Icelandair faces a significant revenue shortfall in 2018 owing to growing competition. The parent company of the airline also needs to find a new CEO. Björgólfur Jóhannsson took full responsibility for the missed numbers and tendered his resignation to the Icelandair Group Board of Directors. It was accepted and CFO Bogi Nils Bogason will serve as interim CEO while a more thorough search is conducted.
Icelandair expects that fares will not rise sufficiently quickly to offset higher costs the company is seeing, mostly around fuel. Previously it anticipated that those fares would tick up in Q3 and Q4 2018. Now it predicts a 2019 shift in airfares at the earliest. Passengers benefit from the cost of travel remaining lower longer but the inability to force fares up speaks to the competition Icelandair faces in every market it touches.
Corporate structural changes and a shifting route network also impacted the company’s earning potential. In a statement announcing his departure Jóhannsson described shifts initiated in Summer 2017 that “resulted in an imbalance between Europe flights and North America flights.” The overall impact of the missteps is expected to hit $50-80 million or 5-8% of passenger revenue for the year.
An inability to raise fares in the face of increased costs speaks to the tremendous competition the transatlantic market faces. WOW Air is delivering a large portion of that from the same hub at Keflavik in Iceland but other LCC operations across the Atlantic also create challenges. And legacy airlines are (finally) adjusting to the new market reality, with fare products to compete at every tier. The competition within Europe is also more difficult to manage. Wizzair, Vueling, Norwegian, EasyJet and others offer service from a variety of destinations in the region and most of the passengers are on discretionary trips meaning the high costs of visiting Iceland adversely impact the overall traveler numbers.
The route structure “imbalance” mentioned in the statement is also tied to growing competition with WOW Air. During the Summer of 2017, with the first 737 MAX deliveries on the horizon, Icelandair went on a significant expansion spree in the US market. Secondary and tertiary destinations found their way on to the route map. And the MAX can help deliver thinner routes more economically than prior generation aircraft, but not every destination will work. The failure comes on the revenue side, not profits, so attributing it all to rising fuel costs rather inability to command higher fares in these secondary markets would be a mistake.
Icelandair was also caught with a seriously lacking premium product on its single-aisle fleet and a premium economy offering that did not fare well against others. The Saga Class option (sold as business class) more closely represents premium economy in today’s transatlantic market. That, combined with the stop in Iceland, generally leaves the carrier in a less-than-ideal position for pricing the product. It drives a premium compared to economy but not compared to other transatlantic carriers’ premium offerings. Given the growth of flat-bed options in the single-aisle market Icelandair may now be regretting the decision to not pursue such on its new 737 MAX fleet, but those planes also serve 3-4 hour trips into Europe where selling the bed option is less compelling.
Jóhannsson’s statement accepting responsibility for the shortcomings is somewhat refreshing in the marketplace. Finding a leader who will fully take responsibility – even after fixing the problems – seems far less common than it probably should be.
The decisions described above were made during my shift and it is clear that they have had negative financial impact on the Company this year. As the President & CEO of the Company, I am responsible towards the Board of Directors and the Shareholders. Earlier today, I submitted my letter of resignation to the Board of Directors. Although the above-mentioned problems have been addressed, it is a matter of responsibility that the said changes at the Company were not implemented in a sufficient way and that the problems created were not reacted to more quickly.I will assume that responsibility and will thus resign as the President & CEO of the Company.
The recent 10 years have been rewarding, challenging and a valuable experience. We have experienced an economic collapse, volcanic eruption and gone through a great growth in a short time. Aviation is by nature a volatile business sector. We have enjoyed a lot of success but also experienced challenging conditions. Times like these are challenging for companies and their employees and we have seen during recent years how powerful the Company can be when it is most needed. I have strongly felt this kind of power during recent weeks after we reacted to the problems mentioned above.
I am proud of our success in recent years and grateful for having had the opportunity to work with a lot of extraordinary individuals. In my opinion, the future of Icelandair Group is bright; the company is financially strong, has excellent employees and has a good position in its markets. I want to thank my fellow employees and the Board of Directors for an excellent cooperation which has always been positive.