Bogi Nils Bogason CFO Group Market development

Financing

Business portfolio – sum of the parts

2 The financial performance of the airline industry in the last two years stands out

45 6% Net profit Industry, USD billion % margin Industry 6%

40 5% 5%

35

30 4%

25 3%

3%

20 39 35

15 2% 2% 2% 1% 1%

10 17 14 1%

5 11 8 9

0 0% 2010 2011 2012 2013 2014 2015 2016

Source: IATA Economics June 2016 Competition on the Transatlantic has been increasing as is evident in recent industry remarks, but the market is adjusting quicker to curb excess supply

“The transatlantic proved more challenging than we Canada leisure carrier seems poised to eliminate expected given the supply-demand imbalance” he says, several transatlantic routes from its network next summer as it adding that Delta will reduce capacity across the Atlantic by seeks to prevent losses like those of summer of 2016 three to four percentage points through the IATA winter season. Company announcement September 2016

Company announcement October 2016

In its full-year outlook, -KLM warns that the "global WestJet anticipates its capacity growth should slow context in 2016 remains highly uncertain" and that savings significantly in 2017 and that unit costs will continue to creep from low fuel prices will be "more than offset in the coming higher. The carrier now anticipates its capacity in 2017 will be up quarters by downward pressure on unit revenue and negative 3.5% to 5.5% year-over-year, significantly lower than the 9% currency impacts". growth in 2106.

Company announcement July 2016 Company announcement November 2016 Icelandair Group’s EBITDA in Q4 2016 is expected to be lower than in Q4 2015

20

3

-7 Q4 2015 Q4 2016

19 Absolute figures EBITDA in USD milliions Competition on the Transatlantic has been increasing as is evident in recent industry remarks, but the market is adjusting quicker to curb excess supply

“The transatlantic proved more challenging than we Canada leisure carrier Air Transat seems poised to eliminate expected given the supply-demand imbalance” he says, several transatlantic routes from its network next summer as it adding that Delta will reduce capacity across the Atlantic by seeks to prevent losses like those of summer of 2016 three to four percentage points through the IATA winter season. Company announcement September 2016

Company announcement October 2016

In its full-year outlook, Air France-KLM warns that the "global WestJet anticipates its capacity growth should slow context in 2016 remains highly uncertain" and that savings significantly in 2017 and that unit costs will continue to creep from low fuel prices will be "more than offset in the coming higher. The carrier now anticipates its capacity in 2017 will be up quarters by downward pressure on unit revenue and negative 3.5% to 5.5% year-over-year, significantly lower than the 9% currency impacts". growth in 2106.

Company announcement July 2016 Company announcement November 2016 The 5 largest airlines in the US have 87% market share vs. 48% in Europe – consolidation will take place in Europe

Other Other

US Intra-EUR market market structure share

7 Source Goldman Sachs The strengthening of the ISK has been unfavourable with the real exchange rate* of ISK in Q3 2016 substantially above the long term average

120 115 110 105 100 100 value Q3 2016 95 90 88 average from 1980 85 85 average from 2000 80 75 70 65 60 55 50 Real exchange 45 rate ISK 40 1980-2016 35 (Q3 2016 = 100) 30 25 20 15 10 Proportional consumer price 5 Proportional salary expenses 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

* Real exchange rate measures the currency exchange rate taking price changes into account. 8 Q3 2016 = 100 Data Central Bank Iceland Our strategy is based on catering to the growing demand of better paying segments – those seeking exceptional travel experience The airline business is a cyclical in nature and prone to external shocks

50 8% Net profit, USD billion % margin 40 6% 6% 5%

30

4% 3% 3% 20 39 35 2% 2% 2% 10 1% 1% 1% 15 17 11 14 5 8 9

0 0% -5

-10

-26 -1% -2%

-20

-4%

-30 -5%

-40 -6% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F

10 Source: IATA Economics june 2016 Cyclicality in the sector is the main reason for our conservative financial strategy

Equity ratio On average to have The goal is to Flexibility no less three months cost pay 20-40% of around than as liquidity annual operational 35% 30% can be in the net profit as assets form of unused a dividend credit lines Icelandair Group is financially strong and fully prepared to seize opportunities

50

45

40

35

30

25 Equity ratio % ratio Equity

20

15

10

5

0 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Net interest bearing liabilities as % of revenues Our margins have systematically outpaced industry averages

16% % margin Industry % margin Icelandair Group 10%

14%

12%

10% 44% 5% difference 6% 8% 6% 5% 5%

6%

6%

4% 5%

3% 2%

2% 1% 1% 2%

0% 2010 2011 2012 2013 2014 2015 2016F

Source: IATA Economics June 2016 % profit = Net profit/total income Market development

