Good morning, and welcome to Icelandair's presentation of the third quarter. I am Bogi Nils Bogason, and here with me is our CFO, Ívar Sigurður Kristinsson . We will go through a presentation. After it, we will have a Q&A session. Please send us your questions to the email address ir@icelandair.is. Q3 was a strong quarter with improved profitability. In fact, it was the best EBIT performance since 2017, with record revenue even though capacity declined by 6%. EBIT amounted to $120 million, which was an improvement of $46 million. At the end of the quarter, liquidity stood at $550 million, up by $48 million compared to last year. The change in our passenger mix shows our strategy in action. In light of market demand, we increased our focus on passengers traveling to and from Iceland.
Our ONE transformation program contributed $40 million in the quarter. Overall, we delivered a considerable improvement in profitability despite high fuel prices and unfavorable currency movements. That shows very well that we are making clear progress in the areas within our control. I would like to thank the Icelandair team for their hard work and contribution to these strong results. A little bit more flavor on the external conditions that have negatively impacted our operations, not only in the third quarter, but throughout this year, and in case of currency and Icelandic cost conditions for even longer. Fuel prices have been very high, currently over $1,600 per ton, more than twice the long-term average. Currency movements and cost pressure in Iceland are affecting our results in three ways.
Wages have risen faster than in our competitor markets. The Icelandic krona has strengthened by 15% in real terms since early last year, reaching a historical high. Our revenue mix gives us a greater net exposure to the U.S. and Canadian dollars than most of our peers, both of which are weak against the krona now. Additionally, the strike in September had a negative EBIT impact of approximately $4 million in the quarter. Adjusted for these factors, it is clear that our underlying performance is stronger than the reported results show. We are not standing still. We continue to prepare for an exciting future. From next year, our fleet will be almost fully new-generation aircraft. From 2029, the longer-range Airbus A321XLR will extend our reach.
We are widening our network, adding new destinations and more frequency through our Keflavik hub. Our partnerships extend our reach well beyond the network we fly ourselves. Through our transformation journey, we are building a leaner Icelandair designed for lasting profitability. I will come back to a few of these points later in the presentation. Ívar, please go through the financials now.
Thank you, Bogi, and good morning all. The traffic figures show the impact of the network rebalancing that Bogi described. We achieved a slightly higher load factor of 86.5%, while yields increased by 17%. Passenger numbers grew by 8% to Iceland and 11% from, while connecting passengers declined by 20%. On-time performance was similar to last year. CO2 emissions fell 3%, supported by higher utilization of our new-generation aircraft. Overall, good traffic results. Now let's look at how they translated into the financials. In quite simple terms, our revenue growth outpaced the cost growth quite well. Operating income increased by 12% compared to a 5% increase in operating expenses, taking our EBIT margin to 18.4%, up from 12.7% last year. The route network accounted for almost all of the improvement, which reflects the stronger revenue performance that we have just discussed.
Leasing also improved, while cargo recorded a small loss in the quarter as higher fuel costs outweighed its revenue growth. At the bottom line, net profit reached $97 million compared to $57 million last year. High fuel prices remain a significant headwind. The fuel expenses increased by $13 million or 11%. Market price increase added almost $55 million, with the hedges offsetting the increase by $28 million. Fleet changes increased fuel efficiency, reduced cost even further, showing how our fleet renewal program is helping us manage the cost pressure. Looking ahead, we have approximately 45% of the fourth quarter fuel consumption hedged at $722 per ton, which gives us improved cost visibility into that quarter. If we put that fuel impact into perspective, then this bridge here shows how the stronger underlying performance drove the improvement in EBIT.
Revenue on fixed currency increased by almost $62 million, while cost ex-fuel rose by less than $5 million. That more than absorbed the fuel increase we just discussed, contributing to our overall EBIT improvement, like I said before, of $46 million. The chart on the right, as well, shows the same progress per unit. Revenue per ASK grew faster than the cost, widening the spread by 35%, the cost ex-fuel. Bottom line, we are translating stronger revenue performance into the improved profitability. Now, looking a little bit more closely at what is driving that revenue improvement. Unit revenues increased by 18%, mainly driven by a 17% increase in the yield and improved traffic mix. The trend from previous quarters continues. Positive momentum in the unit revenue, as we see in the center of the slide, with a rolling 12-month improvement now at around 10%.
Unit cost, ex-fuel, increasing by 8%, 6% on fixed currency. Although the exchange rate was similar year-on-year, the steep strengthening of the ISK last year was partly mitigated by FX hedges. The fleet network mix explain part of the unit cost increase. Fleet renewal and higher share of European flights increased the unit cost, but at the same time strengthened the profitability through higher revenue. Contractual salary increases and the mechanic strike in September added some cost pressure as well. At the same time, we are seeing clear efficiency gains. Salary cost on fixed FX decreasing by 1%, and the ONE transformation program continues to deliver real savings. Liquidity. We ended the quarter with a strong liquidity position of $550 million. Most of that is cash and marketable securities, and with our revolving credit facilities remaining undrawn.
