Arion Banki Hf · OMXICE:ARION
Arion Banki Hf — Investor Presentation (October 2018)
67 slides from Arion Banki Hf's investor presentation, October 2018
Slide 1: Tourism in Iceland: Soft landing or a belly flop?
Tourism in Iceland: Soft landing or a belly flop? Arion Research October 2018
Slide 2: Table of contents
Table of contents • Key findings (p. 3) • From zero to hero (p. 4) • Airlines operating environment and impact on tourist arrivals (p. 11) • The downside risk is significant (p. 21) • Are we getting ahead of ourselves in hotel construction? (p. 28) – How do Icelandic hotels fare in international com
Slide 3: Key findings
Key findings • Increased capacity of the Icelandic airlines has played a large role in the sensational growth in tourist arrivals to Iceland. • Although oil prices have surged since 2016, airfares have not followed. According to estimates, the Icelandic airlines will pay around one thousand ISK with
Slide 4: From zero to hero
From zero to hero In a very short period of time, tourism has gone from a small industry to the largest export sector in the country.
Slide 5: A Cinderella Story
A Cinderella Story More and more foreign tourists, less and less seasonality Tourist arrivals via KEF Total number of tourists Seasonality airport - millions 70% - millions 10.0 2.5 65% 9.0 60% 2.0 8.0 55% 7.0 50% 1.5 6.0 45% 5.0 64 years 6 years 40% 1.0 4.0 35% 3.0 0.5 30% 2.0 25% 1.0 2003 2004 200
Slide 6: Tourism contribution to GDP has doubled
Tourism contribution to GDP has doubled For the past three years, tourism has accounted for roughly 23% of business investment GDP and tourism* Business investment - bn. ISK at constant prices - bn. ISK at constant prices 2,700 14% 450 30% 400 12% 2,500 25% 350 10% 2,300 300 20% 8% 250 2,100 15% 200
Slide 7: The recovery time would have been much longer…
The recovery time would have been much longer… The economic upturn in Iceland has been in a class of its own, largely due to growth in tourism Economic growth and effects of tourism 8% 7.4% 7% 6% 5.2% 5% 4.5% 4.1% 4.3% 4.0% 4.1% 4% 3.4% 3.4% 3.2% 2.9% 3% 2.1% 1.9% 2% 1.4% 1.3% 1.4% 1.0% 1.1% 1.1% 1%
Slide 8: … and the current account would only be a shadow of its current self
… and the current account would only be a shadow of its current self The surplus of trade in services, which is primarily due to tourism, has carried the trade surplus. It should be noted that the analysis below is likely inaccurate, as the impact of tourism on imports has not been taken into accoun
Slide 9: For every 100 tourists, one new job has been created
For every 100 tourists, one new job has been created The increase in tourist related jobs has closely followed the increase in tourist arrivals. The figures for Q2 indicate that the slowdown in tourist arrivals has begun to affect the labor market. Increase in tourist arrivals* and the number of tou
Slide 10: Handing over the growth reins
Handing over the growth reins According to our forecast from August, other export sectors will grow more than tourism in 2018 Share in total exports Exports revenues 100% - YoY growth, constant exchange rate 50% 20% 18% 17% 18% 20% 19% 19% 18% 19% 90% 23% 80% 40% 70% 23% 23% 23% 33% 30% 28% 30% 29%
Slide 11: Airlines operating environment and impact on tourist arrivals
Airlines operating environment and impact on tourist arrivals For small islands, passenger transport is the key driver of tourism. With rising oil prices and fierce competition, Icelandic airlines are now facing considerable headwinds. How will that impact the amount of tourists coming to the countr
Slide 12: Out of European countries, Iceland is the most dependent on home-based airlines
Out of European countries, Iceland is the most dependent on home-based airlines Two other Nordic countries are on the list of top 15 European countries for home carriers Home carriers - seat capacity Iceland Turkey Ireland Belarus Russia Norway Moldova Finland Slovenia Latvia Netherlands Luxembourg
Slide 13: Capacity has increased a lot
Capacity has increased a lot The Icelandic airlines will carry around eight million passengers this year Number of passengers - in millions 5 4.2 4.0 4 3.7 3.6 3.1 3 2.8 2.6 2.3 2.0 2 1.7 1 0.7 0.4 0.5 0.1 0 2012 2013 2014 2015 2016 2017 2018e Icelandair WOW air 13 Sources: Icelandair Group, WOW air
Slide 14: Tourism has followed the Icelandic airlines capacity increase
