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 Last year, '23. My name is Bogi Nils Bogason, and here with me is Ivar Kristinsson, our CFO. And as usual, we will start by presenting the financials and touch upon the outlook. And following that, we will have a Q&A session, And please send us questions. The e-mail address is [email protected]. We can say that in the year '23, we finalized the post-COVID ramp-up and the capacity in the route network grew by 80% with 2 percentage points increase in the load factor, which would have been quite higher, if not for the considerable negative impact of the seismic activities and the ATC strikes in the very important weeks just before Christmas. And looking at the passenger split for the whole year, the Via passengers grew the most at 22%, while the From market grew by 9% and To market by 18%. Last year, we reached a very important milestone to generate a net profit after a few challenging years, and the revenue generation was strong throughout the year with unit revenues increasing by 3% between years, and total revenues were over USD 1.5 billion. EBIT for the year amounted to USD 21 million, a little bit higher than last year, but considerably lower than we expected at the beginning of the year. The events just before Christmas had a considerable negative impact on the Q4 results. And we did also see some signs of overcapacity in some markets leading to some unsustainable airfares at the end of the year. So net profit amounted to USD 11 million compared to USD 6 million loss in '22. And as before, our liquidity is very strong, which is very important. We had USD 323 million at the end of last year in liquidity. And Ivar, please take us through the financials in more details.

