Icelandair Group hf. ($ICEAIR)

Good morning, and welcome to our presentation of the first quarter of this year. Time flies, one more quarter under the belt. My name is Bogi Bogason, and I'm joined by our CFO, as usual, Iva Sever Christenson, and we will go through the presentation. And following that, we will have a Q&A session. And please send us your questions to [email protected]. We can proudly say that Icelandair delivered a strong first quarter with record revenue, outstanding on-time performance and continued efficiency improvements. EBIT margin improved more than 6 percentage points year-on-year, the best first quarter EBIT margin since 2016. And turning to some of the key numbers from Q1. Higher yields and load factors drove a 7% increase in RASK, while total revenues were up 21% on 30% production growth. CASK was flat year-on-year despite considerable salary increases and unfavorable currency developments, a clear demonstration of the efficiency improvements that we have been focusing on. Leasing and cargo both continued to perform well, and our net loss was marginally higher than last year, driven by lower currency gains compared to last year. And liquidity reached an all-time high at the end of the quarter. And Ivar is now going to go deeper into the numbers. Please, Ivar.

Thank you, Bo, and good morning, everybody. Let's start with looking at some highlights of the traffic statistics for the quarter. As Poi mentioned, we grew the capacity by 13% in the quarter. The demand kept up with that and our load factor improved slightly year-on-year. It was -- the load factor was at a record level in addition to yields improving by 9%. Passenger traffic grew across all markets with particularly strong momentum in the front market, which grew 26%. In our operation, we delivered a strong 82% on-time performance, 1 point improved year-on-year, and that placed us among the most punctual airlines in Europe this quarter. And that is quite notable given the challenging weather that we had in Kelavik, especially in late March. And on sustainability, we reduced our CO2 emissions per tonne kilometer by 3%, driven by higher utilization of our MAX and 321 fleet. On the financial performance and the overview of the P&L, then the quarter shows meaningful EBIT improvement despite quite challenging cost environment, as Pai mentioned. Operating income reached $347 million, up 21% year-on-year. That was driven primarily by the passenger revenue, which grew to $258 million. We saw good growth in many parts of the business and again, with the from market leading the growth year-on-year. Cargo delivered almost 1 million in EBIT and leasing another 6 million. In the quarter, we sold a 767 aircraft and the gain on that sale of $8 million is recorded under the other operating income. On the cost side, operating expenses grew 16%, slower than revenue growth, slower than the revenue grew. And I will particularly cover the fuel and salary cost development a bit later in more detail. All this results in EBIT improvement from last year to a negative $53 million, $9 million improvement and over a 6 percentage point gain in the EBIT margin year-on-year. It is worth noting the -- or noting the development of the -- or the currency development. The dollar was more than 10% weaker against the Atlantic krona if we look at the average quarter-on-quarter, and that drove a net $10 million decrease in the EBIT on the EBIT level. Without that currency impact, the improvement in EBIT would have been even more pronounced as we are seeing here. On the salary cost and the key drivers there, we can see that overall expenses increased or salary expenses increased 18%. The contractual rate increases contributed to the upward pressure on that and in addition to the impact from the FX development. Just to clarify, when a weaker -- the weaker U.S. dollars, it inflates the salary cost. The salary cost is mostly in Icelandic krona, but when we report it in dollar, that gets inflated by the weaker dollar. But at the same time, efficiency was good and continues to improve as we have seen in the past few quarters. And this year, it increased by roughly 10% with average full-time equivalents growth of 3% on the 13% capacity growth in the quarter. This shows the continued productivity gains. And yes, as the capacity is growing significantly or it's significantly outpacing the growth in the headcount we have. As you can see here, the -- yes, the overall -- yes, the overall development is depicted on this slide. Yes, on the fuel, the cost bridge here and start with looking at the prices, then the sharp oil price