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

Good morning, and welcome to the Presentation of Icelandair's Fourth Quarter and Full Year Results of the year 2022. My name is Bogi Nils Bogason, CEO of Icelandair. And here with me is Ivar Kristinsson, our CFO. And as usual, we will start by presenting the financials and talk about the outlook. And following that, we will have a Q&A session. And we encourage you to send us questions via the e-mail address ir@icelandair.is. 2022 was definitely a turnaround year for us at Icelandair. The total income amounted to USD 1.3 billion, and more than doubled. The capacity of our passenger network doubled as well. And at the same time, number of passengers increased by almost 150%, resulting in a considerable improvement in load factor, which was just shy of 80% for the year. And total increase of our employees was almost 50%. And it was our excellent team of employees that made the turnaround happen, and I would like to thank them for that. And we have made important steps towards our ambitious CO2 emission reduction goals with our new generation aircraft and higher load factor. Even for a considerable COVID impact at the beginning of the year, Icelandair returned a slight profit before taxes for the whole year. And if not for currency exchange impact on the income tax asset, we would have returned the net profit for the full year. And that is something that we are extremely pleased and proud of, and it's a testament of the strength of Icelandair's business model and the Icelandair team. And then to the highlights of the information we published last night. In Q4, EBIT improved by USD 90 million, and we must go back to 2015 to see better Q4 results. And the improvement is mainly driven by stronger revenue generation. The financial impact of the disruption, because of bad weather just before Christmas, amounted to USD 7 million. And maturity of that amount is related to disruptions caused by closure of the road to and from the airport, while the airport itself was operational. The Loftleidir, our leasing ground, returned excellent results in the quarter, and our cargo operations contributed positively as well. To the balance sheet, which was strong at the end of last year with over USD 300 million in liquidity, and the equity ratio was just over 90%. And in Q4, we reached 95% of our 2019 capacity, number of passengers during the quarter increased by 50%, and thereof passengers on the via market more than doubled. And then to our plans for this year, 2023. Our flight schedule for the year has the highest number of destinations, frequency and connectivity in our history. There is a strong demand in all our markets, and the booking flow is strong. So we are optimistic that the revenue generation will be healthy in the year -- or for the year. But on the other side, there is high inflation everywhere, cost pressure and high salary increases here in Iceland. And when taking all this into account, our EBIT ratio guidance for the year is in the range of 4% to 6%, but I will talk more about the outlook following Ivar's presentations. But looking at our traffic number in Q4, it can be seen that the capacity in the passenger network and cargo was close to what we did in 2019. Total number of passengers was 860,000, and the via market had recovered with 35% of total passengers. As I said earlier, our leasing business within Loftleidir performed very well and sold block hours increased by 17% between years. And as I also already mentioned, we are making important steps in our CO2 emission reduction goals, and the decrease between years was 21% per operating ton kilometer. And then to the financials, Ivar, please.

