Good morning, and welcome to our presentation of the Q1 of this year. Time flies, one more quarter under the belt. My name is Bogi Nils Bogason, and I'm joined by our CFO, as usual, Ívar S. Kristinsson. We will go through the presentation, and following that we will have a Q&A session. Please send us your questions to ir@icelandair.is. We can proudly say that Icelandair delivered a strong Q1 with record revenue, outstanding on-time performance, and continued efficiency improvements. EBIT margin improved more than 6 percentage points year-on-year, the best Q1 EBIT margin since 2016. Turning to some of the key numbers from Q1, higher yields and load factor drove a 7% increase in RASK, while total revenues were up 21% on 30% production growth.
CASK was flat year-on-year despite considerable salary increases and unfavorable currency developments, a clear demonstration of the efficiency improvements that we have been focusing on. Leasing and cargo both continued to perform well, and our net loss was marginally higher than last year, driven by lower currency gains compared to last year. Liquidity reached an all-time high at the end of the quarter. Ivar is now gonna go deeper into the numbers. Please, Ivar.
Thank you, Bogi, good morning, everybody. Let's start with looking at some highlights of the traffic statistics for the quarter. As Bogi mentioned, we grew the capacity by 13% in the quarter. The demand kept up with that, our load factor improved slightly year-on-year. The load factor was at record level, in addition to yields improving by 9%. Passenger traffic grew across all markets with particularly strong momentum in the from market, which grew 26%. In our operation, we delivered a strong 82% on-time performance, 1 point improved year-on-year. That placed us among the most punctual airlines in Europe this quarter. That is quite notable given the challenging weather that we had in Keflavik, especially in late March.
On sustainability, we reduced our CO2 emissions per ton kilometer by 3%, driven by higher utilization of our MAX and 321 fleet. On the financial performance and the overview of the P&L, the quarter shows a meaningful EBIT improvement, despite quite challenging cost environment, as Bogi mentioned. Operating income reached ISK 347 million, up 21% year-on-year. That was driven primarily by the passenger revenue, which grew to ISK 258 million. We saw good growth in many parts of the business and again, with the from market leading the growth year-on-year. Cargo delivered almost ISK 1 million in EBIT and leasing another ISK 6 million. In the quarter, we sold a 767 aircraft, and the gain on that sale of $8 million is recorded under the other operating income.
On the cost side, operating expenses grew 16% slower than the revenue grew. I will particularly cover the fuel and salary cost development a bit later in more detail. All this results in EBIT improvement from last year to a negative ISK 53 million, ISK 9 million improvement and over a six percentage point gain in the EBIT margin year-on-year. It is worth noting the currency development. The dollar was more than 10% weaker against the Icelandic krona if we look at the average quarter-on-quarter, that drove a net $10 million decrease in the EBIT or on the EBIT level.
Without that currency impact, the improvement in EBIT would have been even more pronounced as we are seeing here. On the salary cost and the key drivers there, we can see that overall expenses increased or salary expenses increased 18%. The way the contractual rate increases contributed to the upward pressure on that and in addition to the impact from the FX development. Just to clarify, when a weaker US dollar, it inflates the salary cost. The salary cost is mostly in Icelandic krona, when we report it in USD, that gets inflated by the weaker USD. At the same time, efficiency was good and continues to improve as we have seen in the past few quarters.
This year it increased by roughly 10% with average full-time equivalents growth of 3% on the 13% capacity growth in the quarter. This shows the continued productivity gains and as the capacity is growing significantly out or it is significantly outpacing the growth in the headcount we have. As you can see here, the overall development is depicted on this slide. On the fuel, the cost bridge here, start with looking at the prices.
The sharp oil price spike that we're seeing following the conflict in Iran had only a limited impact on Q1 as around 75% of our consumption in March was actually priced on the February averages. Nonetheless, the fuel price increased by approximately 10% year-on-year. Carbon emissions increased by almost 3 million, driven by higher proportion of our flights to Europe and slightly higher market prices year-on-year. That said, we had some important mitigating factors as well, contributing here. The fleet renewal and the ongoing efficiency initiatives that we are working on reduced the fuel consumption, and our hedging position, of course, provided a meaningful support to the fuel cost when we compare it year-on-year.
Looking forward, we have around 41% of the 2026 fuel consumption hedged at around $660 per ton. Obviously, well below the current spot prices and will dampen the financial impact should the elevated price levels persist. EBIT bridge for the quarter. The chart on the left here, the revenue growth, 21%, was obviously the standout contributor, but and more than offset or compensated the external headwinds and the FX. On a fixed FX, the underlying business performance drove clear improvement in the profitability, as I mentioned before.
