Icelandair History

Company Perspectives:

Welcome to Icelandair, one of Europe's most progressive and dynamic airlines. Operating from our hub at Keflavik Airport, we offer daily and regular scheduled services to Europe and North America, alone or in conjunction with our code-sharing associates. With over 60 years aviation experience, Icelandair is in many ways unique among international airlines, in that apart from our role as a passenger and freight carrier, we also provide a one-stop comprehensive travel service to and from our home country, including hotel, car rental and tour facilities. Discover our world. Welcome aboard.

Key Dates:

1937:

Flugfélag Akureyrar is founded on Iceland's north coast.

1939:

Loss of its sole aircraft grounds Flugfélag Akureyrar.

1940:

Flugfélag Akureyrar is relaunched as Flugfélag Islands.

1943:

Flugfélag relocates to capital city of Reykjavik.

1944:

Loftlei'ir is founded.

1945:

Regular flights to Europe begin.

1949:

Direct London route is launched in collaboration with Loftlei'ir.

1952:

First North American routes open; newly renamed Icelandair takes over domestic routes.

1973:

Flugfélag Islands merges with Loftlei'ir Icelandic Airlines.

1979:

Oil crisis triggers mass layoffs.

1985:

Icelandair faces brush with bankruptcy.

1989:

Restructuring and fleet renewal program begins.

1992:

Liberalization of European air market leads to two years of losses.

1993:

Icelandair enters marketing agreement with The SAS Group.

1996:

Southwest Airlines picks Icelandair for its partner in its first interlining agreement.

1997:

Domestic and cargo competition leads to $4 million loss.

1999:

After 45 years, the Luxembourg hub is closed.

2001:

Code-sharing deal with U.S. railway Amtrak is signed.

Company History:

Icelandair (Fluglei'ir hf.), Iceland's largest publicly traded company, has played off its unique mid-Atlantic location to serve as a convenient option for transatlantic air travel. A one-class, backpacker's airline in earlier decades, Icelandair has since made an effort to appeal to business travelers. It still carries a mix of 85 percent leisure to 15 percent business traffic. The company also has been promoting Iceland as a tourist destination in itself. Icelandair carries nearly two million passengers a year; this traffic is highly seasonal. Although Iceland's native population is well-traveled, only a quarter of Icelandair's passengers are natives. In addition to various aviation support operations, Icelandair is the Hertz franchise for Iceland and has interests in hotels and tour operators.

Origins

Iceland's first airline, Flugfélag Akureyrar, was founded on June 3, 1937, at Akureyri on the country's north coast. The services were welcomed by the extremely isolated fishing villages there. Within two years, however, the one-plane operation was grounded due to the capsizing of its Waco YKS seaplane.

The company relaunched in the capital city of Reykjavik in 1940 under the name Flugfélag Islands. Soon, three young Icelandic pilots, fresh from flight training in Canada, formed their own airline, Loftlei'ir ("Skyways"), on March 10, 1944; it began flight operations on April 7.

These two new airlines operated a mixed bag of equipment at first, notes aviation historian R.E.G. Davies. In the mid-1940s, Flugfélag was flying a Waco floatplane, two de Havillan Rapides, a Beechcraft, a Catalina, and in 1946 launched scheduled international service to Scotland and Denmark using Liberators and DC-3s, respectively, chartered from Scottish Airlines. Loftlei'ir began with a Stinson Reliant seaplane. It later took on the name Loftlei'ir Icelandic Airlines.

In February 1952, Flugfélag, then known as Icelandair, took over all of Iceland's domestic routes. By the early 1960s, Icelandair had a mixed fleet of eight aircraft, and Loftlei'ir fielded five Douglas DC-6s.

Loftlei'ir Icelandic took advantage of Iceland's 1946 bilateral agreement with the United States to seriously undercut the fares of IATA (International Air Transport Association) member carriers. From 1952 to 1962, Icelandic shared this concession with Norwegian carrier Braathens SAFE, whose own network stretched east to Hong Kong. The two airlines also cooperated on maintenance at Braathens' base in Stavanger, Norway. At the end of the 1960s, Icelandic had a 2 percent market share of trans-Atlantic traffic; it was a profitable slice of business.

