INTERVIEW: Icelandair CEO Birkir Hólm Guðnason

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A banking collapse and then a volcanic eruption that caused him to uproot his airline have all been in a days work for Icelandair's youthful chief executive Birkir Hólm Gudnason, writes Mark Pilling in Berlin

Nobody used to know much about Iceland, or really care much either. Most of us thought of it as a remote, freezing chunk of rock somewhere near the North Pole where everybody is involved in fishing and has an unpronounceable name.

What a difference a banking crisis and a volcano make. "This is the biggest PR we have ever had," says Birkir Gudnason, the chief executive of Iceland's flag carrier, speaking about the past two years. But far from ­apologising about their country's financial and natural turbulence, Icelanders are making a virtue out of their notoriety.

"In the short-term, it is bad because passengers just stopped booking their flights and holidays," says Gudnason about the impact of the ash cloud thrown up by the Eyjafjallajökull volcano. "In the longer-term, it is positive because people know more about Iceland and a lot of people want to visit the youngest earth creation on the planet." Now that the eruption has stopped bookings have returned to near normal levels, he notes.

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 ©Billypix
The volcano, in particular, has literally put Iceland on the map. "The perception for many is that Iceland is very far away, but now they know it's close, and perhaps too close," says Gudnason. For instance, recent market research in London has shown that most believe Iceland is 4-6 hours' travel time away from the UK and are surprised to learn it is only a 2.5 hour flight while the east coast of the US is only 4-5 hours away from Iceland. This is not to say that the eruption was something Icelanders wanted. Just as the ash cloud that floated to altitudes of over 50,000ft brought European air transport to a standstill, so it nearly hobbled Icelandair's operation.

Interestingly, however, in the immediate aftermath of the eruption on 14 April Icelandair was able to continue flying. "In the first phase, when Europe was closed, we were operating every day to the USA - there were no [flight] restrictions to the west," says Gudnason. This was because the wind was blowing the cloud southwards across the UK and into continental Europe.

"Then, in the second phase when the wind changed and Europe was opened up, Keflavik [which serves capital Reykjavik] was closed," says Gudnason. By this time the airline's crisis committee - which met at 0700, 1300, 1500 and 2100 every day during the upheaval - had developed a plan to relocate its main base somewhere else. "When we saw the forecasts that indicated the airport would close on 24 April, we acted," he says.

The airline had initially thought it could operate out of the country's northern airport, at Akureyri, if Keflavik in the southwest was closed. But it soon became clear the airport could not handle the 4,000 passengers a day Icelandair was talking about. Gudnason's team looked elsewhere. "We have [Boeing] 757s and are flying transatlantic so it had to be an airport in range of both the USA and Europe." The first choice was Glasgow in Scotland, with Oslo in Norway its second.

As the cloud closed on Keflavik, in a move that typifies the agility of this small carrier, it moved its entire hub to Glasgow along with 200 staff to run the temporary operation. "For passengers flying from the USA to Europe, the transit point was in Glasgow instead of Iceland," says Gudnason. The airline, which received "huge co-operation" from Glasgow Airport, operated there for 10 days. Neither was Iceland itself closed for Akureyri was open and Icelandair flew there from Glasgow with passengers taking buses to Reykjavik.

"It was a big decision but one that turned out to be a huge success. It never affected our booking flow for transatlantic services because we were never locked in," explains Gudnason. "The fact that we weren't locked in is the difference between us and other European airlines - we were able to fly the whole time."

Overall during the crisis Icelandair managed to keep 75% of its schedule running, says Gudnason, a move that generated "hugely positive feedback from passengers". The affair also generated a kind of "wartime" mentality at the carrier. "The atmosphere among our staff was incredible. Everybody wanted to take part and it is mainly thanks to our staff that we were able to pull this off.

For More on...
On the fallout of the ash cloud disruption for the airline sector read here

"We changed our flight schedule 180 times because we only got maps [showing the position of the ash cloud] 18 hours in advance. We issued over 100 press releases and took 3-4,000 phone calls daily, three times the normal amount." But when the end came at the start of June, it was a relief. "By then everyone was very tired because people had been working seven days a week, 20 hours a day for almost six weeks," says Gudnason.

