Icelandair Group hf

ICEX:ICEAIR

Q2-2025 Earnings Call

[Bogi Bogason, executive]

Good morning, and welcome to Icelandair's presentations of the Q2 results. I'm Bogi Nils Bogason, CEO of Icelandair, and with me here is our CFO, Ivar Kristinsson. We will begin with the presentation and followed by the Q&A session. Please send us questions -- your questions to [email protected].

And here on this slide, we see a snapshot of our performance in Q2. Passenger revenue reached a record $393 million. Cash flow from operations was very strong, 7% higher than last year. Net profit rose to $13 million, but EBIT was negatively affected by currency fluctuations and softer demand on the yield pressure and yield pressure on the transatlantic market. Cargo and leasing segments continue to perform very well and on-time performance was 87.2% and we were rated the most punctual airline in Europe in April and June by Cirium. And thanks to our great team for excellent work there. And we maintained a very strong balance sheet with record of $572 million at the end of quarter 2.

Ivar, over to you for more details on the financials.

[Ivar Kristinsson, executive]

Thank you, Bogi. Let's start with some summary of the traffic statistics. In the quarter, we had 13% over or year-over-year increase in the passenger network capacity measured in available seat-kilometers. This growth was supported by the early launch of the second connection bank at -- in Keflavik in early April, coinciding with the timing of Easter compared to starting the bank in mid-May in last year. That initiative aligns with our strategy to expand operation beyond the peak season, which is kind of facilitated by the continued addition of more cost-efficient fleet, which has enabled new opportunities.

New routes were launched to Nashville and Gothenburg alongside increased frequencies to several high or -- yes, larger markets.

Passenger traffic measured in RPKs rose by 14%. Passenger numbers, total passengers increasing to 1.4 million from 1.2 million in the previous year. And the load factor improved 82.1% this year compared to 81.6% last year.

During the quarter, 35% of passengers were traveling to Iceland, 17% from and 44% were connecting passengers, 4% were traveling domestically. There are also particularly strong growth in the To and From market segments where passenger numbers increased 22%. And this shift, it resulted in more favorable passenger mix and positively influenced the overall yield development, partially offset by the softer via market as Bogi -- passively offsetting the software via market as Bogi mentioned. Almost 20% of our passengers or connecting passengers take advantage of the stopover program that we offer. And by that doing that positively contribute to the tourism here in Iceland.

Finally, our CO2 emissions per OTK decreased 4%, reflecting an increase in flights operated on the fuel-efficient 737 MAX aircraft and the 321 LRs as well as higher load factors.

As Bogi mentioned, the results -- the financial results for the second quarter show a net profit of $12.9 million, which is $12 million higher than in the same period last year. EBIT was negatively impacted by the strengthening of the Icelandic krona, the ISK, and lower yields on the transatlantic routes as is visible in the results for the Route Network segment. Meanwhile, the Cargo and the Leasing segment reported improved outcomes.

I will provide a little bit further details regarding the FX impact on the P&L later. But first, let's reflect on some of the financial figures.

Operating income was $463 million, up 13% compared to the previous year. Passenger revenue reached $393 million, up 11%, marking a record for the quarter. Growth was seen across all markets, with the most significant increase observed in the market to Iceland. Cargo revenue, $19 million, up 13%, mainly due to strong development in imports into Iceland. Leasing revenue $30 million, up 46% compared to last year, while other income stood at $20 million, a 9% increase.

To the operating expenses, then the OpEx, excluding depreciation, were $419 million, up 13%. Salaries and related costs increased by 16% to $124 million, which was influenced by the stronger ISK and wage or contractual wage increases.

Aircraft fuel, $96 million, down 1% compared to last year despite the 13% increase in route network capacity. That was attributed to lower fuel prices as well as more flying on -- or the fleet renewal with more fleet -- fuel-efficient fleet. And all that was partially offset by the cost of fuel hedges in the quarter.

Average fuel cost was $807 per ton, reducing 14%. Other aviation expenses were $94 million, increasing by 28%, primarily from higher production the fleet renewal and the inflation in many cost items.