Tourism has followed the Icelandic airlines capacity increase Proportionately higher growth in tourism 2014 and 2015 than increased airline capacity, can possibly be explained by increased flight offerings from foreign airlines Icelandair and WOW air capacity growth and tourist arrivals via KEF airp
Slide 15: Broken up since 2016: Oil price and airfares
Broken up since 2016: Oil price and airfares When oil price started plummeting, airfares followed. However, that has not been the case since oil price started rising again. Jet fuel (USD/Ton) and unit revenue (=100, 2014) 1,200 120 110 1,000 100 800 90 600 80 400 70 200 60 0 50 2014 2015 2016 2017 2
Slide 16: Parallel with unfavorable development of external factors, earnings have gone south
Parallel with unfavorable development of external factors, earnings have gone south Icelandair Group and WOW air projections assume that operating loss (EBIT) for 2018 will be around thousand ISK per passenger Earnings per passenger - USD 80 70 60 50 40 30 20 10 0 -10 -20 2014 2015 2016 2017 2018 T1
Slide 17: Our base case projects very little growth in tourism in the coming years
Our base case projects very little growth in tourism in the coming years Based on expected flight capacity and continuing growth in share of VIA passengers Tourist arrivals via KEF airport - millions annually, % increase 3.0 2.5 2.7% 2.4% 4.5% 1.4% 24.2% 2.0 40.1% 1.5 1.0 0.5 0.0 2016 2017 2018 2019
Slide 18: With capacity blow, we could go roughly two years back in time
With capacity blow, we could go roughly two years back in time Pessimistic scenario: Capacity of a major airline disappears Pessimistic scenario - millions annually, % increase 3.0 2.5 2.7% 2.4% 4.5% 4.5% 1.4% 24.2% 5.5% 10.1% 2.0 -17.8% 40.1% 1.5 1.0 0.5 0.0 2016 2017 2018 2019 2020 2021 Base case
Slide 19: Less fluctuations are in our optimistic scenario than the pessimistic
Less fluctuations are in our optimistic scenario than the pessimistic Optimistic scenario: Airline operations improve and they continue to grow Optimistic scenario - millions annually, % increase 3.0 7.1% 6.5% 2.5 2.7% 4.5% 2.4% 4.5% 4.5% 1.4% 24.2% 2.0 40.1% 1.5 1.0 0.5 0.0 2016 2017 2018 2019 2020
Slide 20: The scenarios are three, but possible outcomes are more
The scenarios are three, but possible outcomes are more If airfares increase and the ISK stays strong, we could see results in the gray area between the base- and pessimistic scenarios All scenarios - millions, annually 3 2.5 2 1.5 1 0.5 0 2016 2017 2018 2019 2020 2021 Base case Pessimistic scenario
Slide 21: The downside risk is significant
The downside risk is significant What if airfares increase significantly? What if the world economy slows down?
Slide 22: Sources: The Travel, Insider, Frugal Travel Guy
Sources: The Travel, Insider, Frugal Travel Guy
Slide 23: Flying to and from Iceland has never been so cheap
Flying to and from Iceland has never been so cheap While the ISK has appreciated, flights to Iceland have become cheaper. Lower airfares have somewhat offset the rising cost of staying in the country. Flight ticket to Iceland: Passenger air transport per tourist - in EUR and USD, YoY 500 6% -3% 450
Slide 24: What could it mean if airfares increase?
What could it mean if airfares increase? First, we have to look at the price elasticity of demand. For tourism in Iceland, Europe and North-America are the most important markets, although the Asia market is growing. According to studies, tourists from America are more sensitive to price changes tha
Slide 25: If airfares to Iceland rise, it could have significant impact
If airfares to Iceland rise, it could have significant impact Depends on the price elasticity of demand, whether airfares to Iceland would increase relatively more than to other destinations and whether other costs would decrease, for example through depreciation of the ISK. Effect of 10% increase i
Slide 26: Economic growth is the fundamental driver of demand for air travel
Economic growth is the fundamental driver of demand for air travel Further escalation in global trade protectionism could have negative effect on air transport Global air passengers Assumed income elasticity - billion, income elasticity = 1 negative impact 4.7 Estimated on GDP 1 1.3 1.8 -0.1% -0.1%
Slide 27: What does the pessimistic scenario mean for the economy?