Icelandair has no plans to ask its government for compensation for the costs it incurred during the ash cloud affair, but Gudnason shares the view of the Association of European Airlines over the leaden response of the authorities to the crisis. "It was an over-reaction," he says of the wholesale airspace closures. "The inputs to the models [used to measure the ash cloud] were not good enough. The most important thing going forward is to have better tools to measure it better."

Although it was located literally at the epicentre of the ash crisis, Icelandair's nimble reaction has kept the financial damage to a minimum. Gudnason reckons it lost up to $7 million because of the disruption. In traffic terms, the first half of the year will still see a rise of 10% although it was tracking at about 20% prior to the crisis.

Nor will the crisis knock Icelandair off course. "I am expecting a good year - similar or better in profit terms compared with 2009," says Gudnason. That could mean a record, for although the airline's results are not separated out from that of the Icelandair Group, it had its most profitable year since 2002, with a double-digit margin, he says.

FINANCIAL PUZZLE 
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While understanding the ownership puzzle of the Icelandair Group is a headache, all that really matters is whether its airline will survive the crisis. That does not seem to be in doubt.The group is a listed company in Iceland with 20% of its shares in a free float. The rest is the bit caught up by Iceland's banking collapse - with these shares essentially owned by the country's three largest banks. Ongoing refinancing measures are close to sorting this out with new investors arriving. The group's finances are worth scrutiny. In krona terms it saw a 11% uplift in revenues in 2009. But the fall in the currency's value sees it report an 18% drop in dollar terms. Its net margin also comes in at a disappointing -5% but this is down to huge financing costs, the losses at subsidiaries and the group's large short-term debt, which mask the underlying strong performance of the airline. 

This in itself is remarkable in a year when Europe's carriers collectively lost $4.3 billion and few made a profit or even broke even. Icelandair's performance raises even more eyebrows when you consider the predicament the entire country faced in 2008, when its infamous banking collapse brought the country to its knees. As prime minister Geir Haarde noted at the time, things were so bad there was a real danger of national bankruptcy.

For Icelandair this was a dire time on two fronts. Firstly the outbound market collapsed as the value of the Icelandic krona plummeted by 80-90%. Secondly, financial distress at the group's main shareholders caused major uncertainty. "When the banking crisis hit, it was a big shock and also a shock for the image of Iceland," says Gudnason.

Unravelling the ownership tangle of the Icelandair Group is a complex question, but for Gudnason the "important message is we have never been owned by the government". The ownership and refinancing work is well underway as the group seeks to rebuild a ­stable financial platform. "It hasn't affected Icelandair at all because we are a strong, profitable operation," he says. Icelandair is 60% of the group's turnover.

In 2008, in the face of a market that had changed almost overnight and with fuel prices rocketing, Gudnason's job was to ensure the airline's survival. "In 2008 our plan was to restructure and streamline the business," he says, but not to shrink the network. Icelandair operates a transatlantic transit hub, connecting seven gateways in North America with 20 points in Europe.

Gudnason was handed the task of turning around Icelandair in May 2008. As group chief executive Björgólfur Jóhannsson said at the time: "A firm hand is needed at the controls of the airline." Faced with falling demand - that year traffic fell by 12% - Gudnason immediately made staff cuts, removing 380 people from its 1,300 strong workforce. He also cut director positions from 15 to seven, reduced SVP positions from seven to four and merged several departments.

Even though he is only 36, Gudnason already has 10 years of experience with Icelandair. He has worked all around the network, mainly with briefs to restructure the local operation he has led. Jóhannsson brought him back to Reykjavik tackle the entire airline. "My job was to take the airline and make it a leaner organisation," he says.

His swift moves to reduce the airline's fixed costs in the face of high fuel prices are typical of Icelandair's ability to react quickly to changing conditions. "Our goal is always to take decisions quickly to keep ahead of other airlines. Why wait? It's more important to take the wrong decision and learn from it than take no decision and I've encouraged my staff to work like that. Our focus is only on profitability. It is not about growing or maintaining our market share and losing a lot of money [trying to do that]. We are very dynamic in cutting and adding capacity when we see changes in the environment," explains Gudnason.

This mantra was put to the test in early 2009 as the outbound Icelandic market evaporated. "2009 was the time to grab the opportunities," says Gudnason. "We moved a lot of resources to markets abroad and focused more on passengers coming to Iceland."

