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CEO Interview - IcelandAir

Birkir Holm Guonason, CEO, IcelandAir, says planning, speed and agility are essential to surviving the tough aviation business environment.

What are you hoping to achieve with your business strategy?

We’re very different from other airlines. We almost act like a Tourist Board and wesee that as a definite advantage. Our marketing focus is very much on Iceland as a destination as well as on Iceland as a hub for transatlantic flights.

This isn’t contradictory. Remember, we have only 320,000 people in Iceland. Around 80% of our passengers are based outside of the country. Our view is that the more people use Iceland as a hub, the more they are likely to visit the country. 

We’ve based our hub and spoke strategy on inventive routes to the United States and Europe with very short connecting times in Iceland. We build a bridge from the US to Europe and vice versa. The transatlantic traffic helps us to build up frequency and therefore grow the tourist market to Iceland. Innovative city pairing and frequency is the key to our success.

Our aim is simply to be a first-rate airline by using the experience we have gained during  more than 75 years of operation. We want to be the airline of choice for all travel to and from Iceland and an exciting alternative across the North Atlantic. We believe we can achieve these goals through efficiency and flexibility.

How did the collapse of the Icelandic banking sector affect the airline?

It was a very tough time and we had to drastically streamline our operations—after it happened Icelanders more or less stopped traveling abroad.

Still, it also gave us a great opportunity. Iceland had been a rather expensive destination, but after the collapse the weak króna allowed us to give our customers very good deals to visit Iceland. We had to act quickly, and we did. We shifted our marketing focus and sales efforts. Some routes were closed down, but other new routes were added that had great potential for Iceland. This is most obvious on the North American flights where we’ve increased capacity by about 50% since 2008.

The eruption of Eyjafjallajökull in 2010 highlighted a number of aviation issues. What did Icelandair learn from the experience?

Again, I think we tell a very different story to many other airlines. To start with, the volcano is just 100 kilometers from our hub. We’ve dealt with eruptions before, but nothing to compare with this.

Our main ambition was to keep going and not to close the shop. In fact, because of the wind direction, we were still operating to the United States and many Northern European destinations while the rest of Europe was shut down. But when Europe opened up again, we were forced to close down operations at Reykjavik (Keflavik International Airport), again because of the wind direction.

When that happened, we made some very quick decisions and managed to move our hub to Glasgow, Scotland, where we operated our route network for 12 days. It was an enormous effort, but we learned some valuable lessons about the need for flexibility. Our staff showed enormous spirit and lifted the company through those tough times.

The eruption also brought world attention to Iceland and to the spectacular nature of the country. We immediately spotted the opportunity to use this as a positive and started a very successful marketing campaign with the government and other players in the tourism industry here. Since the eruption, we’ve had two years of sizeable increases in the number of tourists coming to Iceland.

If you’re quick enough in your decision making and flexible enough, there are good business opportunities even in a crisis situation.

How do the various elements of the Icelandair Group work together and does the group approach affect the strategy of the airline?

We work closely together; our offices are on the same floor of the same building in Reykjavik.
Icelandair represents the bulk of the Group’s turnover and our international airline network operations are the foundation on which other companies in the group build. We have a tight business relationship with our sister companies, such as IGS, the handling service provider at Keflavik International Airport, Icelandair Cargo, Icelandair Hotels, and others.

You can’t really separate one from the other. The group strategy is our strategy. We work closely on building a consensus that applies to the whole group.

Your strategy touches many other elements in the aviation value chain. Do aviation partners understand the airline business? What more can be done to balance out the risk and rewards in the travel industry?

It is only natural that each partner considers itself to be a very important part of the value chain, where each one can say: “Without us, there would be no aviation as we know it.” The aircraft manufacturers are vital, the airports are vital, the air traffic controllers are vital, the distributors are vital, and so on.

Achieving a balance acceptable to all partners won’t be easy. Our industry is heavily regulated and so major structural changes take a very long time. There needs to be better coordination too. For example, it’s frustrating to witness how slow the aviation value chain is to incorporate new technology.

On the whole, I still like to take the positive view. As a company we have to make the best use of the cards in our hand and I don’t expect anything else from others in the industry. There is also common ground— most partners in the value chain have started to realize just how important the aviation and tourism sectors are for economies everywhere.

