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

Good morning and welcome to the presentation of our Q1 results of the year '23. My name is Bogi Bogason, and here with me is our Chief Financial Officer, Ivar Kristinsson. And as usual, we will start by presenting the financials, talk about the outlook. But following the presentation, we will have a Q&A session, and we encourage you to send those questions via e-mail, [email protected]. But first, a few takeaways from the accounts and the announcement we published yesterday afternoon. Our strong revenue generation last year continued in Q1 with record unit revenues, which increased by 70% between years. On the cost side, fuel cost was high during the quarter. And as always, we have some weather disruptions in Q1. But this year, it was more than usual. And in January and February, we had to cancel around 5% of our planned international flights and 27% of the domestic flights, and that impacted our results a bit. Our cargo business performed below our expectations during the quarter due to market -- or weak market conditions and some operational issues, but our leasing business at Loftleidir performed very well. And this result in a negative EBIT of $62 million for the first quarter. But going into the balance sheet a bit, following record forward sales and bookings in the quarter, our liquidity was very strong or USD 458 million. We added 4 aircraft to the balance sheet during the quarter. And due to the seasonal losses, as we always have in Q1 and very high deferred income, the equity ratio is -- was down to 13% at the end of the quarter, but we expect to see it considerably higher in the second half of the year. On the production side, our capacity increased by 38% and passenger numbers went up by 57%. So the load factor was 78.2%. And during the quarter, we made the important steps towards our CO2 emissions reduction goals with the emission decreasing by 13% per operating ton kilometer. And even for the increased capacity and challenging weather conditions, our on-time performance improved quite a lot during the quarter and was 77%. And then to the outlook for the remainder of the year, the outlook is strong and the bookings for the next 6 months are considerably higher than at the same time last year, and fuel price is trending down. But on the negative side, our cargo business is more challenging than we expected at the beginning of the year. And that results in that -- our EBIT ratio guidance for the year is the same as we published in February or 4% to 6%. So Ivar, then to the financials, please?

Thank you, Bogi, and good morning, everyone. As we announced yesterday, EBIT in the first quarter was negative $62 million, as Bogi mentioned. EBIT margin was 26% -- or negative 26%. But nonetheless, we did see various positive signs in the quarter. Starting with the total income, it amounted to $233 million, up by $70 million from last year or by almost 50%. Passenger revenue was $171 million and increased 66% driven by both improved load factor and yield. Cargo revenue amounted to $24 million and decreased $1 million year-on-year. Cargo revenues were below our expectations as market conditions have weakened, as Bogi mentioned earlier. Leasing revenue increased 40% and was USD 19 million. The leasing operation is performing well with all the market segments showing signs of strength. Other operating revenue amounted to $20 million, and the year-on-year growth was driven by revenue from tourism there. It increased 22% to USD 12.4 million. On the cost side then, operating expenses excluding depreciation were $265 million and increased $75 million year-on-year. The increased scope of business, inflationary pressures and costs related to the preparation for the summer all contribute to the higher cost levels in addition to the weather-related disruption cost. Salary cost was $79 million, increased by 19% year-on-year. And the average number of employees rose 24% and were close to 3,100 in the quarter. Other aviation expenses were $49 million, up by $16 million year-on-year. In addition to more production costs, costs were also under pressure from higher engine maintenance cost and various other cost items were, for example, landing fees at foreign airports, where we saw price hikes in the range of 10% to 20% in some cases. Other operating expenses were $71 million, up by $26 million, mainly due to the increased scope of business. Finance cost was $9.3 million and rose by $4.2 million on higher loans and borrowings as well as increase in lease liabilities as the fleet grows. But on the other hand, we had finance income of $6.3 million in the quarter that resulted in net finance cost of $2.9 million, which was $1.2 million lower than last year. And the losses before tax was $65 million and the net loss for the year -- or for the quarter, $49 million and slightly reduced compared to last year. If we look a little bit at the fuel expenses, then fuel expense was $67 million, up 47% year-on-year. The average all-in fuel cost per ton was $1,092 and was 21% higher than last year. It is worth mentioning that in the quarter, we had a spike in cost due to the volatility of the New York Harbor jet fuel price index, which kind of applies to fuel purchases on the East Coast of the U.S. The index there was 34% above the market prices or world market price in January, 24% in February, but has since kind of eased and gotten closer to other indexes and is on par with those at the moment. The isolated impact of this cost alone was around $2 million in the quarter. 70% of all international flights this quarter were flown on the 737 MAX compared to 55% last year. Looking at current hedges then. They equal 50% of the estimated consumption now in Q2 at an average price of $897 per ton. We have 49% of the Q3 consumption hedged at $878, and 29% of the Q4 consumption is currently hedged at $872 per ton. Unit revenue and cost. The RASK -- the total RASK was at a record level, like Bogi mentioned before, $0.076 in the quarter and 17% higher than last year. As previously mentioned, the improvement was both in the [ Loftleidir runway yield ], and the North American route performance was exceptional or strong in the period. The revenue in [indiscernible], revenue through our partnerships with other airlines, our stopover product and package sales are all trending in the right and the positive direction. And overall, it is fair to say that our commercial team has done a really good job extracting value from the positive demand environment that we are experiencing. On the CASK side, total CASK was $0.104, slightly lower than the $0.105% that we had last year. Excluding fuel, it was $0.08 and decreased by 2% year-on-year. And the CASK was negatively impacted by the flight cancellations due to the weather disruptions in which our operation and customer teams managed to ease the negative impact it had on our passengers to the extent possible during that period. Fuel CASK was -- or increased due to the higher roll in fuel cost, but was helped by that proportionally higher number of flights on the MAX that I mentioned before. If we look at liquidity in the quarter or at the end of the quarter, then cash generation from -- or net cash from operation was $154 million. That is as high as we have ever seen it in the first quarter. And the main contributing factor there was that historically high forward sales in the quarter. Cash used in investing activities was $68 million, of that CapEx was $49 million. And the CapEx mainly consisted of purchase of 1 Q400 aircraft, 3 aircraft engines. We invested in aircraft maintenance, as we typically do in this quarter, and other operational assets as well for the Keflavik hub. Net cash from financing activities was positive $37 million, where the largest contributor was the financing agreement that we made for 2 MAXs back in January. In addition to the CASK at hand, we also had committed credit lines -- undrawn credit lines in the amount of $52 million, and that brings our total liquidity to $458 million, which is also very good and the highest liquidity we have seen at the end of Q1. The balance sheet assets are growing. Total assets are $1.7 billion at the end of the quarter, increasing from $1.4 billion at the year-end. Operating assets, $530 million, increasing by $25 million net due to that CapEx I mentioned before. Right-of-use assets, which are the leased aircraft, they amounted to $386 million on the balance sheet, increasing by $67 million. The company entered into 3 lease agreements in the quarter for one 767 freighter, two 737 MAX -- and two 737 MAX aircraft. And all the aircraft assets that we will be acquiring now for the summer season have now been delivered to us, and the assets and liabilities are included on the balance sheet. Total equity was $226 million, and the equity ratio was at 13% compared to 19% at the beginning of the year. The seasonal losses that we had this quarter, the higher asset base and the large increase in deferred income all contribute to reduction in the equity ratio. And this will improve as the year progresses as profitability improves and the deferred income normalizes. And finally, total financial liabilities were $711 million increased in the quarter due to the aircraft investments mentioned before. And net financial liabilities are reduced to $305 million due to the improved cash position at the end of the quarter. So Bogi, back over to you.

