Every other year, the Icelandair Mid-Atlantic Tradeshow takes place in the Icelandic capital, Reykjavik, showcasing Iceland’s credentials as a tourist destination and air hub.
The national flag carrier, Icelandair, is one of the co-organizers and we gladly accepted their invitation to fly to Reykjavik to learn more, first hand, from its CEO, Bogi Nils Bogason, about the current projects, opportunities and challenges that this iconic airline is facing.
Bogason has been at the helm of Icelandair since 2018. This has been a rather eventful period, which has seen the demise of its main domestic low cost competitor, the emergence of a new one, not to mention the global systemic shock brought about by the Covid pandemic and the growing importance of sustainability as a central topic for the future of the aviation industry, particularly in such an environmentally-conscious region as the Nordic countries.
We sat down with Bogason during a recess of the Mid-Atlantic show for an in-depth conversation about all of these matters and to better understand where Icelandair fits in the current aviation landscape.
We started our chat by talking about the post-Covid recovery that Icelandair has gone through. At the time this interview was conducted, Icelandair was just days away from releasing its 2022 figures, which later showed a return to the black.
On February 3, 2023, the Icelandic airline posted a small, but symbolically important, positive return, with earnings before tax of $0.2 million. Revenue more than doubled to over $1.26 billion while passenger traffic showed a 150% increase on the previous year.
You have made a pretty good recovery from the Covid pandemic. What would you say are the other challenges Icelandair is currently facing? You have a new local competitor with a similar business model but, as a low cost carrier, there are also lots of longer-range narrow body aircraft coming to the market, including the A321XLR which will enable airlines to fly between many more different points in Europe and the US. How much of a threat are these two factors to your traditional business model?
We are operating in a very competitive environment. There are 27 airlines flying to Iceland during the summer, including some of the largest American and European carriers, and many of them also many of them flying here year-round. We also have, as you mentioned, a local competitor, PLAY, and they are growing. We respect the competition, we love the competition…the environment is so dynamic…that’s why we need to focus on ourselves and constantly live up to the expectations of our customers, on our operations.
We firmly believe in our business model and our business model has proven itself for decades, not least since post-Covid…We see a bright future ahead.
You mentioned the new aircraft, the A321LR and XLR, we don’t see those as a big threat. We firmly believe in the strength of our network, where we are operating in three distinct markets: to and from Iceland and then the transatlantic market.
We are connecting many points in North America, and we see opportunities to add destinations and connect secondary airports throughout Europe with secondary airports in North America. Some of these won’t be big enough to have direct flights between them…and then we are also connecting secondary with primary and so on.
So, we firmly believe that this model will remain strong. Of course, we need to keep adjusting to what is happening in the competitive environment, but our focus is on our operation, growing and developing our network.
When Icelandair started with this business model many decades ago, a mid-Atlantic stopover was pretty much a necessity, but nowadays not so much. To better understand this market, can you please tell me what the split is between connecting and origin and destination (O&D) traffic? It seems that Iceland has, in recent years, become a very popular tourist destination in its own right.
As we see it, both markets that you mentioned work very well together. We have a mix of passengers in our planes, those that are connecting and those that come to Iceland. We always ask, when we look at new destinations, ‘is it a big market for transit?’, but also ‘is it a good market for generate traffic to Iceland?’. On a normal year, connecting passengers are 40 to 45% of the total. Last year, for example, they were 43% and tourists coming to Iceland represent a similar amount. It may fluctuate a bit, but we are talking about this order of magnitude. And then we have the Icelanders that travel abroad, which are around 10-15% of our traffic.
The stopover traffic, this is about 25-30% of our transatlantic passengers. These are people that spend from one to seven nights in Iceland between their two flights with us. This is our stopover product, which is very popular.
What is the capacity of Iceland, as a country, to keep growing and getting more tourists? I am not talking just about Icelandair here, but also the other 26 airlines that you mentioned. Is there a risk of saturation or are we still far from that point?
First of all, the airport operator, Isavia, is working on a big expansion plan. There are constructions going on, they are expanding the airport. This is a project that is ongoing.
And regarding tourism infrastructure, tourism here is very seasonal, even if we have been quite successful in the last 10 years in turning Iceland into a year-round tourist destination.