On the right, we can see a bit of a longer term trend in terms of the EBIT, that also shows good performance in Q1, steady improvement over the past few years, and definitely a trajectory though that we want to continue to see in the right direction there. Unit cost and unit revenue, starting with the unit revenue, this slide shows quite well the positive revenue trajectory again. This quarter, RASK up 7%, driven by the stronger yields. On the right side here, looking at the right or looking over the past five years, we see a yield growth.
or a yield growth without any load factor trade-off, so to speak, as well as we have been steadily growing capacity year on year in this quarter. Also on the left, you can see the shift in our revenue mix over the past few years as we are seeing, you know, premium share of the ticket revenue growing to approximately 21% of the total passenger revenue this quarter. On the unit cost, CASK overall was flat. Strong result in my opinion, especially considering the meaningful FX headwind that we faced. The ONE program delivering results, improving efficiency and lowering the cost base and by that mitigating some of the inflationary pressure.
Capacity increased as well as we've talked about, that supported the unit cost development. Overall, excluding the FX, the cost development was favorable, and we are managing quite well what is within our control in the short term. The development is encouraging as we head into the peak season and going forward. Slightly on the FX development on the P&L. As I've said, on the EBIT, the impact was ISK 10 million. If we look at beyond the operational contribution, the lower FX income, or the impact of FX on FX income or financial income, was ISK 4.6 million.
If we add the impact to the tax line as well on the P&L, the total FX on profit was around ISK 18 million for the quarter, comparing it to the quarter last year. Cargo and leasing both delivered strong results in Q1. Cargo revenue up 8%, driven by higher import volumes and strong salmon exports. EBIT almost ISK 1 million. In our leasing business, performing well, continues to do that. Sold block hours up 22% in the quarter and delivering ISK 6 million in EBIT. Together, these segments contribute quite meaningfully to the bottom line at the group level. Cash, cash flow and liquidity. Net cash from operations strong, ISK 201 million.
Main contributor there, the strong bookings during the quarter. Our customers are booking the summer holidays, and that resulted in our liquidity growing by ISK 160 million during the quarter. At the end of the quarter, cash and marketable securities are ISK 524 million. If we add the undrawn credit facilities, then liquidity was at ISK 660 million, which, as Bogi mentioned, was the record that we have had at the end of any quarter so far. The balance sheet, equity improved ISK 60 million to ISK 303 million at the end of the quarter. The balance sheet is growing as well, the equity ratio was 13.5% at the end of the quarter.
The increase in the balance sheet from the start of the year, partly due to additions to leased A321LRs and the value of our outstanding fuel hedges. Mainly this is a seasonal impact of the seasonal buildup of cash and as we build up bookings for the peak summer. Bogi, over to you for the business update.
Thank you, Ívar. Let me start by with fuel, one of the, our most significant uncertainties we are currently navigating. As we all know, and Ívar went through, the conflict in the Middle East caused a sharp spike in the prices. Looking ahead, forward, the prices suggest some moderation from the peak and from the current level. Obviously, there is a considerable uncertainty here. If fuel prices, they remain highly volatile, and the near-term movement will just depend on how the conflict will develop. On the supply side, we have a stable outlook for the physical delivery of jet fuel across all of our destinations, which is quite reassuring. We are taking concrete steps to mitigate the impact of fuel volatility on our business on top of the fuel hedges that we currently have in place.
We have implemented the fare increases across all markets, we are applying a strict cost discipline in all areas within our control. This chart gives you a snapshot of how capacity is being managed across the year. In the Q1, we delivered 13% capacity growth, as we've been talking about, fully in line with our strategy to grow outside the summer peak, reduce seasonality, improve profitability through more efficient use of our resources. Moving into this quarter, the Q2, we have trimmed capacity by 2%, or just over 2%, from the previously announced schedule, with the reduction focused on low load factor flights where passengers can be moved to another flight the same day, by that, minimizing customer disruption while improving profitability.
Peak summer capacity in Q3 remain unchanged with capacity flat year-on-year. From September onwards, we are reviewing further adjustments. The overall message is that we are being proactive in our response and adjusting where we have flexibility. On to the important ONE transformation program. Since the start of the program in 2024, two years ago, we have identified over 500 ideas for implementation, of which, just shy of 300 initiatives have already been implemented. The initiatives span both the revenue and the cost side of our business. On the revenue side, we are focused on 3 key areas, making our pricing and revenue management processes more agile and responsive, refining our product and service offerings through selective unbundling of the product, and strengthening our ancillary revenue streams.
