Icelandair and WOW air seek privatisation of Keflavik Airport, but is that the solution?

16 October, 2017

According to local press reports, Icelandair Group’s president and CEO Björgólfur Jóhannsson and WOW air CEO Skúli Mogensen agree that Keflavik International Airport should be privatised in order to keep up with growth in the region. Both carriers are expanding aggressively – increasingly in dangerously direct competition with each other - and are seeking to deploy more transatlantic services. The question is: is privatisation the panacea?

Mr Mogensen in particular seems to have started off from the wrong place altogether when he said the airport was not designed to handle connecting services, which is a growing operation in the future of his LCC. While the original Reykjavik and Keflavik airports, World War 2 bases for Allied forces, had a makeshift feel as a transfer point for civilian commercial services (Loftleiðir, Icelandair’s predecessor, even offered a middle-of-the-night tarmac exchange at Reykjavik) development since the 1960s at Keflavik has been dictated by the airline’s need to promote transfer (‘sixth freedom’) traffic. It isn’t too far off the mark to say that Icelandair might not have survived without it.

The small population – even now it is less than 340,000, the size of a middling European city – means that despite a high propensity to travel amongst the indigenous population Iceland’s airlines need either large numbers of tourists or passengers that are passing through. A very short summer season and a high cost of living meant that until fairly recently tourist numbers were low (they were boosted by the collapse of the currency following the 2008-11 financial crisis and the glacial volcanic eruption of 2010 which gained the country global notoriety; negative tourist growth became +16% in 2011).

CHART - Visitor arrivals have been growing at double-digit rates since 2011, peaking at 39.0% growth last yearSource: CAPA - Centre for Aviation and Icelandic Tourist Board

Thus in the past the very survival of Icelandair was predicated on the generation of connecting traffic, especially in the long off- and shoulder-seasons, and anyone using the airline’s services in the 1990s and early 2000s would vouch for the modern Keflavik Airport’s reputation as the best transfer point in Europe through its Leif Erikson terminal, which opened in 1987.

As the airport became too small for even Icelandair’s transfer operations a new South Building was opened in 2001, the North Building was enlarged through to 2007 and then further expanded again in 2015/16 to 65,000 sq m.

However, there have been complaints recently that growth is outstripping the infrastructure. In Oct-2016 state operator Isavia announced that the consultancy Aton had been commissioned to prepare a report on future development of the airport. That announcement came just nine months after the publication of a new master plan. An additional runway is to be built over the next fifteen years in order to cater to growth. The master plan also proposes a larger airport terminal by 2040, when the airport should be handling 14 million ppa (which sounds conservative when the current growth patterns are considered).

CHART - Icelandair and WOW air account for more than three quarters of the capacity from Keflavik International Airport based on schedule data for the week commencing 16-Oct-2017Source: CAPA - Centre for Aviation and OAG

All this seems rather vague and suggests a lack of urgency. Just a glance at the growth charts implies that more of it is needed. There are other questions, too. In a country with such a small population where are the workers going to come from to build the infrastructure and to man it? The number of employees at the airport increased by 1700 in 2016. While tourism has overtaken the marine sector (including fishing) as the principal plank of the economy not everyone wants to work in aviation, hotels or construction; or can. Large scale immigration might not be a popular remedy in a conservative country.

Under these circumstances the fact that two airline executives that head up privatised airlines should suggest the airport should be privatised is unsurprising. (Iceland has never had a state airline). After all, privatisation should introduce a willingness to invest and easier access to capital to do so. That’s the theory. In the latter case – capital accessibility - that is true but a ‘willingness to invest’ should never be taken for granted. An investor, especially one from the ranks of private equity, might be content to adopt a rubber walls strategy and cram as many air services and non-aeronautical revenue generating fixtures into the existing infrastructure as possible while minimising investment, which is what BAA was accused of doing in the early years of its tenure at London Heathrow Airport.

Then there are the business prospects to consider. Will Iceland always be as popular as it has been in the last five years? Both the Keflavik passenger traffic and tourism figures have dipped, by nine percentage points and six percentage points respectively in the first nine/seven months respectively of 2017.

The Master Plan, published in 2015 and updated in 2016 is based on development plans for the tourism sector. According to the country's Tourism Plan, currency income from the sector will increase significantly, from ISK 350 billion in 2015 to more than ISK 620 billion in 2020 and reaching over ISK 1,000 billion by 2030.

Visitor costs are starting to edge back up and the accommodation stock, despite seemingly half the population being members of Airbnb, is trailing the provision of airline seats, especially during the high season and when there are events taking place. Apart from July and August you can’t camp in Iceland.

Iceland is just one of three Nordic countries that co-operate in tourism promotion but the other two (Greenland and the Faroe Islands) lag it. Neither is going to overtake Iceland any time soon but the Faroe Islands in particular are already making their mark as the preferred choice for the next generation of ‘innovators’ and ‘first movers’ within this esoteric market. (See 'Love Island – Could the Faroes become the next Iceland?').