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

Good morning, and thank you for joining us for the presentation of our Q1 results. My name is Bogi Bogason. And here with me is Ivar Kristinsson, our CFO. As usual, after the presentation, we will have a Q&A session. Please send the questions to the e-mail address [email protected]. But first, to the key highlights of information we published yesterday, despite the negative impact of the seismic activity in January, our passenger revenue generation was stronger than ever in the first quarter and the unit cost decreased by 5%, and we saw a very positive development in our cargo operations. EBIT was EUR 7 million lower than last year, which is all explained by the deviation in January. Liquidity continues to be very strong and was at the end of the quarter, USD 411 million. So, overall, we are quite pleased with the performance in first quarter of this year. Looking at some other key metrics within our company, most of them are at a very good place now, which is a very strong platform to build on. The on-time performance has been improving a lot between years and was 89% in March. Based on our customer service, the customer satisfaction is at a very high note and a score as the first choice carrier here in Iceland is at a very high level. And the employee satisfaction is also very high, and the trend is still upwards. But, Ivar, please take us through the details within the financials.

Thank you, Bogi and good morning, everybody. Let's start with going through the traffic figures for the quarter. Starting with the passenger traffic that increased 20% on a similar increase in our capacity, Loftleioir was slightly lower, 1%. And the reason is that January Loftleioir that were negatively impacted by the seismic activities. The Loftleioir improved year-on-year, both in February and March. Our capacity growth this quarter was concentrated on development to destinations with strong long-term revenue potential. In North America, it included extension to a whole year operation to Ralidurham and we added morning departure flights from KEF to Boston and New York that connect very well into our partners' airline networks there. On the European gateways, we added flights to Rome and Barcelona with our strong transatlantic gateways, and those flights increased the network connectivity. We also invested in capacity to slot-constrained airports where additional slots were awarded. But at the same time, we slightly decreased capacity to saturated markets, such as to the U.K., which did show some sign of overcapacity in the quarter. The number of passengers were 757,000 increasing 14% year-on-year. The market to Iceland was the largest market. 38% of passengers were on that market, but the number of passengers there decreased slightly year-on-year. A number of passengers on via increased significantly or by 48%, accounting for 35% of total passengers and the number of passengers on the market from Iceland increased 8%. These figures, they clearly show the flexibility of our route network and how we can shift focus based on the market trends from one-time to another. Our team achieved a great improvement in on-time performance, delivering an 84% OTP for the quarter, 89% in March, as Bogi mentioned, but the quarter, we had an improvement of 6 percentage points from last year. The improved OTP has a positive impact on our customer experience. And at the same time, it does improve operational efficiencies and reduces costs. Freight carried decreased by 9% on fewer freighter flights than last year, which was part of the measures we took to improve the profitability of the cargo operation by adjusting the capacity to the underlying demand and number of sold block hours in the leasing operation increased 9% and CO2 emissions per OTK decreased by 1%. To the financials, for the first quarter, EBIT was negative USD 69 million, USD 7 million weaker than last year and the negative development all being realized in January, as Bogi mentioned earlier. The EBIT margin was the same as last year. Passenger revenue increased by USD 28 million, driven by the 21% capacity increase in the route network and was at record levels. We saw a very positive development in the cargo operation and the profitability there, despite the 13% revenue decrease year-on-year, the cargo operation managed to turn a slight profit compared to USD 3.8 million in operating loss at the