Thank you, Bogi, and good morning, everyone. Let's take a look at the financials for the quarter. And we'll start with the EBIT, which was negative USD 50 million, which was USD 33 million worse than last year. The EBIT was negatively impacted by the development on Rekonise and the ATC strikes in December. Profitability in cargo operation decreased considerably year-on-year. But however, the performance did improve between the third and the fourth quarter as a result of the measures taken to improve the profitability. The leasing operation continued to perform well with positive results. Passenger revenue rose 10% and amounted to USD 259 million. We saw revenue increase in all markets as well as in both CapEx. Revenue driven by our partnerships with other airlines was strong in the quarter, and we also see that our increased focus on investment in package travel is paying off with a significant year-on-year sales increases that strengthens the overall revenue generation. Revenue from Cargo was USD 21 million, decreased by 1%. Leasing revenue was USD 19 million and increased 8% between years, and other revenue amounted to USD 16.5 million, up by 2% compared to last year. Operating expenses, excluding depreciation, increased by 20% and amounted to USD 331 million in the quarter. Salaries and related costs increased 25% to USD 105 million. The main reason being increased scope of the business and the salary increases in Iceland earlier this year. Strengthening of the Icelandic krona against the dollar also increased salary cost measured in dollars. The average number of full-time employees was close to 3,600 in the quarter and increased 18%. Aircraft fuel cost was USD 88 million, increased by 2% despite the 13% capacity increase in the passenger network. Other aviation expenses were at USD 60 million, up by USD 17 million year-on-year. And the cost of handling, landing, and navigation increased more than the production as a result of inflationary pressure in charters kind of across the value chain. Maintenance cost, USD 24 million, up by USD 7 million, explained by more production and higher engine maintenance costs. Other operating expenses were USD 79 million, up by USD 60 million, mainly due to the increased scope of business. And on the financial items, we had a gain of USD 2 million in the quarter as the interest earned on bank deposits and securities outweighed the interests that we paid. Net loss for the period, USD 38 million, USD 20 million higher than last year. Looking at capacity and traffic stats, then our capacity measured in ASKs in the route network was up 13% compared to last year or the same quarter last year. Load factor was 2% higher despite the aforementioned events before Christmas. To market increased by 3% compared to 20% in the first 9 months. But with the shift of focus in our sales, we managed to make up for it partly with more growth in Via, which was Icelandair largest market during the quarter, 41% of total passengers, grew by 30% year-on-year. Passengers within Iceland decreased 5% on a slightly less capacity than last year, but total revenue increased at the same time. Cargo was up -- or cargo carried and measured in tonnes was up 13% and sold block hours were 2% fewer than last year, due to more scheduled aircraft maintenance. Speaking of the development in the To market and the development in Grindavik in November, then we can here see the impact kind of just around the incidents on the 10th of November. The inflow on the To market had been quite strong in the weeks leading into November, but slowed down significantly and kind of in the weeks following and only started to recover again towards the end of November. Aircraft fuel cost for the quarter, like I mentioned before, increased 2% on the 30% capacity increase. And our effective fuel price, including hedges, was on average around USD 1,037 per tonne, 12% lower than in previous year. Around 70% of all flights, international flights in the quarter were flown on the MAX compared to 64% last year. And that saved around USD 5 million on the fuel line. Looking ahead, we have hedged 56% of the Q1 consumption at a price of USD 839 per tonne, 45% in the second quarter at USD 844 per tonne, and 45% of the Q3 at USD 826 per tonne. Current spot is around USD 900 a tonne. Looking at the unit revenue and cost. Then the unit revenue, the quarter started off quite well. October unit revenues were relatively strong, but November and December were negatively impacted by the reduced demand. And as a result, unit revenue decreased 3.6% compared to last year, all inclusive. Unit cost, USD 0.09, increasing by 2.7% between year and unit cost ex-fuel increased 8%, mainly due to the salary increases and the increase in aviation-related charges that I mentioned before. Just briefly looking at the full year, then we are -- like Bogi said, we are pleased to report the first full year profit since 2017, although highly impacted by the development in the fourth quarter and also the considerable losses that we have had in the cargo operation this year that we are now finally seeing improving. Revenue generation, record levels, and total revenue was the highest we have seen. EBIT for the full year, USD 21 million or 1.4% of revenue. And profit for the year was USD 11.2 million, which was a USD 17 million improvement compared to last year. Salary cost for the full year increased 27% to USD 390 million or a little above that on more production in the passenger route network, expansion of the cargo operation and the additional leasing projects. The krona strengthened against the dollar by 5% from the start to the end of the year, and that contributes also to the increase in U.S. dollars. And we did obviously have the general wage increases here in Iceland at the start of the year. And in addition to that, pilots and cabin crew got their first salary increase since 2020. Average number of employees was 3,638, increased by 593 year-on-year. Liquidity and cash flow. At the end of the year, we had cash and marketable securities of USD 271 million, increasing by USD 5 million from last year. And in addition, we had the undrawn committed credit lines in the amount of USD 52 million, bringing total liquid funds to USD 323 million. Net cash from operation was USD 218 million for the full year. CapEx and other investing cash flow was USD 158 million, including investments in new aircraft and the maintenance CapEx, and also, we had some payments related to the Airbus agreement that we signed in July. Financing, negative USD 56 million. But there were some movements there, including financing of 2 MAX aircraft early in the year and then kind of just a normal repayment of borrowings and lease liabilities. In addition to an early payment we made in November of USD 19 million on a loan, where we kind of took advantage of a strong cash position and could reduce our interest costs somewhat. And finally, the balance sheet and the development, then our total assets amounted to USD 1.5 billion, increasing by USD 116 million. Non-current assets, up by USD 105 million, including the investment in 1 MAX aircraft and 1 Q400 aircraft. And also, we added 2 leased MAX aircrafts and 1 767 cargo aircraft earlier in the year. Other non-current assets, up USD 26 million, There, we have renewal of agreements with long-term customers within our leasing business as well as prepayments related to the Airbus order. Working capital items growing in line with more scope of business. And at the end of the year, we had an equity of USD 288 million, equity ratio of 19%, on par with the start of the year. And now, Bogi, over to you for the outlook.