Until around 2010, most tourists came in July and August. Now we have tourists coming the whole year, but we still have a lot of seasonality and a big peak in late June and July. It is necessary to invest in infrastructure, hotels and so on, but we also need to get the tourists to go around the whole country. We have great nature all around, in the east, in the north, and in the west coast.
Q: Is there the potential to operate some flights from other regional airports? For example, last year a small airline launched non-stop flights between Akureyri, in the north of Iceland, and Europe, in order to provide a more direct access to the north of the country, mainly to those tourists that have already been to Reykjavik.
There is both the potential and the need for tourists to travel around the country. Until Covid hit, around two thirds of tourists were concentrated in the south west of Iceland. There is an opportunity to bring more tourists to the countryside and to connect the domestic airports with our international network at Keflavik, from where you can access 50 destinations. We are a very strong connector and our strategy is to connect Akureyri to our hub.
Now, if you take a domestic flight, you get to Reykjavik airport, near the city centre, and from there you need to take land transport, a taxi or a bus, to get to Keflavik international airport.
Yes, but we are implementing a big change. Earlier the domestic airline operated it differently [Icelandair fully integrated its domestic subsidiary – Air Iceland Connect – in 2021], they even had different reservation systems, but now we have integrated everything and we are going to provide for a stronger flow between domestic and international destinations.
So, you are planning to add flights to Keflavik from domestic destinations?
Yes, well, not so much move flights, but add more flights. Our original plan was to start a direct flight between Keflavik and Akureyri already this spring, but due to some minor issues we decided to postpone that until spring of 2024. We will then be connecting the north of Iceland to our whole international network.
I wanted to ask you about the recent rebranding and whether you have quantified in some way whether this has resulted in a better brand perception. My understanding is that one of the goals of this rebranding was to make the brand more visible and recognizable, for example in social media. Are you getting any feedback from the market about that?
What we have experienced is that the new colours and the new brand is much easier to use and to recognize, the old colour was quite difficult in that respect. All in all, the rebranding has worked very well, not that I have any numbers in that respect, but our impression is that it has been very well received.
Let’s talk about the fleet. You currently operate a mix of Boeing 737 MAX, Boeing 757s and three B767s. The B757s, which have traditionally been the mainstay of your fleet, are meant to remain in service until 2026, right?
Yes, until around that time.
But you are already working on a re-fleeting plan for the longer term. What can you tell me about this? You recently hinted that you may consider going with Airbus. What do you think the fleet look like in, let’s say, 10 years’ time?
In two months’ time we will make a decision about what our fleet is going to look like, how are we going to replace the 757s. It’s a type of aircraft that has been working very well for us, performing very well across our network.
We now have two options in front of us. One is to keep adding B737 MAX aircraft and have the MAX as the core aircraft of our fleet, plus the 767s, with the latter being eventually replaced as well, perhaps with Boeing 787s. The other option is to go to Airbus and start introducing Airbus A321LR and XLR aircraft as replacements for the B757s.
So, it is already decided that the future replacement of the B767s would be the 787?
We currently have three B767s and if we go the Boeing route, we make the decision to stick with Boeing for the whole fleet. In that case, the replacement would be the B787, but no decision has been made yet. We are in negotiations with both Boeing and Airbus. We issued a request for proposals (RFP) in the fourth quarter of last year and we are working on this now.
If the Airbus route is chosen, then it seems that the A321LR or the XLR will replace the B757s. But what would then be the replacement for the B767s?
At the moment, our focus is the replacement of the B757s. The replacement of the wide-body fleet is not a concern at this point of time.
I read about your interest in the Heart Aerospace electric aircraft project. How far have you advanced in this direction? Have you already committed to adopt Heart Aerospace’s future electric aircraft the moment it becomes available?
We have letters of intent (LOI) in place with both Heart Aerospace and Universal Hydrogen.
Would the Universal Hydrogen option be for retrofit?
Yes, they are working on both the ATR and the Q300s. We are cooperating with both, with Heart Aerospace and Universal Hydrogen. We have letters of intent with both. We are very optimistic and think it is realistic that we will be operating carbon-free aircraft within our domestic network before the end of this decade, but as of now, we still don’t know what aircraft will be the first.
So it would be one or the other or both?
Or maybe another option…we have the LOI in place but both aircraft types are at a development phase and they need to be certified and so on. We are not running that process. We believe it is a realistic and viable option, though.
