17-Aug-2011 3:55 PM

Icelandair Group sees strong organic growth in profitable second quarter

Analysis

Icelandair Group reported strong organic growth in a profitable second quarter (three months ended 30-Jun-2011) despite a 49% year-on-year increase in fuel costs. The carrier stated the outlook looks "generally good" and it is "well positioned" to address challenges ahead, aided by a "sound" balance sheet, "very positive" liquidity and a "strong" competitive position in the market.

Summary

Icelandair Group reported strong organic growth and profitability in the second quarter despite a significant increase in fuel costs.
The carrier is well positioned to address future challenges with a sound balance sheet, positive liquidity, and a strong competitive position in the market.
Icelandair Group is one of the most profitable carriers in the Nordic region, joining IAG, Norwegian Air Shuttle, Ryanair, and easyJet in reporting profits in the second quarter.
The outlook for bookings and investment projects in the coming months is strong, with the EBITDA projection for the year remaining unchanged.
The carrier faced challenges from high oil prices, volcanic eruptions, and strike actions during the quarter.
Icelandair Group benefited from the growth in tourism in Iceland and reported double-digit capacity and passenger growth in the second quarter, achieving record load factors.

Icelandair Group joins IAG, Norwegian Air Shuttle, Ryanair and easyJet in reporting profits in the second quarter. It is one of the most profitable carriers in the challenging Nordic region.

The Group's outlook in terms of bookings and its investment projects over the coming months is strong. The EBITDA projection for the whole year remains unchanged at ISK9.5 billion (EUR57.5 million). This would, however, be weaker than 2010 levels, but stronger than the results reported in 2007, 2008 and 2009.

Icelandair Group EBITDA development (ISK mill): 2007-2011

Net profit of EUR2.5 million. Margins decline slightly but still positive

Group revenue increased 14.4% to ISK25,029 million (EUR152 million) in 2Q2011, with transport revenues increasing at a faster pace, by 21% to ISK16,047 million (EUR97 million) to represent 64% of the total.

Icelandair Group revenue (ISK´000,000) mix: 2Q2011

Operating costs increased 16% to EUR138.9 million. Unlike the majority of its European (and global) peers, fuel was not the carrier's largest expense in the quarter, exceeded slightly by salaries, which increased 14% to EUR37.3 million due to increased capacity on international flying. However, fuel was unsurprisingly the fastest-growing expense, increasing 49% to EUR36 million.

Icelandair fuel cost deviation (ISK mill): 2Q2010 vs 2Q2011

During 2Q2011, Icelandair Group reported a return to the black at the net level, with a net profit of ISK409 million (EUR2.5 million). EBITDAR stood at ISK3,888 million (EUR23.6 million), a 12.6% year-on-year decline, resulting in a lower EBITDAR margin of 15.5%. EBITDA for the three-month period was EUR12.7 million, a 2.9% year-on-year increase for an EBITDA ratio of 8.3%.

Icelandair Group financial highlights for the 3 months ended Jun-2011:

Operating revenue: EUR151.8 million, +14.4% year-on-year;
- Transport revenue: EUR97.4 million, +21%;
Operating costs: EUR138.9 million, +16.2%;
- Salaries: EUR37.3 million, +14%;
- Fuel: EUR36.0 million, +49%;
EBITDA: EUR12.7 million, -2.9%;
EBITDA ratio: 8.3%, -1.5 ppts;
EBIT: EUR3.8 million, -26.1%;
EBT: EUR2.7 million, compared to a loss of EUR1.3 million in p-c-p;
Net profit: EUR2.5 million, compared to a loss of EUR975,963 in p-c-p;
EBITDAR: EUR23.6 million, -12.6%;
EBITDAR ratio: 15.5%, -4.8 ppts.

EBITDA (ISK´000,000) and EBITDA margin (%) and EBITDAR (ISK´000,000) and EBITDAR margin (%):
2Q2009 to 2Q2011-08-16

High oil prices, volcanoes and strike actions

High oil prices, volcanic eruption and union action were among the challenges faced by the company.

Oil prices were on average were 47% above last year's levels in the quarter at USD1057 per ton, resulting in a cost increase of ISK1.7 billion (EUR10.3 million). The carrier stated it manages jet fuel prices through a combination of hedging contracts, fuel surcharges and active yield management. Almost half of the projected third quarter usage has been hedged with options.

Fuel price development 2010 and 2011

Fuel hedge positions Icelandair Group: 30-Jun-2011

Costs and revenue losses related to the volcanic eruption that occurred during the quarter are estimated at ISK300 million (EUR1.8 million) and revenues were similarly affected by the pilot overtime strike.

