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

Good morning, and welcome to the presentation of Icelandair's quarter 3 results. I'm Bogi Nils Bogason, and here with me is our CFO, Ívar Sigurður Kristinsson. And as usual, we will start by presenting the financials, the outlook. But following the presentation, we will have a Q&A session. And please send us questions via the e-mail ir@icelandair.is. But first, a few key takeaways from the information that we published yesterday afternoon. We are very proud of the strong results in the very important third quarter. EBIT increased by 21%, up to $112 million, and net profit rose by 46% to $84 million. The improved results were mainly driven by strong revenue generation, where total revenues increased by 15% or up to $560 million, the highest ever in 1 quarter. There is definitely a strong demand for Iceland as a destination, especially from North America, and the number of passengers on that market traveling to Iceland or the 2 markets, grew by 16% between years. And our balance sheet continues to strengthen, which is very important to support further growth and our fleet renewal with new generation aircraft. And at the end of the quarter, we had $424 million in liquidity, and that's an increase by almost $50 million year-on-year. And our EBIT guidance remains the same as in September when we updated it, and I will discuss the outlook further when Ívar has presented the financials. But our team did more than generate great results in the third quarter. We also received 2 highly respected awards, which we are very proud of. Icelandair was rated as a 5-star major airline by the Airline Passenger Experience Association, an award that is based on passenger feedback. And we also won the Best European Airline at the Danish Travel Awards. But over to the financial, Ívar, please.