Thank you very much, Ivar. Then about the outlook this summer, which will be very exciting for us. We will operate the largest flight schedule in the 86-year history of Icelandair in terms of destination and flights. We will be serving 54 destinations, thereof 15 in North America. We have 4 new destinations this year: Detroit, Prague, Barcelona and Tel Aviv. And Crete is also a new destination into the Icelandair network after being served as a charter destination with before. And to be able to fly all of these flights, we have to bring in a lot of new people, which is great. And now we are onboarding about 1,000 new employees and adding them to our great team, and that will be finalized before the summer. And currently, our training center in Hafnarfjörður, is operating 24/7. And thus, last summer, the summer 2022, this high season, we will operate 3 connecting banks out of Keflavik. The first one, the traditional one, which we operate throughout the year, has departures around 8:00 in the morning to Europe and to North America around 5 p.m. in the afternoon. But the second bank has departure through Europe around 3 hours later than the first bank. And the same goes for the afternoon departures to North America. And then the third bank has departures to Europe around midnight here from Iceland and then morning flies to Boston and New York, arriving there on the East Coast around noon or a bit later. And by those 3 connecting banks, we can offer diverse departure times. And with that, we are offering a great product to the market, which has been very well received. And last summer, those -- all those connections were very well received. And we see on the booking flow now that there is a high demand for those products. And we can also add more destinations to the wire network by connecting between banks. And at the same time, we are increasing the utilization of our resources, and at the same time, increasing the utilization of Keflavik Airport, which is very important. And going forward, we see great opportunities in developing the network further by extending the operational season of the second and the third banks and our destinations and frequencies to those banks in a sustainable way. And regarding next winter, we have already disclosed that we are increasing the capacity for the winter '23, '24 considerably between years. We will have 5 destinations as whole-year destinations now that have been seasonal before. And at the same time, we are adding frequency to many of our current whole-year destinations during the winter time. And increasing the winter schedule or our winter schedule is very important for us to utilize our infrastructure in a better way throughout the year. And the same goes for the Icelandic tourism, increasing winter tourism is a key for the sustainable growth of the Icelandic tourism industry. And as we announced early April, we signed a memorandum of understanding for the purchase of 13 Airbus XLR aircraft and the purchase rights for 12 additional aircraft from Airbus. By -- that decision was made on the replacement aircraft for the Boeing 757 that has served our network extremely well and our company for decades. And the first aircraft coming directly from Airbus will be delivered in 2029. But the introduction of those aircraft by Airbus meant to our fleet will start as soon as in the summer 2025. And we have agreements for a lease of four A321LR in the final stages now. And the Airbus 321LR has -- and the XLR has more range than the Boeing 757, which will create great opportunities for our network going forward. And then to the outlook for this year, for the last 9 months of the year and the whole year, our EBIT guidance and CapEx guidance and so on. At the beginning of February, when we published the fourth quarter of last year and the whole year, we published the guidance to the market. And at that time, the guidance stood at EBIT ratio of 4% to 6%. Since then, we have seen some positive development and -- but also some negative. The Q1 results were affected by the weaker cargo results, higher fuel price and more disruptions than expected. But on the other hand, jet fuel prices are lower now than at the beginning of the year, and the revenue generation in Q1 was very strong. And the same goes for the demand in the coming months. All our markets have been and are performing very well with the North American market leading the way, as last year. So when we take everything into account, our EBIT ratio guidance for the year remains the same as in February or 4% to 6%. And the guidance is, as always, subject to change in case of unforeseen events and economic development. And we at Icelandair, we are very excited for the high season, our largest ever. And as I mentioned, our winter schedule is growing a lot as well. As we have been saying, the demand is very strong. However, economies of the world are going through some tough times and inflation is very high everywhere. And it is very likely that by one way or another, the high inflation will impact demand in the end. But with our exceptional team, strong and flexible network and extensive commercial infrastructure in all markets, we can easily adjust to the changes in the market dynamics and shift focus between markets based on how the demand is developing. So we are very optimistic for the year and for the future with our very valuable infrastructure, a clear vision and strategy, very strong and healthy balance sheet. We are in a very good position to seize the opportunities and generate profitable growth for the future. So this concludes the presentation. And now we go into the Q&A session. I hope we have a lot of questions from the audience.