What does the pessimistic scenario mean for the economy? All other things being equal, fewer tourists would mean a drop in tourism expenditure, which could lead to firings. The current account surplus could easily be reversed. The graphs below show what could be called the worst case scenario, as th
Slide 28: Are we getting ahead of ourselves in hotel construction?
Are we getting ahead of ourselves in hotel construction? Accommodation is on average the largest expense of traveling. Hotel construction has been trying to keep pace with booming demand from tourists. With tourist arrivals slowing down rapidly, the question is raised: Are we getting ahead of oursel
Slide 29: Hotels shoulder the burden
Hotels shoulder the burden Every four in ten overnight stays by tourists were spent at hotels in 2017 Registered overnight stays by type of lodging 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Hotel Unlisted Airbnb Guesthouses Other unlisted Apartments and Camping
Slide 30: Lion's share of overnight stays are spent in the capital area
Lion‘s share of overnight stays are spent in the capital area In relative terms, however, growth has been slowest in the capital area as occupancy rates have been very high. The number of tourists visiting the country has outpaced hotel construction, growing 378% since 2010 while the latter has grow
Slide 31: Overnight hotel stays per thousand travelers has decreased
Overnight hotel stays per thousand travelers has decreased Supply shortage, appreciation of the króna and competition with Airbnb seem to be the main causes Overnight hotel stays per 1000 tourists, by Overnight hotel stays per 1000 tourists, region countryside 1,800 350 1,600 300 1,400 250 1,200 200
Slide 32: Length of stay per each hotel guest has not decreased markedly, indicating supply shortage
Length of stay per each hotel guest has not decreased markedly, indicating supply shortage Tourists cut their stay in the capital area in 2014, but since then their average stay has hovered around 2.2 nights Average length of stay by hotel guest - stays and YoY percentage change 3.0 5% 2.5 -2% -2% -
Slide 33: In the beginning of the year, overnight stays decreased in all parts of the country except South Iceland and West Iceland
In the beginning of the year, overnight stays decreased in all parts of the country except South Iceland and West Iceland This trend reversed in August with travelers lengthening their stay at hotels Overnight stays - change between 2017 and 2018 45,000 15% 35,000 10% 25,000 5% 15,000 0% 5,000 -5% -
Slide 34: Which has coincided with lower occupancy rates
Which has coincided with lower occupancy rates Occupancy rates in the capital area are still robust and higher than outside the capital area Hotel room occupancy rates Hotel room occupancy rates - capital region - other regions 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20
Slide 35: We forecast that the number of hotel rooms in the capital area will be around 7,000 by 2022
We forecast that the number of hotel rooms in the capital area will be around 7,000 by 2022 Should our forecast materialize hotel rooms will increase by 43% Arion Research's hotel room forecast in the capital area 8000 7000 6000 5000 4000 3000 2000 1000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018
Slide 36: We expect overnight stays at hotels to increase
We expect overnight stays at hotels to increase Increased supply, together with slower growth in tourist arrivals, lead to a decline in occupancy rates Arion Research's forecast for overnight stays and occupancy in the capital area - thousands 3,000 90% Forecast 80% 2,500 70% 2,000 60% 50% 1,500 40%
Slide 37: Are we getting ahead of ourselves in hotel construction?
Are we getting ahead of ourselves in hotel construction? Compared to the Nordic countries, it seems we are rather reaching a sustainable long-term equilibrium. The substitution effect over to other accommodation has been considerable since 2010 in the capital area. That development seems to have rev
Slide 38: How do Icelandic hotels fare in international comparison?
