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Icelandair Sees Travel Demand in Europe Beginning to Weaken

Edward Russell
July 21st, 2023 at 12:58 PM EDT

Icelandair Boeing 737 in Tenerife

Icelandair posted record profits off booming transatlantic travel in the second quarter. But the rest of the year may not be as rosy with CEO Bogi Nils Bogason warning of some weakness in Europe.

Elevated levels of airline capacity — Play Airlines, anyone? — and economic challenges in some European markets are “putting some pressure on the revenue growth in the second half of the year,” Bogason said during Icelandair’s second-quarter earnings call on Friday. That weakness, for now at least, has yet to affect the carrier’s forecast of a 4-6% operating margin for the year.

That margin target remains a very real possibility thanks to a strong first half of the year. In the second quarter, Icelandair reported a $21 million operating profit — its highest quarterly profit since 2016 — and a 5% operating margin. Revenues increased more than a quarter year-over-year to $414 million; costs were up only 19% and benefitted from a drop in fuel expenses. System capacity was up 17% from 2022 levels.

Transatlantic air travel is booming this summer. Of the airlines that have reported numbers so far — American, Delta, and United — all have cited strong demand between North America and Europe. Delta and United have even extended some seasonal flying to Southern Europe, including Greece, Italy, and Portugal, into September and October in response to that demand.

Icelandair, while not a large transatlantic player compared to the likes of Delta and United, has a unique view of the market given its geography. A plurality of its passengers in the second quarter, 41%, were transiting between Europe and North America over Keflavik. That compares to 39% of its passengers traveling to Iceland, the carrier’s next largest passenger segment.

“History tells us that when costs are going up everywhere people start to spend less on some things. This is just what we have seen in the past. So we are expecting that the inflation will impact demand in the end,” Bogason told Airline Weekly in May. That warning is coming to pass in the second half of the year.

Despite the weakness Icelandair sees in Europe, overall bookings remain “robust” and are pacing ahead of levels seen at this time last year, Bogason said Friday. That strength is in part a reflection of Icelandair’s decision to grow more to North America this year— that’s its strongest market — rather than to Europe. It added new service to Detroit this year.

Icelandair is already planning for summer 2024, its next peak season. The airline plans to add three more Boeing 737-8s to its fleet next spring, for a total of 43 passenger aircraft, to operate next summer. The additional planes will allow it to add service to the Faroe Islands from May through October, with more new destinations likely, Bogason said. Icelandair is also adding new seasonal service to Innsbruck, Austria, and Verona, Italy, this winter.

New Airbus A321LRs and XLRs, which will eventually replace Icelandair’s Boeing 757s, will begin arriving in late 2024. The first four aircraft, all A321LRs leased from SMBC Aviation Capital, begin arriving in late 2024 and will enter service in 2025. Icelandair’s first A321XLRs are due from 2029.

Edward Russell
July 21st, 2023 at 12:58 PM EDT

Tags: Europe

Photo credit: An Icelandair Boeing 737-8 taxis at the Tenerife airport. Flickr / ERIC SALARD

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