Tourism in Iceland: Modest angle of attack Arion Research 13 September 2019 Table of contents • Main Findings (p. 3) • Foggy Skies (p. 4) • More affluent Tourists (p. 16) • Iceland has become less expensive (p. 30) • Tourism is Labor intensive (p. 39) Main Findings • The number of tourists to Iceland has declined by roughly 13% YoY in 2019. A change in Icelandair´s passenger mix has mitigated the effect of WOW air bankruptcy on the number of tourists. YTD number of passengers travelling with Icelandair to Iceland rose by 30% YoY while total number of passengers only rose by 11%. • Based on Isavia´s winter schedule, we expect 20% YoY decline in the number of available seats, flying to and from Iceland, this coming winter. • We expect tourism in Iceland to recover gradually following WOW air´s bankruptcy. Our base case assumes 2% growth in number of tourists in 2020. Grounding of Boeing MAX 8 aircrafts hinders Icelandair´s growth ambitions in 2018 and 2019. Stronger growth in number of tourists mostly rests on whether a new airline or airlines begin operations. • On average each tourist visiting Iceland in 2019 has stayed greater number of nights and spent more money, whether in ISK or in their own currency. Therefore, contraction in the tourist sector is likely to be less severe than we were concerned with at the beginning of the year. We highlight three contributing factors; progress has been made in attracting more affluent tourists, changes in Icelandair´s passenger mix and more reliable data on number of actual overnight visitors. • Increased number of overnight stays per visitor and growing demand for hotels has cushioned the effect of fewer tourists on the accommodation market. However overnight stays in Airbnb have declined significantly as well as overnight stays in vehicles. Surveys show that visitors travelling with WOW air spent on average a shorter period of time in Iceland and were more likely to stay in hostels and apartments than other visitors. • The average price of an overnight stay in a hotel room in Reykjavík this summer declined YoY, and the occupancy ratio has come down, causing revenue per room to contract considerably. • Depreciation of the ISK has alleviated the effect of fewer tourists as Iceland no longer holds the top spot on the list of the most expensive countries to visit. • The demise of WOW air and subsequent contraction in number of tourists has caused number of tourist related jobs to contract. Despite that net migration to Iceland could exceed 4,000 people in 2019. Fewer jobs coupled with a growing work force increases competition in the labor market and contributes to a growth in unemployment. • There is a strong seasonality in the Icelandic labor market, especially in number of tourism related jobs. We expect that at the end of 2019 tourism related jobs will be around 2,000 fewer than at the end of 2018 and that unemployment rate will climb to around 4% by the end of the year. 3 Foggy skies Development after WOW air’s collapse and tourist arrival scenarios 4 17% decrease in tourism since WOW air‘s collapse Number of tourists began to decline in the beginning of the year, as WOW air had already reduced its fleet by roughly half before its operations stopped in late March Number of tourists and YoY change last 12 months 25% 250.000 15% 150.000 5% 50.000 -5% -50.000 -15% -150.000 -250.000 -25% Aug 18 Sep 18 Oct 18 Nov 18 Dec 18 Jan 19 Feb 19 Mar 19 Apr 19 May 19 Jun 19 Jul 19 Aug 19 Tourists YoY change 5 Sources: Icelandic Tourist Board In recent years tourism has moved in tandem with changes in the Icelandic airlines capacity However, the relationship does not appear to be as strong this year as it has been. Following WOW air’s collapse, the outlook is for a 35% YoY decrease in total number of passengers flying with Icelandic carriers while we are only estimating a 15% decline in tourist arrivals this year. Icelandair and WOW air capacity growth and tourist arrivals via KEF airport 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 2013 2014 2015 2016 2017 2018 2019e Icelandair and WOW air Tourists 6 Sources: Icelandair, WOW air, Icelandic Tourist Board, Arion Research Why have we not seen greater decline in tourist arrivals? Mainly because Icelandair‘s passenger mix has changed significantly from last year. Passengers travelling to Iceland with Icelandair have increased by 30% YoY, while total passengers in Icelandair‘s route network has