How do Icelandic hotels fare in international comparison? What do sliding occupancy rates mean in the big picture? 38
Slide 39: Icelandic hotels rely on foreign travelers
Icelandic hotels rely on foreign travelers In other Nordic countries locals comprise the majority of overnight hotel stays Foreign travelers' overnight hotel stays in 2017 as a percentage of total 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Sources: Eurostat, Arion Research. *2017 data for those ava
Slide 40: The capital area reaching occupancy seen in the Nordic countries over the summertime
The capital area reaching occupancy seen in the Nordic countries over the summertime The occupancy in Reykjavík is generally better during winter than in other capital areas Occupancy rates in the Nordic countries - capital areas 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 01/2010 04/2010 07/2010 10
Slide 41: Occupancy of hotel rooms at a national level is very good in European comparison
Occupancy of hotel rooms at a national level is very good in European comparison The seasonality is similar to that seen in the Nordic countries Occupancy rates in Europe 100 90 80 70 60 50 40 30 20 10 0 01/2012 03/2012 05/2012 07/2012 09/2012 11/2012 01/2013 03/2013 05/2013 07/2013 09/2013 11/2013
Slide 42: Occupancy in Reykjavík will remain with the best in class
Occupancy in Reykjavík will remain with the best in class Occupancy rates in European cities 90% 85% 80% 75% 70% 65% 60% 55% 50% London Amsterdam Prague Reykjavík Lisbon Berlin Porto Paris Zurich Milan Geneva Rome Frankfurt 2015 2016 2017 2018 - forecast European average 2015-2017 Sources: Statistic
Slide 43: Prices are, however, very high
Prices are, however, very high Accommodation prices have more than doubled over the last decade. Prices of hotels and restaurants in Iceland are among the highest in Europe. Hotel and restaurants prices - price level indices, EU 28 = 100 210 190 170 150 130 110 90 70 2008 2009 2010 2011 2012 2013 20
Slide 44: Considerable seasonality in ADR as well
Considerable seasonality in ADR as well Rising ISK prices in parallel with the appreciation of the króna has led to hotel rooms in the capital becoming more expensive than in the Nordic countries Hotel room ADR in Nordic capital areas - euros 250 200 150 100 50 0 01/2010 04/2010 07/2010 10/2010 01/2
Slide 45: ADR similar to that seen in London and Amsterdam
ADR similar to that seen in London and Amsterdam It should be borne in mind that there are still no five-star hotels in Reykjavik that distorts comparison to some extent Average daily rate (ADR) in European cities - euros 250 200 150 100 50 0 Geneva Paris Zurich Reykjavík London Amsterdam Rome Milan
Slide 46: RevPAR has been largely unchanged since 2016
RevPAR has been largely unchanged since 2016 Off season RevPAR decreased YoY in 2018* Revenue per available room (RevPAR) in Reykjavík - ISK, thousands and change from previous year 25 9% 1% 0% 9% 13% 20 -4% 12% 27% 15 9% 17% -2% 16% 11% 10 17% 22% 22% 5 0 2010 2011 2012 2013 2014 2015 2016 2017 201
Slide 47: RevPAR among the highest in Europe
RevPAR among the highest in Europe RevPAR in European cities -EUR 200 180 160 140 120 100 80 60 40 20 0 Paris Geneva Zurich Reykjavík London Amsterdam Rome Milano Lisbon Frankfurt Porto Prague Berlin 2015 2016 2017 2018 - forecast Average RevPAR 2015-2017 47 Sources: Statistics Iceland, PwC, Arion R
Slide 48: Equity ratios have never been better
Equity ratios have never been better Equity ratios in tourism related industries 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Transport by air Accomodation Food and beverage service activities 48 Sources: Statistics Iceland, A
Slide 49: Airbnb showing signs of growing pains
Airbnb showing signs of growing pains Airbnb has soaked up demand for overnight stays in the past three years, especially in the capital area. However, the development over this summer indicates the sharing economy for overnight stays is shrinking 49
Slide 50: Same old story: Airbnb has been growing
Same old story: Airbnb has been growing The growth has been particularly powerful outside the capital area. However, it is difficult to quantify the actual number of overnight stays on Airbnb, as Airdna and Statistics Iceland tell a different story. Thus, the total share of Airbnb was 21% in 2017, b
Slide 51: But growing pains are appearing
But growing pains are appearing Following growth spur over the last two years overnight stays in Airbnb have decreased YoY over the past five months in the capital area Overnight stays on Airbnb - stays and percentage change YoY 250,000 200,000 -19% -20% -11% -4% -6% 10% 6% 150,000 11% 13% -2% 27% 5
Slide 52: Supply of Airbnb rentals has started to decrease
Supply of Airbnb rentals has started to decrease A strong real exchange rate, tightening regulation and increased competition with hotels has potentially reduced the incentive to rent out assets through Airbnb. Rising real estate prices have also made selling more attractive. Active Airbnb rentals A
Slide 53: Less seasonality in Airbnb ADR
Less seasonality in Airbnb ADR On average there are more bed places per bedroom on Airbnb, compared to hotel rooms Hotel and Airbnb ADR Hotel and Airbnb ADR - ADR in ISK per bed room - ADR in ISK per bed place 30,000 14,000 12,000 25,000 10,000 20,000 8,000 15,000 6,000 10,000 4,000 5,000 2,000 0 0
Slide 54: How quickly the tide turns
How quickly the tide turns In no time at all the tourist industry has gone from double digit growth to much more sustainable levels. What happened?