Thank you, Bogi, and good morning, everyone. I'm pleased to report the fourth quarter results with strong earnings performance, especially taking into account that this is a seasonally weak quarter in our operation. Starting with the income, then total income amounted to $291 million and increased $98 million. Passenger revenue was $217 million. And as in the third quarter, we enjoyed a record passenger revenue. And those were higher than in 2019 on 95% of that capacity. Cargo revenue was $20 million, down by 18% on somewhat less demand for export but also due to our capacity being somewhat limited early in the quarter as one of our 757 freighter was taking on maintenance. Revenue from aircraft lease was $18 million, increased 23% on 17% increase in sold block hours. Other operating revenue was $18 million and decreased by $4 million, the main reason being lower revenue from tourism industry or tourism, due to the divestment of Iceland Travel that we completed at the end of November 2021. Total operating expenses were $275 million, of which aviation expenses were $129 million, up by $44 million, driven by the 50% more capacity in the quarter as well as close to a 50% increase in fuel costs. Other OpEx was $62 million, increasing by $13 million. And more production is driving most of those cost items, apart from the tourism expenses that are significantly reduced due to that aforementioned divestment of Iceland Travel. Net finance cost, $1.4 million, and those included a foreign gain on -- or gain on foreign exchange of $3.8 million in the quarter. EBIT, negative $16.7 million, slightly less than 6%, improving by $19 million. Net loss, $17.8 million after tax, or after the tax expense of $4.5 million in the quarter. That was impacted by the exchange rate loss on the deferred tax asset. Salaries and related expenses amounted to $84 million and increased by $16 million. The increase is mainly related to increase in production and due to contractual wage or general wage agreements here in Iceland, including the increases from 1st of November this year or '22. Icelandair is continuing to ramp up its production, and that impacts the salary cost as well in the quarter. For example, transition training for MAX pilot started as early as October, as we are preparing for our biggest summer ever, as Bogi mentioned. The average number of full-time employees was 3,050, up by 25%. Aircraft fuel, the biggest cost item on our income statement, was $86 million compared to $42 million last year. The average market price was $1,161 per ton, up by 47%. The larger 737 MAX fleet did positively contribute to the fuel savings. As during the quarter, 64% of all flights were done on the MAX. Hedged fuel was around 36% of the consumption at the average price of $1,067. Looking forward or looking at forward hedges, then we are 37% hedged for the first quarter at an average price of $1,026. And we have started to build up positions for the second and the third quarter as well, currently at USD 928 and USD 911, respectively, per ton. As Bogi mentioned, the improvement year-on-year in our income is largely driven by the stronger revenue generation. And looking at the unit revenue, then our unit revenue was $0.0783, increased 13%. The RASK improvement was both driven by load factor and yield, with Saga Premium performing very well and contributing positively towards the higher unit revenue. Unit cost ex fuel decreased 9% or $0.063, and the unit cost decrease was helped by better utilization of our aircraft, more flying. And on the other hand, it was, to some extent, hit by passenger service and disruption-related cost being higher than last year. Fuel CASK increased 47%. Per ASK, it was $0.025. And although some $0.003 lower than in the third quarter when the fuel -- or market prices peaked. And the result was all-in CASK being 8.8%, 2% higher than last year. Just briefly looking at the 12-month financials. Then we have come -- then it's clear that we have come a long way since the first quarter last year, when we were faced with significant losses and headwinds, both in terms of uncertainty related to COVID, how that would develop as well as rising fuel costs following the start of the war in Ukraine. And taking that into account, it is great to be able to report that full year EBIT improved by $155 million, and ending the year with a slight profit before tax. Liquidity, cash and marketable securities were of $266 million at year-end, in addition to committed credit lines in the amount of $52 million, taking the total liquidity to $318 million. Looking at cash flow during the quarter, the net cash from operation was $34 million. Cash used in -- or net cash used in investing activities totaled $62 million, and that was driven mainly by investment in 1 737 MAX aircraft and overhaul of other engines. And cash used in financing activities were $27 million, and that includes both repayment of lease liabilities and debt. And to the balance sheet, total amount -- total assets amounting to $1.4 billion, increasing from $1.2 billion at the beginning of the year. Operating assets increased by $114 million, primarily driven by the addition of 3 MAX aircraft. And right-of-use lease assets increased by $94 million, due to the lease agreement of 4 new MAXs and 767 freighter. And equity amounted to $273 million, and the equity ratio was 19%. Financial liabilities, $592 million. And net financial liabilities are $326 million, and rising during the year due to the aircraft investments. And now Bogi, if you take us through the key takeaways and outlook.

Thank you, Ivar. And as I mentioned in the beginning, and Ivar went through last year was a turnaround year for Icelandair after 4 challenging and eventful years. COVID impacted us quite a lot in the first quarter of '22, but in Q2, we started a steep ramp-up. And following that, we have been in some kind of normality, so to say. But even though we've had our hands full navigating through the challenging years, we have used the time very well to strengthen and simplify the company to be better equipped to compete and return healthy results in the years ahead. And I will now go through a few of the changes that have been made to our company. Looking a few years back, Icelandair was some kind of a conglomerate in the Icelandic tourism industry, with a holding company organizational setup, resulting in rather complicated and heavy management structure. But now we are just focusing on being a very small, dynamic airline in a very competitive market. Our focus is just on the airline operations and aviation, and we have divested the noncore businesses and integrated or merged all airline activities under one management team. And our shareholder structure has also changed a lot. It is much more diversified now compared to how it was a few years back. And it is also great to have more international shareholders than before and at the same time, to have around 4% of the Icelandic population on board as shareholders. We have, in recent years, invested heavily in our new fleet, new generation aircraft. And at the end of this year, 2023, almost 60% of the fleet will be the new aircraft types. The new generation aircraft has already created new opportunities for Icelandair and will play a key role in developing our network further. Last year, we made very important steps in building an air freight hub here in Iceland. The first 767 freighter was introduced. And the second one will come on the line in April this year. Those aircraft will fly to Los Angeles, Chicago, New York and Liege in Belgium. And the passenger aircraft will, of course, continue to transport airfreight. And combined, the freighters and the passenger network will create a very strong network for the Icelandic import and export, and also transit via Iceland, where we have set goals for considerable growth. Sustainability and responsibility is at the core of our business, and we take our role in the Icelandic economy very seriously. I don't have to mention the importance of Icelandair for the Icelandic tourism industry and the economy in general. And Icelandair is the largest -- is also the largest private employer in Iceland. Our strategy there is to offer very competitive salaries and attractive working conditions and culture. And by that, we have been able to attract excellent employees into all positions during the steep wrap up, post-COVID. And equality and diversity within our employee groups are very important to us. And even though all the changes during the COVID ramp up, and then -- ramp down, and then ramp up impacted our progress. You can see on the slide here that the numbers are improving a lot between years now. And when it comes to the environment, as we have been talking about earlier during this presentation, we have made already a huge progress in reducing our CO2 emission, mostly because of our significant investment in new fleet, which is currently the most effective way to reduce carbon emissions. Over the next years and decades, a combination of further measures is required to reach our goal of decreasing the carbon emission by 50% per operational ton kilometer by 2030, and to reach net zero emissions by 2050. Those are our goals in this respect. And then to the plans for this year, 2023, which are very ambitious. And in terms of destinations and frequency, it will be the largest flight schedule in the history of Icelandair. We will have 30 destinations in Europe over the summer and 14 in North America. And with Greenland domestic destinations and the winter destinations, we will have, in total, 54 destinations, creating around 800 connections within the network and countless more connections via partnerships with other airlines on both sides of the Atlantic. And looking at the schedule and the destinations in more detail. Next summer, we will have 4 flights per day to [ , Gran Canaria ], 3 a day to Paris. And we will have 7 destinations in Europe, with double daily service or more. In North America, we will have 3 flights per day to Boston, and 6 destinations in North America with double-daily service or more. Then we are growing our Greenland operations a lot between years and moving all the Greenland flights to Keflavik Airport. And by that, connecting Greenland in a much better way with our extensive international network. And top of the growth -- on top of the growth in the passenger network, we are, as we have been talking about, developing the airfreight hub here in Keflavik and by that, creating profitable growth opportunities. Our leasing operations within Loftleidir had an excellent year in 2022, and the outlook is strong for this year. And within the passenger network, the booking trend is gradually returning back to normal. All markets are performing very well, with North America showing significant strength. And in terms of sales and bookings, January was a record month, which is a great indicator for demand, and the strength of our network. And looking at the total capacity in our markets, seats available to Iceland in July are currently 170% of what it was in 2019, while the transatlantic market is after around 98%. So the recovery on the Icelandic market is outpacing most Western markets. But on the cost side, there are some headwinds. The supply chain is still slow, which means more disruptions and higher cost for the airline industry. And there is high inflation in all markets and the cost pressure. And on top of salary increases here in Iceland, which are very high, the fuel prices still remain quite high. So based on all the data and assumptions, we have in front of us now, our EBIT margin guidance for the year is between 4% and 6%, a bit lower than our long-term of 8%. And the main reason for that is the steep cost increases. However, to some [indiscernible], we are very optimistic and excited for the year ahead. We -- at this company, Icelandair, we are ready and excited to operate the largest schedule in the history of the company, in terms of destinations and frequency. So all in all, we see a strong outlook for the year, and we are quite optimistic here. So this concluded the presentation, the material and -- but now we hope to have lively discussions and questions.

