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Europe

Leaner Icelandair Forecasts Robust Transatlantic Demand This Summer and Higher Profits in 2023

Edward Russell
February 3rd, 2023 at 12:36 PM EST

Two Icelandair Boeing 737 Maxes at Amsterdam's Schiphol airport.

Icelandair will fly its largest schedule ever this summer, in response to what executives think could be a very strong peak travel season across the North Atlantic.

The airline will serve 54 destinations from its Reykjavík hub this summer, CEO Bogi Nils Bogason said during Icelandair’s fourth-quarter results call Friday. That is up from 42 during the summer of 2019, according to Diio by Cirium schedules. New destinations include Barcelona, Crete, Detroit, Prague, and Tel Aviv.

“There is a strong demand in all our markets, and the booking flow is strong,” Bogason said. He added that he was “quite optimistic” about the outlook for 2023, which for Icelandair includes potentially its best profit margins since 2017.

To be clear, while Icelandair may fly its largest schedule ever during the peak summer months, the airline’s full-year 2023 capacity guidance indicates that it will still be smaller than it was four years ago. It plans 15-20 percent year-over-year capacity growth that, based on 2022’s full year numbers, will still be 5-9 percent less capacity than it flew in 2019. Icelandair operated just over 21 percent less capacity last year than it did before the pandemic.

Bogason is not alone in his optimism. Among the airlines that have provided guidance for the year ahead — which does not include most European carriers — the outlook is overwhelmingly bullish, especially in the transatlantic market. United Airlines Chief Commercial Officer Andrew Nocella described the market setup as “unbelievably good,” citing little industry capacity growth compared to 2019 despite higher levels of economic activity on both sides of the Atlantic Ocean. Executives at American Airlines and Delta Air Lines have echoed his view; European heavyweights Air France-KLM, International Airlines Group, and Lufthansa Group will release guidance later in February and in March.

Even Icelandair competitor Play Airlines, the budget startup that launched in 2021 with a Reykjavík base, plans significant growth this summer. The carrier will add at least 11 new destinations, including Dusseldorf, Hamilton near Toronto, Stockholm, and Washington Dulles, to its map. Play is scheduled to provide its guidance on February 15.

The problem are the constraints facing the industry. Supply chains, from parts and engines to new aircraft deliveries, remain delayed with few expecting them to return to normal levels before the year is out. On top of that, staffing remains a concern on both sides of the Atlantic with Europe’s air traffic manager, Eurocontrol, warning in January of potentially “huge challenges” ahead this summer. Taken together on an industry level and airlines, even where there is travel demand, cannot fly as much as they want and, in many cases, as much as they did just four years ago.

There is a silver lining to the airline industry’s capacity constraints. A fewer or equal number of flights this summer compared to pre-pandemic on higher demand will mean high airfares and revenues for carriers. That’s good for bottom lines, at least when the additional revenues outpace the added costs of high fuel prices and higher wages at many airlines.

Icelandair CEO Bogason expects the latter to be true. That is, that revenue growth will outpace cost growth. And he is not shy about the potential hold ups in this equation: Icelandair faces high inflation, fuel, and labor costs, plus supply chain issues, to name a few, Bogason said.

Still, the airline forecasts a relatively strong earnings before interest and taxes (EBIT) margin of 4-6 percent in 2023. That would be its best result since 2017 when it posted a 4 percent margin. Icelandair targets a long-term EBIT margin of roughly 8 percent.

Icelandair is scheduled to receive four Boeing 737-8 deliveries this year. Bogason did not indicate any concern about the timing of those aircraft given Boeing’s challenges. He also did not comment on the on-going search for a replacement aircraft for Icelandair’s 12 Boeing 757s. The airline anticipates operating 20 737 Maxes, 12 757s, and three 767 freighters by the end of 2023.

The carrier posted a $16.7 million EBIT loss on $291 million in revenue in the fourth quarter. Revenues were down nearly 9 percent year-over-three-years. Unit revenues, measured in in revenue per available seat kilometer (RASK), increased 13 percent compared to the same period in 2021 while unit costs (CASK) excluding fuel decreased 10 percent.

Part of the change in revenues, however, was Icelandair’s decision during the pandemic to shed all non-core activities, including its hotel and tourism businesses. This slimming down has the company now focused on “being a small, dynamic airline,” as Bogason put it.

Icelandair posted an EBIT profit of nearly $19 million on $1.3 billion in revenues for all of 2022. Unit revenues increased 22 percent year-over-year, and unit costs excluding fuel decreased 24 percent.

Edward Russell
February 3rd, 2023 at 12:36 PM EST

Tags: Europe

Photo credit: Two Icelandair Boeing 737 Maxes at Amsterdam's Schiphol airport. Flickr / Luc Verkuringen

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