Tourism in Iceland · Travel Air transport-400-300-200-100 0 100 200 300 400 ... Travel agency, tour operator and other reservation service and related activities ... Austria Germany

Tourism in Iceland:

Soft landing or a belly flop?

Arion Research

October 2018

• 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 comparison? (p. 38)

– Airbnb showing signs of growing pains (p. 49)

• How quickly the tide turns (p. 54)

Table of contents

• 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 each passenger in 2018, a development that is unsustainable in the long run. Airfares are simply too cheap and they need to increase. Analysis of tourist’s price elasticity of demand indicate that rising airfares could lead to decrease in number of tourists, especially if the ISK remains strong.

• We predict very little growth in tourism in the coming years. In our base case tourist arrivals will increase by 1.4% next year and 2.4% in 2020. There is quite a lot of uncertainty, but we consider the downward risk to be greater. For example, if growth in VIA passengers continues at the same rate in 2019 as it has done in 2018, number of inbound tourists could slightly decrease. Global trade tension could also slow growth in passenger transport, a development which would affect Iceland.

• Last year, hotels accounted for less than half of all registered overnight stays in Iceland. In recent years, the vast majority of hotel nights have been in the capital area. However, countryside hotels have been attracting increased shareholding, mostly in Southern Iceland, Reykjanes Peninsula (South-West) and West Iceland.

• Increase in tourism beyond supply growth in hotels has created basis for Airbnb to gain market share. However, recent numbers indicate that Airbnb’s activities are shrinking, as Airbnb’s overnight stays reduced significantly over the summer.

• It appears that strong króna and high prices has not shortened tourist’s vacation time as much as previously thought because tourists have increasingly sought after cheaper accommodation, such as Airbnb. Tourist’s consumption in ISK has in turn contracted, but pretty much stayed unchanged in foreign currency. Developments differ from nationalities where some are more vulnerable than others.

• For the economy in general, consumer behavior is now more important than before, since the tourism industry can no longer rely on revenue growth through an increased number of tourists.

Key findings

In a very short period of time, tourism has gone from a

small industry to the largest export sector in the country.

From zero to hero

A Cinderella Story

More and more foreign tourists, less and less seasonality

Sources: Icelandic Tourist Board, Arion Research. * Based on Research‘s forecast.

-

0.5

1.0

1.5

2.0

2.5

19

49

19

54

19

59

19

64

19

69

19

74

19

79

19

84

19

89

19

94

19

99

20

04

20

09

20

14

Tourist arrivals via KEF airport- millions

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1949-2012 2013-2018

Total number of tourists- millions

64

yea

rs

6 y

ear

s25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18*

Seasonality

Percentage of tourists visiting in June-August

Percentage of tourists visiting in other months

Tourism contribution to GDP has doubled

For the past three years, tourism has accounted for roughly 23% of business investment

Sources: Statistics Iceland, Arion Research. * The weight of tourism in GDP is not in perfect accordance with Statistics Iceland's

TSA, as air passenger transportation weighs more here than in the TSA.

0%

2%

4%

6%

8%

10%

12%

14%

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2010 2011 2012 2013 2014 2015 2016 2017

GDP and tourism*- bn. ISK at constant prices

Tourism contribution to GDP GDP without tourism

Share of tourism in GDP (r.axis)

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

350

400

450

2010 2011 2012 2013 2014 2015 2016 2017

Business investment- bn. ISK at constant prices

Tourism contribution to business investmentBusiness investment without tourism

Share of tourism in business investment (r.axis)

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

Sources: Statistics Iceland, Arion Research

1.4%

0.7%

3.2%

1.4%

2.9%

5.2%

3.4%

1.0%

-0.1%

3.4%

1.1% 1.1%

4.3%4.1%

1.9%

1.3%

4.1%

2.1%

4.5%

7.4%

4.0%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2011 2012 2013 2014 2015 2016 2017

Economic growth and effects of tourism

Economic growth withouth tourism contribution to GDP Economic growth withouth tourism contribution to GDP and business investment Actual GDP growth

… 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

account.