Thank you, Ivar. But before we dive into the outlook of the future, I would like to briefly sum up last year. Where the route network performed very well with a record revenue generation despite the aggressive ramp up. And at the same time, our leasing business, Loftleidir, continued to perform very well. However, the profitability was below our objectives, one-off items, including short term. The activities in early summer and then the Q4, the events had considered with a negative impact in addition to the cargo operations, what we have been talking about, that have been unusually weak. And as a result, 2023 profitability does not fully reflect the strength of the core operations of Icelandair. And I can't summarize last year without mentioning the great Icelandair team that got a few international awards for Excellent Product and Service. And now in January, Icelandair won the Icelandic Customer Satisfaction Award for airlines with a significant margin. And it is definitely true that happy employees means happy customers. Our employee NPS score has historically been quite high compared to all the companies, both here in Iceland and internationally. But with continuous focus on our employee engagement, the score has risen considerably between years. And in '23, we took quite important steps to our sustainability goals. We continued to be an important part of the Icelandic society and the economy here. Icelandair is the largest private employer in Iceland, creating important jobs in the country, and we are committed to being a great place to work. I don't have to mention the importance of Icelandair for the Icelandic Tourism Industry and the economy in general. Last year, the Icelandair's tax footprint here in Iceland was USD 236 million or ISK 32 billion. Equality and diversity within our employee groups are very important. And we saw a positive development there last year, as you can see on the slide here. And when it comes to the environment, we have made progress in reducing our CO2 emissions relatively, mostly because of our significant investment in new aircraft types. And looking into this year, we are planning around 11% growth in our passenger network compared to 18% growth in '23. And our growth focus is mainly on, first of all, extending the operational season of well-performing routes that have so far been seasonal. Secondly, to increase connectivity to our partners' networks, in North America, especially with the morning flights out of Keflavik. And then we are connecting large Transatlantic European markets with North America, such as Rome and Barcelona that have been just to and from destinations for a long time. And lastly, the focus is on investing in slots in important markets like Amsterdam, where we are anticipating slot reductions in the future. And this year, we are adding 3 new destinations: Pittsburgh, Halifax and the Faroe Islands. And then we will continue to develop our 3 connecting banks in Keflavik, as we have been doing in the last couple of years. By that, we can offer more departure times, which improves our product. We will, for example, start the morning flights to Seattle and improve connectivity with our partner there, Alaska Airlines. By that, we will become the first international long-haul carrier in Seattle to have triple daily service. But if you look at the total growth into Keflavik this year, the big picture is quite different from what we at Icelandair are doing. Other airlines are adding considerable capacity into markets with already full year service. And we are seeing high double digit growth to destinations like London and Frankfurt. And as you can see, to the left on the slide here, the Keflavik market continues to outgrow the transatlantic market and actually most other markets in the world. And as we saw some signs of in quarter 4 of last year, it is very likely that this will result in continued overcapacity and in some unsustainable airfares at least in the first half of 2024. On to the fleet that we will operate this year. We are rapidly renewing our fleet, resulting in lower unit cost and less carbon emission. This year or this summer, we will operate 36 aircraft in the international passenger network. But in total, we will be operating over 50 aircraft when we add the regional cargo and the leasing aircraft. And as we have been talking about last year was very challenging for our cargo operations, and we have taken actions to improve it. One of the 767s has been leased out to align the capacity to the demand. And by that, we are decreasing the fixed cost considerably. And with that and other actions, we expect cargo to return to positive EBIT this year after heavy losses last year. The outlook for Loftleiðir, our leasing arm continues to be strong. Last year was good, and the outlook for this year is even stronger. For the past years, as we mentioned in the beginning, our focus has been on ramping up the operations again post COVID, but we can say that we finalized that in '23. Now we are going into more normal operations with slower growth, which means that we are putting more efficiency, but we are putting more focus on efficiency and the cost of our operations into -- we are putting more focus on that, cost optimization and decrease the unit cost. We definitely have a strong pipeline of initiatives aim to drive the unit cost lower. Our operations in [ Loftleiðir Icelandair ] and Icelandic Tourism industry in general are very seasonal. We've seen that in the past. And now post COVID, the seasonality is even more extreme because the leisure travel has outgrown business travel. And we are working on initiatives to mitigate the cost of low resource utilization in the off season. There, our leasing arm, Loftleiðir, will play a key role with the know-how, experience and network, and the focus there is to lease out the extra capacity during the winter time. And as we've been saying, we have a clear plan for turning around the performance in our cargo operation. And of course, we will continue to invest in our hub position here in Keflavik, develop the route network, and work to strengthen our brand revenue streams even further. So these are the priorities for this year and the future. So to summarize, this year, the prospects are mostly good for the whole year. The booking situation is in general promising. The To market is recovering after the events during the last weeks and months. The transatlantic market is showing considerable strength with higher proportion of bookings coming from that market compared to last year. The From market is also strong. However, the first quarter will be challenging because of the aforementioned events, but the outlook for the summer is good. And at the same time, our operating environment continues to be somewhat uncertain. The seismic activity in Reykjavik is still causing concerns and have negatively impacted the revenue generation in Q1. There is continued cost pressure and uncertainty due to general bargaining agreements, which are ongoing in Iceland now. And then we have mentioned the overcapacity in Keflavik, and it is a bit hard to predict how that will play out in the coming months. And due to the uncertainty, an exact guidance for the year is not provided now. However, we expect to generate improved EBIT and net profit in '24 compared to last year. And looking more long term, we see considerable growth opportunities for our network and business model. However, growth is never a goal itself. It needs to be profitable and sustainable. To support the profitable growth and the replacement of the 57 aircraft, we have already committed to 20 Airbus aircraft, of which 7 are leased from lessors. And then we have further 12 options. In the winter '24, '25 for Airbus A321LRs are coming in, and we've already secured 3 more for summer '26. And to conclude, we can say that even for some bumps on the way, when we have been rebuilding the company following COVID, we are mainly working according to the plan, and we are in a stronger position than ever before. We are the leading hub carrier in Iceland, which is a strong position to be in, and we are operating the unique route network with considerable growth opportunities. We have definitely the right product and the service for the environment and the markets we operate in. And we see a lot of opportunities to improve operational excellence and cost optimization following this deep ramp-up. Our strong infrastructure on the commercial side and the diverse revenue streams have proven itself in the past years and we'll definitely continue to do so. Our balance sheet is healthy with strong liquidity, which is very important. And as always, the know-how and the experience of our excellent team of employees will continue to make the difference. So we have very ambitious and bright plans for our company, and we are very confident on that path. We firmly believe that we are on our way to reaching our long-term profitability objectives. So that concludes the presentation. And now we hope that we have some great questions from the audience.