A big grab was to open another US gateway. When SAS announced it was pulling off Copenhagen to Seattle in March 2009, Icelandair acted. "We had been looking at Seattle for 10 years, but never felt it was the right time to go in," he says. Within two weeks of the SAS decision, Icelandair had its plan for the route ready and launched in July that year.

Gudnason's team put together strong business cases to sell this, and other investments like new seating and in-flight entertainment systems, to the group's board. "When they saw our cost structure and our profitability, and that we were strong, we gained their support," he says.

With heavy promotion of its many attractions and with the bonus of the weak krona, tourists flocked to Iceland. "Last year was the best ever for tourism in Iceland," says Gudnason. Tourist numbers rose by 10% in 2009 as travellers from the USA and Europe poured in. Icelandair is shameless in adjusting its capacity quickly to respond to market and currency effects. As the downturn began to bite, in winter 2008-09 the carrier cut capacity 28% when others were cutting 4-6%, explains Gudnason. In addition, "when the euro is strong, we add seats to Europe, whereas when the dollar is strong we add seats to the USA".

CHANGE MANAGER 

 Nothing much seems to phase Birkir Hólm Gudnason, the 36-year-old head of Icelandair. A caustic comment at the recent IATA annual general meeting in Berlin from a European airline counterpart of "thanks for the ash cloud" doesn't raise his hackles at all. It looks like he has got use to being "blamed" for the ash cloud, as many other Icelanders must have been.

Gudnason has led the carrier through great turbulence after being appointed chief executive in May 2008. He was, by all accounts, in the right place at the right time. Most of his career has been with the airline, moving around its German, US and Scandinavian offices. "My tasks were restructuring, down-sizing and sorting out our distribution," he explains.

After two years when the airline itself didn't have a figurehead, with it being run from group level, Gudnason was called upon to use his restructuring skills on the whole airline and bring in a fresh, dynamic spirit and team to lead this change. Upon his appointment group chief executive Björgólfur Jóhannsson described him as a "powerful leader who knows Icelandair inside out and has a variety of experiences of the operation of the company in Iceland and abroad".

Gudnason is molding the airline in his own image and with his own values. Its overseas managers are empowered to take major decisions themselves. His senior vice-presidents are under 40 years of age, but all with 10-15 years with Icelandair. Not surprisingly, Icelandair itself has become a more energetic and reactive business.

This summer Icelandair will operate 12 757s, a 13% capacity increase over 2009, and will decide in August about its schedule in 2011. "We are analysing 15-20 destinations in Europe and the USA and will choose a few of these. Our goal is also to even out the traffic flows, as we have a big summer peak," says Gudnason. Around 40% of its business comes from its transatlantic transfer services with the rest O&D to Iceland.

On the fleet front, Icelandair is looking at an eventual replacement for its 757s. As many 757 operators know, this is not a straightforward task. "The 757 is the perfect aircraft for our network and location," says Gudnason. However, in the 2015-2020 timeframe, the phase out of the 757s will need to start. "We are in that process now with an order to be placed in 2012 or 2013," he says.

Icelandair is looking at aircraft with 150 or more seats and might even split the order between two types as there is no one aircraft that can do the job it wants at present, says Gudnason. One solution could be to lease aircraft from its sister company, Icelease, which is listed as having three Boeing 787 purchase options, but no decision has been made on this possibility, he notes.

While the aircraft strategy is up in the air, what is certain is that Iceland is open for business. The mental image for many of the volcano is that the whole of this huge island has been covered with ash. "People thought it was not safe to go to Iceland. In fact, the eruption and ash cloud only affected 2% of the country - otherwise it is not affecting the daily lives of people," says Gudnason. The Icelandic tourism authority has even gone to the trouble of installing webcams in key locations to show the outside world that all is well. "This is to clarify the misunderstanding, and to explain that Iceland is more awake than ever."

With a strategy that emphasises its independence and focuses on selling its niche to the best of its abilities, Gudnason looks to have quickly built a new relevance for Icelandair, along with a low cost base. It knows the market it is going for intimately and moves quickly to take any new chances that arise.

At present Iceland's tourism body and the government is running a $6 million marketing campaign - called Inspired by Iceland - that is promoting the country in the wake of the ash cloud. For other small flag carriers, seeking to not only defend their turf but to grow, Icelandair has demonstrated that even in adverse circumstances it can be done.