Airline CEO Interview with Icelandair, President & CEO, Bogi Nils Bogason

Transcript

Helen:

Okay, excellent. Great. Well, thanks for joining us today, Bogi. It's really good to see you again.

Bogi:

Yeah.

Helen:

I haven't seen you really since I was in Iceland last, which I think was, I don't even know how many years ago now.

Bogi:

Yeah, a few years ago. Likewise, great to see you.

Helen:

Yes, it's great to see you too. And thanks very much for talking with us this month. So the theme is sustainability, and I definitely want to talk about it because you are replacing your 757 aircraft, and that was a pre-pandemic plan.

Bogi:

Mm-hmm (affirmative).

Helen:

And so I definitely want to talk about that, but let's talk about the pandemic and the impact it's had on your business. What's the past year and a half been like? Catch us up on the business in general and what you wound up doing about the Icelandic stopover...

Bogi:

Mm-hmm (affirmative).

Helen:

And how has Icelandair handled the pandemic? So that's very broad, and however you want to handle that is great.

Bogi:

As for every other airline, it has been a very challenging period, of course. And if you go back to the beginning of 2020, we were quite optimistic at the beginning of the year. We were... And the first two months of 2020, we were quite successful in our operations, so we were, as I said, optimistic for the year, but then COVID came and affected us all. And we needed to take very drastic actions in the spring to the summer of '20. Huge layoffs... We unfortunately needed to lay off about two thirds of our workforce and we went into some kind of a hiatus. For quite a long time, our mantra was to, we can say, keep important connections open between Iceland, Europe, and also North America, both cargo- and passenger-wise.

Our focus through this period was to keep the infrastructure alive, have the flexibility available so we could wrap up again as soon as the month would pick up. And soon after COVID hit us, we saw that we needed to restructure our balance sheet and improve our liquidity. So we went into extensive financial restructuring, which included negotiations, and in the end, agreements with all our major stakeholders.

So we reached new long-term agreements with all the major unions, new agreement with the financiers, with Boeing on upcoming deliveries and further much compensation. And then we were granted here in Iceland, a government that guaranteed credit line and do the restructuring process, and did in September last year with a very successful share offer here in Iceland.

So, of course, this also very hectic process and period for us, but in the end it was very successful and we have a very strong liquidity now and strong balance sheet. And as I said, our mantra throughout the last 18 months has been to keep the infrastructure and flexibility alive. Of course, as for other airlines, cargo was not as affected as the passenger network and the cargo part of our business has been doing quite well. And we have been utilising the opportunities there and took flights between China, Europe, and US, where we re-raked the profits of the passenger 767s. And it was all to generate the very important revenue stream for our group.

But we have also... We used this time to, we can say, improve our operations. We were working on improvement projects where we were focusing on streamlining and simplifying our operations. To name a few, we integrated the domestic operations to the... You can say the international network, and now we just operate one brand, one distribution system. And so, instead of two, we divested the... We can say the non-core businesses, the non-aviation business, like the hotel part and the tour-operating part.

So we have been working on a lot of things during this period, but fortunately since May this year, we have been racking up our network. In July, we were operating just below 50% of 2019 capacity. In August, just above 50%. And in the winter, we assume to get even closer to 2019 capacity. But as for everyone else, things are constantly changing and we just have to adapt to that. So this is what has been happening in our world for the last one and a half years, so to say.

Helen:

So it's been busy, right? [Crosstalk 00:06:12] to say the least.

Bogi:

It has been extremely busy. Maybe just to mention one more thing. A new shareholder came in this summer Bain Capital, which is now the largest shareholder of Icelandair Group with about 16.7% stake in the company. So, yeah, you're right. We have been extremely busy and we have been able to keep strong liquidity and then the balance sheet is quite strong after the restructuring and the new equity. So we are also ready to seize the opportunities ahead of us and also to weather the situation.

Helen:

That's great, that really is great. I mean, your product, I had the opportunity to sample it and it's a good product and it's good that you've been able to restructure the business. Or were you able to also use the opportunity to reduce your costs or adjust your cost structure? How should we think about that? And also, you reduced the workforce. Have you been calling people back now? How are things this summer and how does it look for the fall?

Bogi:

Yeah, we have been calling people back when we started the wrap-up in May. This spring, we started to call people back, both in the production and to the office and so on. So fortunately, we have been calling people back, but we are not yet at 2019 levels or pre-COVID levels. But as I said, we are assuming that we will gradually get closer to pre-COVID levels during the winter and in the coming years. But when we did the... We can say we raised the equity last year, we put out a scenario for investors, and in the scenario, we were assuming that we would fully reach pre-COVID capacity in the year 2024.

