Icelandair Rides High Yields to Profits
Q&A With Icelandair CEO Bogi Nils Bogason
It’s easy to get distracted in Icelandair’s Reykjavik headquarters overlooking the runways at Reykjavik’s downtown airport. The occasional departing De Havilland Dash 8, soaring up over the city, immediately catches one’s eye. But Icelandair CEO Bogi Nils Bogason is seemingly immune to such distraction — as one would be after seeing it day in and day out — on a recent sunny May afternoon in this Nordic capital.
No, Bogason is serious about the airline he has led since 2018, and for good reason. Despite strong demand and historically high yields, Icelandair has only just turned around after several years of losses that pre-dated Covid. The carrier generated a 1.5 percent operating margin last year, and is on track to a 4-6 percent result this year — a level of return it has not achieved since the middle of the last decade. Why? Yields, mostly.
Bogason sat down with Edward Russell in Icelandair’s mid-century modern headquarters building to discuss what’s going right for Icelandair, and why he can’t put the threat of high inflation out of his head. The interview has been edited and condensed for clarity.
Airline Weekly: In April you said summer bookings were very strong, is that still true?
Bogi Nils Bogason: Yes, it’s still true. The booking flow is strong and, looking at the next six months, the bookings are 40 percent stronger than last year. So yes, the demand is still very strong.
AW: And to North America?
BNB: The flow from North America to Iceland and to Europe is still stronger than vice versa. But we are in a good position because we can shift our focus when things change, when the dynamics change. If the euro will become stronger against the dollar, we can shift the focus more to Europe and so on. And so that’s a good position to be in.
AW: Icelandair will fly its largest summer schedule ever this year, yet capacity is down compared to pre-pandemic. What’s happening here?
BNB: The reason is that we have been adding a lot of [737] Maxes to our fleet, and phasing out 757s. If you compare our fleet now to what it was pre-Covid, where we only almost only had 757s and 767s, we will operate 18 Maxes this summer and the Max aircraft has fewer seats. So when we say that the summer will be our largest ever, we are talking about in terms of destinations and frequency, but ASK [available seat kilometers] is a bit lower because we have smaller aircraft on average.
AW: Is Icelandair hit by Boeing’s delivery delays this summer?
BNB: We will operate 18 Maxes, and in total 34 aircraft in the international passenger network. We also
have 13 757s and three 767s in the fleet, I think that is total 34. We are not expecting any deliveries of new aircraft for the summer from Boeing, we are taking some Maxes for the summer from a lessor. But next winter we are going to add two more Maxes that we have already secured, and there are some delays there but it’s not impacting us for this summer.
But we are seeing what everybody else is seeing. The supply chain is a bit slower than pre-Covid, and so
we are seeing some issues for the spring for the wrap up [May to June period], which we have taken care of now. We have leased in one aircraft for just two weeks because of that.
AW: You recently said high inflation would impact travel demand “one way or another.” Tell me a bit more about your concerns.
BNB: No, not yet. Just history tells us that when costs are going up everywhere people start to spend less on some things — when groceries are going up, heating the houses are going up, and electricity is going up. This is just what we have seen in the past. So we are expecting that the inflation will impact demand in the end, but we have not seen it yet in our bookings. Where it will start, we don’t know and we are just ready for that. But still the demand is very strong.
But we can say on the other side, we could say that Covid taught the world that we would like to travel, we would like to meet friends and families and we would like to experience something instead of staying at home. So maybe what has changed will mitigate the impact of inflation — that people are prioritizing, they’re spending differently than historically and all our industries will just have to see how this will play out. But as I said, the history tells us that inflation will, in the end, impact the demand for most industries.
AW: Icelandair forecasts a 4-6 percent operating margin this year, a financial result it has not achieved since 2016. What’s driving the strong numbers?
BNB: That is actually below our long term EBITDA margin goal, which is 8 percent on average over the cycle. And you are completely right, there are quite a few years since we were able to generate that high EBITDA. But if you look back, Icelandair was doing very well in 2015, 2016, and 2017. But 2018 was the first year of loss making. And during those years the competition was very strong now, and we are operating in a very competitive environment. But in 2018, we were competing with Wow Air.
Wow ended up in a bankruptcy, and they were just trying to survive and fill the seats for very low prices. And that was very challenging environment for us because they had grown a lot. They were up to almost the same size as us, and not selling the seats for sustainable prices. So the competition affected our operations a lot. You can say irrational and sustained competition affected us a lot in 2018.