Yes. Good morning. We have already a few questions. The first one is, what's the reason for not giving out EBITDA guidance like was done at Icelandair before the pandemic and is done at many airlines? And can you give an estimate for revenue for '23?

I'm starting now at it, Ivar?

Sure.

It's completely right. In the past, a few years ago, we always published EBITDA guidance, but then we had some changes to the accounting standards. So IFRS 16 came in, and we -- all leases are now included in the balance sheet and the P&L. Then the P&L changed a bit. So we decided to publish EBIT guidance instead of EBITDA, and we see a lot of airlines publishing EBIT. So I think we are in line with a lot of airlines that we compare ourselves with. Regarding the revenues, we have published our estimated production or capacity growth, but we have not published our estimated or forecasted revenue for the whole year. There are, of course, a lot of moving parts in our industry. Fuel prices go down, and that might impact airfares and so on, so the sort of information that we publish within our guidance now. Ivar, would you like to add something to this?

I think it's a good summary. Thank you.

Here's a question on the cargo operation. What do you expect the size of the cargo operation to be in terms of number of aircraft and the revenue growth for the next 2.5 and 10 years?

Yes. As we have said, our plans are to build upon airfreight hub here in Keflavik as we have done for decades in the passenger network. We have invested in two 767 freighters with [indiscernible] on the line now and within the operations. And our plans are for further growth. How fast the growth will be and how big the growth will be, we don't know that now. We want to see those 2 aircraft do very well in our operations before we make further decisions on investments in more cargo aircraft. So this is just our plan. We want to build up the hub -- airfreight hub here in Keflavik. But how fast the growth will be and we just want to do it step by step.

Here's a question on cost. CASK ex fuel in Q1 '23 was similar to Q1 '22. Can we, though, expect CASK in the next quarters to decline year-on-year? And then how much will be at similar levels?

Yes. I mean we are not disclosing kind of the CASK kind of quarter-by-quarter. What I would say is that we will have seasonal development in the CASK in Q2 as we had in Q1. The comparison year-on-year isn't going to be more positive than we had in Q1. I can't really comment on that asset. But what I would say is that some of the inflationary pressures that we saw in the first quarter were increases that kind of came earlier in the year than we had expected. So we'll see how things develop in Q2. We think we have seen most of the increases already kind of leading into the spring, but we will have to see how things develop.

You talk about a favorable outlook in the leasing operation. What growth rate can we expect this year in salt block hours? And what -- and can we expect similar revenue per block hour for the rest of the year as it was in Q1?

Again, we are not kind of disclosing the outlook per business segment. But as we mentioned in the news -- or in the announcement and in the presentation, we are forecasting kind of ongoing positive development in that area. How exactly the percentages of -- or the percentage growth of the block-outs will be, I can't really comment on that.

No, we do not publish that, but all customers of our clients of Loftleidir or leasing have recovered quite well after the pandemic. And so the Loftleidir business is doing very well, and the outlook is good. So that's very important for us.

Yes. This was the last question.

So no further questions at this point of time. So we will just thank you very much for attending. We, as I said during the presentation, we look very much forward for the high season. The demand is very strong. And we have the largest flight schedule in our history. We are planning a growth for the winter. So a lot of exciting things happening within Icelandair. Thank you very much for attending, and have a good weekend.

Thank you.