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

Good morning, and thank you for joining us for the presentation of our Q1 results. I'm Bogi Nils Bogason, and here with me is Ivar Kristinsson, our Chief Financial Officer. And as usual, we will go through a presentation. And following that, we will have a Q&A session, and please send us questions to the e-mail address [email protected]. In the first quarter, we saw operational improvements in all business segments, the passenger route network, cargo and our leasing business at Loftleiðir. Unit costs continued to decrease, driven by our focus on increased efficiency where we are just turning every stone as part of our transformation journey. EBIT improved by just less than $7 million between years, and net loss was just over $15 million lower than in the previous year. Cash flow from operations was very strong, $57 million higher than last year or USD 204 million, and total liquidity has never been stronger at the end of first quarter and stood at $510 million. We finished the quarter with a record load factor, even though Easter was in April this year. Our partnership with Southwest came into effect in February and has already resulted in bookings to and from over 70 airports in the USA. We are seeing slower bookings in the fall and into the winter than at the same time last year, and there is uncertainty regarding how travel demand will develop into quarter 4 this year. Near term, bookings for the summer in the markets to and from Iceland are stronger now than at the same time last year. And we expect profitability to be stronger in quarters 2 and 3 this year than last year. But Ivar, please take us through the financials.

Thank you, Bogi, and good to see you all. Let's start with some key metrics for the operations in the first quarter. Number of passengers rose 9%, while the capacity as measured in available seat-kilometers rose 7%, resulting in an improved load factor that was at a record level in the quarter. The From market or passengers there grew by 7%. To market grew by 3% at the same time. As in recent quarters, we have seen highest growth on the via market, while passengers within Iceland, they declined slightly, 5%, mainly due to more weather-related cancellations in the quarter than in the same period last year. As Bogi mentioned, we continue to make important steps in our sustainability journey and our relative CO2 emission decreased by 6%, which was driven by increase in flights operated by new aircraft, the fuel-efficient 737 MAXs and now the 321LR aircraft. We achieved higher load factor and our fuel efficiency program yielded good results. Freight carried reduced slightly year-on-year due to less dedicated freighter capacity and sold block hours in our leasing business rose more than 50% year-on-year. Looking at the financial results, where we reported positive development in profitability with EBIT being negative $62 million, but improving $7 million year-on-year. All segments improved compared to last year. And the net loss improved even higher or even more or by $15 million on higher financial income and lower calculated taxes. Total operating income was $287 million, up 11%, where passenger revenue was $214 million, which is a record for the first quarter as well. Cargo revenue, $21 million, on similar levels as last year, while leasing revenue grew 47% to $29 million in the quarter. Other operating revenue, $23 million, up 13% year-on-year. That was driven by positive development in our kind of tourism revenue segment. On the cost side, then operating expenses, excluding depreciation, was $309 million, up 5% year-on-year. This increased less than the capacity or the production, which then had a positive impact on the unit cost. We did, in fact, see positive development in most of our cost categories in the quarter. Salary development was positive. Total cost, $92 million, down $2 million year-on-year. We had average -- the workforce FTEs were average 3,175, around 8% lower than last year. Other aviation expenses and other operating expenses are growing with more production in both the route network and in the Leasing business. And we can see that -- or you can see that there are some shifts in cost between a few categories due to outsourcing of the catering services we did last year that happened at the end of Q1. Depreciation was $40 million, up by $6 million, increase explains by higher depreciation of both owned assets and leased aircraft assets. And net finance income, positive $3 million and improved $6 million year-on-year, where we had foreign exchange gain of $5 million in the quarter this year compared to a slight loss last year, all resulting in net loss before tax of $59 million for the quarter. Looking at the fuel cost development, then fuel expenses were $62 million, down 3% between years on the 7% capacity increase. The decrease results again from more fuel-efficient fleet and lower fuel prices. All in all, fuel price was on average $862 per ton. That includes hedges and all other costs and down by 10% year-on-year. Carbon emission credits were a bit more expensive this year, the cost per unit increasing 10% year-on-year. Forward-looking on the hedging, then we have 38% of the use in the network covered for the next 12 months at the average price of USD 749 with all hedges that are now in place for '26 at an average price below $700. The unit revenue picture, the RASK was $0.073, increasing by 1% on a record load factor in the quarter despite absence of Easter this year compared to last year. And as you can see in the picture here, we have now achieved improved unit revenues 2 quarters in a row. Saga Premium unit revenues were strong, increased 9% year-on-year. Overall, the yield was $0.08 and decreased 5% compared to last year. And kind of same picture on the unit cost and the development there, then the unit cost was $0.096, decreased 3% and the ex-fuel CASK was down 1%. Like I mentioned before, most cost items showed positive trends supported or due to our continued focus on efficiency. And we can see in the chart here that now we have seen overall unit cost decrease in 5 quarters in a row, which, of course, just reflects on the continued focus we have on leaner operation and discipline in spending. As expected in the winter months, we had this winter a few days with adverse weather impact here in Iceland. It was a bit more than last year. And if we compare the unit cost year-on-year, then kind of irregularity cost kind of had a 1% kind of impact on the unit cost in the quarter. Liquidity, very strong, as Bogi mentioned, cash and marketable securities, $418 million at the end of the quarter and increasing by $163 million from the start of the year. Cash from operations, $205 million, improving by $58 million compared to last year. Investing or cash used in investing $32 million. Thereof CapEx was $19 million and financing activities or net financing activities were $26 million due to the repayment of interest-bearing loans and repayments of operational lease liabilities. Credit lines undrawn at the end of the quarter of $92 million, bringing total liquid funds to $510 million, which is the highest liquidity we have ever had at this time of year and around USD 100 million higher than in the same period last year. Total assets, $1.9 billion, increasing by $257 million from the beginning of the year, primarily driven by the seasonal increase in passenger bookings for the high season, which boosts both the cash position as well as increases the deferred income line on the liability side. Noncurrent assets up by $39 million due to the addition of 1 A321LR aircraft, which also explains the kind of development or the movement in financial liabilities. Equity, $241 million, and the equity ratio was at 13% at the end of the quarter. And over to you, Bogi.

