Nordic boom
How airlines revived Iceland’s economy.
The 2010 eruption of the notorious and unpronounceable Eyjafjallajökull volcano in Iceland was a disaster for global aviation, resulting in the cancellation of some 100,000 flights and lost revenue of US$1.7 billion. The Icelandic tourism industry couldn’t have come up with a better advertisement if it tried.
“We had some luck in that,” Icelandair Group chief executive Björgólfur Jóhannsson said in an interview. “Everybody blamed Iceland, but it put Iceland on the map all over the world.”
The number of foreign visitors to Iceland more than doubled between 2010 and 2014, when nearly one million people visited — not bad for a country with a population of 320,000. (If Canada had the same ratio of tourists to population, it would have had 109 million foreign visitors last year. The actual number was approximately one-10th of that.)
Tourism is now the biggest contributor to Iceland’s export revenue, surpassing even fishing, which has dominated the country’s economy since the Vikings first arrived on its shores in the ninth century.
Foreign visitors have also been a key factor in helping Iceland get back on its feet after the body blow it was dealt during the financial crisis. All three of the country’s major banks defaulted and its economy contracted 10 per cent in two years. It is just now preparing to lift the capital controls that have been in place since 2008.
“Overall, macroeconomic conditions in Iceland are now at their best since the 200809 crisis,” Peter Dohlman, the International Monetary Fund’s mission chief for Iceland, said in a recent interview with the IMF’s internal magazine.
“A particular bright spot for Iceland has been the booming tourism industry, which has also contributed to a strong current account surplus.”
Iceland’s airlines have played an essential role in this tourism boom, taking advantage of the Nordic country’s strategic location between North America and Europe, and using its stunning natural features — including active volcanoes — as a selling point.
According to the International Air Transport Association, the aviation industry accounted for 12.9 per cent of Iceland’s GDP in 2011, including its spinoff effects on tourism, and supported more than 20,000 jobs. (By comparison, the banking system’s total liabilities prior to its collapse were more than 10 times Iceland’s annual GDP.)
Icelandair, which routes all its flights from both continents through Reykjavik, offers travellers the option of stopping over in Iceland for up to seven days for no extra airfare. And the airline has rapidly expanded its presence in Canada since the two countries signed an open-skies agreement in 2007. It now offers direct flights from Toronto, Vancouver, Edmonton and Halifax and is looking at adding Montreal next year.
The impact this has had on tourism is obvious: between 2012 and 2014, the number of Canadian visitors to Iceland more than doubled, making Canada its fastest-growing source of tourists.
“I don’t know, I thought Canada had a lot of wilderness and beautiful landscapes too, but somehow Iceland attracts a lot of people,” Jóhannsson said.
And it’s not just Canada — for the last six years, Icelandair has increased its North Atlantic capacity by an average of 19 per cent annually and now offers direct flights to cities ranging from Minneapolis to Manchester to Madrid.
The airline, which earned US$66.5 million last year on revenue of US$1.1 billion, expects to fly approximately three million international passengers this year, up from 2.6 million in 2014.
To keep up with the influx of visitors, Icelandair Group is also expanding its tourist services business, which includes travel agents as well as nine hotels throughout the country.
“We are planning to build up the infrastructure in Iceland so we can take on more tourists in the future,” Jóhannsson said.
The airline is also expanding its fleet with the addition of two Boeing 767s, which will replace two smaller 757s.
Icelandair is not alone in offering flights from Reykjavik to Europe and North America. In late 2011, an Icelander who had spent the past eight years in Montreal returned home and decided there was room for a low-cost carrier on many of the same routes.
“When I looked at the opportunities after coming back to Iceland, I saw the growth in tourism,” said Skúli Mogensen, founder and CEO of Wow Air. Mogensen left Montreal after selling his mobile software company Oz Communi- cations to Nokia in 2008.
“I saw one carrier that effectively had a monopoly position and I thought that surely we could do a lot better,” he said.
Wow Air, which models itself after no-frills carriers like Ireland’s Ryanair, launched with a flight to Paris in May 2012 and has since expanded to 20 destinations in Europe and the U.S. (It doesn’t fly to Canada yet, but Mogensen said he plans to begin service to Montreal next year.)
“The reason why I think there’s a great opportunity on the transatlantic front is that 99 per cent of the traffic is controlled by the old legacy carriers with old legacy pricing,” he said.
“Wherever we have come in, we have lowered prices by some 40 to 50 per cent.”
Wow Air isn’ t publicly traded, but Mogensen said the airline fills about 90 per cent of its seats, was profitable in the second half of last year and expects to remain profitable going forward.
It’s a good time to be an Icelandic airline, but the industry isn’t without its challenges. Last month, strikes broke out across the country as workers demanded large pay raises to reflect the improving economy. Although both Icelandair and Wow Air say they weren’t affected, labour unrest remains a threat to the budding economic recovery.
Managing the tourism boom is another challenge for the industry, as it would be for any country whose annual visitor count is more than triple its population — and growing by double digits every year.
“This needs to be managed carefully because one of the unique things about Iceland is its incredible sense of wilderness,” Mogensen said.
“I certainly would not want to lose that. Like any industry, it needs to be managed properly.”
We had some luck in that. Everybody blamed Iceland, but it put Iceland on the map all over the world. — Icelandair Group chief executive Björgólfur Jóhannsson on the 2010 eruption of the Eyjafjallajökull volcano, resulting in the cancellation of some 100,000 flights