Other operating expenses of $105 million, up 14% due to more business operation and the stronger krona.

Depreciation amortization were $43 million, up from $37 million last year on greater or more production and higher depreciation of owned and leased aircraft assets as the fleet is renewed.

Finance income, positive $5 million, $7 million better than last year, and that was driven by the FX gains on funds in Icelandic krona, appreciating against the dollar. And as a result, earnings before taxes, $6 million, net profit, $12 million, both reflecting year-on-year increase due to improved profitability and the effect of the stronger krona on deferred taxes on the balance sheet.

Here, we are highlighting the key factors driving the EBIT change between the quarter and the same last year, as can be seen when we eliminate the impact of the currency movement, then comparable EBIT is improving, showing here by $10 million year-on-year, among other things, due to the positive impact of more production and the transformation program as we see both labor costs as well as other efficiency improvements positively impacting the results.

As I mentioned, we also continue to see quite an inflation in some cost categories such as airport and navigation fees as well as in some maintenance cost categories.

The impact of the FX impact of the strengthening of the ISK is around $12.6 million on the EBIT and that is net of currency hedges for the quarter. And as mentioned in the previous slide, then the appreciation of the krona led to a negative effect of $12.6 million on EBIT. But however, when we kind of look at this through the bottom line through the entire P&L, then the impact is positive $2.6 million and that is due to the impact on the finance costs and the tax provisions. The positive impact on finance income comes from a significant cash balance in krona, which gained value as the currency strengthens, value in U.S. dollars that is. This -- while currency shift post challenges on the operating profit, those kind of strategic cash holdings helped to mitigate the net earnings impact.

And additionally, the tax liability was affected due to those -- due to deferred tax assets, which are the nominated in krona, which fluctuate with the currency movements as well.

Here, we see kind of highlighting a key development in the operational efficiency on the labor cost as -- despite a 13% increase in the production, the number of FTEs remained largely unchanged compared to last year. Majority of our costs or salary cost is in krona and the stronger krona against the dollar had around a 10% impact on the salary cost this quarter. And again, partly -- the impact partly offset then by currency hedges that we have in place.

Shifting a little bit to unit revenues. Then as we have mentioned, the overall decrease or the overall development was a decrease by 2% year-over-year on 13% production increase. That was driven by the low yields on a via. But the weakness was, to some extent, offset by our focus on the To and From markets, which improved the overall passenger mix.

And in addition, kind of notable information or figures is that the premium revenue outpaced economy revenue, premium rising 15% compared to 10% of the economy. You can see there also that the other revenue bucket was slightly lower year-on-year. Those revenue include regular accounting adjustments and we do see fluctuations in those items, both downwards and upwards from 1 quarter to the next.

Cargo and Leasing performing well. Production in those segments grew quite significantly in the quarter, block hours in Leasing increasing by 43%. That is both attributable to current and kind of developing contracts and freight carried or freight in the cargo system grew 10%. Cargo segment continued to show improvements in EBIT performance. We have seen that in recent quarters and the Leasing business maintained a robust 18% EBIT margin on 37% revenue increase.

Cash flow, strong. Cash and marketable securities, $480 million at the quarter end, up $63 million from the start. Net cost from operation, USD 118 million with $47 million used in investing activities, thereof around $19 million in net CapEx.

Financing activities, $28 million. That's repayment of loans and lease liability and with credit lines of $92 million, our liquid funds at the end of the quarter reached $572 million by the end of June.

And finally, on the balance sheet, then total assets, around $2.1 billion end of June, increasing from the beginning of the year due to the continued fleet in -- or in the passenger network. That included additional 321 LRs that we added this spring as well as due to kind of the seasonal buildup of bookings for the summer.

Cash and marketable securities growing significantly, and that is also reflected on the deferred income on the liability side, which grew $180 million for the first half year.

Total equity, $283 million at the end of June, equity ratio of 14% compared to 13% last year. The equity is positively impacted by that strengthening of the krona and as visible in the total comprehensive income, then due to currency translation differences as well as positive position of open cash and fuel hedges. Some of those items will flow through the P&L in the coming quarters if the kind of will be on a similar level as of now.

