Icelandair Group Annual Report 2018 2 Contents 2 Overview 42 Governance 3 Key Figures 43 Corporate Governance 4 Icelandair Group at a Glance 45 The Board of Directors 6 Chairman’s Address 46 The Executive Management 8 President and CEO’s Address 48 Responsibility 11 Business Review 49 Corporate Social Responsibility 12 Vision and Strategy 50 Environmental Accounting 14 Structure 53 Social Accounting 15 International Flight Operations 55 Governance Accounting 17 Air Iceland Connect 56 Accounts 19 Loftleidir Icelandic 57 Consolidated Financial Statements 20 Icelandair Hotels 23 Iceland Travel 24 VITA 25 Financial Review 26 Shareholder Information 29 Performance in 2018 33 Financial Position 36 Risk Management 40 Outlook 2019 Overview ICELANDAIR ANNUAL REPORT 2018 3 Key Figures USD thousands 2018 2017* 2016 2015 2014 Operating results 47% 43% 42% Total income 1,510,518 1,417,987 1,285,574 1,139,699 1,113,297 44% 20% EBITDAR 126,893 207,765 254,960 261,710 193,410 19% 17% 32% EBITDA 76,479 170,076 219,845 226,666 154,338 EBIT -56,968 49,645 118,437 142,840 79,009 12% EBT continuing operations -67,810 48,642 120,111 140,223 79,908 Loss / profit for the period -55,570 37,538 89,068 111,223 66,499 5% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018-56 Balance sheet Total assets 1,464,122 1,423,842 1,292,493 971,979 849,220 GRAPH 1: EBITDA % 2014–2018 GRAPH 6: Equity ratio Total equity 471,379 596,545 568,213 456,531 365,055 2014–2018 Interest-bearing debt 415,801 289,541 242,382 65,530 61,934 Net interest-bearing debt 116,341 64,263 -7,743 -148,589 -153,707 Cash flow Net cash from operating activities 61,553 205,603 209,024 245,136 215,315 Net cash used in investing activities -129,933 -228,419 -291,759 -219,942 -130,156 116 64 111 Net cash from / used in financing activities 149,336 14,554 113,643 -14,320 -88,684 89 Cash and cash equivalents end of period 299,460 221,191 226,889 194,586 184,762 66 -8 38 -149 -154 Key ratios -56 Earnings per share in US Cent per share -1.16 0.75 1.79 2.24 1.34 Intrinsic value 12.07 15.09 13.99 11.24 8.99 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Equity ratio 32% 42% 44% 47% 43% Current ratio 0.71 0.99 0.92 0.8 0.83 GRAPH 3: Net profit/loss USD GRAPH 7: Net interest-bearing Capex USD thousand 331,429 166,131 243,397 210,400 109,293 million 2014–2018 debt USD million 2014–2018 Tranport revenue as % of total revenues 72% 74% 74% 74% 73% EBITDAR ratio 8.4% 14.7% 19.8% 22.3% 17.4% EBITDA ratio 5.1% 12.0% 17.1% 19.2% 13.9% *Restated 20% 18% 17% 17% 1,464 16% 1,424 1,292 972 849 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018-56 GRAPH 5: Total assets USD GRAPH 8: Cash as % of revenues million 2014–2018 ICELANDAIR ANNUAL REPORT 2018 4 Icelandair Group at a Glance ICELANDAIR GROUP ANCHORAGE AT A GLANCE Our vision is to unlock Iceland’s potential as a HELSINKI STOCKHOLM VANCOUVER EDMONTON year-round destination, to strengthen Iceland‘s SEATTLE OSLO PORTLAND BERGEN COPENHAGEN BILLUND BERLIN HAMBURG position as a connecting hub and to maintain DUSSELDORF SAN FRANCISCO AMSTERDAM FRANKFURT MUNICH ICELAND GLASGOW BRUSSELS ZURICH our focus on flexibility and experience MANCHESTER MILAN DUBLIN LONDON GENEVA HEATHROW PARIS & GATWICK DENVER MINNEAPOLIS / ST. PAUL MADRID ICELANDAIR GROUP IN NUMBERS 2018 CHICAGO KANSAS CITY TORONTO MONTREAL CLEVELAND HALIFAX WASHINGTON D.C. BOSTON PHILADELPHIA NEW YORK JFK & NEWARK 80+ successful 51 planes 55 4.4 million TAMPA ORLANDO Icelandair Destinations in 2018 years in aviation destinations passengers North America: 21 Europe: 23 41K 327k 34K 4,606 freight tonnes hotel nights BH charter FTEs OUR BRANDS + Our international + Our domestic + Our aircraft leasing and + Our hospitality + A leading travel company + Travel agency focusing flight operations flight operator consulting business business focusing on trips to Iceland on trips from Iceland ICELANDAIR ANNUAL REPORT 2018 5 ICELANDAIR GROUP AT A GLANCE Our Icelandair customers TO The tourist market�with 36% Iceland as�a destination 4.6 MILLION passengers forecasted in 2019 FROM +59% 4,142 The domestic 4,046 13% market in Iceland 3,679 36 36 3,073 38 2,603 36 12 13 36 12 I 15 The international market between� 16 52 51 51% Europe and�North America 50 49 48 25% of via passengers make a Stopover in Iceland 2014 2015 2016 2017 2018 to from via ICELANDAIR ANNUAL REPORT 2018 6 Chairman’s Address Transforming Iceland into a year-round destination Over the past decade, Icelandair Group has been at the forefront of transforming 2.3 million in 2018, which is a 242% increase. In 2012, around half of the tourists Iceland into a year-round