The Benefits of Aviation study on Iceland shows how important aviation is to the domestic economy. Has the government learned from the study?

Not really. The government still has a lot to learn about the benefits of aviation. Even though the study showed that aviation supports 6.6% of GDP and 9,200 jobs—12.9% and 20,600 jobs if you include tourism—there is a basic lack of understanding about the importance of aviation and tourism to the Icelandic economy.

Following the 2010 volcanic eruption, the government joined us in a very successful campaign for Icelandic tourism called “Inspired by Iceland”, and that should have shown the way forward.

Unfortunately, the Icelandic government is very keen on aviation taxes. For example our sister company, Air Iceland, still has to pay a domestic carbon tax, even though we’re now part of the European Union Emissions Trading Scheme (EU ETS). That means they are now paying twice for the same emissions. The domestic tax should not have applied once the EU ETS kicked in. The airport, which is operated by the government enterprise ISAVIA, has also increased its user charges in recent years. And, in addition, a massive increase in value-added tax on accommodation is being contemplated.

We need governments to understand that higher taxes can lead to reduced revenue – for the economy as much as the airline.

Still, IATA has been very supportive and we have been able to get our message across and help fight off some other proposed tax increases.

How can governments improve the security process? With such a large proportion of transfer passengers, Icelandair must be very keen on coordinating security requirements and avoiding the need for re screening?

Absolutely. We have a very short connection time at our hub and the importance of simple and effective security systems is paramount.

What we need is coordination and the use of the best technology. Looking forward, there are some technology and regulatory solutions coming along that will dramatically simplify the process and at the same time increase security.

What is your view on the Single European Sky? It is a long way off its targets, so what should be done?

Keep up the pressure, keep pushing. This is something that has been on the agenda for a long time, but seems almost impossible to push through or implement.

Everyone has to realize that the Single European Sky (SES) is essential for airlines and the environment. The impact of the current inefficiencies is huge. SES must be prioritized based on clear business cases and the implementation fast-tracked.

Is it governments and poor regulation that are stopping the industry from making a decent profit?

There isn’t a simple answer to this question. The truth is it’s a combination of many things, historical, cultural, and technical.

In general, I’m not comfortable with this industry putting the blame on others. Only the airlines themselves can be held responsible for their operations.

Having said that, many governments are not lending a helping hand. Clearly, there is overregulation and poor regulation and that needs to be improved. Alongside the problems we have already highlighted, such as the EU ETS and SES, there are other issues such as slots and passenger rights that are in danger of worsening the situation and affecting how airlines operate.

What about capacity? Too much capacity is usually held up as a reason for poor airline performance and yet Icelandair has been very aggressive in its capacity increases.

You have to look at capacity in relation to yields and load factors. We do not add capacity unless we see business in it and our growth is based on a transatlantic feed that supports the traffic to Iceland. 

The yields and load factors have to be acceptable. Icelandair serves a small niche market. We are specialists in this market, we study it closely, and when we spot opportunities for growth we must have the courage to take them. This is what we have been successfully doing for the past few years. We have been able to build up transatlantic traffic that helps us to improve the frequency in the network and increase the tourist market to Iceland.

But remember, before that we had to cut capacity very fast as our business environment deteriorated. So the key again is flexibility, an active network and efficient revenue management. Airlines have to be able to move quickly and adjust with speed to the changes in the environment. That’s the name of the game.

Does technology provide the answers to many of the industry’s problems?

Technology is the key to efficiency and to lower costs, as we have seen with e-ticketing, online bookings, and now mobile technology. It takes significant investment to develop technology, but you always have to take the long-term view and consider the potential savings and efficiency new technology brings to both the airlines and the consumer.

Just think of the vast difference in the airline-operating environment compared with 20 years ago. Technology is definitely having a critical impact—not only in lowering costs but also in improving customer service and choice.

How would you characterize your management style?

I try to keep it simple and quick and let the great people around me do their job without too much interference. My office is always open. I am just one part of the team and I tell everyone we should always work together.

I also emphasize that we need to make quick decisions. It’s better to make a wrong decision than no decision.

If you could change one thing in aviation tomorrow, what would it be?

First, and most importantly, enforce a low cost base value chain, which means reduced costs in airport charges and taxes. But we must also develop a coherent aviation policy that fosters fair and open competition. Consumer oriented market forces should dictate the global aviation market and not government regulations.

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