We are in a stronger position than at the same time last year, which gives us financial flexibility as we move into the winter season. Finally, turning to the balance sheet. Total assets were $ 2.1 billion, increase since start of the year mainly reflects the higher cash position and additional leased aircraft. Equity strengthened with the equity ratio now at 17.5%. That concludes the financial review. Bogi, back to you for the business update and outlook.
Thank you, Ívar. First, a little bit more on the fuel prices. After the peak in April, prices eased a little bit in June, but since then, they have climbed back to over $1,600 per ton, and that is 2.3x the 2025 average. The forward markets remain quite volatile, and we are planning for elevated fuel costs throughout the winter. What we are doing, we are acting on what we can control. We have raised fares across our markets and maintained a strict cost discipline. We have also accelerated the phase-out of the 757s and the 767s and reduced capacity. Alongside these actions, our transformation program and the new generation fleet continue to improve fuel efficiency, as Ívar went through. Due to the fact of the high fuel prices and challenging currency mix or currency development, the winter will be challenging.
Fuel hedge coverage is decreasing, and we see that the ISK remains quite strong. At the same time, capacity into Iceland is increasing, concentrated on few European gateways. However, our revenue generation side is holding up, but in a little bit tougher market. Winter revenue still compares quite favorably with last year, but bookings are coming in later and closer to the departure. In quarter four, our schedule is 4% below the plan earlier in the year. In the first quarter next year, the capacity is down 8% compared to the initial schedule. We will continue to optimize our network in line with market dynamics. However, when fuel and FX will normalize, the full benefit of the improvements we have made, and we will continue to make, will definitely show in our results.
Negotiations with our unions, they continue, but at a slower pace than we would like to see. We are very fortunate to have an exceptionally skilled and experienced workforce, and the employees represented by the unions are one of the company's greatest strengths. Our objective is unchanged. Sustainable agreements that support Icelandair's long-term competitiveness, operational flexibility, and future growth while we continue to provide attractive aviation jobs here in Iceland. However, our situation is quite complex. Over 80% of our revenues are coming from abroad, where we are competing with international airlines, while almost all of our salaries are paid in the local currency, ISK. Looking at the 10-year period from 2014 to 2024, wage growth in Iceland has been far above our neighboring countries, which is not sustainable for us or the tourism industry.
These dynamics underpin the importance of constructive, fact-based negotiations aimed at reaching sustainable agreements. The objective I have just outlined has implications beyond Icelandair and our union negotiations. Competitive export industries generate the value and the foreign currency that our living standards here in Iceland are built on. Alongside the wage developments, we also need to look at taxes, charges, and the wider cost of doing business here in Iceland. That is very important when considering additional taxation on tourism and exports. It is essential to look at the total burden these industries already carry and how further increases would affect their ability to compete internationally. Turning to our financial guidance for the full year, we expect an EBIT loss for the year of $20 million-$30 million.
For this quarter, Q4, we expect the unit revenue to rise by 6%-9% between years, with capacity down 3%. Unit cost, excluding fuel, are expected to increase by 7%-9%. As always, the guidance remains subject to risks and uncertainties. Looking further ahead to next summer, 2027, we will add next spring two new destinations, St. Louis and Madrid, more frequencies in Scandinavia, further development of selected southern European markets, and continued growth in Greenland. Our capacity is concentrated where we have a comparative advantage and the strongest opportunities for sustainable profitability. Overall, capacity at Keflavik Airport is currently expected to increase slightly year-on-year. At the same time, our seat capacity at Icelandair will decrease slightly following the phase-out of the 757 and the 767. The transition to a smaller aircraft will, however, enable more frequent services, greater customer choice, and broader connectivity.
Partnerships continue to be an important part of our strategy and extend our own network. On that note, through our Southwest partnership, customers can now connect with our networks on one ticket via six U.S. gateways to more than 100 destinations. From next spring, St. Louis becomes the seventh gateway, and the partnership extends to our frequent flyer programs. Saga Club members will earn and redeem points on Southwest flights, and the same goes for Southwest members on Icelandair flights. Then a little bit to our product. Demand for Saga Premium has been strong or has never been stronger. In Q3, number of Saga passengers was 18% higher than last year, while Saga seats increased by 9%. Saga revenue grew by 35% over the same period. We are acting on this demand. Before last summer, we added more Saga seats to our MAX 9 aircraft.