Sources: Statistics Iceland, Arion Research. * Research‘s forecast from August.

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016 2017 2018*

Export revenues of foreign travellers- bn. ISK at constant exchange rate

Travel Air transport

-400

-300

-200

-100

0

100

200

300

400

2010 2011 2012 2013 2014 2015 2016 2017 2018*

Scenario where export revenues of foreign travellers increase by 5% annually

- bn. ISK at constant exchange rate

Secondary incomePrimary incomeBalance on servicesBalance on goodsCurrent account balanceCurrent account balance with 5% growth

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.

Sources: Statistics Iceland, Icelandic Tourist Board, Arion Research. * Tourist arrivals via KEF airport.

-50

0

50

100

150

200

-1,000

0

1,000

2,000

3,000

4,000

5,000

2011 2012 2013 2014 2015 2016 2017 2018

Increase in tourist arrivals* and the number of tourist related jobs- increase between years, quarterly data

Other activities linked to tourismTravel agency, tour operator and other reservation service and related activitiesFood and beverage service activitiesAccommodationPassenger air transportIncrease in the number of tourists, thous. (r.axis)

Handing over the growth reins

According to our forecast from August, other export sectors will grow more than tourism in 2018

Sources: Statistics Iceland, Arion Research. * Research‘s forecast from August.

20% 19% 20%24% 26% 29% 31%

39%42%

41%

26% 25%26%

27%26% 23%

22%

20% 16% 17%

31%36%

35%33% 30% 29%

28%23% 23% 23%

23%

20% 18% 17% 18% 20% 19% 19% 18% 19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Share in total exports

Tourism Seafood Industrial goods Other

-20%

-10%

0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 2014 2015 2016 2017 2018*

Exports revenues- YoY growth, constant exchange rate

Tourism Industrial goods Seafood Other

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 country?

Airlines operating environment

and impact on tourist arrivals

Sources: Anna aero, Arion Research12

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

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Austria

Germany

UK

Luxembourg

Netherlands

Latvia

Slovenia

Finland

Moldova

Norway

Russia

Belarus

Ireland

Turkey

Iceland

Home carriers- seat capacity

Sources: Icelandair Group, WOW air, Arion Research13

Capacity has increased a lot

The Icelandic airlines will carry around eight million passengers this year

2.0

2.3

2.6

3.1

3.7

4.04.2

0.1

0.40.5

0.7

1.7

2.8

3.6

0

1

2

3

4

5

2012 2013 2014 2015 2016 2017 2018e

Number of passengers- in millions

Icelandair WOW air

Sources: Icelandair Group, WOW air, Icelandic Tourist Board, Arion Research14

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

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2013 2014 2015 2016 2017 2018e 2019e

Icelandair and WOW air capacity growth and tourist arrivals via KEF airport

Icelandair and WOW air Tourists

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.

Sources: Bloomberg, Icelandair Group, WOW air, Arion Research

Unit revenue = Revenues / Revenue passenger kilometers (RPK)15

50

60

70

80

90

100

110

120

0

200

400

600

800

1,000

1,200

2014 2015 2016 2017 2018

Jet fuel (USD/Ton) and unit revenue (=100, 2014)

Jet fuel (l.axis) European airlines (r.axis) Icelandair (r.axis) WOW air (r.axis)

Sources: Icelandair Group, WOW air, Arion Research

Arion Research projections for 2018 Icelandair Group‘s EBIT based on company‘s EBITDA guidance16

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

-20

-10

0

10

20

30

40

50

60

70

80

2014 2015 2016 2017 2018 T12m

Earnings per passenger- USD

Icelandair Group, EBITDA Icelandair Group, EBIT WOW air, EBITDA WOW air, EBIT

Sources: Icelandic Tourist Board, Arion Research17

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

40.1%

24.2%4.5% 1.4%

2.4%2.7%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2016 2017 2018 2019 2020 2021

