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

Good morning, and welcome to the presentation of Icelandair's Q3 results. My name is Bogi Nils Bogason. And here with me is Ivar Kristinsson, our CFO. As usual, we will go through a presentation. And following that, we will have a Q&A session, and please send these questions to the e-mail address, ir@icelandair.is. But before Ivar takes us through the financials in a little bit of details, I would like to mention some of the key points of the information we published yesterday afternoon. On the operational side, our team performed exceptionally well with a record on-time performance month after month, which results in a lower interops cost and also improved customer satisfaction. The focus we have had on cost optimization is depicted in lower unit cost between years despite the high inflation environment. However, as in the second quarter, unit revenues were lower than last year because of softer demand on the market to Iceland. But despite the softer demand, we managed to ensure a strong load factor by using our flexibility and shift the focus to the via market. The yields on the transatlantic market were under a little bit of pressure due to increased capacity, which resulted in lower profitability than last year, with EBIT of $83 million compared to $112 million last year. And during the year, we have kept on strengthening our revenue generation, not the least by expanding our global partnership network. Here, I would like to highlight our announcement in September when Icelandair was introduced as the first airline partner of Southwest, which is one of the largest airlines in North America. And this is obviously an important milestone for Icelandair, and a great recognition for our company and our team. A little bit into the outlook. We are seeing the market to Iceland recovering, and the booking status now is stronger than it was at the same time last year. We are also seeing signs of unprofitable capacity exiting the market a bit, which will lead to yield improvements. And therefore, we expect to see considerably improved profitability in the fourth quarter. And regarding the next year, the year 2025, we are increasing our capacity by around 9%. The growth will mostly be in the shoulder seasons, and with limited additional resources, the same number of aircraft, which should contribute to lower unit cost. And we are expecting the improvement in profitability. We are forecasting quarter 4 to continue into the year 2025. And on this slide, you can see the changes in the passenger mix. The softer demand to Iceland resulted in 9% fewer passengers than last year, although we still transported significant number of passengers to Iceland or 550,000. This mix change also resulted in a 31% increase of via passengers. At the same time, we saw a 3% increase in from passengers. The demand on the from market is still strong, and we are seeing a preference to travel with Icelandair in all segments. I've already mentioned the improvement in on-time performance between years or 5.1 percentage points, which is a great achievement by our excellent team of employees across the whole company and many thanks to all of them. CO2 emission per operational ton kilometer decreased by 3% This positive development is due to high load factor, more block hours on the Boeing 737 MAX aircraft than last year and our strong fuel efficiency program. And freight ton kilometers decreased by 34% as we continue to adjust the capacity to the demand. But on the other hand, we saw a significant increase in sold block hours within our leasing business. And Ivar, now to the financials, please.

Thank you, Bogi, and good morning. If we look at the numbers for the quarter, then we can see that the third quarter results that we presented yesterday where we reported EBIT of $83.5 million, which represents a 15% EBIT margin. Lower than last year, and primarily, that was due to the decrease in passenger revenue that amounted to $497 million and reduced $12 million or 2% year-on-year. Cargo revenue was $17 million, down by $4 million compared to last year as we had fewer dedicated cargo flights as we scale down the capacity to better match the demand. Leasing revenue, $23 million, up by almost $10 million; and other income was $17 million, which was slightly lower than last year or by $1 million. Operating expenses amounted to $427 million, up by 4%, which was positive development as we saw the production, for example, in the route network grew that grew 8% in the quarter, that leading to an improved cost performance. Salary cost, $102 million, reducing slightly year-on-year. We had around 3,900 employees this quarter, down by 4% between years, and that is partly explained by the outsourcing of our flight catering operation earlier this year. The flat salary cost was also the result of the reduction that we did in the nonproduction headcount in May and published in -- or announced at that time, and less overtime costs in our production units as a result of the operational and on-time performance improvements. Aircraft fuel was $125 million, up 3% year-on-year and other aviation expenses, $95 million compared to $85 million last year on more production output as was the case with other operating expenses that were $106 million, up by $2 million year-on-year. Net finance cost, $1.7 million compared to $5.4 million last year. And that is explained by reduced and lowering of long-term debt, which we have been paying 12 months or by more than $60 million. And net profit of the quarter was $69 million, USD 15 million lower than last year. If we look at the revenue and the unit revenue, in particular, it was $0.084, 10% year-on-year decline. As like Bogi mentioned, we had also the decrease in the demand on the Iceland market or the market to Iceland and our shift of focus to the transatlantic, which put the pressure on the yields, and resulting then in the lower unit revenue. That can be seen with the via passenger mix or the via passenger proportion of our total passenger count representing 48% this year compared to 40% last year. Yield was -- or the average yield was $0.093, 11%, but lower than last year, but partly offset by the higher load factor, which improved by 1.4 percentage points. Revenue generation of Saga Premium was strong as it has been in recent quarters with unit revenue actually increasing there year-on-year. And as we have mentioned as well, it is comforting and pleasing to see the result we have achieved on the cost side this year, which is reflected in the unit cost reduction this quarter as in the last one, despite inflationary pressures in parts of the industry and here in Iceland. The unit cost in the quarter was $0.071, decreasing by 2%. And that is also true with the CASK ex fuel, if we look at that, that was down 2% as well. The reduction driven by good ops performance, including of 15% year-on-year decrease in unit cost related to irregular operations, our cost control and the continued introduction of the more cost-efficient MAX aircraft. And looking at the fuel, in particular, $125 million, up by 3% on the 8% production growth. And this favorable development is result of the more fuel-efficient fleet, good performance in our fuel efficiency program and the cost of the carbon emission credits were slightly lower as well. Weighted effective fuel price this year was $908 per ton, similar as last year. And looking ahead, then our fuel hedging position covers approximately 38% of the usage of the next 12 months at the average price of USD 798 per ton. And our leasing business continues to perform well, large or huge growth in the revenue in the quarter, and we do foresee that to continue in the coming months. The segment delivered $4.9 million in EBIT in the quarter, representing a 21% margin. Cargo continues to have a strong turnaround there or the turnaround in the quarter was close to $6 million year-on-year. And we still -- or we expect the cargo operation to deliver positive EBIT for the full year. Then looking at the cash flow and liquidity. We had a favorable development since start of the year in the cash flow. Net cash from operations in the first 9 months was $209 million. Investing activities, net investing activities, including CapEx was around $99 million. And financing activities, $77 million. Repayment of interest-bearing debt and reduced -- or reduction in the lease liabilities. And at the end of the quarter, we had $92 million in undrawn credit line or credit lines, bringing the liquid funds to a total of $396 million at the end of Q3. And finally, on the balance sheet, assets, total assets amounting to $1.6 billion roughly, increasing by $132 million from the beginning of the year. Noncurrent assets up $81 million due to new lease agreements and -- or new leased MAXs, new lease agreements in the leasing segments and other investments. On the liability side, other noncurrent liabilities growing on increase in the provisions of future maintenance events and trade and other payables, along with deferred income are higher than in the beginning of the year due to the seasonality of the business. And equity -- total equity $297 million, equity ratio of 18% in -- at the end of the quarter. And back over to you, Bogi.