quarter last year. Our leasing operations continued to deliver strong performance, driving important revenue and reducing seasonality, that improves the utilization of our resources. Revenue in leasing segment increased by 8% and EBIT for the leasing was a positive USD 3.2 million. On to the cost side. Total operating expenses increased 11%, driven by the 21% increase in the capacity in the route network and lower fuel market price and more flying on the fuel-efficient 737 MAX had a positive impact on the cost development. Salary expenses were USD 95 million, increased USD 16 million year-on-year. The average number of FTEs or full-time equivalents were up 11%. But from 1st of March, we have outsourced our flight kits kitchen operation in Caloic approximately ISK 2 million on the salary cost due to the strengthening of the Iceland krona. There were also many other positive signs on the operating costs in the quarter. Our maintenance unit cost was lower as well as our handling costs as we continue to put emphasis on more leaner operation. The 6 percentage points in improvement in OTP also led to lower Eros costs, and that's cost as EU compensation and passenger recommendation costs. Overall, our unit cost was down 5% and ex fuel, the cost was down 2%. And finally, on the P&L, the financial costs were USD 3.3 million, slightly higher than last year, which was driven by foreign currency loss this year versus a gain last year. And net loss after taxes amounted to USD 59 million. On the fuel, USD 64 million for the quarter, down 4% despite the 21% capacity increase. The reduction in total cost is explained by lower fuel price and lower cost of the carbon emission allowances. In addition to, like I said before, the more flying on the 737 MAX that you can see by 4%. And, in fact, comparing to 2019, then our fuel efficiency was down 17%. Fuel price kind of the all-in fuel price for the quarter was USD 953, 13% lower than last year. Looking ahead on the hedges, then we have hedged around 50% of the consumption now for Q2 and Q3 at a price of USD 844 and USD 832 per tonne, respectively. And overall, looking at the next 12 months, we have 42% hedged at the average price of USD 832. Unit revenue or RASK in Q1 was USD 0.03, decreased 5% year-on-year. which is quite a good result in our opinion, given the capacity increase. And the revenue generation on Saga Premium was strong and partnership revenues continue to develop in a favorable way. Average yield was USD 0.085, reducing by 1% year-on-year, and that was impacted by the change in the mix of 2 from versus via passengers. Load factor was down 1 percentage point. Turning to liquidity. Then at the end of the quarter, we had cash and marketable securities in the amount of USD 359 million, increasing by USD 89 million from the start of the year. And in addition, we had available under committed credit lines in the amount of USD 52 million, bringing total liquid funds to [Audio Gap]. On the cash flow, net cash from operation was strong, USD 147 million for the quarter, and that was driven by good momentum in bookings. Net CapEx, USD 32 million. Majority of that was purchase of aircraft engines and investment in aircraft heavy maintenance. And on that note, as we stated in our guidance that we published earlier this month, then we do expect total CapEx or total net CapEx for the year to be in the USD 130 million, USD 140 million region. And finally, financing activities were USD 27 million, and that consisted of repayment of loans of USD 13 million and a similar amount in the repayment of lease liabilities. Total assets, USD 1.7 billion at the end of the quarter, increasing by 175 million from the start of the year. Noncurrent assets up by USD 35 million. The main drivers there are, in addition to the aforementioned CapEx are the addition of 2 leased aircraft to the fleet. That consisted of 1 737 MAX for the passenger network and 1 737-800 aircraft for the leasing operation. Current assets growing due to the seasonal buildup of bookings, and that increases both the trade receivables and the cash position. Equity was at USD 233 million, equity ratio of 14% at the end of the quarter. The equity ratio in this quarter or in the first quarter is negatively impacted by the seasonal buildup of the bookings and in comparison, the equity ratio was at 13% last year compared to 14% this year. And with that, over to you, Bogi the business update and outlook.