tourist destination. Through our efforts and significant visited Iceland in the summer time compared to only a third in 2018, showing how investments, we have played a leading role in the development of Icelandic popular Iceland has become all year round. tourism, benefiting not only our own operations but the entire Icelandic travel industry. Our focus on steadily expanding our route network over the years has Furthermore, these efforts have also had a positive impact on employment in been key to enhancing Iceland’s position as an international connecting hub. Iceland. The number of people working in the travel industry has doubled, from 16 thousand people in the summer 2011 to 32 thousand people in the summer This has been our focus since 2012 when we created our future vision “to unlock 2018. Today, more people work in the travel industry over the winter time than Iceland’s potential as a year-round-destination, to strengthen Iceland’s position over the high season in the summers of 2011 and 2012, or as a connecting hub, and to maintain our focus on flexibility and experience.” It 25 thousand people. is safe to say that we have reached our goals and fulfilled this vision. Iceland is already a popular year-round destination and now serves as a strong connecting Strategic highlights of the year hub between Europe and North America. The year 2018 was challenging. The financial performance of the Company was Ulfar Steindorsson heavily impacted by both external factors as well as internal challenges. In 2017, Chairman We can be proud of Icelandair Group’s role in this development and growth decisions that were made regarding our sales and marketing activities and our route across the Icelandic travel industry. Large part of the projects has been our network ended up having a considerable negative impact on our operations and own marketing initiatives, but we have also partnered up with the Icelandic overall performance. This challenging time resulted in the resignation of our former Government and other parties in projects such as Inspired by Iceland, Meet in President and CEO, Bjorgolfur Johannsson. I want to take this opportunity to thank Reykjavík, Iceland naturally, and more. Our subsidiary Iceland Travel is one of him for his significant contribution of driving the growth and success of Icelandair the major travel companies in Iceland, offering a diverse product portfolio and Group for over 10 years. top-quality services aimed at creating unique experiences for travellers visiting Iceland. Through Iceland Travel we have serviced over 450 thousand tourists A number of measures are already being taken to address the issues we were faced between 2012 and 2018. Furthermore, through our subsidiary Icelandair Hotels, with in 2018 and these projects are in the capable hands of our new Executive we have developed high quality hospitality services over the years through a Management, which is led by our new President and CEO, Bogi Nils Bogason, who cohesive mix of international and local brands who have added great value to was appointed in December 2018 after having served as Interim President and CEO Iceland as a quality destination. since August 2018. In 2018, we transported 4.1 million passengers, which is more than 100% increase from the year 2012 when the total number of our passengers was around 2 million. Since 2012, the number of passengers travelling over the winter months has increased by over 150% and we now transport more passengers during the so-called shoulder seasons than we did in the summer 2011. We see a dramatic increase over the last decade when it comes to the total number of tourists traveling to Iceland, from 673 thousand tourists in 2012 to ICELANDAIR ANNUAL REPORT 2018 7 Chairman’s Address, continued: New vision, mission and values In February 2019, a new organisational structure was presented to further reflect our Since 1937, we have brought the resourceful and innovative spirit of Iceland to the clear shift to flight operations. At the same time, we announced that we had decided world. Icelandair was in many ways a pioneer of modern-day travel. The Company to divest ourselves of our remaining travel-industry-related operations. Icelandair has grown tremendously over the decades and, as mentioned above, contributed Hotels have been in sales process since October 2018 and we have now started to the vast growth of the travel industry in Iceland and strengthened Iceland as a preparing the sales process for Iceland Travel. connecting hub between continents. Broad shareholder base We believe that now is the right time to look to the future.