Financing

Business portfolio – sum of the parts

14 B737 MAX will be added to the fleet in 2018 and the financing is being prepared

6

5 The total 3 number of confirmed order for B737 MAX 3 is 16 until 3 2021

2

3 1

2

1

B737 MAX 9 2018 2019 2020 2021 B737 MAX 8 Icelandair Group’s financial position is strong with 35 unsecured aircraft on the balance sheet and the lion’s share of real estates unencumbered

1.4 x -141 +89 1.2 x Interest bearing debt 201 195 EBITDAR

0.9 x

0.6 x 106

60 0.3 x 0.3 x 0.2x

31.12.2010 Interest bearing debt Cash and short 2010 2011 2012 2013 2014 2015 LTM Q316 term investments 30.09.2016 All figures in USD million 5 year senior unsecured bond in the amount of USD 150 million issued in October 2016

3 month LIBOR 210.4 + 3.5% interest with no 163 LIBOR floor

Maturity overview after 150.0 bond issue:

60.4

35.1 26 25.2 10 2 6 3

Total secured Total Total interest Unsecured Total interest- Q4 2016 2017 2018 2019 2020 Subsequent bank loans* unsecured bearing bond issue bearing repayments bond issue* liabilities* Oct 2016 liabilities

All amounts in USD millions 17 * Amounts at 30 September 2016 The bonds were mainly sold to institutional investors in Scandinavia

Middle East Privat wealth UK & Other 2% 2% 8% Hungary 3%

Denmark Sweden 8% 35%

Investor Investor demand demand Switzerland by geography by type 11%

Institutional Finland Norway 98% 13% 20% Market yield comparison shows Icelandair Group is punching above its weight

7.5 USD

EUR (NR) 7.0 (B-/B3)

(NR) 6.5

(B-/B3)

6.0 (B+-/B2)

5.5

(NR) Yield to maturity maturity to % Yield 5.0 (BB-/B3) (NR)

4.5 (BB) (BB-/B1) (BB-/B1) (NR) 4.0 (NR) (BB-/B1) (BB-/B1) 3.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Years to maturity %

Source: Bloomberg Aircraft financing – setting in motion a well prepared process

The current plan is to 6 aircraft of 16 for Market is Own aircraft will have majority of sale leaseback currently be financed the aircraft on the strong and price closer to delivery balance sheet RFP sent out in indications this month promising

The plan is to close in Q1 2017 Healthy aircraft financing environment – broad liquidity

2008 2009 2010 2011 2012 2013 2014 2015 2016

Leasing companies

Capital markets

Commercial banks

Export credit

PE & Hedge funds

Tax equity

New sources New funding sources of funding

Airframe & engine manufacturers

Satisfactory Cautionary Major concern

21 Source: The Boeing Company Market development

Financing

Business portfolio – sum of the parts

22

Conglomerate discount?

Ryanair Holding (EU) 7.8 Norwegian (EU) 5.9 Allegiant (NA) 5.1 Southwest Airlines (NA) 4.6 Spirit Airlines (NA) 4.5 American Airline (NA) 4.4 Alaska Air (NA) 4.3 SkyWest Inc. (NA) 3.9 Easyjet (EU) 3.8 Delta Air (NA) 3.6 EV United Continental (NA) 3.5 EBITDAR (EU) 3.4 Hawaiian Holding (NA) 3.3 enterprise value to Jetblue (NA) 3.2 earnings before Westjet Airlines 3.1 interest. taxes depreciation, (EU) 2.9 amortization IAG Group (EU) 2.8 and rent (EU) 2.3 Air France - KLM (EU) 1.6 SAS (EU) 1.3 Aeagan Airlines (EU) 1.0 0.8 Flybe Group (EU) 0.2

EV/EBITDAR Icelndair Group at share price 24.5 ISK Consolidation of our real estate portfolio

Icelandair Head Office Icelandair Hotel Akureyri Hanger at KEF airport

Air Iceland operating facilities Icelandair training center Cargo warehouse KEF airport Sizable balance sheet in comparison with Icelandic real estate companies

Figures represent total assets in ISK millions Potential “rough” real estate portfolio valuation

EBITDA estimate EV/EBITDA Indicative EV range

1.0 19.4x 20.8 19.4 IG Real estate 18.6 @ 20.8x Market = multiples * 18.6x

1.0 IG Real estate @ Market 4.0x = multiples * 4.0

16.8 15.4 14.6 Difference 14.6 – 16.8x

0 Upside potential Figures in ISK billions EV/EBITDA hotels vs. airlines

x2

8

4

Airlines Hotels Business portfolio: Sum of the parts

The so called We have syste- So far the conclusion It makes sense to conglomerate discount matically reviewed our has been that the long add up the value is well established portfolio of companies term interests of the of the different in the finance literature over the last shareholders is to keep businesses within five years the current portfolio the Group instead of and realize the applying an Airline Sector synergies within the multiple on the Group a Group whole Disclaimer

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