That change has worked well and increased our revenue, and we are now looking into the possibility of adding more premium seats to the whole fleet. At the same time, we are giving our customers more choice. Recently, we debundled part of our Saga Premium product, and we are looking into further Saga fare options to increase customer choice even more. With our Saga product, we are very well positioned in premium economy, which is the industry's most profitable part of the premium market per square meter on board of the aircraft. The ONE transformation journey is changing how we, here at Icelandair, operate, and the results are building quarter by quarter. In Q3, ONE delivered an actual impact of $40 million, and once fully implemented, we now estimate the annualized impact to be at $138 million. ONE delivers on three fronts in our operations.
First, we are lowering structural cost through better procurement, higher productivity, and greater efficiency. Second, we are strengthening revenue through better pricing and more agile commercial approach. Third, we are using digital tools, AI, and automation to change how we work. Finally, I would like to conclude with four key takeaways. First, despite strong headwinds from fuel price and currency developments, we delivered record revenue and the strongest EBIT since 2017. We expect this coming winter to be challenging with persisting high fuel prices and strong ISK. Therefore, we need to provide predictability in the areas within our control, and there, the union agreements are crucial. We are transforming Icelandair. The ONE program continues to deliver, and from next year, our fleet will be among the youngest in the industry. The Airbus A321XLR will join our fleet from 2029, creating further opportunities for Icelandair.
Finally, fuel prices and the ISK are at historical highs, and that will not last forever. We are building a stronger Icelandair, not only to deal with near-term headwinds, but to be ready to use the tailwind fully when it comes. That concludes our presentation, but Ívar and I, we are now happy to take your questions. Do we have some?
Yes, we already have some questions. First one, your guided RASK is up 6%-9% for the fourth quarter. How do you see unit revenue developing into the first half of 2027 and the 2027 summer season based on what is booked today?
Would you like to start there, Ívar?
Yeah. We are seeing stronger revenue, as far as we can see it. With regards to 2027, it is a bit early in the booking season to tell. But so far, we are seeing the positive RASK momentum continue.
How much of the unit revenue gain this year reflects fuel being passed through into fares and surcharges, and how much is structural, such as the capacity that left the market and the premium products? If jet fuel fell back towards pre-war levels, would you expect unit revenue to give back a similar amount, or would most of the gain hold?
There are so many moving parts in our environment, and it is such a dynamic market, and it is very hard to say and mention an exact number regarding the fuel. As we have been going through, we have rebalanced the network, and we have been doing a lot of changes within the commercial setup, so to say. We have strengthened the commercial machine of the company. There are a lot of moving parts, and I firmly believe that even though the fuel would go back to normal levels, which we don't expect in the near future, we would see improvements compared to how it was before in our revenue generation. But it is very hard to mention any exact number. Ívar, do you have more flavor on this or?
No, I think that is a good answer.
What is your capacity plan for the coming quarters, specifically RASK growth for the 2027 summer season and winter 2027, 2028, given the 757 and 767 exit and the deliveries of the new A320neo and the A321LR?
Our seat capacity next summer is a little bit less than this year. However, we have more frequency because we are phasing out the 757 and the 767. So we have a little bit fewer seats, but more frequencies, as I said. That means better service to our customers and more connectivity. Into the winter, we have not finalized the plans for the winter 2027, 2028, but I think the current base plan is a little bit growth between years.
Yep.
But we will adjust based on how the market will develop, obviously.
How comfortable are you with liquidity through the winter, considering advanced bookings and seasonal cash outflows? Do you expect any additional funding needs?
No. We don't expect any additional funding needs this winter. As we went through, our situation going into the winter is quite strong, and we are very confident that based on what we have in front of us now, there are no additions needed.
Where do you see the biggest opportunities to improve cost efficiency, particularly crew productivity and matching capacity to seasonal demand?
First of all, regarding the last point, as we have been going through, we are quite far in our refleeting project. Next year, we will have one of the youngest fleets in the airline industry, and that means we have more opportunities to fly more during the wintertime because the variable cost is lower on those aircraft than the older ones that consume more fuel. What we have been doing this year and last year, and we will continue to do, is to decrease our seasonality by flying more on those very efficient aircraft throughout the year. That's one thing. Regarding further cost improvements, we see a lot of cost improvements in our operations. However, the currency development and so on, somehow, it don't come through the P&L fully due to the currency fluctuations. A lot of improvements, and we will continue on that path.
The union agreements are one thing there. We did a lot of changes, or we agreed on a lot of changes with our pilot union and the cabin crew union in 2020, and we have seen that productivity has been on the way up, and we need to stay there. However, we also need to take care of our people. We have to look at, there are some complaints about fatigue and so on, and we have to take that quite seriously. We have to have all the metrics on green, not just productivity. This year has been quite complicated. We are phasing out the 757s and the 767s. A small fleet, but with a bigger fleet next year, Airbus and MAX, two rather big fleets compared to how it was this year. Much simpler setup.