We also made some mistakes in our operations. How we managed the network, some decisions in the sales and marketing functions and so. And our CEO at that time resigned because of that. Then, in 2019, we were doing much better, and in the first quarter and we were in control, let’s say, of our operations. But then the Max grounding happened, and that impacted us a lot because the Max was supposed to be a big part of outreach in summer of 2019. So that cost us a lot of money. Then Covid happened. So that has been the last few years.
AW: You’ve mentioned it is still a very competitive environment, plus you have a new competitor, Play, launched by many former Wow executives. What is the difference today?
BNB: It is a very competitive environment, and we do welcome the competition. We are competing with Play but there are probably 26 other airlines flying to and from Iceland during the summer, and many of them flying throughout the year. So as before, the market here is very competitive and dynamic, and we just love that. We definitely respect the competition. Play is doing very well on the operational side, and so we respect the competition. That is just how the industry is — it is very competitive.
AW: What I’m trying to get at is how, with the competition, can you achieve 6 percent, 8 percent margins where you could not before?
BNB: There are a lot of things to it. We are doing quite well on the operational side. We have been focusing a lot on on-time performance, and we’ve seen a big improvement there. Of course, we are operating out of Iceland, which can be challenging during the wintertime. And then on the revenue side, we have been doing very well. We have been able to increase our unit revenues, which is very important because we are operating out of Iceland.
We are a small airline. We will never be able to get up to the economy of scale of like EasyJet or many of the other players that we are competing with. We have high living standards in Iceland, and we are paying high salaries. So we know the environment that we are operating in and because of that it’s very important that we are able to improve and increase unit revenues. And we have been able to do that, and we have been focusing a lot on strengthening the infrastructure there. Iceland over the decades has built up a very strong infrastructure on the commercial side. The Iceland brand is very well known in all our markets, even though we are very small, we have very strong sales and marketing sector.
We partner with airlines like JetBlue on the east coast of the U.S., and Alaska on the west coast. So we’ve been building up partnerships like that, and that is helping our revenue generations a lot. And we are feeding into their networks and they to ours. Then we have been focusing on improving our structure regarding network management and revenue management, and investing a lot there. The revenue generation that we have been seeing both last year and during the first quarter this year, I think they depict that we have been making the right decisions.
AW: Speaking of partnerships, would Icelandair consider joining an alliance?
BNB: We consider that every third or fourth year quite thoroughly. We probably did that the last time three or four years ago, it was pre-Covid if I remember correctly. But the conclusion has always been to stay out. We are operating a unique network here in the middle of the Atlantic, and the conclusion has been to stay out of the alliances and focus on partnering with airlines like JetBlue, Alaska, and SAS.
AW: Icelandair recently announced a major order for Airbus A321XLRs to replace its 757s. Why the XLR?
BNB: Yeah, so long story short, we have known for quite a few years that we have been the need for a full replacement for the 757 was coming up. And in 2012, we made the decision to go for the Max, and the Max has been doing extremely well in our network. Fuel efficiency, range, price, and so on. However, we needed the full replacement for the 757. Around two years ago, we went into a big project where we were analyzing and working on our long-term fleet strategy, what options do we have for our network, and so on. The conclusion was that we had two good options in front of us for our long-term fleet: One was just to keep the Max as a core aircraft in our fleet, and operate a few widebodies with the Max, the 767. And the 767 might be replaced with the 787 long term.
The other option was to start to introduce Airbus A321LRs and XLRs into our fleet. With those two options on the table, we set up a campaign between Airbus and Boeing, and the conclusion was the deal with Airbus. And there are of course endless things that come into a decision like this. Passenger comfort, how we can develop our network, transition cost, training cost, and then the whole financial motor and taking everything into the account. This was the decision.
One important factor is having an aircraft, a narrowbody aircraft, because the key of our business model is to operate a narrowbody aircraft between the continents. Why Iceland? Definitely we are using some 767s. But that is mainly where we have slot restrictions at some airports, and we need bigger aircraft. But the key to our business model is to operate narrowbody aircraft between the continents via Iceland, and having an aircraft that can do everything that the 757 can do and more creates a lot of opportunities for our network. That was of course a big factor.
AW: What new markets could the A321XLR open for Icelandair?
BNB: We had San Francisco in our network on the 767 but we can do San Francisco on XLR. So a narrowbody aircraft to the West Coast — Los Angeles, San Francisco, Houston, Phoenix — there are a lot of opportunities there. And then Dubai [to the east]. But we have not made any decisions. Those are longer term possibilities. We are just focusing on the network for this year and next.
AW: Any updates on the four XLRs Icelandair plans to lease for delivery in 2025?
BNB: It is in the final stages.