spike that we've seen following the conflict in Iran had only a limited impact on Q1 as around 75% of our consumption in March was actually priced on the February averages. Nonetheless, the fuel price increased by approximately 10% year-on-year. Carbon emissions increased by almost $3 million, driven by higher proportion of our flights to Europe and slightly higher market prices year-on-year. That said, we had some important mitigating factors as well contributing here. The fleet renewal and the ongoing efficiency initiatives that we are working on reduced the fuel consumption and then our hedging position, of course, provided a meaningful support to the fuel cost when we compare it year-on-year. And looking forward, we have around 41% of the 2026 fuel consumption hedged at around $660 per tonne, obviously, well below the current spot prices and will dampen the financial impact should the elevated price levels persist. EBIT bridge for the quarter. The chart on the left here, the revenue growth, 21% was obviously the standout contributor, but -- and more than offset or compensated the external headwinds and the FX. On fixed FX, then the underlying business performance drove clear improvements in the profitability, as I mentioned before. And on the right, we can see a bit of a longer-term trend in terms of the EBIT, and that also shows good performance in Q1, steady improvement over the past few years and definitely a trajectory that we want to continue to see in the right direction there. Unit cost and unit revenue, starting with the unit revenue, then this slide shows quite well the positive revenue trajectory again. This quarter, RASK up 7%, driven by the stronger yields. And on the right side here, looking at the right or looking over the past 5 years, then we see a yield growth and -- or yield growth without any load factor trade-offs, so to speak, as well as we have been steadily growing capacity year-on-year in this quarter. Also on the left, you can see the shift in our revenue mix over the past few years as we are seeing premium share of the ticket revenue growing to approximately 21% of the total passenger revenue this quarter. And on the unit cost, CASK overall was flat, strong result, in my opinion, especially considering the meaningful FX headwind that we faced. The one program delivering results, improving efficiency and lowering the cost base and by that, mitigating some of the inflationary pressure. Capacity increased as well as we've talked about, that supported the unit cost development. And so overall, excluding the FX, the cost development was favorable, and we are quite -- or we are managing quite well what is within our control in the short term. The development is encouraging as we head into the peak season and going forward. Slightly on the FX development on the P&L. As I said, on the EBIT, the impact was NOK 10 million. And if we look at beyond the operational contribution, then the lower FX income was close to -- or the impact of FX on FX income or financial income, sorry, was NOK 4.6 million. And if we add the impact of the tax line as well on the P&L, then the total FX on profit was around NOK 18 million for the quarter, comparing it to the quarter last year. Cargo and leasing both delivered strong results in Q1. Cargo revenue up 8%, driven by higher import volumes and strong salmon exports. EBIT almost 1 million. And our leasing business performing well, continues to do that. Sold block hours up 22% in the quarter and delivering $6 million in EBIT. Together, these segments contribute quite meaningfully to the bottom line at the group level. Cash flow and liquidity. Net cash from operations, strong $201 million. Main contributor there, the strong bookings during the quarter. Our customers are booking the summer holidays, and that resulted in our liquidity growing by $160 million during the quarter. At the end of the quarter, cash and marketable securities, $524 million. And if we had the undrawn credit facilities, then liquidity was at $650 million, which, as Poe mentioned, was the record that we have had at the end of any quarter so far. And the balance sheet, equity improved $16 million to $303 million at the end of the quarter. The balance sheet is growing as well. So the equity ratio was 13.5% at the end of the quarter. The increase in the balance sheet from the start of the year, partly due to the additions of 2 leased 321LRs and the value of our outstanding fuel hedges. But mainly, this is a seasonal impact of the seasonal buildup of cash and as we build up bookings for the peak summer. And Boy, over to you for the business update.