Helen:

Okay. So, okay.

Bogi:

And regarding the cost structure, we made a long-term agreement with our unions and the new agreements, we can say, improve our cost structure and our competitiveness quite a lot. So we have been focusing on the restructuring. In the restructuring, we were focusing on improving the liquidity and the long-term competitiveness of the company.

Helen:

That's great. That really is great because one of your competitors went bankrupt last year and a new competitor, I think, started or is in the process of starting up. So what's the competitive situation like in Iceland now? And what about international-flying airlines flying in and out? For a long time, it was Icelandair only, and none of the US airlines, especially, were flying to Reykjavik or even thinking about the market. And then pre-pandemic, everybody rushed in. That last summer, summer of 2018, I think every major city in the US had some kind of non-stop service or service over one of the big airline hubs into Iceland. So you saw a huge amount of new capacity come in. I mean, that's a lot to unpack, so take your time answering the question, but yeah, how should we think about that?

Bogi:

Yeah, we think about that in broad terms, we are very used to operate in an extremely competitive environment. You are completely right, pre-COVID there were about 25 to 30 airlines flying into Iceland and then pre-COVID, 50% of our business was the transatlantic business where we were connecting via Iceland to Europe and North America. And there, the competition, it is of course extremely high, but you are also right. Wow Air went out of business in 2019, and Play is starting up here in Iceland this summer. But as I said, we look at the competition in broad terms. We are competing with most of the European airlines, many of the US airlines are coming back, so this summer or now, we have about 20 airlines flying to and from Iceland. And we have a proven business model, and as I said, we have been improving the competitiveness of the company, lowering the cost structure. So we just look forward to the competition, both with local Play, and also all the other airlines that we are competing with, and we are used to operating in a very competitive environment.

Helen:

So this summer, or earlier maybe in the spring, Iceland was one of the first countries to open to vaccinated travellers. And so I'm sure that... I know Greece and Croatia from the US opened as well and there seemed to be this jailbreak to those three countries this past summer. So can you talk a little bit about how that affected your business and what your forward bookings look like now? And also, because of the Delta variant, have you seen a deceleration in bookings or have there been any changes in the way Iceland is receiving visitors to the country because of the Delta variant?

Bogi:

Yeah. First, Iceland opened up the borders in the beginning of April for vaccinated tourists and immediately we saw strong pickup in bookings, especially from the US. And that enabled us to wrap up quite quickly our network and we have been seeing a lot of tourists coming into Iceland, mainly from US this summer. But as it been happening throughout this period for the last 18 months, the situation is constantly changing, good and bad news coming out. And we just have to be agile and adjust, and flexibility is one of our key strengths.

The Delta variant and increased number of cases in the US has affected the bookings. And just yesterday, we announced our... We can say revised winter schedule, and we are cutting down the capacity a bit from... We had... Yeah, announced two months ago, and that is because the month is a bit weaker than we expected at that time. However, we are assuming that we will be at 65% to 2019 capacity level in Q4 and go up to 75, around that, in Q1 next year. But as I said, our mantra is to be flexible and we have to adjust to good and bad news constantly.

Helen:

And can people still stop over in Iceland for up to a week and then go elsewhere? Or is that too hard to do with the pandemic now?

Bogi:

Yeah, people can definitely do that, but the wider market is still rather weak. It is more to and from traffic now and mostly to and mostly from the US. But going forward, we will focus on [inaudible 00:14:24] product, which was successful pre-COVID, and that will be a good opportunity and a good product going forward if we believe that. But because US is still, we can say closed for European tourists, the market is still quite weak.

Helen:

Right, exactly. So I don't know what the government here is thinking.

Bogi:

Can you tell me anything about that, or?

Helen:

Yeah, I think... I don't know to be frank. I have, multiple times, written or said publicly that I think the government needs to reopen its borders. And you saw the EU, earlier this week, add the US non-vaccinated travellers back to the no-fly list and/or cautionary list. And I think part of that was political and done in an effort to discourage, or in an effort, rather, to encourage the US to open its borders. And I don't understand why our borders aren't open because frankly, it's not like we've kept the Delta variant out of the country by closing our borders, right? The virus is here and it keeps mutating and it's going to keep mutating unless people get vaccinated. I mean, that's what rhinoviruses and coronaviruses do. So I think we just all, as a world, have to learn how to live with it. And maybe just get our... We get a flu shot every year, so why shouldn't we get a coronavirus shot every year? So I don't know, but the government hasn't been asking me my opinion.