So with that, over to you, Bogi, for you for the business update.

[Bogi Bogason, executive]

Thank you, Ivar. The first a brief snapshot of our markets as we see them now. First, the 2 market, demand still remains strong on that market despite the high really change of rate of the Icelandic krona. And the From market, we are seeing a record strength in outbound travel. And our market share on those markets that went from Iceland continues to grow, and that is just reflecting our focus on these segments. And as we've been saying, the via market remains soft, primarily due to the geopolitical situation, which is affecting transit travel and putting some pressure on yields there.

Our domestic market here in Iceland remains stable and continues to contribute positively to our whole profitability.

And as we've been saying, both cargo and leasing segments continue and have been performing very well with strong performance and a promising outlook for the remainder of the year. Looking at the first 6 months of the year, cargo returned 7% EBIT margin, building on last year's turnaround and expectations there remain positive for the remaining of the year.

The Leasing operations after delivered an impressive EBIT margin of nearly 19%. During the same period, the first half and all major projects there are performing well, supported by expanded fleet and their lease. And the outlook for the second half there is also quite strong.

Together, these segments Loftleioir and Icelandic Cargo play a vital role in diversifying our revenue streams and our overall financial stability.

And Ivar went through how the strength of the Icelandic krona has been impacting our operations in recent months. Over the past year, the krona has appreciated considerably. And at the same time, domestic inflation remains more persistent than in many other markets. And together, these factors have driven the real exchange rate to near historical highs. And in the past, such situation has proven and sustainable and is now posing challenges for export sectors and tourism is there included. It is, therefore, very critical that the economic policy reflects this situation, especially when we consider the government's announced the intention to raise taxes on the tourism sector.

And as we been highlighting, we are currently facing pressure on yields in the via market alongside the strong Icelandic krona. But we have seen a scenario like this before, and we have a clear playbook to navigate through a situation like this. In fact, the slide here is taken from a presentation that we had when we were raising equity in 2020. And when the krona is strong and the via market is soft, growth is not our priority. Instead, we take targeted approach to capacity restraints. Our focus shifts to the To and From markets. At the same time, we actively seek new profitable mixes. And this approach has proven effective in past cycles in recent decades and is still the framework that we use for our decision making.

And if you look at how we are navigating through the current environment, firstly, we are not expanding during the high season. Instead, the growth is concentrated in the shoulder seasons and the off season with the same number of aircraft and employees of last year, which improves efficiency and helps driving down unit cost.

Secondly, our emphasis is on the To and From markets as a 22% growth in Q2 shows.

Thirdly, we are identifying and capitalizing on high potential routes. Nashville and Gothenburg, which we started this year are good examples of that. And our new and efficient fleet enables winter expansions to destinations like Miami, Malaga and Edinburgh. In Istanbul, we're going Istanbul in September, and there, we are leveraging our partnership with Turkish Airlines and addressing strong demand to visit Iceland from Asia.

Finally, looking ahead to Summer 2026, planning is already underway. And if current conditions persist, we will not grow during the high season. We have the flexibility, if needed, to reduce capacity by retiring more 757s, which have low ownership costs conversely. If the condition improves changes, we can extend the life of selected 757s to support further growth.

And at the same time, we remain laser focused on what we can control, continuously strengthening the company. Our fleet modernization is well underway. The introduction of Airbus 321 LR has been a great success and its performance alongside the Boeing 737 has been excellent. These aircraft unlock significant opportunities for expanding and developing our route network. And our team has done an outstanding job in improving our network efficiency. This is clearly reflected in our on-time performance, and that not only reduces cost but also enhances the customer experience. And we continue to invest in improved processes, systems and equipment across the operations.

At the same time, we continue to strengthen our commercial foundations where the Icelandair brand remains very robust. Saga Premium is in high demand and plays a key role in driving unit revenue. Our Saga Loyalty Club, by far, the largest loyalty program in Iceland is essential for customer retention. And in Q2, we expanded our airline partnership, signing a new agreement with Air India and extending our collaboration with both Southwest and Turkish Airlines. And in our transformation journey, one, we are leaving no stone unturned. At the end of the quarter, we have already carried out 170 initiatives that are expected to deliver $90 million an annual impact when fully implemented. And with further gains anticipated in the years ahead.

