we have been experiencing some disruptions mainly at the international airports and we were experiencing that during the summer. That is mainly due to lack of staff and some slowdown in supply chains and it has negatively impacted our operations and service level during the summer. And our on-time performance has suffered and our customer net promoter score as well. The NPS score has been below our targets especially in the via and the domestic market and we are doing what we can to improve the situation in this respect. But however, our extensive route network with 3 connection banks in Keflavik, very high frequency and diverse departure times helped a lot in third quarter in handling the disruptions and we were able to minimize the impact on our customers by using the network so to say. And last summer we added 3 new destinations to the network and they all performed in line with our expectations or better. The demand for our service in North Carolina, Raleigh-Durham has been so strong that we decided to extend the operating season until early January and then resume early next spring. And the flight to Rome, which we started as well this summer, departed early mornings and came back late afternoon and connected to the second bank to North America. That product was well received by the via market and creates opportunities for further development between connecting banks. And all in all, the network worked very well this summer. The balance was good and we have a great platform for further sustainable growth of our network into the coming years. And in the current environment where fuel prices have been spiking, inflation is high; strong revenue generation is extremely important. And our third quarter results, they clearly depict the high value of Icelandair's brand, product and service offering and along with strong revenue management, sales, marketing and distribution functions. The improved utilization of our Saga Premium product has helped a lot in increasing unit revenues and our Saga Club gives us opportunity to provide better service to our frequent flyers. All our markets are very dynamic and having sales offices and sales people on the ground in many countries and areas is very valuable. And our own sales during third quarter was about 60% of our total sales, which is a bit higher than in a normal year or pre-COVID years. The reason is it has taken our tour operators and travel agency partners longer to rebound after the pandemic, but we see them coming back very strongly now. And our broad distribution helps us greatly in reaching customers, which would be very expensive to reach through direct means in markets where our brand is, we can say, less visible. And Icelandair has for many years have built valuable partnerships with other airlines, which extends ours and theirs network and generates very important revenues. Our cargo business and leasing business supports our revenue generation as well and profitability. And the infrastructure that you see on the slide here cannot be built overnight and is, as I said in the beginning of this slide, very important when we are facing cost increases we can say all over the place. What has also helped us during the ramp-up in generating capital results is the simplification and streamlining of our operations in recent years. Now we are just focusing on aviation and airline operations instead of being almost everywhere in the tourism industry. With the integration of VITA and Air Iceland Connect into Icelandair, we have been able to create cost efficiency and also strengthen revenue generation. By taking destinations like Tenerife and Alicante into Icelandair's network, the sales window and distribution network is much bigger and the same goes for our domestic and Greenland destinations. And as we already announced, we are increasing the capacity in our cargo operation and by that, building a connecting hub for airfreight here in Iceland in Keflavik. To support that buildup, we are extending and investing in our cargo warehouse in Keflavik and 2 767 freighters will come on the line in the coming months. And the plan is that they will fly 3 to 5 times per week to Chicago, Los Angeles and New York and then almost double daily to Liege in Europe. And talking about the fleet, this summer we operated 14 MAX aircraft and we will add 4 more for summer 2023. And in the fall of 2023, 2 more will be added bringing the MAX fleet up to 20 aircraft. And last month we started our future fleet campaign and the goal is to conclude that process in the coming months. And finally, on the outlook, how we see the next few months. In the fourth quarter our capacity will be around 98% of what we did in 2019 in the same quarter. There is of course some uncertainty due to high inflation and geopolitical unrest. However, the booking status in the fourth quarter is already strong with the bookings out of North America especially strong. And based on all the assumptions that we have in front of us, we are expecting the full year EBIT margin to be at the range of 1% to 3%. So that concludes the material, but now we would welcome your questions. As I said in the beginning, the e-mail address is ir@icelandair.is. Do we have any questions already?

We are waiting for the questions to come in. But maybe to start with, you talk about the future fleet campaign. Would you be able to expand on that a little bit?

Ivar, would you like to take that?

Yes. So that's kind of just in line with what we have already announced or talked about. And we are looking at kind of replacing and growing the fleet and we have asked the OEMs, Airbus and Boeing, for a proposal for aircraft for the 2025 until 2030 period. And we are already in dialogue with them on this and we'll continue to do so in the coming months and hopefully, yes, conclude that at some point next year.

Early next year. Further questions?

Yes, here is 1 question. Can you give an estimation about the net profit for the entire year in U.S. dollars?

What we have -- what we published yesterday is 1% to 3% EBIT margin. And as we saw in Q3 like currency fluctuation impacts the financial items so exactly where we will end, it's rather hard to say. But Ivar, would you like to add something to this?

No. That's just the situation. I mean we can't really tell about the bottom line. There's too most fluctuation there.

And another question. Could you please address the impact of higher interest rates on your leasing payments for the company? Do they follow short-term USD LPR rate?

So I mean on the lease rates, most of our leases are fixed for the entire period. So the aircraft that we've taken on deliveries as of now, the lease for those aircraft are fixed for the remainder of lease period. So yes, so that's the situation.

How do you see next summer in terms of the production, the flight schedule and new destinations?

We have not finalized or concluded our final plans for next year. We are still working on it. It will take us a few more weeks to finalize the schedule. We are analyzing some new opportunities, new destinations and so on. But as we mentioned when we went through the material, there is some uncertainty, inflation is high in all our markets. However, we see lot of opportunities for us for our strong business model and strong network, but it will take us a few more weeks to come out with the final schedule for next year so to say. But we are assuming that we will grow a bit into next year.