World's hottest airline route leads to cold destination

When Kurt Sperling chose Iceland for a vacation off the beaten path, the American didn't expect his hotel to be thronged with visitors from around the world.

"I was amazed at the number of people," said the 55-year- old psychotherapist, who made his first trip to the island this month. "I'm selfishly concerned that tourism may really boom and all of the unspoiled aspects of the country will be sullied."

Adventurers like Sperling may face even bigger crowds this year. Spurred by passenger growth double the average of European hubs, UK budget airline EasyJet has just begun services to the country and will be followed by local startup WOW Air in June.

The turnaround since an $US85 billion ($A81.5 billion) bank default in 2008 made the nation of 320,000 an emblem of the global financial crisis has been spurred by a weakening of the krona that's made prices cheaper for visitors. An economic revival and volcanic eruptions attracting adventurous travellers have also helped.

Keflavik airport, Iceland's only international terminal, boosted passenger numbers 18 per cent to 2.1 million last year and forecasts the total will reach a record 2.4 million in 2012.

Traffic to Iceland is climbing even as sagging demand and spiraling oil prices undermine profitability across swathes of the airline industry, with earnings likely to plunge 62 per cent this year to $US3 billion, equal to a 0.5 per cent margin on sales, the International Air Transport Association said on March 20.

Volcanic eruptions

The failure of the financial system prompted two years of losses at Icelandair Group HF, which had survived for seven decades with a business model based largely on providing one-stop flights between Europe and North America. The carrier says the crisis and volcanic eruptions that followed ultimately had a positive impact, forcing it into a strategic review and putting its home country on the international map.

An eruption of the Eyjafjallajokull volcano in April 2010 caused the cancellation of more than 100,000 flights as an ash cloud drifted over Europe, with further disruption occurring just over a year later when the Grimsvotn caldera blew.

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"Iceland was getting tremendous appearances in the news," Chief Executive Officer Birkir Holm said in an interview. "In the short term it could harm the tourist industry, but long term it could be a huge opportunity. We saw a chance to take all our resources, marketing and everything, and attract more tourists."

WOW factor

Icelandair aims to carry a record 2 million people in 2012, helping the stock to a 17 per cent gain this year. The stock closed at 5.91 kronur on March 23, valuing a company that listed in Reykjavik in 2006 at 29.6 billion kronur ($A224 million).

The stock surged 60 per cent in 2011 after three years of declines, outdoing not only mainline carriers such as Deutsche Lufthansa and Air France-KLM, which suffered declines, but also Ryanair, the best performer on the seven- member Bloomberg EMEA Airlines Index with a 3.8 percent drop.

Discount operator WOW will start "fairly conservatively," flying to 13 cities including London, Berlin, Paris and Alicante in Spain before adding routes next year, founder Skuli Mogensen said in an interview. It will use leased Airbus SAS A320 planes.

"Assuming Iceland continues to invest in infrastructure, airports and tourism we think that there's a great opportunity ahead," said Mogensen, 43. "The economy has recovered far better than most people would have believed, or even have realized, and we think that is very sustainable."

Mogensen made his money as founder and chairman of Oz Communications, which he sold to Nokia Oyj for an undisclosed sum in 2008. He declined to say how much he's investing in WOW.

Easyjet expansion

Iceland completed a 33-month International Monetary Fund program in August, and Fitch Ratings in February raised the island to investment grade, praising an "unorthodox crisis policy." The IMF said March 2 that the economy will expand 2.5 per cent in 2012, versus a 0.3 percent contraction in the euro area forecast by the European Commission. It grew 1.9 per cent last quarter and 4.4 per cent in the three months to Sept. 30.

EasyJet will fly to Iceland three times a week with Airbus A319 jets from its base at Luton, north of London. Europe's second-biggest discount airline initially planned a summer-only service before deciding on year-round flights as the level of demand became clear, Hugh Aitken, the company's UK commercial manager, said in a telephone interview. More than 50 percent of summer seats have already been sold, the carrier says.

"Iceland is a destination that has become a lot more visible over the past couple of years, partly because of their efforts and partly because of external events," he said. "A lot of travelers have been to Paris and Barcelona and they're asking for something different. Reykjavik definitely fits the bill."

Like EasyJet, WOW will fly through the Icelandic winter, when the sun barely rises, joining Icelandair, Nordic carrier SAS and local no-frills operator Iceland Express, which began flying in 2003 and is limiting its summer schedule to 16 cities after withdrawing from US routes. These routes could resume in 2013, spokesman Heimir Mar Petursson said.

Keflavik's 2012 timetable also features 12 summer-only carriers, including Deutsche Lufthansa AG, Delta Air Lines Inc. and discount operators Air Berlin, Germanwings and Norwegian Air Shuttle ASA, which makes its first scheduled flight to the airport 30 miles from the capital on June 7. Passenger numbers should reach 15,000 a day on 23 flights, the hub's website says.

Visitors are drawn by the volcanic landscape, with its lava flows and geysers, the northern lights and the Blue Lagoon hot springs. Natural charms aside, Iceland's allure has been buoyed by the drop in the krona, which has yet to recover a 25 percent slide against the dollar over two weeks in December, 2008.

Icelandair CEO Holm plans to cash in by adding a ninth North American destination, Denver, to the network in May. Four of those routes have been opened since the financial crisis.

Sperling, a resident of Greenwich, Connecticut, who flew with the carrier from New York's John F. Kennedy airport, said he's already planning his second trip of the year.

"It's a cinch from the east coast," he said. "We enjoyed ourselves and it was so reasonably priced compared to some other destinations. And I feel like I only scratched the surface."

Bloomberg

Read: Travel guide to Reykjavik

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