Looking at the capacity here To and From Iceland, as history, and global airline data consistently show having 2 hub and spoke carriers operating from the same small or medium-sized airport or hub is not a sustainable model. However, this has been the reality at Keflavik Airport for the past few years, but that is now changing. Starting this fall, Icelandair, will be the only hub-and-spoke carrier in Keflavik. In quarter 3, our capacity in Keflavik remains flat, while the total market capacity is down by 5%. And in Q4, other carriers are reducing the capacity by 11%, while we are selectively stepping in where we see long-term profitable opportunities. Despite this, total market capacity will be down by 4% in quarter 4.

This transition to more rational capacity situation will strengthen our position and allow us to optimize our network and resources in line with the market and the demand. And through the financial guidance for the year and next quarters, for the full year, we anticipate the EBIT to be at breakeven. So now we have some backer. I didn't see the slides. Yes, we anticipate EBIT to be at breakeven for the full year. Bookings for the peak summer period are ahead of last year, reflecting strong demand. However, yield pressure continues on economy fares in the via market. Despite this, EBIT profitability is expected to improve year-on-year in quarter 3.

While the bookings are slower into quarter 4, yield improvements are forecasted in both the To and via market and EBIT is expected to be in line with last year EBIT profitability. And our guidance assumes a strong ISK throughout the year with USD-ISK exchange rate of 1.23. If the krona has remained at last year's average level throughout this year, our EBIT guidance would be approximately $50 million higher, assuming all other factors remain unchanged.

And in summary, what we have been saying here today, me and Ivar, in Q2, Icelandair delivered a net profit of $13 million with a very strong cash flow from operations and record liquidity at the end of the quarter. At the same time, EBIT was impacted by foreign currency fluctuations and softer demand on the transatlantic market.

After several years of unsustainable competitive environment in Keflavik with 2 hub and spoke carriers, the landscape is now shifting from the 4 and onwards. Even though the competition will continue to be fierce with over 20 airlines flying to and from Iceland, this development strengthens our position considerably. And our focus remains firmly on factors that are within our control, and we are actively transforming the business for the future.

With that in mind, we are definitely confident that we will, in the near future, reach our profitability goals and thereby create long-term value for our shareholders.

And this concludes the slides on the presentation. But now it's the Q&A session. And our environment is dynamic, so there must be a lot of questions coming in.

[Unknown Executive]

Yes. We already have some questions both on the results and the market development. So first question, can you comment on how much of an impact the stronger ISK has had on your results this year? That is, can you quantify the impact on EBIT?

[Bogi Bogason, executive]

Do you want to?

[Ivar Kristinsson, executive]

Yes. Yes, as we went through in the presentation, our estimates are of year-to-date impact of $12.6 million on EBIT. The impact is much more on the cost side than the revenue side as, of course, we sell kind of flight tickets well in advance and conjuring a very important booking period kind of the like early spring. And then kind of the FX was kind of more on par with last year. So yes, predominantly, the impact is on the cost side. And as Bogi mentioned, if you look at the year as a whole, we roughly estimate the FX impact given the kind of current FX level to be around $50 million for the full year.

[Bogi Bogason, executive]

The question was about the first half and the first quarter was -- it was a minimum impact on the first quarter.

[Ivar Kristinsson, executive]

That's right.

[Unknown Executive]

Can you share some light on the change in impact of the 1 transformation journey? So far, the impact has been estimated $70 million, which you have reported previously and has now increased to $90 million. Is the change coming from cost or revenue initiatives or both? Does the weaker USD have any effect?

[Bogi Bogason, executive]

So it's both. As we mentioned, it's 170, 1-7-0 initiatives that we have already implemented or are being implemented. So it's both cost and revenue initiatives. But the difference from $70 million to $90 million, it's more revenue initiatives than cost.