Thank you, Ivar. Let me start by fuel, one of our most significant uncertainties we are currently navigating. As we all know, and Ivar went through, the conflict in the Middle East caused a sharp spike in the prices. But looking ahead, forward prices suggest some moderation from the peak from the current level. But obviously, there's a considerable uncertainty here. Fuel prices, they remain highly volatile and the near-term movement will just depend on how the conflict will develop. On the supply side, we have a stable outlook for the physical delivery of jet fuel across all of our definitions, which is quite reassuring. And we are taking concrete steps to mitigate the impact of fuel volatility on our business on top of the fuel hedges that we currently have in place. We have implemented fare increases across all markets, and we are applying strict cost discipline in all areas within our control. This chart gives you a snapshot of how capacity is being managed across the year. In the first quarter, we delivered 13% capacity growth as we've been talking about, fully in line with our strategy to grow outside the summer peak, reduce seasonality and improve profitability through more efficient use of our resources. Moving into this quarter, the second quarter, we have trimmed capacity by 2% to just over 2% from the previously announced schedule with a reduction focused on low load factor flights where passengers can be moved to another flight the same day and by that, minimizing customer disruption while improving profitability. Peak summer capacity in Q3 remained unchanged with capacity flat year-on-year. But from September onwards, we are reviewing further adjustments. The overall message is that we are being proactive in our response and adjusting where we have flexibility. On to the important One transformation program. Since the start of the program in 2024, 2 years ago, we have identified over 500 ideas for implementation, of which just shy of 300 initiatives have already been implemented. The initiatives span both the revenue and the cost side of our business. On the revenue side, we are focused on 3 key areas: making our pricing and revenue management processes more agile and responsive, refining our product and service offerings through selective unbundling of the product and strengthening our ancillary revenue streams. On the cost side, the program covers a broad range of actions such as increased automation, organizational restructuring and improved productivity. When fully implemented, the initiatives are estimated to deliver an annual impact of EUR 170 million. And this is a significant number, and it just underscores why execution of this program remains one of our highest priorities. And as many airlines, Iceland Air has had business functions in more than one location for decades. However, as part of our current transformation program, we have been putting more emphasis on exploring opportunities abroad to drive efficiencies, simplify and strengthen our core airline operations here in Iceland. First, our financial service center in Tallinn, Estonia, which we have been operating since 2002. This center handles accounting, ticketing and back-office services for Ifoner and remains a cornerstone of our finance and back-office support structure. During the last 2 years, we have been strengthening this support function. The second is our customer service center in the Philippines, which we have operated in partnership with a third party since 2017, and it provides a support for customer-facing operations. Third, recently, very recently, we are opening a technical service center in Lithuania in May this year, next month. This new division will take on responsibility for our third-party technical services -- the Baltics have a strong aviation culture and deep technical expertise, making it a natural fit for this type of operation for us. And fourth, we have signed a letter of intent to acquire a 49% stake in Maltice air operator certificate. This is a strategic step. The investment will provide Iceland Air with increased operational flexibility and open up new business opportunities. In summary, these 4 initiatives reflect our ongoing strategy to place the right functions in the right location, reduce our cost base and allow our Icelandic operations to focus on what it does best. And looking at our route network for this year for 2026, we continue to see a strong demand outlook and healthy yields -- we will operate over 60 destinations with a fleet of 41 aircraft and with 6.2 million available seats. Our network is supported by 3 connecting banks generating over 800 connection possibilities through jetlag. The capacity is up around 1% from last year, but the composition is important. The growth is weighted on European destinations with increased emphasis on Southern Europe and Scandinavia. This reflects the strategic shift we discussed earlier in response to the weaker U.S. dollar, reducing our transatlantic and U.S. exposure while capitalizing on a strong European demand. We have already announced 4 new destinations this year, Faro in Portugal, Venice in Italy, Kitanskke in Poland and Tron in Norway. These additions further strengthen our European network and align very well with our current network focus and strategy. Taken together, this is a network based for the current environment, diversified, demand-led and positioned to deliver strong yields. Regarding our fleet, we have 3 stories to tell there, starting with the utilization. In 2026, we will operate a fleet of 52 aircraft with 35 serving international routes and 6 on the regional markets. The international fleet has been reduced by 2 aircraft in summer 2026 following Boeing 757 and 67 retirements. And importantly, 90% of our international flights will be operated by Boeing MAX and Airbus aircraft, our most modern and efficient types, delivering approximately 30% better fuel efficiency. And in the current fuel price environment, this is very valuable. On the Airbus side, our fleet transition is progressing well. We currently have 6 Airbus in operations, growing to 9 in summer 2027. to bridge a small gap caused by a delayed Airbus 321 LR delivery. We are working on securing Airbus 320 CEO aircraft that will enter the fleet before this summer in the next few weeks. We are also actively working on securing aircraft for delivery in 2027 and '28 as we finalize the phaseout of the 757 and the 767. And at the same time, we are growing the fleet. And finally, on fleet retirements, the Boeing 767 fleet is planned to retire after 2026 Christmas period in our international network. And our base plan assumes a limited number of Boeing 757s aircraft remaining in operations through the fall of next year. However, if fuel prices remain elevated, we may accelerate the 757 retirements potentially after the summer season this year. And our shareholders and the investor community have been asking about the ongoing negotiations, the status there. The collective bargaining agreements with the unions representing our pilots, cabin crew and mechanics all expired last year, and negotiations are currently underway across all 3 groups. On cabin crew, discussions are progressing, but for pilots and mechanics, the negotiations have been referred to the state mediation, which is a standard part of Icelandic labor relations process when direct negotiations require additional support to reach a conclusion or a resolution. And I want to be very clear about what we are focusing on in these negotiations. It is to reach agreements that allows us to continue to offer attractive aviation jobs here in Iceland for the long term. And to be able to do that, we need outcomes that safeguards Iceland Air's competitiveness support our fleet and network growth ambitions and increase our operational flexibility for Liflandel to be able to run a resilient airline in a highly competitive environment. And then to the financial outlook for the year, which is definitely subject to a high level of uncertainty. The fuel price volatility will pressure our margins from this quarter or the second quarter. That said, we are not without offset. Our hedges, strong demand outlook and improving yields will absorb some of that impact and the mitigating actions we have outlined today will further dampen the effect. The net impact on our full year results will ultimately depend on how fuel prices develop from here, both the duration and the magnitude of price movements and importantly, how any sustained fare increases will impact the passenger demand. If you look at just the second quarter, as we see it now, unit revenues are expected to improve between years, but with higher fuel prices, we expect profitability to be lower than last year. And to close before we go into the Q&A session, I would like to bring together the 4 takeaways from the presentation. First, the first quarter was a very strong quarter. We delivered a record revenue and load factor, improved efficiency and outstanding on-time performance and the liquidity has never been higher. And I would like to thank the factor team for great performance in the quarter. Second, we have made strategic network adjustment in response to the current environment. Thirdly, we are taking concrete mitigating actions in response to the volatility. where increases have been implemented across all markets. Capacity has been trimmed and further adjustment for fall and winter remain under active review. And fourth, we are transforming for the future. The ONE program is delivering real and lasting change to how we operate. In first quarter, we saw considerable efficiency improvement with decrease in nonproduction FTEs on 13% capacity growth. The current environment is obviously challenging, but Icelandair is responding with discipline, agility and clear strategic direction. And that takes us to the Q&A session.