On the cost side, the program covers a broad range of actions, such as increased automation, organizational restructuring, and improved productivity. When fully implemented, the initiatives are estimated to deliver an annual impact of ISK 170 million. This is a significant number, and it just underscores why execution of this program remains one of our highest priorities. As many airlines, Icelandair had business functions in more than one location for decades. However, as part of our current transformation program, we have been putting more emphasis on exploring opportunities abroad to drive efficiencies, simplify, and strengthen our core airline operations here in Iceland. First, our financial service center in Tallinn, Estonia, which we have been operating since 2002.
This center handles accounting, ticketing, and back office services for Icelandair and remains a cornerstone of our finance and back office support structure. During the last 2 years, we have been strengthening this support function. The second is our customer service center in the Philippines, which we have operated in partnership with a third party since 2017, and it provides a support for customer facing operations. Third, and recently, very recently, we are opening a technical service center in Lithuania in May this year, next month. This new division will take on responsibility for our third-party technical services. The Baltics have a strong aviation culture and deep technical expertise, making it a natural fit for this type of operation for us.
Fourth, we have signed a letter of intent to acquire a 49% stake in a Maltese Air Operator Certificate. This is a strategic step. The investment will provide Icelandair with increased operational flexibility and open up new business opportunities. In summary, these four initiatives reflect our ongoing strategy to place the right functions in the right location, reduce our cost base, and allow our Icelandic operations to focus on what it does best. Looking at our route network for this year, for 2026, we continue to see a strong demand outlook and healthy yields. We will operate over 60 destinations with a fleet of 41 aircraft and with 6.2 million available seats. Our network is supported by three connecting banks, generating over 800 connection possibilities through Keflavik.
The capacity is up around 1% from last year, but the composition is important. The growth is weighted on European destinations, with increased emphasis on Southern Europe and Scandinavia. This reflects the strategic shift we discussed earlier in response to the weaker U.S. dollar, reducing our transatlantic and U.S. exposure while capitalizing on a strong European demand. We have already announced four new destinations this year, Faro in Portugal, Venice in Italy, Gdansk in Poland, and Tromsø in Norway. These additions further strengthen our European network and align very well with our current network focus and strategy. Taken together, this is a network built for the current environment, diversified, demand-led, and positioned to deliver strong yields. Regarding our fleet, we have three stories to tell there. Starting with the utilization.
In 2026, we will operate of a fleet of 52 aircraft, with 35 serving international routes and 6 on the regional markets. The international fleet has been reduced by 2 aircraft in summer 2026 following Boeing 757 and 767 retirements. Importantly, 90% of our international flights will be operated by Boeing MAX and Airbus aircraft, our most modern and efficient types, delivering approximately 30% better fuel efficiency, and in the current fuel price environment, this is very valuable. On the Airbus side, our fleet transition is progressing well. We currently have 6 Airbuses in operations, growing to 9 in summer 2027.
To bridge a small gap caused by a delayed Airbus A321LR delivery, we are working on securing an Airbus A320ceo aircraft that will enter the fleet before this summer, in the next few weeks. We are also actively working on securing aircraft for delivery in 2027 and 2028 as we finalize the phase-out of the Boeing 757 and the Boeing 767, and at the same time, we are growing the fleet. Finally, on fleet retirements, the Boeing 767 fleet is planned to retire after 2026 Christmas period in our international network, and our base plan assumes a limited number of Boeing 757s aircraft remaining in operations through the fall of next year.
However, if fuel prices remain elevated, we may accelerate the 757 retirements, potentially after the summer season this year. Our shareholders and the investor community have been asking about the ongoing negotiations, the status there. The collective bargaining agreements with the unions representing our pilots, cabin crew, and mechanics all expired last year. Negotiations are currently underway across all three groups. On cabin crew, discussions are progressing. For pilots and mechanics, the negotiations have been referred to the state mediation, which is a standard part of Icelandic labor relations process when direct negotiations require additional support to reach a conclusion or a resolution. I want to be very clear about what we are focusing on in these negotiations.
It is to reach agreements that allows us to continue to offer attractive aviation jobs here in Iceland for the long term. To be able to do that, we need outcomes that safeguards Icelandair's competitiveness, support our fleet and network growth ambitions, and increase our operational flexibility for Icelandair to be able to run a resilient airline in a highly competitive environment. To the financial outlook for the year, which is definitely a subject to a high level of uncertainty. The fuel price volatility will pressure our margins from this quarter or the Q2. That said, we are not without offset. Our hedges, strong demand outlook, and improving yields will absorb some of that impact, and the mitigating actions we have outlined today will further dampen the effect.