Icelandic's low transatlantic fares helped many young Americans--including future president Bill Clinton--"cross the pond." Some of the traffic was routed directly to Icelandic's base in Luxembourg, which did not have an airline of its own. The low-budget flights, with single-class seating, foreshadowed Freddie Laker's transatlantic travel bargains.

Perceiving a shortage of hotels in the country, the airline got into the hospitality business around 1970. When the main airport was moved to Keflavik, the company turned the Reykjavik terminal into an inn.

1973 Merger

Flugfélag Islands and Loftlei'ir were merged under the new Fluglei'ir holding company on July 20, 1973. Fluglei'ir, which continued to be known as Icelandair in international circles, assumed all operating responsibility for the two airlines on October 1, 1979.

Atlantic crossings accounted for nearly two-thirds of the airline's international traffic in 1974. The airline used DC-8s for transatlantic service and Boeing 727s for European routes.

A worldwide oil crisis in 1979 prompted mass layoffs. An experiment with the widebodied DC-10 aircraft did not help: the type was grounded by the FAA in the peak of the tourist season after an American Airlines crash in Chicago.

Government Investment and Divestment in the 1980s

The government of Iceland acquired 20 percent of Icelandair in a 1981 share issue. Four years later, the government of Iceland sold its 20 percent stake in the carrier, making it privately owned.

About the same time, Sigurdur Helgason, who became CEO in June 1985, began to steer the company into a hub-and-spoke system centered on Iceland, and began developing the country as a tourist destination in itself. This was quite an adjustment, as three-quarters of the company's business had been U.S.-Europe travel. Helgason had earned an M.B.A. degree at the University of North Carolina, Chapel Hill, before joining the company in 1974.

In the mid-1980s, Icelandair was offering trans-Atlantic customers unique island-hopping packages with no extra charge for stopovers in Greenland and Iceland. Weather limited the Greenland excursions to the summer months. These flights were made with smaller commuter aircraft.

In the fall of 1988, Icelandair canceled money-losing service to Baltimore-Washington and Boston while it awaited delivery of new Boeing 757s to replace its aging, inefficient DC-8s, which first entered service in 1970. The service resumed in 1990. At the same time, Icelandair was instituting a marketing agreement with USAir and launching a new program to attempt to win over lucrative business travelers.

In 1989, reported Air Transport World, two-thirds of Icelandair's international traffic was coming from Europe, not the United States, in a reversal of the situation 15 years earlier. Deregulation of U.S. airlines had led to increased price competition from that side of the ocean. Icelandair responded by focusing on Europe, and routing all transatlantic traffic through its hub at Iceland's Keflavik Airport. The historic Reagan-Gorbachev Summit of 1986 helped increase Helsinki's stature as a site for international conferences and conventions.

The company dealt with a seasonal reduction in traffic by directing aircraft to Mediterranean charters in the winter. It was also a rather diversified enterprise. In addition to flying visitors to Iceland, Icelandair owned two hotels, a flight kitchen, a car rental agency, and a travel agency. Cargo--mostly seafood exports--accounted for 10 percent of revenues in 1990.

Soaring in the 1990s

In the early 1990s, Icelandair was carrying more than 750,000 passengers a year--nearly three times Iceland's population. The liberalization (deregulation) of the European air travel market hit the company hard, however. Icelandair posted losses in 1992 and 1993 before managing a net profit of $9.1 million in 1994, when revenues were $215.3 million, up 10.6 percent.

The company spent $336 million to rejuvenate its fleet. Three Boeing 757s replaced the McDonnell Douglas DC-8s the company had been using on long routes. The company leased another 757 to the airline Britannia. Four flexible and efficient Boeing 737s served medium-length routes. Icelandair's domestic Flugleider division replaced its Fokker 27s with five Fokker 50s for the short hops. The planes were named after goddesses from Icelandic folklore--Hafdis, Aldis, Eydis, Vedis, and Fanndis.