Tourist arrivals via KEF airport- millions annually, % increase


With capacity blow, we could go roughly two years back in time

Pessimistic scenario: Capacity of a major airline disappears

40.1%

24.2%4.5% 1.4%

2.4%2.7%

4.5%

-17.8%

10.1%

5.5%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2016 2017 2018 2019 2020 2021

Pessimistic scenario- millions annually, % increase

Base case Pessimistic scenario


Less fluctuations are in our optimistic scenario than the pessimistic

Optimistic scenario: Airline operations improve and they continue to grow

40.1%

24.2%4.5% 1.4%

2.4%2.7%

4.5%4.5%

6.5%

7.1%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2016 2017 2018 2019 2020 2021

Optimistic scenario- millions annually, % increase

Base case Optimistic scenario


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

0

0.5

1

1.5

2

2.5

3

2016 2017 2018 2019 2020 2021

All scenarios- millions, annually

Base case Pessimistic scenario Optimistic scenario

What if airfares increase significantly?

What if the world economy slows down?

The downside risk is

significant

Sources: The Travel, Insider, Frugal Travel Guy

Flying to and from Iceland has never been so cheapWhile the ISK has appreciated, flights to Iceland have become cheaper. Lower airfares have somewhat

offset the rising cost of staying in the country.

Sources: Statistics Iceland, Icelandic Tourist Board, CBI, Arion Research. * Estimation based on airfares in 1H 2018.

2% 1%-3%

-5%

-9% 2%-6%

-12%

-10%

-3%

6%

-10% -2%

-9%

-14%-6%

-10%-4%

0

50

100

150

200

250

300

350

400

450

500

2010 2011 2012 2013 2014 2015 2016 2017 2018*

Flight ticket to Iceland: Passenger air transport per tourist- in EUR and USD, YoY

EUR USD

What could it mean if airfares increase?D

es

tin

ati

on

Origins

Africa America Asia Oceana Europe

Africa -0.282 -3.081 -0.579 -2.190

America -0.704 -1.619 -1.310 -0.804 -1.136

Asia -1.767 -1.223 -1.818 -1.246 -1.436

Oceana -0.675 -1.046 -0.917 -0.449

Europe -1.374 -0.750 -1.205

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 than others. Europeans are fairly price sensitive as well.

Sources: A Meta-Analysis of International Tourism Demand Elasticities.

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.

Sources: Icelandic Travel Board, Arion Research

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2016 2017 2018 2019

Effect of 10% increase in airfares on tourist arrivals- millions of tourists, based on different price elasticity of demand and Research's base case, all other things being

equal

Base Case -0.4 -0.8 -1 -1.2 -1.6

Economic growth is the fundamental driver of demand for air travel

Further escalation in global trade protectionism could have negative effect on air transport

Sources: IATA. * Numbers in brackets represent millions of tourists.

Es

tim

ate

d

ne

ga

tive

im

pac

t

on

GD

P

Assumed income elasticity

1 1.3 1.8

-0.1% -0.1% (-4)* -0.1% (-6) -0.2% (-8)

-0.4% -0.4% (-18) -0.5% (-23) -0.7% (-32)

-1.1% -1.1% (-48) -1.4% (-63) -2.0% (-87)

4

4.1

4.2

4.3

4.4

4.5

4.6

4.7

2017 2018 2019

Global air passengers- billion, income elasticity = 1

Base case Very small impact on GDP (-0.1%)

Larger impact on GDP (-1.1%)

Gulf War

Second oil shock

Volcker recession

Global financial crisis

9/11

Trade war?

2008-2017

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1991 1980 1981 2009 2001 2019 10-yearaverage

Selected passenger shocks in the past- global passenger numbers, YoY change

What does the pessimistic scenario mean for the economy?