Bogi:

And you are able to visit us so we should be able to visit you, so- [crosstalk 00:16:17]

Helen:

Agreed. Completely agreed. And it would be easier. And I actually travelled to Ecuador this summer and it was very easy to travel. It wasn't as difficult as I thought it would be. What was really nice about it is nowhere we went was too crowded, because we were in the Galapagos Islands as well and nothing was crowded. Everything was pretty uncrowded and that was really nice, but that's not the way to encourage tourism and obviously long-term revenue growth. So pre-pandemic, you were intending to retire the 757 fleet, which is kind of an older fleet, narrow-body fleet. I know I had the pleasure of flying it in business class. It was a nice product. I can't complain whenever I can dose for most of the night. It's a short flight right out of New York, so it's not like I got a good night's sleep, but I got some sleep.

But anyway, what's the philosophy regarding the fleet? Especially with your carbon footprint, your goals for reducing carbon emissions, and that's such a huge issue. And nobody talked about it in 2018, everybody talked about it in 2019, they're still talking about it here, 2021. Europe is looking at all sorts of carbon taxes and other aviation taxes when aviation isn't even a big percentage of transport taxes, right? Most transport emissions rather come from road, over 70%, versus 12% for aviation. So again, a lot to unpack, but how are you thinking about that the fleet replacement... I know you mentioned in your remarks earlier that you had negotiated with Boeing a delivery adjustment on the 737s, so maybe just wrap all that up for us.

Bogi:

Yeah. We have actually been talking about focusing a lot on decreasing, we can say our carbon emission footprint, and we have been taking a lot of measures for the past few years, here at Icelandair, and it is just an integral part of our strategy. But the 77, has for decades, served our network extremely well. It's, as you mentioned, a great aircraft and fits very well to our route network setup, but we all know that the aircraft will not last forever and we have already started to fade them out of our fleet, and we have been doing that for the last 12 months.

Just before COVID hit us, we were working on our long-term fleets strategy, but we put that project a bit on hold, we can say, during the pandemic. But now we are restarting the project and we are focusing on what aircraft will replace the 57 for the longer missions, so to say, because we have already taken in the Boeing 737 MAX aircraft, and we are operating the MAX now in our network. And we are very pleased with the performance of the Boeing 737 MAX and the aircraft has outperformed expectations, both regarding range and fuel efficiency. Of course, it goes hand in hand. And the CO2 emission is about 36% lower than on the 77 so we are extremely happy with the performance of the automatics. And the aircraft is, of course, much more environmentally friendly than the 757 aircraft.

But, as I said, we are now reviewing our longterm strategy which aircraft will replace the 57, and which aircraft we will use for destination like Seattle, Portland, Orlando, and so on, going forward. And the plan is to conclude this work before end of this year. And we are, of course, focusing a lot on reducing our carbon emissions in this project.

Helen:

And then the 767, I guess at some point, right? Has to be replaced.

Bogi:

Yeah, but there is not a definite need to replace them as soon as the 57, so we can say that the 767 is not, we can say, part of this project. Our strategy is to keep the 767 in our fleet going forward. However, we have decided to convert two 767s into cargo aircraft. We see opportunities to strengthen Iceland as a cargo hub and all cargo operations have been doing very well in recent years. And, as I said, we see opportunities to increase capacity there and strengthen Iceland as a cargo hub.

Helen:

That's a great opportunity. So the other thing, before we talk about a couple of other big issues, is what about ancillary revenues? Is that a big part of your revenue stream?

Bogi:

Yeah, in the past it has been a big part of our revenue stream, but we see great opportunities to increase that revenue stream. As I said earlier, we have been changing the, we can say, the strategy and the set up of Icelandair Group. A few years ago, we were, we can say, everywhere in the tourism sector, but now we have been divesting the hotel company, the non-aviation, non-airline tour operator, but that doesn't mean that we are not going to have revenues from, we can say, selling hotel rooms and land arrangements, and so on. But we are more going to do it on a commission basis. We are not going to operate in hotels ourselves going forward. But our plan is to invest in digital solutions so we can increase a revenue stream from commissions, in that respect. And we see opportunities in increasing our revenues there, and we are focusing a lot on that.