In 1991, a devastating year for airlines worldwide, Icelandair managed a $2.3 million profit on turnover of $228 million. In 1992, however, Icelandair posted a net loss of $315,000 on turnover of $227 million. At the time, Icelandair had 1,300 employees and managed two Reykjavik hotels. The relatively new Saga business class accounted for 10 percent of revenue in 1992.

To survive in the liberalized European air market, Icelandair planners believed the airline needed a strong partner. They signed a marketing agreement with The SAS Group in 1993. The airline also signed a code-share deal with small Faeroe Islands operator Atlantic Airways. Passenger count topped one million in 1995.

In late 1996, Southwest Airlines (SWA) began testing its first marketing agreement ever with another carrier, allowing Icelandair to bundle a coupon for travel on SWA's Cleveland-Baltimore route with its own transatlantic flights. In August 1998, Trans World Airlines, which had just added Caribbean destinations, linked its frequent flier program with that of Icelandair.

Icelandair posted a net loss of $4.2 million in 1997 due to fierce competition from Islandsflug following deregulation of the domestic market. Cargo competition was also stiff. Icelandair soon recovered, however, logging net earnings of $2.2 million in 1998, thanks to an increase in passenger sales.

The 20 hotels operated by the airline were spun off in 1998 into the Icelandair Hotels Ltd. subsidiary. The airline was also the country's agent for Hertz auto rentals and owned a travel agency. The domestic carrier was called Flugfélag Islands hf., or Air Iceland.

In a 1999 Air Transport World article, Icelandair CEO Sigurdur Helgason characterized the airline's decade-long restructuring as emphasizing production in the early to mid-1990s, before shifting to a focus on branding and marketing at the end of the decade. A new aircraft livery was part of the image campaign designed to retire its "backpacker airline" label in favor of an emphasis on business travel.

Icelandair had less than a 1 percent share of transatlantic traffic, but was dominant in routes connecting Scandinavia to secondary U.S. markets such as Minneapolis, Boston, and Washington, D.C. On these routes, going through Reykjavik could save travelers up to three hours versus other airlines' hubs. In January 1999, Icelandair dropped its longtime Luxembourg hub from its route network after 45 years.

At the time, the airline continued to update its fleet by phasing out Boeing 737s in favor of larger Boeing 757s. The carrier used the extra space for its expanding cargo business.

New Units, Challenges After 2000

Icelandair brought an intermodal transport concept from Europe to the United States when it inked a code-share deal with Amtrak in 2001. This allowed Icelandair passengers in the United States to buy a single ticket good for both a transatlantic flight and a railway trip to the Baltimore-Washington International Airport.

Icelandair suffered greatly along with the world's other airlines from the downturn in traffic following the September 11, 2001 terrorist attacks on the United States. Falling fares on North Atlantic routes prompted the carrier to refocus on traffic to and from Iceland. Icelandair lost ISK 1.2 billion for the year on revenues of ISK 37.97 billion. It was beginning to recover, however, by the first half of 2002.

The company made a few structural adjustments during this time. Icelandair Ground Services became a subsidiary in the beginning of 2001. A new subsidiary, Fluglei'ir - Leiguflug hf. (Icelandair Charter and Leasing), was launched in early 2002. A new profit center, Shared Services, was later added to provide financial services to group companies.

Principal Subsidiaries: Amadeus Island hf. (Amadeus Iceland; 95%); Bílaleiga Fluglei'a ehf. (Icelandair Hertz Car Rental); Fer'askrifstofa Islands hf. (Iceland Travel; 91%); Fer'asmin'urinn hf. (Destal; 92.5%); Flugfélag Islands hf.; Fluglei'ahótel hf. (Icelandair Hotels); Fluglei'ir - Frakt ehf. (Icelandair Cargo); Fluglei'ir - Leiguflug hf. (Icelandair Charter and Leasing); Flug'jónustan Keflavíkurflugvelli ehf. (Icelandair Ground Services); Iceland Tours Ltd, U.K.; Islandsfer'ir hf.; Kynnisfer'ir fer'askrifstofanna sf. (Reykjavík Excursions; 92.9%).

Principal Operating Units: Customer Club; International Passenger Services; Technical Services; Saga Boutique; Shared Services.