27 Sources: Statistics Iceland, CBI, Arion Research

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 the ISK is kept stable and the effects of tourism on imports is ignored.

-

50

100

150

200

250

300

350

400

450

2017 2018 2019

Inbound tourism expenditure in Iceland

- bn. ISK, floating exchange rate

-4%

-2%

0%

2%

4%

6%

8%

2013 2014 2015 2016 2017 2018 2019

Current account- % of GDP

Current account - pessimistic scenario-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

2014 2015 2016 2017 2018 2019

New/lost jobs in tourist related activities

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 ourselves in hotel construction?

Are we getting ahead of ourselves in hotel construction?

Sources: Statistics Iceland, Arion Research29

Hotels shoulder the burden

Every four in ten overnight stays by tourists were spent at hotels in 2017

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Hotel Unlisted Airbnb Guesthouses Other unlisted Apartments andPrivate-home

accommodation

Camping sites Youth hostels Other

Registered overnight stays by type of lodging

2012 2013 2014 2015 2016 2017


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 grown by 79%.

214%

534%

418%266%

477%

427%

0

500

1,000

1,500

2,000

2,500

Capital area Southwest West and Westfjords North East South

Overnight stays in hotels by regions- stays (thous) and change from 2010

2010 2014 2017

Overnight hotel stays per thousand travelers has decreased

31

Supply shortage, appreciation of the króna and competition with Airbnb seem to be the main causes


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Capital area Countryside

Overnight hotel stays per 1000 tourists, by region

2010 2014 2017

0

50

100

150

200

250

300

350

Southwest West andWestfjords

North East South

Overnight hotel stays per 1000 tourists, countryside

2010 2014 2017


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

-2%

5%-2%

-9%-4%

4%-3%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012 2013 2014 2015 2016 2017

Average length of stay by hotel guest- stays and YoY percentage change


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

-15%

-10%

-5%

0%

5%

10%

15%

-25,000

-15,000

-5,000

5,000

15,000

25,000

35,000

45,000

Jan Feb Mar Apr May Jun Jul Aug

Overnight stays - change between 2017 and 2018

Capital area Southwest West and Westfjords North East East Total change Tourist arrivals (YoY - r.ax)

Which has coincided with lower occupancy rates

34

Occupancy rates in the capital area are still robust and higher than outside the capital area


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Hotel room occupancy rates- capital region

2010 2014 2016 2017 2018

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Hotel room occupancy rates- other regions

2010 2014 2016 2017 2018

Sources: Statistics Iceland, City of Reykjavik, media, Arion Research35

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%

0

1000

2000

3000

4000

5000

6000

7000

8000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Year end2022

Arion Research's hotel room forecast in the capital area

Hotel rooms New rooms (forecast)


We expect overnight stays at hotels to increase

Increased supply, together with slower growth in tourist arrivals, lead to a decline in occupancy rates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

500

1,000

1,500

2,000

2,500

3,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Arion Research's forecast for overnight stays and occupancy in the capital area- thousands

Base scenario Room occupancy (r. ax) Average occupancy in Nordic capital areas (2010-2017)

Forecast

Are we getting ahead of ourselves in hotel construction?

37

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 reversed over the last few months when supply has increased.


20%

30%

40%

50%

60%

70%

80%

90%

100%

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21

Occupancy forecast: optimistic scenario- Only current construction finished, travelers increase

their length of stay at hotels

Base scenario

Optimistic tourist arrivals scenario

Pessimistic tourist arrivals scenario

Average occupancy in Nordic capital areas (2010-2017)

Forecast

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

03

20

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20

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20

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20

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20

16

20

17

20

18

20

19

20

20

20

21

Occupancy forecast: pessimistic scenario- All projections in development realize, travelers

decrease their length of stay at hotels

Base scenario

Optimistic tourist arrivals scenario

Pessimistic tourist arrivals scenario

Average occupancy in Nordic capital areas (2010-2017)

Forecast

What do sliding occupancy rates mean in the big

picture?