Slide 55: The Icelandic airlines are not expanding as fast
The Icelandic airlines are not expanding as fast The main reason for slower growth in tourist arrivals is that the Icelandic airlines route network is not expanding as fast as before. The composition of nationalities visiting Iceland largely depends on where, and how often, the airlines fly. Iceland
Slide 56: More VIA passengers than ever before
More VIA passengers than ever before Other development that contributes to slower growth in tourist arrivals is the growing importance of VIA passengers. To some extent, this trend can be attributed to new destinations in the Icelandic airlines route network, but another important factor is how expa
Slide 57: One of the most expensive destination in the world
5,000 0 10,000 15,000 20,000 25,000 prices Zürich Interlaken Reykjavík Copenhagen Amsterdam London Venice Stockholm Oslo Luxembourg Paris Bergen Dublin Helsinki Barcelona Florence Brussels Salzburg Edinburgh Rome Vienna Hamburg Nice Munich Bruges Berlin Milano Lisbon Dubrovnik Ibiza Naples Valletta
Slide 58: What does this dubious title mean for the consumption pattern of foreign tourist?
What does this dubious title mean for the consumption pattern of foreign tourist? Studies indicate that consumer behavior and the duration of stay is more vulnerable to price increases than arrivals. This is especially true for small islands.
Slide 59: The income effect seems to be relatively small
The income effect seems to be relatively small When the trip becomes more expensive, many tourists respond by shortening their stay. Looking at all overnight stays in the country, registered and unlisted, the effect seems to be small – so far. Overnight stays per tourist and the real exchange rate 5
Slide 60: The substitution effect is clearer
The substitution effect is clearer If all overnight stays are summarized, the duration of stay has changed only slightly, while registered overnight stays per tourist have dropped. This indicates that as prices of hotels and guesthouses increase, tourists look to cheaper options, i.e. Airbnb. Overni
Slide 61: Winter stay stretches to the countryside
Winter stay stretches to the countryside While tourists seem to be increasingly moving out of the capital area for the winter months, there have been little changes over the summer. According to overnight stays in hotels, this trend has continued in 2018. Registered overnight stays in the capital ar
Slide 62: Tourists migrate South for winter
Tourists migrate South for winter During the winter months, tourists increasingly travel to the South and Southwest. This means that tourists are more concentrated than ever, contrary to the goal of better distribution. Registered overnight stays in the countryside Registered overnight stays in the
Slide 63: Each tourists spends fewer ISK than before
Each tourists spends fewer ISK than before The bright side is that each tourist has been spending more and more in his/her own currency. In fact, 2017 was the first year where this trend reversed. Total consumption per tourist Total consumption per overnight stay - in ISK and YoY - in ISK and YoY 25
Slide 64: Weaker ISK = more spending in ISK
Weaker ISK = more spending in ISK Latest figures for 1H of 2018 show that each tourist is spending more in ISK than before, which isn‘t surprising as the ISK has depreciated in 2018. Spending in foreign currency has stood its ground. Consumption per tourist Foreign payment card turnover per visitor
Slide 65: Why does consumer behaviour matter?
Why does consumer behaviour matter? Because we can no longer rely on revenue growth through growth in tourist arrivals. In 2017 each tourist spent less than before, both in ISK and foreign currency. However, as tourist arrivals increased by 24%, export revenues continued to increase. Export revenues
Slide 66: Contacts
Contacts Elvar Ingi Möller Erna Björg Sverrisdóttir elvar.moller@arionbanki.is erna.sverrisdottir@arionbanki.is Þorsteinn Andri Haraldsson Head of Research thorsteinn.haraldsson@arionbanki.is Stefán Broddi Guðjónsson stefan.gudjonsson@arionbanki.is 66
Slide 67: Disclaimer
Disclaimer • This presentation is for information purposes only and is not designed to form a basis on which recipients should make decisions. The information contained in this presentation does not represent any promise or forecast of future events. The Bank is not obliged to provide the recipient
Arion Banki hf. — Investor Presentation (October 2018) on 6ix