Thanks, Ivar. Yes, a little bit of a business update and then the outlook. This quarter, the fourth quarter of 2024 will mark a very big milestone in the 87-year history of Icelandair when we will take delivery of our first Airbus aircraft and the preparation for the implementation of Airbus fleet is well underway within the company. So we will take delivery of 1 Airbus 321LR in this quarter and 3 more in the first half of next year. They will replace 4 Boeing 757 aircraft. So the number of aircraft in the fleet in the summer 2025 will be the same as this year. And the foundation of our business model, Icelandair business model and our key competitive advantage is the location of Iceland midway between Europe and North America. Our route network, as you can see here on the slide is the heart of our business model, where we leverage the location of Iceland to connect the continents, North America and Europe. At the same time, we are in a prime position to ensure a strong tourism market here in Iceland. And we are proud to be the first choice carrier among Icelanders. And to further unlock the opportunities of the network, we are continuing to renew our fleet, where the Boeing 737 MAX has been performing extremely well in recent years and has created a lot of profitable growth opportunities for us. And Raleigh-Durham is a great example of that. The Airbus 321LR will do the same. And with the introduction of Airbus 321XLR, new and attractive markets will open up. So in summary, the renewal of our fleet will create immense opportunities for Icelandair, and at the same time, be fundamental for the future development of Iceland as a tourist destination and a connecting hub. However, the location alone is not enough for an airline to operate from Iceland successfully. You have to have the right product and service for the market that you're operating in. At the same time, you need a strong infrastructure to compete in a very competitive international environment, and to be able to address external challenges that regularly come up within our industry and in our environment. And that is what we at Icelandair have. Over the decades, we have built up and invested in our leading hub carrier position here in Iceland, our extensive route network, our operational infrastructure where we strive for operational excellence and cost optimization in line with our product and service offering. We have our strong commercial infrastructure and diverse revenue streams. And last but not least, our experienced team of employees that make all the difference. And when it comes to our commercial infrastructure, we have been focusing on driving revenue generation and diversification further by enlarging our partnership network. In June, we signed a strategic partnership agreement with Emirates, which is the largest airline in the Middle East. Their extensive network will open up exciting and convenient travel opportunities for our customers across the Middle East and into Asia and vice versa. And in October, we signed the codeshare agreement with TAP. Customers traveling from Iceland can enjoy stopover in Lisbon before continuing to top destinations in Europe, Africa and South America. And recently, last week, we signed 2 codeshare agreements at the Arctic Circle Assembly here in Reykjavik with Air Greenland and Atlantic Airways. With these agreements, we will provide great connections between Greenland and The Faroe Islands on one hand, and North America and Europe on the other hand, via Iceland. And these agreements will drive stronger connections and share growth for the airlines and promote exciting destinations within the Arctic region. And finally, in September, we signed an MOU with Southwest Airlines, as I mentioned before, and becoming -- and by that becoming their first airline partner. Southwest is one of the largest airlines in the U.S., it operates over 800 aircrafts, has around 75,000 employees and carried almost 140 million passengers last year. And with our partners in North America, Alaska Air, JetBlue and now Southwest, we are extremely well covered in the U.S., which creates lot of opportunities for the future. And then on to the outlook for the remainder of this year, the Q4 of this year. The outlook for the passenger network is better than at this time last year, and the booking status is stronger. There are signs, as I mentioned earlier, of some unprofitable capacity exiting the market, which should improve yields in the market. And as Ivar went through, the turnaround of Icelandair cargo continues and the profitability of Loftleioir stays strong. So with all that, we expect to see considerable improvement in profitability in Q4 between years, and the full year EBIT to be in the range of negative USD 10 million to USD 20 million. And then to our flight schedule for next year. We will serve 55 destinations in the summer of 2025. We are adding 2 new, Nashville in North America, which will provide exciting connections for passengers from Iceland and Europe to different U.S. destinations; and the new [ W route ] in Gothenburg as a new destination. Frequency will also be increased to destinations where we have strong airline partners, leveraging these partnerships opportunities. And next summer, we will operate 42 aircraft in the passenger network, including 21 Boeing 737 MAX aircraft and 4 new Airbus 321LRs. But the number of aircraft in the fleet will be the same between years. And the growth for next year will be concentrated in the shoulder seasons, spring and fall, including an earlier start of the second [ bank ] just before Easter. And capacity during the summer peak will be similar to this year. Overall, we expect capacity growth to be around 9% in '25 compared to '24 with similar resources. So that should -- that growth will positively impact the unit cost. And as the lower unit cost shows this year, we have been focusing on improving efficiency to ensure improved profitability. And with that in mind, we initiated a comprehensive transformation journey in the first half of this year, which has already started to materialize. The primary objective of the transformation is to increase operational efficiency, mainly by lowering costs, but also through revenue-generating initiatives. We are -- during this journey, we are leaving no stones unturned and we have put a plan in place that will significantly contribute to reaching our long-term 8% EBIT going. And by the end of next year, our objective is that the transformation will deliver USD 70 million at an annual run rate with further impact in the following years. So we expect, as we've been saying, the improvement in profitability that we are forecasting in the fourth quarter to continue into next year and the impact of the ONE transformation journey will further enhance the operational results. So after a few challenging years, I firmly believe that Icelandair is in a very strong position now and has all the opportunities to create value for its shareholders and the Icelandic society. And that brings us to the end of the presentation, but hopefully, we have some questions from the audience now.