Icelandair Group stated the pilot strike came "at the worst possible time, as the training of new pilots had been delayed due to the eruption". The carrier in Jul-2011 reached an agreement with the Icelandic Air Line Pilots' Association, averting further strikes. Icelandair canceled about 20 flights in Jun-2011 after the union banned its members from working overtime. The action had no impact on any services in Jul-2011.

Benefiting from tourism growth in Iceland

Icelandair Group noted that bookings of services to Iceland have been particularly strong and the number of tourists visiting Iceland during 2011 is expected to reach record levels. Air Iceland has added a substantial number of flights to Greenland that have proved successful, the company said. Icelandair Group has invested in two Dash 8-200 aircraft for the Greenland route, which will replace the company's older Dash aircraft. Loftleidir, which currently manages six B757-200s and five B767-300ERs under the Icelandair air operator certificate, also performed well and the company's project status is "good". Revenues at Loftleidir increased by 28% year-on-year in the quarter.

Icelandair Group growth by business segment: 2Q2011

Looking forward, the successful opening of Icelandair Hotel Akureyri and renovation of Icelandair Hotel Reykjavík Natura are expected to support winter sales. The group opened a new hotel in Akureyri in the second quarter.

Double-digit capacity and passenger growth in 2Q2011. Record load factors

Icelandair reported a 27% year-on-year increase in international passengers in 2Q2011 to a record 464,000. As part of this, transit passengers increased by 33%, with outgoing passenger growth of 32% and incoming passenger growth of 18%. Incoming passenger levels are expected to grow at a faster pace in 3Q2011, and to close with growth of close to 20% in the full-year.

Icelandair passenger numbers (000's): 2Q2008 to 2Q2011

Icelandair passenger mix (to/from/via): 2Q2008 to 2Q2011

The carrier stated inbound tourism to Iceland is very likely to move in line with Icelandair sales and is expected to grow from 500,000 visitors 2010 close to 600,000 in 2011.

Despite international capacity growth of 25% on the second quarter, Icelandair managed to report record load factors of 79.3%, a 3 ppt year-on-year increase. The number of passengers that flew with Air Iceland increased by 14%, owing to the addition of more services to Greenland.

Icelandair capacity (ASKs, 000,000) and load factor (%): 2Q2008 to 2Q2011

Sold block hours decreased by 2.8 ppts. Sold block hours increased at Loftleidir, but decreased at Iceland Cargo due to maintenance work.

Icelandair Group traffic highlights for 2Q2011

First half review

In the six months to 30-Jun-2011, international capacity increased 22%. Load factor again reached a new record, at 76.2%. The number of passengers increased in all markets, with the largest increase, 29%, seen in the North Atlantic market. There was also a considerable increase in flights from Iceland (+26%) and a somewhat smaller increase in flights to Iceland (around 13%). In terms of revenue distribution in the six-month period, 26% was from Iceland, 21% from North America, 19% from Europe and 14% from Scandinavia.

Icelandair Group total revenue split by location for the first six months of 2011

Icelandair also reported record passenger numbers in Jul-2011.

Icelandair Group traffic highlights for Jul-2011

IG Invest transfers rights to purchase three B787s to Norwegian Air Shuttle

In May-2011, IG Invest, an affiliate of Icelandair Group, signed a Letter of Intent with Norwegian Air Shuttle, aimed at transferring its rights to purchase three B787 aircraft IG Invest has on order with Boeing. IG Invest is a holding company of aircraft and aircraft related assets, and has one further B787 on order from Boeing. This is Icelandair's sole aircraft present only order. The existing fleet stands at 20 aircraft, according to Ascend data from Aug-2011.

Icelandair Group fleet profile: Aug-2011

Exploring possibility of listing in other stock exchanges in Scandinavia

The financial position of Icelandair remains strong. The equity ratio is 29% and cash and cash equivalents and marketable securities stood at about ISK18.4 billion (EUR111.4 million) at the end of Jun-2011.

In Feb-2011, Icelandaiar Group announced a resolution approved by the Board of Directors to explore the possibility of listing the company in another stock exchange in Scandinavia. This work is proceeding as planned and conclusions should be available later in 2011.

As of 10-Aug-2011, the three largest shareholders in the company are Framtaksssjoour Islands (29%), Islandsbanki (20.6%) and Lifeyrissjoour veslunarmanna (12.1%).

The largest shareholders in Icelandair Group as of 10-Aug-2011

Icelandair's share prices have been one of the most consistent among airlines in the Nordic region and the company is the sole airline operator in the region to report a share price increase over the past three months. Investors are clearly impressed by the carrier's performance this summer, which suggests the Group can look forward to strong third quarter earnings.

Shares Comparison for SAS Group, Norwegian, Icelandair Group, Finnair, Cimber Sterling for the Last 3 Months