Thank you, Ivar. To the business update and outlook. First of all, regarding our flight schedule for this year. Looking at the full year, we are planning around 8% growth in our passenger network. The growth is focused on the off-peak seasons and on off-peak hours within the day. That will both improve our resource utilization and offer our customers more travel options than ever before. During the summer, we will operate 42 passenger aircraft in the route network, the same number as last year. Thereof 21 Boeing 737 MAX and 4 new Airbus 321LRs. And including Cargo and Loftleiðir, we will be operating 55 aircraft in the coming months. We are adding 4 new destinations to the network, Nashville, Tennessee, which we started earlier this month; Gothenburg, a summer destination starting in June. Istanbul starts in the fall with an addition of being a great destination itself. We will leverage our partnership with Turkish Airline and strengthen our reach into Asia and the Middle East. And finally, Miami with the first flight in October. And we are strategically growing our network outside of the peak period where increased utilization is driving down unit cost. And furthermore, it strengthens our position as the leading hub carrier in Keflavík, our home and -- our hub and home. And this growth is achieved by increasing frequencies to existing destination, developing counter seasonal destinations like Miami and Istanbul and extending the operating period of the second connecting bank starting before Easter and operating further into the fall. This creates more choices for our customers, but it's also a very important part of developing the network for high utilization of our new generation long-range aircraft such as the Airbus 321LR and later the XLR. And as always, we are, of course, monitoring demand and capacity developments in our markets very closely, and we will make full use of the flexibility of our network and operations to adjust capacity to demand at any given time as we see required. And addition to our network flexibility, our extensive commercial infrastructure puts us in a very strong position to adjust to any changes in our markets, both in addressing challenges and also to seize opportunities. Some of our strengths here are the robust Icelandair brand, which is very well known across our international markets, the Saga Premium product, our Saga Club, which is the largest loyalty program in Iceland and our valuable airline partnerships. The demand for our Saga Premium cabin continues to grow, as Ivar went through, and is driving very important revenue. And our Saga Club loyalty program, which supports customer retention and further revenue generation has been growing significantly and is approaching 2 million members. Regarding our airline partnership strategy, we have made significant progress in expanding our global partnership network. As already mentioned, we recently entered into a partnership with Southwest, which is already off to a very good start. Customers of both airlines can now seamlessly connect via Baltimore, Nashville and Denver and onward to Iceland and Europe as well as across Southwest extensive U.S. network. A little bit more about our fleet and the development there. Currently, we are operating 3 767 Boeing wide-body aircraft, and we recently finalized the review of our future wide-body aircraft strategy. Our conclusion there is to phase out these aircraft over the next years and place our focus on developing an efficient fleet of narrow-body aircraft. This decision aligns with our core strategy and the key competitive advantage, which is the ability to operate a narrow-body aircraft further east and west than our competitors by connecting via Iceland as well as it supports the streamlining of our cost base and operations in general. And we foresee that 2029 will be the last year Icelandair will be operating 767 passenger aircraft. The transformation journey we announced last year is progressing very well. Its main purpose is to improve financial performance by driving operational efficiencies, reducing costs and further increasing revenue generation. Over 400 initiatives are scheduled for implementation with 90 already implemented at the end of the