Monday 21 October 2019

Iceland faces new challenge, 10 years on

Slowdown: A tourist in the popular Blue Lagoon. While the number of visitors rose nearly 40pc in 2016, the increase was only 24pc in 2017
Slowdown: A tourist in the popular Blue Lagoon. While the number of visitors rose nearly 40pc in 2016, the increase was only 24pc in 2017
Mar Gudmundsson, governor of Iceland's central bank

Ragnhildur Sigurdardottir and Nick Rigillo

Just as Iceland looks back at a decade of recovery since its financial and economic collapse, it is once again grappling with an existential challenge for one of its key industries.

Tourism and the foreign cash it provides was instrumental in digging the 340,000-person nation out of its deep hole. Now, the industry is cooling fast and problems are mounting for its airlines after years of rapid expansion.

Rewind to 10 years ago, and a similar tale could be told about the nation's banks.

Arion Bank, in a report called 'Tourism in Iceland: Soft landing or a belly flop', warned that the nation could face falling numbers of visitors next year after a boom that saw arrivals more than quadruple over the past decade.

Tourism is the largest 'export' and accounts for 12pc of GDP and about 20pc of business investments.

The spillover from a tourism crisis could affect the whole economy, including "demand for labour, investments in hotels, the current account balance, and the exchange rate of the krona," said Gylfi Magnusson, an associate professor at the University of Iceland.

The cooling is most apparent on the front lines of the industry.

The Icelandic carriers have encountered turbulence as other Nordic operators are squeezed by higher oil prices after embarking on ambitious planes to grab a slice of the transatlantic travel market.

Reykjavik-based Icelandair Group was this week forced to seek the help from bondholders after issuing a profit warning and seeing its CEO quit two months ago.

The airline had hoped for a rise in airfares that never materialised.

Wow Air, a rapidly growing low-cost carrier that together with Icelandair brings the majority of tourists to Iceland, has been the subject of a whirlwind of speculation as it raised new cash through a bond issue.

It has cancelled flights to Edinburgh, Stockholm and San Francisco over the winter, citing delays in the delivery of two Airbus A330neo aircraft.

Such delays were also cited by Primera Air, another Nordic carrier, as it filed for bankruptcy this week.

Norwegian Air Shuttle ASA, a pioneer in low-cost transatlantic flights, has meanwhile cut more routes as it grapples with costs and a stretched balance sheet.

The troubles haven't gone unnoticed at the central bank. It was last month forced to intervene in the currency market to prop up the krona, which tumbled amid concern over the financial situation at Wow Air. The currency slumped as much as 1pc on Wednesday following the revelation from Icelandair. "It is no secret that airlines, in particular here in the North Atlantic, are now dealing with a more difficult operating environment than before," central bank Governor Mar Gudmundsson said.

"Oil prices have almost doubled in a year and the competition in this market is great," he added.

In addition, Icelandic companies are lumbered by significant salary increases when measured in foreign currency, he said.

The trouble comes against the background of a slowdown in tourism, which according to central bank forecasts will no longer dominate Icelandic exports in 2019.

The number of visitors rose nearly 40pc in 2016 but only 24pc in 2017.

In these two years, the economy grew at an annual rate of 7.4pc and 4pc respectively. This year's annual increase is expected to be 15pc, according to airport operator ISAVIA.

Last month, the IMF said the effects of a strong krona between 2014 and 2016 were now being felt on tourism growth and domestic demand.

It listed strong oil prices, competition in the air transport sector, "escalating world trade tensions" and "uncertainty around Brexit negotiations" among the potential risks to Iceland.

But Mr Gudmundsson rejects any comparisons with the banking crisis of 10 years ago.

"Those were totally different events and occurred in the financial system and in banks which can be subject to bank runs. Companies are constantly taking risks and some take more risk than others."

Bloomberg

Irish Independent

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