Chairman Address

Dear Shareholders


Although the Group’s operations have generally been successful in 2007 there is no disguising the fact that the performance of some companies within the Group has been unsatisfactory. The operating results of Icelandair, Icelandair Cargo and Bluebird have been below projections. Icelandair is the most important company within the Group and is responsible for the greatest part of its turnover.

Icelandair is also of considerable importance to its home country as the company forms Iceland’s most important physical link with the rest of the world. We are aware that as a result Icelanders expect much of the company. At the same time shareholders naturally expect the Board and staff to produce acceptable returns. In 2008 improving financial results will take precedence for everyone responsible for managing the Company’s operations. Without sustained profitability and growth the company’s customers would suffer as well as its shareholders. Adequate profitability is the precondition for stability and development in the field of aviation in Iceland.

Icelandair Group’s operating environment is constantly changing and tough competition means that no company within the field can take its position for granted. The companies that perform best in such circumstances are those that are managed by people who appreciate the need for a constant review and re-assessment of acquired methods.

In recent years we have seen Icelandic companies break free of old and fossilised ways of thinking and become vigorous and forward-looking companies operating in international markets. Nowadays many brand name companies are making increased use of outsourcing while maintaining a strong image. The brand name Icelandair is well known throughout the world and we have to build the company’s future on that brand rather than a devotion to an acquired structure.

The aviation business is still in many respects in the shackles of old traditions, practices and ways of thinking and it often seems that a great amount of time and energy is put toward dealing with the narrow interests of individuals and circumscribed groups. If Icelandair Group intends to continue to hold its place among the most forward- looking and best companies in its field everyone within the Company must work toward a common goal.

We must strive to be a company that people are proud to work for and shareholders are proud to own. In collaboration with the company’s staff and labor unions, Icelandair has managed to achieve an amicable resolution to a large number of issues. This does not alter the fact that we need to strengthen and improve the company’s competitiveness. The key word in that respect is flexibility. If an agreement can be reached on a more flexible structure such an agreement would radically alter the company’s competitive position. The number of employees would grow and the productivity of the company and its staff would improve dramatically.

Icelandair Group’s strategy and structure differ in many respects from those of traditional European airlines. If we had to rely entirely on the domestic market, there would be no basis for sustaining the current level of operations. Icelandair Group thus seeks a broad compass, with diverse operations. This is reflected in the Company’s structure which assigns different tasks to specialised subsidiaries, all of which are accountable to Icelandair Group and a shared purpose.

Out of a large number of projects undertaken by the subsidiaries during the year I would like to make special mention of two that are of major importance to shareholders. These are the development and reconstruction of Icelandair and the Group’s growth into foreign markets, with an increased emphasis on international charter flights.

In the last few years Icelandair has successfully managed to develop scheduled flights with a high flight frequency between Iceland and a large number of cities on both sides of the Atlantic. The key to this success is a route network which is based on Iceland acting as a hub, making it possible to offer a wide variety of routes between North America and Europe and at the same time provide the home market with a wide range of destinations.

This network, ingenious as it is, has a constant need for fine tuning. In the past year new destinations were added together with the introduction of morning flights from Iceland to the USA. This year we will see a slight decrease in the frequency of flights to Norway and Sweden as well as a discontinuation of flights to Baltimore. Instead we will introduce a new route to Toronto in Canada.

Parallel to the launch of new destinations, a change was made to the company’s fare policy. One-way fares were introduced along with a wholesale review of the company’s very important revenue management mechanisms with the utilisation of new software and a new methodology. We are also embarking on a renewal of all seats in our Boeing 757 jets. The new leather seats, complete with a personal video and entertainment system, are already being installed at our maintenance centre at Keflavik airport. In addition we will introduce various intriguing innovations that we believe will improve services for our customers and revitalize Icelandair’s image.

Icelandair Group is growing fast internationally. An emphasis has been put on building up a strong operation in the emerging markets of Central and Eastern Europe. In 2007 we finalised the purchase of a 50% stake in the Czech airline Travel Service, together with options for an additional 30% later this year. Travel Service is a charter airline that operates twelve passenger jets on flights between Prague and Budapest and several cities in the Mediterranean. Last year Travel Service carried 1.8 million passengers, which is somewhat more than Icelandair carried on its own routes. The low cost airline Smart Wings was included in the purchase and previously Icelandair Group had acquired the Latvian airline Latcharter which has grown considerably in the past year, with the fleet of passenger jets growing from two to nine.

The foreign part of operations, i.e. the operations of Loftleiðir, Bluebird, Travel Services and Latcharter, along with the aircraft trading company Icelease, belong to a segment within Icelandair Group known as Global Capacity Solutions. As things stand, we hope that this part of the operations will generate around 40% of the corporation’s EBITDA this year. Changes were made to Icelandair Group’s Board of Directors last autumn. A new Board of Directors was elected to the company in September and at the same time the number of board members was reduced from seven to five.

Near the end of last year Mr. Jón Karl Ólafsson stepped down as president and CEO of Icelandair Group after a long and productive career within the Company. I convey to Jón Karl my warmest thanks for our collaboration. In January this year Björgólfur Jóhannsson took over the position of company president and CEO. He has my best wishes in anticipation of a valuable contribution to the company in the future.

I offer the managing directors and all the employees of Icelandair Group my thanks for their excellent work and the goodwill they have shown towards the Board of Directors. I thank the shareholders for their trust in the Company and its management.

In 2008 the Board of Directors and management of Icelandair Group are faced with the task of implementing changes in order to improve the operations of the Company and increase its profitability. This is a challenging task as improved operating results must go hand in hand with a continued rise in the standard of service and increased job-satisfaction. Good morale, good services and improved economic results are integral factors that cannot be separated in the long run. The future success of the company depends on our ability to harmonise these factors.

Gunnlaugur M. Sigmundsson
Chairman of the Board


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