Principal Competitors: Aer Lingus Group plc; Air Atlanta Icelandic; Continental Airlines, Inc.; Islandsflug--Icebird Airlines; KLM Royal Dutch Airlines; Virgin Atlantic.

Further Reading:

• "Amtrak, Icelandair Enter Service Arrangement," Washington Times, June 4, 2001.
• "Banks Fly at Umbrella Facility and JOL for Icelandair 757," Airfinance Journal, March 2001, p. 11.
• Cameron, Doug, "Start-Ups Avoid an Atlantic Crossing," European, July 13, 1998, p. 24.
• Coppola, Vincent, "Airline Takes Overland Route," Adweek (Southeast edition), October 2, 2000.
• Daube, Scott, "Icelandair to Halt Operations at Three Gateways; Will Reopen Them After Delivery of More Efficient Jets," Travel Weekly, July 28, 1988, p. 5.
• Davies, R.E.G., A History of the World's Airlines, London: Oxford University Press, 1967.
• Davis, Lou, "The Back Road to Europe; Commuter Level Airlift Promises Revival of Short-Haul Tourist Traffic Along the Original Island-Hopping Air Route Across the North Atlantic," Air Transport World, June 1985, pp. 76+.
• "Domestic Carrier Finds Fokker 50 Well Suited for Iceland's Challenges," Aviation Week & Space Technology, June 29, 1992, p. 37.
• Dwyer, Rob, "Smart Geysers," Airfinance Journal, February 1999, pp. 38-41.
• Friedland, Jennifer, "Jacksonville, Fla. Airport Begins Trans-Atlantic Service with Icelandair," Florida Times-Union, September 8, 1994.
• Gunning, Gary, "Focus: Icelandair; Celebrating Sixty Years," Iceland Business, January 1997, p. 8.
• Holyoke, Larry, "TWA Forms Frequent-Flier Alliance with Icelandair," St. Louis Business Journal, August 3, 1998, p. 5A.
• "Icelandair Speeds Up Promotion," Travel Trade Gazette UK & Ireland, March 29, 1999, p. 44.
• "Icelandair: The Atlantic Niche Specialist," Airways, September/October 1996, pp. 51+.
• Jamison, Jane, "Icelandair Weathers the Storm of '91, Predicts Even Stronger '92," Travel Weekly, May 4, 1992, pp. 22+.
• McDonald, Michele, "Southwest, Icelandair Sign Marketing Agreement," Travel Weekly, December 23, 1996, p. 33.
• Michels, Jennifer, "National Pride: Icelandair Uses Creative Marketing and Low Fares to Attract Bargain-Hunter Travelers to Its Hot Home Country," Travel Agent, September 17, 2001.
• Nelms, Douglas W., "Selling the Niche," Air Transport World, November 1999, p. 101.
• ------, "Shifting the Niche," Air Transport World, December 1995, p. 71.
• Njio, Frits, "Icelandair Strengthens Its Nordic Links," Interavia/Aerospace World, July 1993, pp. 47-48.
• Odell, Mark, "Fishing for New Markets," Airline Business, October 1993, pp. 50+.
• Ott, James, "Icelandair Applies U.S. Lessons to Changing European Market," Aviation Week & Space Technology, June 29, 1992, pp. 34-36.
• Petersen, Othar Orn, "Aviation and Air Transport in Iceland," Airfinance Journal, Guide to Aviation Lawyers Supplement 1998, pp. 93-94.
• Poling, Bill, "Icelandair to Resume Service at Baltimore/Washington Airport," Travel Weekly, April 30, 1990, p. 12.
• Proctor, Paul, "Icelandair Sees Opportunity in the North Atlantic," Aviation Week & Space Technology, July 20, 1998, p. 48.
• Reingold, Lester, "Moving Up-Market: No Longer a Single-Class, Low-Fare Airline, Icelandair Has a New Fleet, New European Services and New Saga Class," Air Transport World, September 1990, pp. 118+.
• Straszheim, Milton R., The International Airline Industry, Washington, D.C.: The Brookings Institution, 1969.

Source: International Directory of Company Histories, Vol. 52. St. James Press, 2003.