Yes. Here, we have 1 question relating to the air controller strike in December. Will Icelandair receive any compensation for the losses related to the ATC strike?

Yes. As we stated last year in the media, we are going to seek compensation, but we have not accounted for it in any account, in the Q4 accounts. But Icelandair is going to seek compensation.

Then there's a question on the cargo. Are there any other particular reasons why you expect cargo to be profitable this year other than leasing out 1 cargo aircraft? Is there more demand or higher prices or something else in the market?

Do you want to take this, Ivar?

Yes. So I mean, as we went through, we are quite confident that we will be able to do that. There are certain measures that have been taken. And of course, the big levers are kind of matching the capacity we have in the market with the demand. But there are other ways and other means that we can pull as well. We are returning 757 freighter as well this spring. So all in all, we are quite confident, yes.

Here's 1 regarding guidance. When do you expect to issue a guidance? Is it following the collective agreements or following more certainty on the seismic activity?

Yes. As we went through, there are some uncertainties that we are coping with that is impacting our view on this, and it just needs to -- remains to be seen when we are coming out with more exact guidance than we do now, whether it is the collective bargain agreements or the seismic activities or something else. This is something that we have to analyze and decide upon as time goes by. I think, further, do you want to add, Ivar?

No.

In the recent inflation numbers, airfares dropped significantly, obviously, in the light of recent events here in Iceland. In your announcement, you also mentioned the unsustainable airfares of various airlines as a reason for uncertainty. Are you currently chasing these fares in order not to give up market share? Or have you been able to show more resilience in unit revenue?

