Icelandair Continues To Grow 757 Fleet

By Jens Flottau
Source: Aviation Week & Space Technology
September 16, 2013
Credit: Keith Gaskell

Imagine the prime minister showed up one night on national television for an emergency address to his people and closed his speech with the words “May God be with us.” Then it would be fair to assume that things looked serious. And the outcome would certainly be hard to predict.

But that is exactly what happened in Iceland five years ago. When Geir Haarde delivered his speech on Oct. 6, 2008, the country's three largest banks had just collapsed and with them, the economy. The national currency was only worth a third of the value it had 24 hr. earlier, and Iceland was in very real danger of going bankrupt, too. People were wondering whether there would be food in the supermarkets the next day. Travel demand evaporated within one afternoon. Nobody could afford to fly anymore.

Given the circumstances, it seems like a major surprise that Icelandair still even exists. But the carrier not only continued to fly, it also started one of the most unusual success stories of the global airline industry. It has doubled its capacity over the past four years and has ambitious plans to grow its fleet and network further. With the exception of 2008, the company has always been profitable in recent years.

Of course, one must not forget that in this period two of the island's 130 volcanoes (Eyjafjallajokull in 2010 and Grimsvotn in 2011) chose to erupt, seriously disrupting air travel for weeks. Icelandair was forced to relocate its hub from Keflavik to Belfast for weeks and managed to keep almost 80% of its normal schedule. Ironically, those eruptions have done much to promote Icelandair's growth even further. So it is not black humor that the airline has named two of its aircraft after the pair of volcanoes. (The entire fleet carries the names of different volcanoes.)

Icelandair and its predecessors have long been known as the “hippie airline,” offering a cheap transatlantic travel alternative for students like Bill Clinton, who used the carrier for his first trip to Europe in the 1960s and later became U.S. president.

While the hippie days are long gone, the airline is still essentially in a similar niche and has managed to define a sophisticated, unusual, hip business model in which it seems to thrive against all conventional wisdom. Its home market (300,000 people live in Iceland) is tiny. The carrier itself is not big and has to compete against three giant transatlantic joint ventures that control schedules and fares for more than 80% of the market. Icelandair is not a member of any of the three alliances and it operates a relatively old and fuel-inefficient fleet of Boeing 757s.

Nevertheless, the single most important reason why the model works is simple geography. Iceland is right underneath the great circle routes from Europe to North America. Flights into Europe are between 3 and 4 hr. long and flights to North America last between 5 hr. (Boston) and close to 8 hr. (Denver). In other words, Icelandair is the only airline that can use narrowbody aircraft for its entire route network. “Because of the geographic location of Iceland, we can fly single-aisles to the [U.S.] West Coast,” says Birkir Holm Gudnason, who has served as CEO since 2008. Its 757s fly to Seattle and reach the Deep South (Orlando, Fla.). The competition needs widebody aircraft to get to those destinations. It means a big investment, large markets and major risk.

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