Yes. First, on the leasing business. Looking at the segment breakdown for the 9 months, the leasing operation is delivering higher EBIT than the route network. Will you put more emphasis on leasing going forward?

The leasing business at Loftleiðir has been performing very well this year and in the past and is very important part of our core business, we have been gradually growing there. We have won the largest customer. We added one aircraft this year there. And we have been growing the VIP business as well, but we are not expecting any step changes there. We just go after the opportunities we see. And -- but there are no plans for any big growth, just a gradual growth that we see general -- in general in our business. Right, Ivar?

Yes. I agree with that. And in addition to that, we are putting a lot of focus on kind of the winter capacity that we have in excess in the route network and the focus in the leasing business in the coming years will as well be on that -- to utilize that to as much as or as much as we can.

You referred to some unsustainable capacity exiting the via market. Is that only PLAY? Or are there other airlines doing the same?

We have seen the announcement from PLAY, and we've seen capacity taken out of the market in quarter 4. And based on the news in the market, we expect to see a similar development in the first quarter. So it seems that the capacity will be a bit more rational going forward than it has been in the past. So -- and we also see some international airlines cutting down capacity into Iceland, for example, for next year. So as I said, there are signs of irrational [ category ] going out of the market both in the market to and from Iceland and the transatlantic market as well.

Here is a question on -- yes. And also the -- on that note, what has the competitive impact of PLAY, where has it been the most. Is the impact equal across all markets to, from and via, or mostly in the to and from market?

We are, of course, competing mostly on the market to and from Iceland. Both airlines are fairly small players on the transatlantic market. So we are competing mostly on the markets to and from Iceland with local carriers as we've been doing in the past.

Do you see -- how do you see the development of yields on the transatlantic market in the next 12 months?

Would you like to start there, Ivar.

Yes. I mean, I think it's really -- it's difficult to evaluate how are the -- how is the development going to be so far out. But like Bogi, you're mentioning, what we are seeing in the forward-looking capacity, then kind of the growth seemed to be stabilizing and there was a high growth in that market last winter, which negatively impacted the yield. So it's kind of if we look into the next summer, we are quite early in the booking season. So I think it's too early to tell. But at least kind of if we look at the capacity side of things -- of the capacity and demand balance, then at least that seems to be developing more favorable than last year.

At [ Loftleioir ] because of decreased demand into Iceland or the market to Iceland at the beginning of this year. We did see if the [ focus ] quite rapidly, and we went quite deep into the via market, which impacted the yields quite a lot. Now we are seeing capacity going out of the market to and from Iceland that we can easily shift the focus back to the to market, and that should improve yields as well.