Thank you, Bogi. Let's start with an overview of a few traffic stats. The capacity in the route network increased 15% between years, measured in available seat kilometers, while the revenue passenger unit grew by 11%. We had 1.5 million passengers in the third quarter, 7% more than at the same time last year. The number of passengers on the market to Iceland increased most by 16% and accounted for 45% of the total numbers, number of passengers, as Bogi mentioned. And on-time performance in the international network improved by 8% year-on-year to 78% this summer. CO2 emissions per OTK increased 1% between years on a slightly lower load factor and due to more flights on a larger cargo aircraft. Freight carried, measured in freight ton kilometers, increased by 52%, while sold block hours in the leasing operation remained similar as last year. But if we look at the financials, and then as we announced yesterday, EBIT was healthy $112 million and the EBIT margin was 20%. As in previous quarters, the results that we are seeing are the strongest that we have seen for the last 6 years. Revenue generation was strong, and we enjoyed the highest revenue we have ever seen in a single quarter in the third quarter this year. Passenger revenue was $508 million, compared to $433 million last year, which represents an increase of 17%. We saw revenue increase in all markets as well as in both cabins. Cargo revenue was $21 million compared to $20 million last year. And as we have mentioned in our commentary lately, despite the revenue growth, cargo has been underperforming this year and various measures are being taken to turn that business around. Bogi will cover that in more detail later on. Leasing revenue increased 2% to $13.7 million on similar number of sold block hours as last year, but profitability in the leasing business remained strong and improved slightly year-on-year. Other operating revenue amounted to $17.6 million, slightly lower than last year, but that was mainly due to changes in our strategy to move away from charter flights here in the Icelandic market, to have the same flights included in our normal flight schedule, where the available seats can then be sold through all our channels and the revenue is then recognized in the passenger revenue line. Operating expenses, excluding depreciation, amounted to $412 million, up -- or up 14% year-on-year or $52 million. More production in the route network and in the cargo operation, contractual wage increases and general inflationary pressures explain the increases. Salary cost was $102 million compared to $75 million last year, and are increasing due to the more production I mentioned and wage increases earlier this year. Stronger ISK, or stronger Icelandic krona, versus the dollar also added around 5% to the salary cost when compared to last year. The average number of full-time employees was almost 4,100 and increased 18% year-on-year. Aircraft fuel was $121 million, decreased by $15 million year-on-year due to lower market prices as well as positive impact from more flights on the fuel-efficient 737 MAX aircraft. Other aviation expenses were $85 million compared to $69 million last year, the increase there was mainly in the landing, handling and navigation costs. Other operating expenses were $104 million compared to $80 million last year and rose due to more production again and, to some extent, due to more emphasis on flights to North America due to the strength of that market. Net finance cost for the period was $5.4 million. Profit before tax was $106 million. And profit after tax $84.5 million or $26.5 million higher than last year, which represents close to a 50% increase year-on-year. If we look a bit deeper into the passenger revenue, then 56% of the passenger revenue in the quarter originated in North America, while Europe represented 27% and Iceland 14%. Passengers on North American routes rose 13% compared to 7% in the network overall. While the passenger revenue on North American gateways grew by 25%. But on the European gateways, it grew by 10%. Load factor on North American routes was also higher or 87% in the quarter. Yes, sorry about that. The demand on the 2 markets was strong, as we have mentioned, 45% of all passengers there on the 2 market compared to 41% a year ago. Via passengers were 40% of overall pax. And of those passengers, the transatlantic passengers, then 1 in every 5 decided to do a stopover in Iceland, which we do offer to our customers for up to 7 days without any additional lever. And the market from Iceland represented 10% of the total passengers this quarter. Fuel expense, $121 million, again down 11%. And the weighted effective fuel price with kind of all-inclusive was $910 per ton and decreased 29% year-on-year. Around 60% of all international flights in the quarter were flown on the MAX compared to 50% last year. And the additional flying there saved approximately $7 million on the fuel cost line. Looking ahead, then we have hedged around 40% of the consumption in Q4 at an average price of $856 per ton, 33% hedged in Q1 at -- Q1 next year at $811 per ton and 26% hedged for the second quarter at $840 per ton. Unit revenue and cost, the unit revenue was also at a record level in the quarter. It rose 3% if we exclude the negative impact from less belly cargo, which kind of entered the overall -- or the overall RASK increase was 1% due to that. We saw unit revenues rise in all months this summer, and especially in September, which was a strong month this year comparing year-on-year. We continue to see positive development in revenue through our various partnership agreements with other airlines, where the partnerships in North America with JetBlue and Alaska were especially strong. And also the new partnership we have with Turkish Airline, and was signed this summer, is off to a good start. We saw yield improvements in all markets, both in Saga Premium and Economy cabins, while the seat load factor was slightly lower. Unit cost was $0.073, 2% lower than last year, helped by more flying on the MAX again and as well as lower jet fuel prices. As in the second quarter, we had some negative impact from having to lease in some short-term wet-lease capacity. However, the cost was much lower this quarter than in the second quarter. Stronger Icelandic krona, the wage increases I mentioned before and the inflationary pressures in many areas of the supply chain impacted the nonfuel cost that rose 12% year-on-year in total. We are benefiting from [ various ] positive development in the maintenance cost line, both due to the introduction of more MAX aircraft, as well as good management of the 757 fleet maintenance costs. That resulted in the maintenance cost line staying flat year-on-year. Cash flow. Cash flow from operations has been strong this year, with net cash from operations positive by $241 million year-to-date. We have also been investing a lot in the business by close to $104 million this year, both aircraft engine and aircraft maintenance. And we are currently also building our new headquarters in Hafnarfjordur as well, which so far has been funded with our own cash. Other investing activities include payments related to new Airbus agreement that we signed in early July. And financing cash flow was $18 million due to repayment of loan and borrowings as well as reduction in aircraft lease liabilities. But we also made some new finance agreements related to our MAX aircraft earlier this year. In addition to cash and -- or cash and marketable securities, we had undrawn committed credit lines in the amount of $52 million at the end of the quarter, bringing total liquid funds to $424 million, which is an increase of $106 million from the start of the year. And finally, if we look at the balance sheet and the development from the end of the third quarter last year, then noncurrent assets are up by $106 million. That includes investment in 737 MAX aircraft, one Q400 aircraft. And we have also added 2 leased MAX aircraft and one 767 cargo during that period. Noncurrent liabilities, up $57 million at the same time. And cash and marketable securities up by $51 million. And at the end of the period, we're at $372 million. And equity, up by almost $50 million to $337 million. And as aforementioned, equity ratio of 21% as we enter strong third quarter. And with that, over to you, Bogi, for the outlook.