Thank you, Ivar. Yes, the year 2023 was the year we returned to profitability with record revenues. It was also the last year of rebuilding the company following COVID. It took a lot of focus on the effort, but now with more moderate growth into this year and going forward, the focus will definitely be on operational excellence, and we are mobilizing the whole company around that. At the same time, we continue to invest in the commercial infrastructure to increase the revenue generation further, which has been strong in recent months and year. However, even though the rebuilding of the company was a huge task, we have, at the same time, been working on initiatives that have and will improve our profitability. As you went through, we did see a lot of positive signs in unit cost in quarter 1. For example, we have simplified the organizational structure, resourcing and fuel management position. The economy of scale has been coming through. Our capacity is growing between years on the same overhead. Our cargo operations have been profitable during the last 2 months after heavy losses last year. And the actions taken there are forecasted to result in a positive full year EBIT this year. And that is a turnaround of almost USD 20 million. We are continuing on the path to narrow our management focus and simplify our operations. As Ivar mentioned, an international flight catering company recently took over the operations of our flight kitchen. Our people there or the people within our catering department have done a great job in the past. But with the continued growth, we firmly believe that a specialized company in this field can bring in best practices, both from efficiency and quality standpoint. And with our new and younger fleet, we have been revising and executing new maintenance strategy. And that, among other things, resulted in lower maintenance unit cost in quarter 1. And we will definitely continue on this path, having many initiatives on our plate that will further improve the company's profitability. We are working on reducing the seasonality of the business with actions such as increased leasing of aircraft in the low season to other operators, which will improve the performance during the quarters. We are also lowering sales and distribution cost relatively, that's done by lowering GTS fees and optimizing delivery of products and pricing across channels. We are reducing costs related to flight disruptions through better planning and effectiveness throughout the organization. And we are continuing to decrease fuel costs through optimization of operational processes. And at the same time, we are negotiating agreements with many suppliers to drive cost savings and we've already started to prepare for renewing the collective bargaining agreements with our flight crews with focus on increased flexibility for the benefit of the company and our employees. So, we can say that we are actually turning every stone within our operations. And post covered, the revenue generation of the company has been quite strong. However, we are working on and we see a lot of opportunities to strengthen it even further. First of all, by continuing to develop the network with new destinations and increased connections through additional frequencies and bank structure development. On May 1, next week, we are starting flights to fire Islands again. And by that and other actions, further strengthening our position here in the Arctic. And after the integration of Vita with Iceland, we are growing package sales and extracting synergies there. And our ancillary sales are growing through digital channel development and optimization of sales efforts throughout the customer journey. And to the partnership network, which is a vital part of our revenue generation and over 10% of our revenues are coming from partner airlines. Last year, we signed an agreement with Turkish Airlines and recently, we announced an upcoming cold sale agreement with Emirates. Being part of the sales and distribution networks of such accomplished airlines significantly strengthens our foot hold in Asia and Middle East. With the development of our free to network in the near future, we have the opportunity to fly into their hubs, which will strengthen the flow between the networks further. And our partnership strategy has proven itself. And in the near future, our plan is to strengthen the cooperation with current partner airlines and add new airlines to the partner portfolio. And if we look at the whole year 2024 in our route network, we are planning around 10% growth in our there compared to 80% growth in 2023. And our growth focus is mainly on opening new markets, increasing capacity to markets which are underserved and to increase connectivity to our partners' networks, both in North America and Europe. And we will continue to develop the 3 banks in [indiscernible]. By that, we can offer more departures tanks, which improves our product, for example, we will start morning flights to Seattle this summer. And by that, improved connectivity with our partner there, Alaska Airlines. And to the outlook for the year, as Ivar went through, and we said in the press release yesterday, we are seeing a bit of a change in the booking flow compared to last year. The market to Iceland is weakening a bit, and we believe it's because of the following reasons. First of all, we have been talking about and the tourist meters, we have been talking about the media coverage of the seismic activities and [ Recons ]. That has negatively impacted the flow to Iceland and the demand. And due to inflation and cost increases here, Iceland has become more expensive than many other destinations that Iceland is competing with. And post COVID Iceland wars, we can say one of the first destinations out of the blocks and now other destinations are coming in more aggressively, both in our near markets and further away and that is impacting the flow now to Iceland. But however, with the flexibility of our business and network, we have shifted our focus more to the bio-market and that is going well, even though the change mix puts a little bit pressure on the yields. And at the same time, the markets from Iceland and within Iceland are performing well. And the demand for our Saga products, product continues to be very strong, which is very positive and important for the unit revenues. And we have mentioned the turnaround of the cargo operations and the leasing business continues to perform very well. So, when we account for everything here, the guidance that we published at the beginning of this month, early April, remains unchanged. We expect the total revenue to be around USD 1.6 billion. We expect the EBIT ratio to be in the range of 2% to 4%, and we expect the net profit to be higher than last year. And so, to wrap things up, all in all, we are quite pleased with the performance in the first quarter. Many of our key metrics are at a very good place, and we are expecting improved results for the full year compared to last year. We are working on a lot of initiatives to improve the profitability further in the coming years. So, we definitely believe that Icelandair is firmly on the right track. And finally, I would like to thank our great team of employees for their hard work during the quarter and our customers for choosing Icelandair. And that concludes the presentation and brings us into the Q&A session. Hopefully, we have some questions.

