Icelandair is, arguably, one of the few carriers that were very heavily affected by the Boeing 737 MAX crisis. While such giant as Southwest Airlines (LUV) , another all-Boeing operator, had the scale to cover for the absence of the grounded aircraft, Icelandair did not have such luxury. And the company’s financial results reflect that, as highlighted by the airline itself:
“The suspension has already had significant adverse effects on the Company’s operations and profitability and will continue to do so while the suspension remains in place,” states a presentation discussing Icelandair’s financial results dated February 6, 2020.
However, a little spicy detail was also included in the same presentation: the current fleet is “under review.” While the 737 MAX suspension has delayed the work of the review, Icelandair expects the results to be published in the next few months. And Icelandair has quite a big issue to solve – where does it go next with its aircraft? Currently, three options are on the table: to maintain the current strategy, introduce Airbus aircraft into the fleet, or switch to an all-Airbus fleet.
But what would be the best option for the airline?
Currently operated aircraft
Icelandair started 2020 with 31 Boeing aircraft:
Icelandair fleet composition as of February 1, 2020, according to the carrier. Image: AeroTime.
Prior to global regulators grounding the newest iteration of the MAX in March 2019, Boeing was supposed to deliver three jets in 2019, five in 2020, and two in 2021 to Keflavik International Airport (KEF) in Iceland, completing the carrier’s initial order. Now, Icelandair expects to receive only three new 737s by the end of 2020, hindering the airline’s ability to grow or to profit from its current routes.
After all, despite its trials and tribulations, the 737 MAX remains a very efficient aircraft. Icelandair indicates that the MAX uses 37% less fuel than the 757-200 and 14% than the 737 NextGeneration, the previous version of Boeing’s best-selling narrow-body aircraft family.
But even if we were to take out the 737 MAX crisis out of the equation, Icelandair has a problem: an aging fleet that is in dire need of replacing. According to planespotters.net data, the airline’s average aircraft is 20.1 years old, with some Boeing 757s approaching their 30-year mark.
Finding substitutes for the 757 and the 767
While the airline is currently leasing three Boeing 737NG aircraft to cover for the absence of the MAX, Icelandair was forced to keep the older 757s running, stated the presentation discussing Q4 2019 financial results.
Crucially, the 757s can travel almost 700 km further compared to the 737 MAX, making some of the routes Icelandair operates unviable if it were to replace the 757s with the 737 MAX. While theoretically the newest 737 iteration could fly from the Icelandic capital to Miami, Seattle or Anchorage, for example, due to the safety requirements of aircraft having enough spare fuel to either divert or have contingency fuel if weather conditions are unfavorable or routes have to be changed, it is unable to do so practically, in addition to Extended-range Twin-engine Operational Performance Standards (ETOPS) certifications.
Furthermore, the airline’s four “new” 767-300ER aircraft, which Icelandair acquired in 2016, are not the same shiny new frames that left Boeing’s facilities in the late ’90s and early ’00s: the average age of the wide-bodies is 21.1 years, states planespotters.net data. While on one hand acquiring second-hand aircraft allows the airline to save cash (Icelandair invested $89 million into aircraft in Q2 2016, the same quarter it acquired the two 767s), costs to run these aircraft accumulate over time as they have to go through C and 4C checks. According to a report published by El Al Tech, the Boeing 767 has to go through its C-check for its systems every 6,000 Flight Hours or every 18 months and the structure of the aircraft has to be checked every 3,000 Flight Cycles or every 18 months. Meanwhile, 4C checks for the plane’s systems are done every 24,000 Flight Hours or 72 months, while the structural 4C checks need to take place every 12,000 Flight Cycles or 72 months.
Such procedures are no easy task and are also expensive, never mind the fact that the aircraft is sitting on the ground and not making money while they are maintained.
From all-Boeing to some Airbus‘ aircraft?
Over the past few months, Icelandair was not the only airline circulating in the rumor mill about a potential change-up in fleet strategy, potentially as a result of the 737 MAX crisis. The aforementioned Dallas-Love Field (DAL) based carrier, Southwest, was rumored to be looking into some of the products in the Airbus lineup. However, the two companies are completely different beasts: in size alone, Southwest Airlines (LUV) is one of the biggest airlines in the world, with more than 740 aircraft operated in and around the United States. The scale alone would be detrimental in making the move profitable in the short and medium-term for Southwest.