first quarter. These initiatives have already started to have a positive financial impact, as we can see in decreased unit cost. And we expect annual gain of over $40 million at the end of last quarter and $70 million by the end of this year. And then to the financial outlook for the full year of 2025. The results for the first quarter were in line with our expectations and the current booking status for the coming months in the markets to and from Iceland are stronger than at the same time last year. And based on that, we expect profitability for the second and third quarters to improve between years. The performance of our Cargo operations is improving, building on a strong turnaround in the Cargo last year and the outlook in the coming months is positive. Our Leasing business is also business -- our Loftleiðir is also expecting to maintain its strong performance. At the end of January this year, we published a full year guidance. And since the issuance of the guidance, economic volatility has increased and caused uncertainty regarding long-term travel planning and bookings, which is reflected in a slower booking flow for the fall and the winter. At the same time, the Icelandic krona has strengthened by 10% against the U.S. dollar, which negatively impacts the competitiveness of Icelandic export industries and companies. And given the higher level of uncertainty regarding demand trends for the fall and the winter, forecasting fourth quarter results remains very challenging. And due to that, we are not reaffirming our full year guidance at this time. Finally, to summarize what we have been going through here, [indiscernible]. In quarter 1, Icelandair continued to deliver decreased unit cost in inflationary environment. And during the quarter, we saw operational improvements in all of Icelandair's business segments, resulting in improved EBIT and bottom line results between years. Cash flow from operations was very strong in the quarter with a record liquidity at the end of March or over USD 400 million. And based on current assumptions and bookings, we expect profitability in the second and third quarter to improve between years. Recent developments in the world's economy is creating some uncertainty in the demand for the fall and the winter, and we monitor these developments closely, and we are using our flexibility to adapt capacity to demand at any given time. And our focus is first and foremost on business areas where we can -- on business areas we can control. And we have already been making significant progress such as through our transformation program. And our strong commercial infrastructure and strengthened position is the key to adjust to the dynamic environment and address challenges and seize opportunities. And that concludes the presentation. And hopefully, we will have some questions from the audience.

Yes. We already have a couple of questions. The first one is, how is the future booking development into Q2 and Q3 from the U.S., Europe and Iceland?

As you've been saying, the current booking status from -- you can say in all markets is strong, stronger than last year for quarter 2 and quarter 3 for the high season. But it is the fall and the winter, which is creating uncertainty. Slower bookings now than at the same time last year for the last months of the year, but the summer is looking good, better than last year.

Is there any difference in the development in premium versus leisure segments?

Would you like to take that?

Yes. We are -- I would say that we are seeing improvements in both of those segments. But as we went through in the presentation, kind of the development in the premium products has been better, and we are -- we continue to see that trend.

You have a strategy for commercial cooperation with other airlines, latest Southwest. Do you have any plan to tie up with airlines in Europe?

We have been strengthening our partnership portfolio, and we are working with airlines in Europe and our strategy going forward is to [ have ] partners, strengthen the relationship with current partners, and our team is working hard on this, and we will have some news in the years to come.

That's it for the questions today.

Thank you very much. Have a good day.