Yes. We have a couple of questions on capacity. In retrospect, do you think the capacity increase in the winter '23, '24 was a good decision? And on the other hand, do you expect overcapacity on the North Atlantic routes in the summer?

First of all, regarding the hindsight, so to say, the capacity growth this winter, we are always looking after the long term, long-term profitability of our network and the routes and the capacity that we are put again. So, in short, we firmly believe that the development of the network and the management of the network has been successful. We have mentioned some overcapacity and sustainable capacity in mature markets. We have not been adding capacity there. We have been also rent through mentioned briefly. We slightly did cut down capacity to U.K., for example. So, our capacity growth this winter has been very strategic. We are focusing on underserved market. We are focusing on adding destinations like [indiscernible] into our full year operations. That was seasonal operations before and has been performing very well, so, all in all, we are quite pleased with what we have been doing on the network side. Regarding overcapacity in the transatlantic market this summer, we don't expect to see overcapacity there. We are seeing some growth between years, but we believe that the situation there will be, yes, just okay, so to say.

Here's a question regarding the air controller strike in December. How is the claims case against Isavia regarding that, going?

That case is just in our process as cases like that, it just takes time. Our lawyers are handling that for us. And there are no news regarding that at this point of time, but that is just in the process.

We have a couple of questions regarding the fleet and deliveries. Are there any delivery delays regarding the Boeing quality issues and slower production process?

Yes. I mean I could take that. We are, I think, 3 MAXs to the fleet this spring. We have already introduced kind of 1 of those 3 into the fleet. There are 2 coming straight out of the Boeing factories, and we expect them to be delivered in the coming days, so to speak. So, there has been slight delays, yes, but we are foreseeing that they will be delivered very shortly.

And what is the current status of the entry into service of the Airbus?

Yes, I can take that as well. The first aircraft is expected to be delivered at the end of this year, and then we will have the others coming early next year. That is the delivery plan as it stands now with Airbus and the kind of the induction as such and the preparation is going really well. We have started to train our flight crews. There are a few flight crews that will be flying Airbus this summer for another carrier. So, all in all, the Airbus implementation is on track.

How is the outlook for the cargo operation for the rest of the year? Do you expect to return to profitability after taxes for the full year?

Regarding last, as I said, February and March, we saw positive EBITDA there. And what we have said, we expect that the cargo company will return positive EBIT for the whole year, which is a great turnaround compared to last year, almost USD 20 million.

Do you believe that the goal of 8% EBIT ratio will be possible for 2025?

We have not laid out or published our plans for 2025, but we are very optimistic that in the near future, we will be reaching our long-term profitability goals, which is 8% EBIT over the cycle. So, our plans and strategy are completely unchanged there. We are just very optimistic that we will quite soon reach that, whether it will be next year or a little bit later, that remains to be seen. We are working on our plan for '25 now, but that's definitely still our long-term goal, and we are as optimistic to reach that goal as before.

Talking about the longer term, when do you expect flights to start to Istanbul and Dubai?

The same goes there. We have not finalized the plans. And regarding that, we are taking the first surpluses into the fleet, as Ivar mentioned at the end of this year and that gives us a lot of opportunities to develop the network. And then we get the Acela into the fleet in '29, which year it will be and how we will develop the network in the next few years remains to be seen. There are a lot of opportunities, both regarding new destinations and other frequencies to current destinations, and this is just an ongoing work.

So, that concludes the questions this morning.

Yes. Thank you very much for great questions, and we look forward to the summer and present second quarter in July. And just to clear the summer. Happy summer, as we stay here in Iceland. Thank you.