The net impact on our full year results will ultimately depend on how fuel prices develop from here, both the duration and the magnitude of price movements, and importantly, how any sustained fare increases will impact passengers' demand. If you look at just at the Q2, as we see it now, unit revenues are expected to improve between years, but with higher fuel prices, we expect profitability to be lower than last year. To close, before we go into the Q&A session, I would like to bring together the 4 takeaways from the presentation. First, the Q1 was a very strong quarter. We delivered a record revenue and load factor, improved efficiency, and outstanding on-time performance, and liquidity has never been higher. I would like to thank the Icelandair team for great performance in the quarter.
Second, we have made strategic network adjustment in response to the current environment. Thirdly, we are taking concrete mitigating actions to, in response to the volatility. Fare increases have been implemented across all markets, capacity has been trimmed, further adjustment for fall and winter remain under active review. Fourth, we are transforming for the future. The ONE program is delivering real and lasting change to how we operate. In Q1, we saw considerable efficiency improvement with decrease in non-production FTEs on 13% capacity growth. The current environment is obviously challenging, Icelandair is responding with discipline, agility, and clear strategic direction. That takes us to the Q&A session.
Yes. Good morning. We already have some questions. First, regarding outlook for Q2, is your base case a negative EBIT in the quarter?
Ívar, want to do it? Ívar talk.
Okay, I will take this. Base case or not, I mean, if you just look at the current fuel prices of where we have the spot close to $1,500, then obviously, you know, that would result in a loss for the quarter.
You say demand is strong. Can you shed any light on how strong it is compared to last year?
We have been going through, we have been raising fares in all markets, and, but the demand is still strong. The bookings are very strong in all markets. The fare increases have not been impacting the booking flow or the demand. The demand, the situation is just very strong in all markets.
How much does jet fuel have to decrease from current levels for your Q2 profitability to be flat year-on-year?
Yeah. On that, I mean, obviously, that is gonna be somewhat impacted also by the how we see the yields and the revenue develop. Again, looking at the current spot levels, we would have to see at least a double-digit reduction in the fuel prices in order to, for that to be, you know, the result.
To expand on the fuel situation, what is the outlook on fuel hedging?
As we went through in the presentation, we have around 40% hedged for this year. Before this conflict started, we had been building up quite a good hedging position on really favorable prices. At the moment, you know, the situation is quite good. I mean, our policy calls for up to 50% hedged, hedging, six months into the future, and from month seven to 12, we hedge up to 40%. We will just continue to hedge according to that policy.
Regarding the possible Malta operation, do you envision operating a part of the passenger network through the Maltese AOC?
We signed the LOI at the beginning of this month, and we have been working on the business plan, and the negotiations are taking place. It is, so to say, in the initial stages. As we've been saying, we see this as a platform for Loftleiðir, our leasing arm. Loftleiðir has not been competitive in the typical ACMI market in Europe, for example. By this, if this will take place, this could create opportunities for Loftleiðir. We also have very high seasonality in our business, as many other airlines, but because we are located here in Iceland, very northerly, we have more seasonality than most of our competitors, and they have more flexibility to address the seasonality.
This platform could be a tool to address the seasonality as well. This is in the initial stages. We are working on the business plan and it remains to be seen how this will develop.
Can you share any information on the scale of the savings by simplifying the fleet? First, by retiring the Boeing 757s and then the 767s. Are we talking single or double-digit numbers in $ millions on an annual basis?
On the simplification of the fleet, as you mentioned, it is gonna bring considerable savings when we phase or when we have totally phased out those fleet types. What I would say is that I would look at it as being single-digit savings rather than something more than that. There, I just want to reflect on that we have already phased out a large part of the fleet. Also that fleet, you know, had some advantages as well. If you look at the net impact, we're talking about single digits.
A bit more on the fleet, is the A320 leased to fill the A321 delivery delay?
Yes.
Yes, that's the case.
Mm.
When do you decide to phase out the Boeing 757? Maybe after this summer?
I think, we will do it earlier. We are just working on it now, looking into it now, and reviewing the fleet plans, based on the current environment. We will probably decide upon that in before end of May.
Okay, here's a question on demand. On the North Atlantic, what is the current situation there?
Would you like to start that, Ívar S. Kristinsson?
I would ask you to answer that question.
The market, as we have been saying, we have been rebalancing our network very successfully, putting a less focus and exposure on the trans-Atlantic market and the U.S. market, due to, we do see stronger demand and higher yields on the markets to and from Iceland. By that, we have been able to increase the yields quite a lot. It's still the situation that to and from Iceland to Europe, yeah, Scandinavia is stronger than the trans-Atlantic market and the U.S. one.
Okay. That concludes the questions this morning.
Thank you very much.