Are you looking at these as a like-for-like replacement of the existing short haul fleet or as a way to expand?
Both. We are planning to grow our regional operation, so it would, hopefully, be both, replacement and expansion. And the range is perfect, 45-50 minutes of flight…more investment in infrastructure is needed, though.
When it comes to destinations, are you working on any new ones?
We added four last year, Raleigh-Durham, Rome, Nice and Salzburg, and another four this year, Detroit, Prague, Barcelona and Tel Aviv.
Some of these are very seasonal, like Salzburg for the ski traffic. Some we had covered already in the past, like Barcelona, but we are doing it now in a way that we facilitate the connection with our US flights.
We also fly to Crete, but this was a bit different because it’s seasonal and we had been doing it as a charter and through our tour operator, but it is now integrated into our network too.
We are always analysing new opportunities and new destinations and adding frequencies to some of our old destinations. For example, when we started Raleigh-Durham, we started conservatively, during the high season…if a new destination then works well, we then expand, adding frequencies, extending to the low season and so on.
On the west side of your network, how far can you go? What would be the maximum range you can reach? Would your narrow body fleet get to California?
Not to California, the B767s can do that, but not the narrow bodies. The limit is Seattle, Portland, Denver…and Orlando!
And on the European side? How far can you go? Would Tel Aviv be the maximum range?
You can go to Tel Aviv comfortably, and a bit further!
There is a new airline in the US, Northern Pacific Airways, that takes inspiration from Icelandair and wants to replicate your business model in the Pacific region, using Alaska as a stopover point to fly between Asia and America. My understanding is that they had been talking with you about this project. Is there some sort of cooperation agreement?
There is nothing formal. We have been talking but there is no formal agreement or partnership in place, just informal conversations. Also, their project has been put on hold.
Are there partnerships with any other airlines on the horizon?
Our strategy is to strengthen our existing partnerships and add new partners eventually, but I can’t name any new ones now. Bilateral agreements with airlines like JetBlue and Alaska Airlines have worked very well, it is a win-win for all airlines involved. This is our strategy.
We also recently announced an agreement with Air Greenland, even if we are competing on the route between Greenland and Iceland, we are adjusting our schedules and they are adjusting theirs so that they fit better. We are still competitors, but by adjusting our schedules we are strengthening the traffic flow between our respective networks, so it’s a win-win situation that benefits both.
Is there any product that allows people to easily combine trip visits to Iceland and Greenland?
There is a package, it is part of our stopover programme. We offer flights to other parts of Iceland and also to Greenland.
Back in 2019, Icelandair subsidiary Loftleiðir acquired a majority stake in Cabo Verde Airlines, the national carrier of Cape Verde, a small Portuguese-speaking island nation located between the coasts of Africa and South America. Loftleidir subsequently got out of this venture. I couldn’t miss the chance to ask about this short-lived project.
I would like to ask you about the Cape Verde project, which I think was conducted via Loftleidir, right?
Yes, it was done through them. Loftleidir is a subsidiary of the Icelandair group, fully owned by us.
What happened with that project? It seems that it didn’t go as expected?
No, it didn’t go as expected. Cape Verde was partly privatized and we got 51% and then Covid came and the project didn’t go as expected and now we are fully out of it, we are not involved anymore.
The logic was to do what you do here in Iceland, with connecting traffic, but in the South Atlantic?
Yes, to connect a few continents via Cape Verde, just as we do here in Reykjavik: Europe, Africa and North and South America.
What is your shareholding structure? Does the Icelandic state have any participation in the company?
No, the Icelandic state is not our shareholder. We have some 16,000 shareholders and the main one is Bain Capital, based in Boston, that has slightly above 17% of the company.
To wrap it up, I would like to get back to your business model. We have talked about the balance between connecting and origin and destination (O&D) traffic, but how do you expect both markets to evolve? Are both segments of the market evolving in the same direction?
Looking back over the last few years, to 2012 or so, the two main markets have been of similar importance, they have remained pretty constant. If anything, connecting traffic has increased in the last 10-12 years, from around 30 to nearly 50%. The highest up it got was 52%.
And within this segment, the split between European and American traffic has been shifting, it depends a lot on circumstances such as the strength of the US dollar. In the past, Europe, as a whole, was a bit higher, although, as a single country, the US is our largest and most important market.