We already have some questions. First, regarding outlook for Q2, is your base case a negative EBIT in the quarter?

Yes. Okay. So I will take this. Base case or not, I mean, if you just look at the current fuel prices of where we have the spot close to USD 1,500, then obviously, we're going to -- that would result in a loss for the quarter.

You say demand is strong. Can you shed any light on how strong it is compared to last year?

As we have been going through, we have been raising fares in all markets, but the demand is still strong. The bookings are very strong in all markets. So the fare increases have not been impacting the booking flow or the demand. So the demand situation is just very strong in all markets.

How much does jet fuel have to decrease from current levels for your Q2 profitability to be flat year-on-year?

Yes. On that, I mean, obviously, that is going to be somewhat impacted also by the -- how we see the yields and the revenue develop. But again, looking at the current spot levels, then we would have to see at least a double-digit reduction in the fuel prices in order for that to be the result.

To expand on the fuel situation, what is the outlook on fuel hedging?

So as we went through in the presentation, we have around 40% hedged for this year. Before this conflict started, we have been building up quite a good hedging position on really favorable prices. So at the moment, the situation is quite good. I mean our policy calls for up to 50% hedging 6 months into the future. And from month 7 to 12, we hedge up to 40%, and we will just continue to hedge according to that policy.

Regarding the possible Malta operation, do you envision operating a part of the passenger network through the Malt AOC?

Yes. We signed the LOI at the beginning of this month, and we have been working on the business plan and the negotiation are taking place. So it is, so to say, in the initial stages. As we've been saying, we see this as a platform for Lote, our leasing arm. Lofte has not been competitive in the typical ACMI market in Europe, for example. So by this, if this will take place, this could create opportunities for Lofte. We also have a very high seasonality in our business as many other airlines, but because we are located here in Iland. -- very notably, we have more seasonality than most of our competitors, and they have more flexibility to address the seasonality. And this platform could be a tool to address the seasonality as well. So -- but this is in the initial status. We are working on the business plan, and it remains to be seen how this will develop.

Can you share any information on the scale of the savings by simplifying the fleet, first by retiring the Boeing 757s and then the 767s. Are we talking single or double-digit numbers in USD millions on an annual basis?

Yes. So on the simplification of the fleet, as you mentioned, it is it is going to bring considerable savings when we face or when we have, yes, totally phased out those fleet types. What I would say is that I would look at it as being single-digit savings rather than something more than that. And there, I just want to just reflect on that, we have already phased out a large part of the fleet. And yes, and also that fleet, it had some advantages as well. So if you look at the net impact, and we're talking about single digits.

A bit more on the fleet. Is the A320 leased to fill the A321 delivery delay?

Yes. Yes, that's the case.

When do you decide to phase out the 757, maybe after this summer?

I think we will do it earlier. We are just working on it now, looking into it now and reviewing the fleet plans based on the current environment. And we will probably decide on that before end of May.

Okay. Then here's a question on demand on the North Atlantic. What is the current situation there?

Would you like to start? I would ask you to that question.

So the market, as we have been saying, we have been rebalancing our network very successfully, putting a less focus and exposure on the transatlantic market and the U.S. market due to you see stronger demand and higher yields on the markets to and from Iceland. And by that, we have been able to increase the yields quite a lot. So it's still the situation that to and from Iceland, Europe, Scandinavia is stronger than the transatlantic market and the U.S. one.

Okay. That concludes the questions for this morning. Thank you very much.