We have some questions.

Okay. That's good.

Here are some -- the first question. Management guidance in terms of metrics in monthly traffic reports and financial guidance, so far, is limited compared to what is provided by both American and European airlines. What are your thoughts on that?

If I start, then, Ivar, you will add to it. We are -- we know that our guidance or the information that we provided in the guidance is limited compared to many international airlines. And -- but we are now back in providing an EBIT guidance. And our goal is to add information, forward-looking information. We did not make bigger steps at this point of time, but our plans are for making bigger steps going forward and provide more information in line what we see internationally. Right, Ivar?

Yes, I agree with that. I think now that the operations are becoming more normal, then that will definitely be higher on our agenda.

There seems to be some disruption on the webcast. We apologize for that. We hope that it is okay. We have some further questions -- comment. This is regarding the -- a report from Miri Capital, that is they're referring to. And it is your view on presentations or meetings with foreign investors in conferences and road shows, if we have any plans for that.

Yes, in the past, we can say before COVID and all the challenges, we were participating in conferences internationally, and it has been our plans when things go back -- come back to normal, like we are today, to focus more on that being more with you all in the international investor community, and that is definitely our plan.

Also your view on compensation. Compensation would help to align interests with shareholders. What is your view on such management equity-based performance compensation?

It was approved at the last AGM, last Annual General Meeting, that the Board has -- and the Board has now the approval to put in place a stock option program for key employees. And now it's just in the hands of the Board and the Compensation Committee of the Board, but we are seeing both companies here in Iceland and internationally going this route to align the management teams and the key employees better with shareholders. And now this company has already bought us the approval to do that.

Regarding the cargo operation, back in December, when Icelandair received this 767-300 for the cargo, what are -- can you talk more about the plans for the cargo operation?

If I start again, we -- as I went through, the plan is to build an airfreight hub here in Keflavik like we have been doing in the passenger network for decades. And the first 767 freighter came on the line in fourth quarter. The second one will come in April.

Start operation in March, April.

Start operation in April. And we will continue to use the passenger aircraft as well and utilize the value space. So therefore, for airfreight, and by that, we are building a very strong network for airfreight, and that is just our strategy there. And we see opportunities for profitable growth there.

Here are 2 more questions. Is the medium-term EBIT target still 8%, as it was in the memorandum prior to the share offering in 2020? Has it changed due to the fuel price increases following the situation in Ukraine?

No. Our long-term EBIT, the ratio goal is still 8%. But as I said during the presentation, we are not reaching that based on the guidance that we published in '23, and that is because of the steep cost increases. But the long-term goal regarding the EBIT ratio remains the same, 8%, over the cycle.