How do Icelandic hotels fare

in international comparison?

38

Sources: Eurostat, Arion Research. *2017 data for those available39

Icelandic hotels rely on foreign travelers

In other Nordic countries locals comprise the majority of overnight hotel stays

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Foreign travelers' overnight hotel stays in 2017 as a percentage of total

Sources: Statistics Iceland, local statistics agencies in Nordic countries, Arion Research40

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

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100%

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Occupancy rates in the Nordic countries - capital areas

Reykjavík Copenhagen Oslo Stockholm Helsinki

Sources: Eurostat, Arion Research41

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

0

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Occupancy rates in Europe

Iceland Denmark Sweden Norway Finland Germany Netherlands Switzerland

50%

55%

60%

65%

70%

75%

80%

85%

90%

London Amsterdam Prague Reykjavík Lisbon Berlin Porto Paris Zurich Milan Geneva Rome Frankfurt

Occupancy rates in European cities

2015 2016 2017 2018 - forecast European average 2015-2017

Sources: Statistics Iceland, PwC, Benchmarking Alliance, Arion Research42

Occupancy in Reykjavík will remain with the best in class

Sources: Statistics Iceland, Eurostat, Arion Research43

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.

70

90

110

130

150

170

190

210

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Hotel and restaurants prices- price level indices, EU 28 = 100

Iceland Denmark Sweden Norway Finland Germany Netherlands Switzerland

Sources: Benchmarking Alliance, local statistics agencies in Nordic countries, Arion Research44

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

0

50

100

150

200

250

01

/20

10

04

/20

10

07

/20

10

10

/20

10

01

/20

11

04

/20

11

07

/20

11

10

/20

11

01

/20

12

04

/20

12

07

/20

12

10

/20

12

01

/20

13

04

/20

13

07

/20

13

10

/20

13

01

/20

14

04

/20

14

07

/20

14

10

/20

14

01

/20

15

04

/20

15

07

/20

15

10

/20

15

01

/20

16

04

/20

16

07

/20

16

10

/20

16

01

/20

17

04

/20

17

07

/20

17

10

/20

17

01

/20

18

04

/20

18

07

/20

18

Hotel room ADR in Nordic capital areas- euros

Oslo Stockholm Helsinki Reykjavík

Sources: Statistics Iceland, PwC, Arion Research45

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

0

50

100

150

200

250

Geneva Paris Zurich Reykjavík London Amsterdam Rome Milano Frankfurt Lisbon Porto Berlin Prague

Average daily rate (ADR) in European cities- euros

2015 2016 2017 2018 - forecast Average ADR 2015-2017

Sources: Statistics Iceland, Benchmarking Alliance, Arion Research *Jan-May46

RevPAR has been largely unchanged since 2016

Off season RevPAR decreased YoY in 2018*

27%

12%

13%-4%

9%

9% 1% 0%

22%

22%

17%

11%

16%

17%

9%

-2%

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015 2016 2017 2018

Revenue per available room (RevPAR) in Reykjavík- ISK, thousands and change from previous year

High season Off season

Sources: Statistics Iceland, PwC, Arion Research47

RevPAR among the highest in Europe

0

20

40

60

80

100

120

140

160

180

200

Paris Geneva Zurich Reykjavík London Amsterdam Rome Milano Lisbon Frankfurt Porto Prague Berlin

RevPAR in European cities-EUR

2015 2016 2017 2018 - forecast Average RevPAR 2015-2017


Equity ratios have never been better

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Equity ratios in tourism related industries

Transport by air Accomodation Food and beverage service activities

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

Airbnb showing signs of

growing pains

49

Sources: Statistics Iceland, Airdna.com, Arion Research *Jan-Aug50

181%

40%

-6%*

1630%

335%

15%*

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2015 2016 2017 2018*

Overnight stays on Airbnb- stays and percentage change YoY


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, based on data from Statistics Iceland, but 31% based on Airdna's

data.