You start here, Ivar?

Yes. The situation in the market, as we explained in the Q1, especially, there is a lot of new capacity in the market. And what we have been doing kind of in the past few weeks is that we have been kind of reviewing our capacity and kind of seen what we have been able to do with regards to that. But at any given time, we are with certain capacity out in the market, and there is a booking situation that we are constantly evaluating what to do in order to maximize the unit revenue of the capacity that we have.

And maybe to add to this, as we went through and I went through, we have quite diverse revenue streams like partnership with other airlines and so forth that helps us a lot in situations like this. And our growth into this year, there is a firm strategy behind that, as I went through, where we are connecting better with the partner airlines and so on coming up with a better product with flights to North America, extending the operational season of gateways that have so far been seasonal and working quite well. So our strategy on the growth is quite firm, and we have not been adding a lot of frequency into markets that have been very well served. So -- and having all those diversified revenue streams helps us a lot in the environment now.

Are you comfortable with the price of jet fuel at the moment? Were you taking advantage of the low prices this summer and the end of the year to increase fuel hedging?

I mean, what I can say is that we have a certain strategy in place, and we are kind of just continuing to work according to that. I mean, we are not in the market kind of to gain or lose. This is a kind of a mean to kind of smoothen out the fluctuation. So we are just acting according to the policy.

It was presented that ramp-up is complete in 2023. Can you give any information about the expense ramp-up cost during '23 and its effect on EBIT for the year?

No, we cannot give a certain number for that. I mean, obviously, we have a certain amount of seasonality in every year, but what we mean by that ramp-up is kind of finalized is that over the past, what, 24 months, 30 months, then we have basically gone from a very little production to kind of where we were pre-COVID. So kind of as we see the next couple of years or at least this year and what we see is that the growth will be kind of proportionally lower. So that's what we mean by that.

And we can put more focus, as we mentioned, on operational excellence cost optimization and also to keep on strengthening the revenue generation. So being able to move the focus from the ramp-up to just normal operations will give us a lot of opportunities.

In terms of risk management, are you thinking about building other revenue streams that can hedge against low flight activity due to weather-related events or volcanic activity to make the bottom line more stable?

We have actually been working on simplifying and streamlining our operations and to put more focus on the airline operations, divested the hotel company, the incoming tour operator and so on. And as we see it, it has been -- we are on a good path there to have more narrow focus for the management. And the team in general is better. And so we are not going to move away from that strategy. However, we are also, at the same time, focusing on getting more revenues on, for example, on a commission basis from selling packages and so on. But to move into totally new direction to improve the revenue stream that is not on our radar now.

Here is a question on the fleet. First, on the Boeing 737 MAX. Do you expect any delays in aircraft deliveries following the implementation of Boeing regarding quality and safety?

No, not directly related to that. We have -- we are going to take delivery of 3 MAXs in the coming weeks and months and 2 of them are coming from Boeing and kind of work on those is progressing according to plan.

Could you give an update on the entry into service for the new A321 fleet?

Yes. So I mean, the company is already kind of preparing for that, and we plan to have the first aircraft delivered as early as October this year. And shortly following that, we will start to use the aircraft in operation. The exact timing of that, it's difficult to say at this point in time, but we'll see.

And then 3 more for [indiscernible]

And we will have 3 more in the months after that.

Here is the final question, and it's regarding next summer. Again, many airlines will have huge capacity on the North Atlantic routes next summer. Do you expect overcapacity on some routes?

On the transatlantic market, then, what we are seeing now is, the transatlantic market is showing a sign of strength. And as the bookings are now, the transatlantic market is relatively higher than at the same time last year. So in general, that market is stronger now than last year and the outlook for that market for the summer, it is just quite promising.

So that was the final question that we have.

Okay. So thank you all. Thank you, Ivar, and hope to see you again after 3 months. Have a good week, and thank you for attending.

Thank you.