I think we will be able to see more cost achievements due to that next year. A lot of opportunities because of a simpler fleet.
Maybe elaborating on this a bit, how much of ONE's expected benefit of $123 million is already reflected in the results? What further improvement should we expect over the next 12 months?
With regards to ONE, like we went through, our estimate of this quarter was close to $40 million. Of everything we have put in motion, the impact is close to $140 million. I would think around or a little more than $100 million is already in the run rate. We continue to add to the pipe, so we still foresee that those numbers will increase in the coming months.
Mm-hmm.
Have you thought of disclosing the full annualized employer cost of pilots and cabin crew separately, including salaries, allowances, overtime, employer pension contributions, and payroll charges?
No, that's not something we have thought about, breaking out the salary cost per employee group.
Could you please specify for the main narrow body fleet how many pilot and cabin crew FTEs are required per aircraft during the summer period, and what are the average annual operated block hours per pilot and cabin crew FTE? How do those figures compare with mainline airline benchmarks?
Do we have these?
This is a very detailed question. With regards to number of crew per aircraft, I do not know exactly how to answer that. We are not seeing any changes to the overall requirement per aircraft from what we have been operating in the past.
Mm-hmm, no. Just to refer to the previous question as well, we have been going through a very complicated period with the refleeting. That means we have had not as high productivity on the 757s as on the MAXs.
Yeah.
If you look at the MAX productivity, we are in line with the international benchmarks, and we need to continue on that path. However, we have to focus on all the metrics, fatigue, and so on. When we have a simpler fleet next year, we will see gains in our P&L and less cost. We see a lot of opportunities there.
I think a big part of the difference in utilization per aircraft type has been that we have been taking the seasonality a lot out on the aircraft that burn more fuel, which has meant that the 757 seasonality has been much more than the other. That has impacted the utilization on that type.
A few questions on the fleet. Is the A321XLR delivery in 2029 on time?
Yes, it is on time, and we foresee that we will have the first aircraft in operation before summer 2029.
Anything else on the current status of aircraft deliveries?
Just to rephrase, we are expecting to take four A320neo into operation this winter and three A321LRs. So far, that plan is unchanged. We will have those aircraft in operation in the next few months.
Are you announcing when the last 757 and the 767 flights are?
I am pretty sure that we will do that in due course when we have that information available.
Could you give us an update on your Malta AOC? Are you transferring aircraft there?
The acquisition was concluded at the beginning of this week. We announced that early Monday morning, and our current plans there are to move the few 757s that are operated by Loftleiðir there has currently, due to the fact that we want to fully utilize the opportunities that we have now with the simpler fleet. We do not want to leave part of the 757 operations here in Iceland, so we are going to move that fully to abroad and focus on the implementations of the Airbuses here in Iceland. Then the ongoing operations of Airbuses and new MAXs here in Iceland and move the few 757s to Malta. That is the current plan.
Can you imagine to fly to Asia one day? How many white spots are left for you in North America?
Can we imagine to fly to Asia one day? We had plans in 2017 or 2018 to fly to Delhi, but our current focus and our competitive advantage is to connect the continents, Europe and North America, via Iceland on a narrow-body aircraft. We are expert in selling this great destination here, Iceland. That is our competitive advantage, and that is our core business. We see opportunities in North America. We see opportunities for new destinations. When the XLR comes in 2029, we can fly further into North America, California, Texas, and so on. A lot of opportunities to develop our current network further on a narrow-body aircraft. That is our business model.
We have time for one final question.
Okay.
What is your outlook for passenger yields in 2027, assuming oil prices remain around current levels? We have heard the airline CEOs on both sides of the Atlantic discuss potential yield increases of up to 20% next year. Do you see that scale of increase as realistic for Icelandair?
You start, Ívar.
Yeah, I think, like I said before, we are seeing the positive RASK and yield momentum into the next year. What I would say on the 20%, I think at least it is unrealistic that we are going to see those kind of increases on top of what we had in Q3.
Yes. Our time is up.
Okay.
If there are any remaining questions, we will answer them in email.
Yeah. Just to conclude, as we went through, Q3 was a great quarter for us. We are quite proud of the performance in the quarter. The winter will be challenging, but we are ready for it, both regarding looking at the liquidity, and we are simplifying our operations. Icelandair is stronger now than ever before. Even though the quarter was strong, we had quite a complicated fleet, as I went through. Next year, we will have much simpler fleet that will create a lot of opportunities. Even though the winter will be challenging, going forward, we see great future for our company. Thank you, and have a nice weekend.
Thank you.