Thanks, Ívar. And first, regarding the whole year '23. On September 30, we published an updated guidance because of a spike in fuel prices since July and weaker cargo operations than we expected. And the Q3 results that we are publishing now are in line with the expectations that the updated guidance in September was based on. And the outlook for Q4 is also similar as it was then. So we take everything into the account, our EBIT guidance for the year remains the same, and we expect to return net of it for the full year. But as always, the guidance is subject to change, unforeseen events and economic developments. But looking further ahead into '24, we are planning around 10% growth in our passenger network between '24 and this year. The growth will come from increased frequency to our current destinations. And also, we will add new destinations that will be announced soon. We will grow more into North America than Europe because we expect that market to be stronger next year as it is now. And we will continue to develop our 3 connecting banks in Keflavik as we have been doing in recent years. By that, we can offer more departure times, which improves our product and definitely stimulates demand. For example, summer '24, we will start the morning flights to Seattle and improve the connectivity with our partner there, Alaska Airlines. And by that, we will become the first international long-haul carrier in Seattle to have a triple daily schedule into that market. But the 10% growth into next year or '24 is quite different from what we have been doing in the last 2 years or so. In early '21, we were in hiatus with around 10 flights per week to 4 destinations and operating 4 aircraft in our international passenger network. But during the summer, this summer '23, we were operating the largest flight schedule in the 86-year history of the company in terms of frequency and destination. And to be able to grow in this manner, we have been focusing on introducing aircraft to our fleet, recruit and train thousands of employees. And our excellent team has done all this in a very efficient way, generated profit and strong cash flow. However, we firmly believe that with much moderate growth into next year, we can focus even more on operational efficiency, which we believe will improve our cost structure. And at the same time, we still see further opportunities to increase the unit revenues with our strong foothold in very important markets and with the Icelandair's excellent commercial infrastructure. And as we have been mentioning, we are working hard on bringing our cargo operations back to normal results by adjusting the capacity to demand. And to be able to do that, we will return one 757 to lessor in the coming months, and our plan is to lease out the one 767 at least short term. The prospects for our leasing business at Loftleiðir continues to be strong. Loftleiðir has recently signed lease agreements for 4 aircraft with our largest leasing customer, extensions on a new agreement and the so-called [ A&M ] projects continue to grow in a profitable way. So to sum it up, this year, the passenger route network and our leasing business at Loftleiðir are performing very well. But cargo is loss-making after generating positive results for many years. However, we fully believe in the long-term prospects of the cargo operations, and our goal is to be back to profitability there next year. And just to show you how big impact cargo is having on our results, our current EBIT guidance for this year would be in the range of 5% to 6%, instead of 3.3% to 4.3% if the cargo operations would be normal. And normal in this respect means average EBIT in the year of 2013 to '22, excluding year '20 and '21, which were unusually strong years for the cargo sector because of COVID. So based on all this, the strong performance of the passenger route network and leasing, the opportunities to improve our operational efficiency and unit revenues further, and by our full focus on bringing cargo back to profitable operations, we firmly believe that we are on track to reach our goal of 8% EBIT over the cycle. And finally, overall, we are, as you can hear, very pleased with the results in the quarter, with the strong performance of our passenger network and leasing operations. The third quarter is always the largest and most important in our business. And this was the largest third quarter in the company's history in terms of revenues, flights and destinations. And despite the high growth, we improved the on-time performance considerably, as Ívar went over before, and that is very important. I would like to thank our outstanding team of employees for a great work during the quarter and our customers for their trust. So now we have concluded the presentation, and we hope to have questions from the audience.

Yes. We already have some questions. First, we have 2 questions on the cargo operation. The first one is, given the results, do you have to change your cargo strategy? And the second one is, you state that the long-term outlook for the cargo operation remains good, could you please elaborate?

Yes, we -- yes, as I said, we firmly believe in the long-term outlook of the cargo operations and our cargo business. As I went through the cargo company, cargo has been profitable for many years until now. And we are optimistic that we will be able to turn it into profitability quite soon. But to be able to do that, we have to adjust and align the capacity to the demand. And that means, as we went over, we need to return one 757 or the last 757 in the fleet to the lessor, and we will do that in the coming months. And the plan is also to lease out the 767, one of the 767 at least short term. So we can say that is the biggest change that we will see within the strategy as it is now compared to the next few months. It is very important in the cargo business as in the passenger network to have the right capacity for the demand that is in the markets. Anything further there, Ívar?

No.

Then the second question, can you please walk us through the rate increase this summer, around 20% for flight attendants, for example? This is well above what you presented current collective bargaining agreements that expire in September '25. Isn't that correct?

Yes. So we made an agreement with the 3, we can say, flight unions or the technicians, the cabin crew and the pilots. And for the cabin crew and the pilots, there have been a salary freeze since 2020. But now, pilots got salary increase 1st of June, and the cabin crew from 1st of September. And the salary increases were partly based on salary increases that we have been experiencing here in Iceland or just the salary increases for the last 3 years. Because of the high salary increases in Iceland, the salary increases now are quite high, and a big portion of the salary increases that explain the total increases in our salary line as Ívar went through over before.

How is the outlook for bookings into the year 2024? Are you seeing pressure on ticket prices already or signs of slowdown in your markets?

As I -- as we said, the outlook for like fourth quarter is the same as when we updated the guidance in September. The booking status is stronger and at the same time last year. So all in all, the demand is still quite strong in all markets. Anything to add there, Ívar?

No, not really. I mean, yes, compared to previous year, I mean, our booking status is strong. So...

Regarding your long-term 8% EBIT goal, you mentioned in your announcement that you're on the right path to achieve it. Do you still believe it is achievable in the foreseeable future with fuel price at current levels? At what levels are you comfortable with fuel price?

Ívar, you start on this.