Sources: Statistics Iceland, Airdna.com, Arion Research51

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

13%11%

10%

-6%

-2%

-11%-19% -20%

65%52%

58%

22%

27%

6%

-4% -6%

0

50,000

100,000

150,000

200,000

250,000

Overnight stays on Airbnb- stays and percentage change YoY


Supply of Airbnb rentals has started to decrease

52

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.

Sources: Statistics Iceland, Airdna.com, Arion Research *A working paper by the Central Bank of Iceland suggests that full time rentals on Airbnb in 2017 were

around 752-1,898 in the capital area and 204-902 in the countryside.

0

500

1000

1500

2000

2500

3000

3500

4000

4500


Active Airbnb rentals- capital area

2017 2018

0

500

1000

1500

2000

2500

3000

3500

4000

4500


Active Airbnb rentals- countryside

2017 2018

Less seasonality in Airbnb ADR

53

On average there are more bed places per bedroom on Airbnb, compared to hotel rooms

Sources: Statistics Iceland, Airdna.com, Arion Research

0

5,000

10,000

15,000

20,000

25,000

30,000

01

/20

15

03

/20

15

05

/20

15

07

/20

15

09

/20

15

11

/20

15

01

/20

16

03

/20

16

05

/20

16

07

/20

16

09

/20

16

11

/20

16

01

/20

17

03

/20

17

05

/20

17

07

/20

17

09

/20

17

11

/20

17

01

/20

18

03

/20

18

05

/20

18

07

/20

18

Hotel and Airbnb ADR- ADR in ISK per bed room

Airbnb - Entire home Airbnb - Private room Hotel room

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

01

/20

15

03

/20

15

05

/20

15

07

/20

15

09

/20

15

11

/20

15

01

/20

16

03

/20

16

05

/20

16

07

/20

16

09

/20

16

11

/20

16

01

/20

17

03

/20

17

05

/20

17

07

/20

17

09

/20

17

11

/20

17

01

/20

18

03

/20

18

05

/20

18

07

/20

18

Hotel and Airbnb ADR- ADR in ISK per bed place

Airbnb - Entire home Airbnb - Private room Hotel room

In no time at all the tourist industry has gone from double digit growth to much more sustainable levels. What happened?

How quickly the tide turns

The Icelandic airlines are not expanding as fastThe 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.

Sources: Icelandair Group, WOW air, Túristi.is, Icelandic Tourist Board, Arion Research

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2013 2014 2015 2016 2017 2018e 2019e

Icelandair and WOW air capacity growth and tourist arrivals via KEF airport

Icelandair and WOW air Tourists

-30%

-20%

-10%

0%

10%

20%

30%

40%

United States France Nordic countries Germany

Flight supply and tourists- change between July 2017 and 2018

Change in available flights Change in the number of tourists

More VIA passengers than ever beforeOther 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 expansive the country has become.

Sources: Isavia, Arion Research

10%

15%

20%

25%

30%

35%

40%

45%

50%

January February March April May June July August September October November December

VIA passengers- % of total traffic through the airport

2012 2013 2014 2015 2016 2017 2018

One of the most expensive destination in the worldFew places are as expensive as Iceland for the typical tourist, both because of strong króna and high

prices

Sources: Priceoftravel.com, CBI, Arion Research. * Prices from May, in ISK. Exchange rate from September 18.