[Ivar Kristinsson, executive]

Yes. And it is all new initiatives. It's not reevaluation of the previous $700 million due to FX improvement or development.

[Unknown Executive]

Just to clarify, when you say that you expect profitability to improve in Q3, are you referring to the absolute EBIT number, the EBIT margin or both?

[Ivar Kristinsson, executive]

We are more referring to the absolute number. But in general, both are improving in Q3, both the margin and the absolute figures.

[Unknown Executive]

Are you still confident in your target of achieving a long-term 8% EBIT margin?

[Bogi Bogason, executive]

Yes, as I said in my final slide and in my final remarks, we are confident on our -- that we will reach our long-term profitability goals, which are 8% EBIT over the cycle. We are turning every stone within the company. There are a lot of things, a lot of metrics that are developing in a positive way. And we have a playbook to navigate through the current situation. Of course, short-term volatility in FX, very drastic impact to our operations and the via market is like in this has been quite weaker than we expected. But as we've been seeing in the past things will then change back and we are able to navigate through this. We will via our network strategy and just turning every stone within the company with the fleet modernization and so on. So we are definitely -- we have fully believe that we will reach our long-term profitability goal of 8% in the near future.

[Unknown Executive]

Yes. Here, we have a few questions on the market developments. Do you expect more pressure on the yields regarding the tariff situation from the U.S.?

[Bogi Bogason, executive]

More pressure. There is quite a pressure now, the via market, especially on the economy side is quite weak. And it remains to be seen how long that situation will last. As we've seen in the past, when a situation like that persist for a long time, airlines start to cut down capacity and the situation improves again. We have seen cycles like this many times before, and we expect to see the cycle being similar as history tells us. But it's hard to say how long this will last. Will it be throughout the year and into next year, that remains to be seen. But as I went through, if you see this situation persist into next year, we will definitely not grow during unit season. We have some flexibility to cut down capacity with aircraft that have low ownership costs. So we will just have to navigate through this in an efficient way.

Anything more on this, Ivar?

[Ivar Kristinsson, executive]

No.

[Unknown Executive]

Is there already some overcapacity on the North Atlantic? And will it get even more seasonal?

[Bogi Bogason, executive]

When we see pressure on yields, it's not just Icelandair that is seeing pressure on yield. We see other airlines reporting this. And when we talk to our colleagues at other airlines, they are definitely seeing the same, the yields on the economy. Seeds are quite low, and we are seeing pressure there. And when the situation drags on, the airlines will act on that by probably decreasing capacity, and that's -- as I said, that's something that we've seen many times before.

[Unknown Executive]

Can you give an update on the fleet delivery process from Airbus and Boeing?

[Ivar Kristinsson, executive]

Yes. So basically, looking at the committed fleet that we have yes, the committed fleet commitments than next winter, we will receive 3 additional A321 LRs, which is going to be -- yes, the fleet renewal that we will have for Summer 2026. Those aircraft will be ready for operation in 2026. And that is currently what we have kind of in terms of the delivery stream kind of in the near term. And of course, we have the order with the Airbus that comes later, but we are actively talking to lessors and other players in the market for additional aircraft in the coming years. But there are no decisions that have been made on that at this point.

[Unknown Executive]

And on the development in the market here in Iceland, with place moved to new markets, will this push Icelandair to expand flying in Q3 and Q4? And what opportunities do you see with this change?

[Bogi Bogason, executive]

Yes. As I mentioned previously in 1 of the slides, we are selectively updating capacity like in fourth quarter, but the total capacity to and from Keflavik base down both in quarter 3 and quarter 4. So we are just selectively adding capacity into some destinations like in Northern Europe. And through this dynamic and the situation in the markets now, weak via market, we are putting more focus on To and From, and we will continue to do that as 22% growth in second quarter depicted.

[Unknown Executive]

So that concludes the questions today.

[Bogi Bogason, executive]

Thank you very much. Thank you for attending, and enjoy the rest of the summer. Thank you.

[Ivar Kristinsson, executive]

Thank you. Bye-bye.