increased by 11% YoY growth in Icelandair's route network YoY growth - YTD - YTD 30% 44% 41% 11% 33% 32% 29% Total To Iceland 25% 19% Icelandair's passenger mix - inner circle 2018, outer 2019 15% 13% 13% 14% 9% 8% 9% VIA To 7% 41% 44% 36% 3% 51% 12% Jan 19 Feb 19 Mar 19 Apr 19 May 19 Jun 19 Jul 19 Aug 19 Passengers Passengers to Iceland 15% From 7 Sources: Icelandair, Arion Research Since WOW air‘s collapse, two out of three tourists have travelled with Icelandair Icelandair‘s share in tourist arrivals was 40-50% when WOW air‘s fleet was at its peak Icelandair's share in tourist arrivals to Iceland 350.000 90% 80% 300.000 70% 250.000 60% 200.000 50% 40% 150.000 30% 100.000 20% 50.000 10% 0 0% Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18Sep 18 Oct 18 Nov 18Dec 18 Jan 19 Feb 19 Mar 19 Apr 19 May 19 Jun 19 Jul 19 Aug 19 Tourists Tourists travelling with Icelandair Icelandair's share Sources: Icelandair, Icelandic Tourist Board, Arion Research. 8 *Assuming that every passenger travelling to Iceland with Icelandair is a tourist as well as 25% of VIA passengers, which historically have used the company‘s „Stopover“ concept What if Icelandair‘s passenger mix had remained unchanged? If it hadn´t been for the shift in Icelandair‘s passenger mix, we assume that tourists YTD would have been around 100 thousand fewer than what we have seen so far. The YTD decline would thus have been around 20% instead of 13%. Number of tourists and YoY change 250.000 30% 20% 150.000 10% 50.000 0% Jan 19 Feb 19 Mar 19 Apr 19 May 19 Jun 19 Jul 19 Aug 19 -50.000 -10% -150.000 -20% -250.000 -30% Number of tourists Number of tourists assuming unchanged passenger split from 2018 YoY change YoY change assuming unchanged passenger split from 2018 9 Sources: Icelandic Tourist Board, Icelandair, Arion Research Airlines external environment has been relatively stable this year. Key question is whether air fares continue their downward long- term trajectory? Statistics Iceland‘s latest measurements suggest that seasonal fluctuation in air fares is diminishing Jet fuel and air fares 1.200 160 140 1.000 120 800 100 600 80 60 400 40 200 20 0 0 2014 2015 2016 2017 2018 2019 Jet fuel, USD/ton (l.axis) Air fares, =100 2014 (r.axis) 10 Sources: Bloomberg, Statistics Iceland, Arion Research Air fares: 42 months down, 3 months up…then down again In the first three months after WOW air‘s collapse, air fares increased YoY. However, in July they returned to the same old declining trend according to Statistics Iceland International air fares to and from Iceland - YoY change 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Jul 15 Jul 16 Jul 17 Jul 18 Jul 19 Apr 15 Apr 15 Oct 16 Apr 16 Oct 17 Apr 17 Oct 18 Apr 18 Oct 19 Apr Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 11 Sources: Statistics Iceland 7% increase in seat capacity from non-domestic carriers Fourteen airlines have announced that they will offer scheduled flights to Iceland in the Winter 2019-20 1,8m. Seat capacity in Winter 2019-20* 100% 500.000 seats 100% 400.000 80% 53% 60% 300.000 35% 37% 40% 200.000 27% 9% 20% 4% 100.000 -1% 0% -17% 0 -20% -17% -37% -100.000 -40% -200.000 -60% -300.000 -80% -400.000 -100% Icelandair EasyJet Wizz Air Norwegian SAS Finnair British Transavia Lufthansa Atlantic Air Baltic JET2.Com Air Airways Airways Greenland Seat capacity Change from previous year Sources: Isavia, Arion Research. *Winter schedule is period from 1.11-31.3. Czech Airlines is missing in the chart above. The carrier announced daily flights from 12 Keflavik airport to Prague with layover in Copenhagen. Possible seat capacity from new WOW air also missing Around 20% fewer seats available this winter According to Isavia‘s Winter schedule. Space left behind by WOW air will only be met to a small extent. Seat capacity in 2019-20 winter schedule 4,0 3,6 3,5 3,0 0,07 0,07 2,8 2,5 0,92 2,0 1,5 1,0 0,5 0,0 Number of seats 2018-19 WOW air Icelandair Other airlines Number of seats 2019-20 Sources: Isavia, Arion Research. *Czech airlines seat capacity not included as mentioned on previous slide as well as possible seat capacity from new 13 WOW air Our base case assumes slow start after the belly flop in March Based on airlines already operating. Even if the grounding of the B737 MAX aircrafts would be lifted soon, we expect delays in deliveries of new aircrafts to Icelandair. Thus, we assume a roughly unchanged capacity for Icelandair between 2019 and 2020.