0

5,000

10,000

15,000

20,000

25,000

Züri

ch

Inte

rla

ke

n

Re

ykja

vík

Co

pen

hag

en

Am

ste

rda

m

Lo

ndo

n

Venic

e

Sto

ckh

olm

Oslo

Lu

xe

mbo

urg

Paris

Berg

en

Du

blin

He

lsin

ki

Barc

elo

na

Flo

rence

Bru

ssels

Salz

bu

rg

Edin

burg

h

Ro

me

Vie

nna

Ha

mbu

rg

Nic

e

Mu

nic

h

Bru

ges

Berlin

Mila

no

Lis

bon

Du

bro

vnik

Ibiz

a

Na

ple

s

Valle

tta

Ma

drid

Talli

nn

Ath

en

s

Lju

blja

na

Mo

scow

Santo

rini

Pra

gue

Ten

erife

Bra

tisla

va

Wars

aw

Split

Kra

ko

w

Rig

a

Viln

ius

St. P

ete

rsbu

rg

Buda

pest

Zag

reb

Sara

jevo

Če

ský…

Belg

rade

Sofia

Buchare

st

Kie

v

Ista

nbul

Europe 3-star travel index for 2018- typical budget for normal daily expenses*

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.

What does this dubious title mean for the

consumption pattern of foreign tourist?

Sources: Statistics Iceland, Airdna, Arion Research. *Research‘s estimation for 2018.

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.

60

65

70

75

80

85

90

95

100

105

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2010 2011 2012 2013 2014 2015 2016 2017 2018*

Overnight stays per tourist and the real exchange rate

Overnight stays per tourist Real exchange rate (r.axis)

The substitution effect is clearerIf 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.

Sources: Statistics Iceland, Airdna, Arion Research. * Summer 2018 based on the latest figures. Winter period is from September to April.

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Overnight stays per tourist

Winter* - all Summer - all Winter - registered Summer - registered

Winter stay stretches to the countrysideWhile 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.


78% 79%

72%70%

68%65%

60%

39% 38%36%

32% 34%35% 35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2011 2012 2013 2014 2015 2016 2017

Registered overnight stays in the capital area- % of all registered overnight stays

Winter Summer

Tourists migrate South for winterDuring 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.


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2011 2012 2013 2014 2015 2016 2017

Registered overnight stays in the countryside in winter

- % of all registered overnight stays

South Southwest West Westfjords

Northwest Northeast East

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015 2016 2017

Registered overnight stays in the countryside in summer

- % of all registered overnight stays

South Southwest West Westfjords

Northwest Northeast East

Each tourists spends fewer ISK than beforeThe 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.

Sources: Statistics Iceland, Airdna, CBI, Arion Research

0%-4% 1%

-5%

-12%

1% 2%4%

6% -2%

0

50,000

100,000

150,000

200,000

250,000

2013 2014 2015 2016 2017

Total consumption per tourist- in ISK and YoY

Floating exchange rate Constant exchange rate

0%

-5%-3% 0%

-13%

1% 1% 0%

11%-3%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2013 2014 2015 2016 2017

Total consumption per overnight stay- in ISK and YoY


Weaker ISK = more spending in ISKLatest 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.

Sources: Statistics Iceland, CBI, the Centre for Retail Studies, Arion Research

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2016Q1

2016Q2

2016Q3

2016Q4

2017Q1

2017Q2

2017Q3

2017Q4

2018Q1

2018Q2

Consumption per tourist- YoY

Constant exchange rate Floating exchange rate

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Foreign payment card turnover per visitor- excl. flights, YOY


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.

Sources: Icelandic Tourist Board, Statistics Iceland, Arion Research

150

200

250

300

350

400

450

2015 2016 2017 2018 2019 2020 2021

Export revenues of foreign travellers, based on different developments of consumption- Research's base case for tourist arrivals, bn. ISK at constant prices

Travels, unchanged consumption per tourist Travels, 3% growth in consumption per tourist Travels, 3% decline in consumption per tourist

Contacts

66

Elvar Ingi Möller

[email protected]

Þorsteinn Andri Haraldsson

[email protected]

Erna Björg Sverrisdóttir

[email protected]

Head of Research

Stefán Broddi Guðjónsson

[email protected]

mailto:[email protected]




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