In contrast, Icelandair only has 31 aircraft in its fleet, with some replacements already coming in as the 737 MAX is ungrounded in the coming months.
The Airbus A321LR and A321XLR make up the perfect replacement for the aging fleet of Icelandair’s aircraft. While airline execs have been pleading for a “757 on steroids” from Boeing, which lingered around with the New Midsize Airplane (NMA) and recently announced that it is going back to the drawing board with the aircraft, Airbus has the two perfect variants to replace the old Flying Pencils and, potentially, the 767-300ER.
The A321LR and the A321XLR have got what the 757-200 currently has and even do more: both Airbus’ variants have more range, seat more passengers in a standard 2-class configuration and, of course, consume less fuel as they are equipped with more fuel-efficient engines. Icelandair configures its Boeing 757 in a two-class layout, seating 182 travelers. The A321LR and the A321XLR and fit 206 and up to 220 passengers, respectively, according to Airbus.
Boeing 737 MAX, 757 and 767 and Airbus A321LR and Airbus A321XLR range from Keflavik Airport (KEF) in Iceland. Image: AeroTime.
While the two are not aiming to take the throne of the 737 MAX, they are definitely the contenders for the crown of Boeing’s other narrow-body. But what about the wide-bodies, the 767s?
Both Airbus iterations of the A321 can’t fly as far or carry as many passengers, but seemingly, Icelandair provides the answer about what it will do with the 767s: the airline is shrinking and aims to grow its efficiency, rather than scale.
Reducing capacity and few new destinations
When discussing its future in the Q4 2019 report, the airline indicated that in 2020 will reduce the number of flights by 3% and reduce capacity, measured in Available Seat Kilometers (ASK), by 8%. Additionally, while Icelandair increased its Earnings Before Taxes and Interest (EBIT) by 31% compared to 2018, it still made a net loss in 2019 with a negative result of $57.8 million, an increase of 4%. While the impact of the 737 MAX crisis to EBIT was quantified to $100 million, Icelandair’s profits have been on a steady drop since 2015, with the carrier’s first loss-making year being 2018. Such developments, including the unforeseen events of the groundings, have put a strain on the airline, including flights to Kansas City International Airport (MCI) and San Francisco International Airport (SFO) in the United States being cut from the network. Flights were operated by the airline’s Boeing 757 and Boeing 767-300ER aircraft, respectively.
And the fact that Icelandair still has four wide-bodies in its fleet, even if the airline projects that it will carry fewer passengers (from 4.4 million in 2019 to 4.2 million in 2020), might prompt the company to offload the 767s in the near future as their operating costs only go up, which is not in line with the strategy to reduce their costs, something it has managed to achieve in 2019. Seemingly, the carrier is aiming to grow in terms of efficiency, rather than scale – including with the projected reduction in passenger numbers, Icelandair’s only new destination in 2020 is to Barcelona, Spain (BCN).
New opportunities provided by the A321 extended range products
At the same time, neither the Airbus A321XLR nor the Airbus A321LR is available right now: while the former is still in development and will graze the skies in 2023, the queue for the A320 family is quite long: Airbus has a backlog of 6,249 aircraft as of January 31, 2020.
This gives time for Icelandair to get back up on its feet and then finally decide on its next aircraft contract. After all, introducing a new aircraft is no easy task. An airline has to prepare its workforce for the new horse, including pilots, cabin crew and maintenance personnel, which again, is also a procedure that costs
While switching to an all-Airbus would make very little sense, considering the fresh soon-to-come 737 MAX deliveries, introducing one of the long-range variants of the A321 family would allow Icelandair to retain the same route network and possibly return to such cities as San Francisco (SFO). The lower operating costs of a narrow-body compared to a wide-body might make routes that were cut profitable once again. Furthermore, the increased range of Airbus’ A321 family would allow Icelandair to connect Keflavik with such cities as Los Angeles (LAX) and Dubai (DXB) directly, with a refueling stop allowing the carrier to potentially operate fifth-freedom flights to the ever-growing aviation market in East and Southeast Asia, including cities like Singapore (SIN) and Beijing (PKX).
Whatever decision Icelandair will reveal in the coming months, it will be crucial: the outcome of the fleet strategy review will be the pillar of the airline’s long-term future. And in a volatile environment, especially in Europe, where consolidation is very prominent, a wrong move could seal the fate of an airline very quickly – as evident by the rapid rise and fall of another Icelandic airline, WOW Air.