Helen:

Gotcha. You know, the other big issue for companies has been culture and diversity, and you've been a leader in this area. In fact, until recently you had a female CFO. So what's your view and the board's view in that regard? How do you think about encouraging the next level of diverse candidates, female candidates, especially, in upper management levels. And maybe that's not as big an issue in Iceland as it is in the United States, and I'm being very parochial.

Bogi:

You're completely right. We have been a leader in this respect and Iceland has also been a leader in gender equality. And our mission is to bring the spirit of Iceland to the world, so it goes hand in hand. But this is, we can say, our focus and a very important focus area when it comes to our corporate responsibility. And for me and for the board, it's an important thing to promote gender equality and not just to say it. We want to walk the talk and that is, we can say, part of our recruitment criteria and also in our promotion processes. And we have made a lot of improvements in this respect over the past decades, not just within the [inaudible 00:24:42], also in the air, so to say. But going forward, this will be a very important part of our corporate responsibility and is one of our three values.

Helen:

What are the other two values?

Bogi:

It is responsibility, it is simplicity and passion.

Helen:

Gotcha. And then, let's see... What other opportunities exist for Icelandair? Either growth or, I mean, you're not getting into anymore... Any acquisitions on the... I don't know, what's the right word? In ancillary businesses and in vertical or integration. But what other opportunities are there for the company?

Bogi:

Our focus, going forward, is to operate on airline-related businesses. And, as I said, we are divesting the non-aviation businesses and that is our focus. But we believe Icelandair has a lot of opportunities. Iceland has great opportunities as a tourist destination. We have been seeing a lot of tourists coming into Iceland this summer, bearing in mind the situation, and the feedback that we are getting from them is great. They feel safe and secure here, and we believe going forward, Iceland has, as I said, great opportunities as a tourist destination, and we play a key role there.

And then also on the transatlantic or the wider market, we see even further opportunities there going forward than we saw pre-COVID. We can connect the secondary cities in Europe with secondary cities in North America on a very fuel-efficient, narrow-body aircraft, so those markets work very well together. The two markets to Iceland and from the wider market. So just going forward, we see opportunities there in all three markets, and we are going to, we can say, go for those opportunities.

And then you mentioned the stopover programme, which was a success pre-COVID, and we will also focus on that. And I already mentioned the cargo opportunities to strengthen as a cargo hub, and we have already made decisions to invest in more capacity there.

Helen:

And then I know this is really premature given where we are in the pandemic and the rebuilding process and so on, but how should investors think about capital returns? We talked a little bit about the replacement programme, so there's some CapEx there, but how do you think about... And like I said, it's incredibly premature given where we are and we're probably not even talking about something that's not going to occur until maybe 2024, 2025, but how should... In the capital raise you did last year, what did you tell investors about returns?

Bogi:

If I remember correctly, there was some kind of scenarios put up there which were quite lucrative for investors and the share issue went very well. And, as I said earlier as well, when Bain Capital came in July of this year as the largest single investor now.

But you are completely right, it is honestly strange to talk about return on investment in this situation. But we have been focusing a lot on improving the competitiveness of the company going forward. In the past, the company generated healthy returns for investors, and we have a proven business model, we have the financial strength, and within, we can say, improve the cost structure. We believe when the world will be normal again, the company can generate healthy returns for investors.

Helen:

Gotcha. What else should we talk about? Is there anything else that I should have asked you that I didn't ask you or anything else you want the listeners to know about Icelandair? And maybe even about Iceland and how well the country handled the pandemic? It was reported here in the US that the country did handle it very well, so I don't know if there's anything else you wanted to talk about.

Bogi:

We have been, and the authorities here in general, have been handling the COVID situation quite well. That is my opinion. Of course, there was some backlash in July due to the Delta, but we are now seeing a decline there again, which is great. The key strength is high vaccination ratio, and now even though we have new cases on a daily basis, but we have very few cases of serious illnesses. So, as you mentioned, we just have to live with it, live with COVID and our strength is, as I said, high vaccination ratio. I think about 84% of the population over 12 years old is fully vaccinated. So, all in all, we are just doing very well.

Helen:

That's great. Okay. Well, I think that runs out of my questions and I think we're just about out of time anyway. So I think we timed it very well-

Bogi:

Yeah, good timing.

Helen:

And yes, and I look forward to seeing you in person again, hopefully not too far away... Too out there.

Bogi:

Likewise. Well, thank you very much, Helen.

Helen:

Thank you.

Bogi:

Good to see you. Cheers.

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