Icelandair Group Annual Report 2010

Transcription

1 Icelandair Group Annual Report 2010

2 Key Figures ISK million Operating results Total income 88,015 80,321 72,199 63,477 EBITDAR 21,254 17,435 8,821 11,056 EBITDA 12,578 8,135 3,053 5,477 EBIT 6,254 1,483-7,351 2,337 EBT continuing operations 6,576-4,469-8, Profit / loss for the year 4,556-10,665-7, Balance sheet Total assets 84,239 89,104 99,947 66,760 Total equity 28,403 14,605 20,080 25,033 Interest bearing debt 24,604 43,163 43,635 25,098 Net interest bearing debt 12,129 41,227 39,570 23,092 Cash flow Net cash from operating activities 14,329 8,781 4,531 3,889 Net cash used in investing activities -4,168-7,799-7,452-5,461 Net cash used in financing activities -49-3,283 3, Cash and cash equivalents and marketable securities end of year 12,994 1,909 4,065 2,006 Key Ratios Earnings per share ISK Equity per share ISK Equity ratio 34% 16% 20% 37% Current ratio Net tangible worth ISK million 7,191-8,993-9,241-1,813 CAPEX ISK million 5,015 5,922 7,908 9,217 Transport revenue as % of total revenues 61% 59% 58% 57% EBITDAR ratio 24% 22% 12% 17% EBITDA ratio 14% 10% 4% 9% Average number of full time employees 2,129 2,182 2,437 2,544

3 Table of Contents Chairman s Address 02 CEO s Comment 04 The fleet 06 Financial restructuring of Icelandair Group 08 Icelandair Group 09 The Subsidiaries 10 Financials 18 Risk Management 21 Corporate Governance 24 Shareholder information 27 Financial Statement 28

4 2 Chairman s Address Sigurdur Helgason, Chairman of the Board Last year was one of the most remarkable years in the long and colourful history of Icelandair Group. The final steps were taken in the extensive work of financially restructuring the Company, and new shareholders joined the Group. The operating results turned out to be exceptional in spite of the severe disruption caused by the volcanic eruption in Eyjafjallajökull. As a result, the Company finds itself on a much sounder footing than a year ago. The results of the Company in 2010 were the best in its history, with the Group s profits amounting to ISK 4.6 billion. The Company s total turnover increased by 10% over the year, amounting to ISK 88 billion at yearend. Earnings before financial items taxes and depreciation amounted to ISK 12.6 billion, as compared to ISK 8.1 billion in the preceding year. The improved performance was primarily a result of significant increase in Icelandair s passenger revenues. Passenger revenues increased as a result of an improved load factor and good revenue management in the route network. The number of passengers in the Trans Atlantic market grew substantially, accounting for 38% of the company s total number of passengers, as compared to 28% in Financial restructuring The financial restructuring was the most important and most extensive task of the Company s management in New shares were offered to professional investors, and the Icelandic Enterprise Investment Fund became the Company s largest shareholder by subscribing to ISK 1.2 billion in new shares at the price of ISK 2.5, which corresponds to a total of ISK 3 billion. The largest creditors converted debts in the amount of ISK 3.6 billion into shares based on a share price of ISK 5 per share, which corresponds to a subscription to 720 million shares. The total increase in share capital thus amounted to ISK 2.92 billion new shares in nominal value in the offer to professional investors. At the end of 2010, the general public was invited to subscribe to new shares in an open offering, concurrently with a closed offering for employees and shareholders. It was a pleasant experience to observe the investor response to Icelandair Group s share offering. Over 800 investors subscribed to ISK 2.9 billion in nominal value, with demand far exceeding supply, which was just over ISK 1 billion. The offer was made at the price of ISK 2.5 per share, and demand on the secondary market has been quite strong. It is a welcome sight to see that investors are perceiving a long-term investment opportunity in Icelandair Group s stock. The financial restructuring was then formally completed on 10 February, when all formalities had been concluded. The current position is therefore that the Enterprise Investment Fund is now the Company s largest shareholder, with holdings of approximately 29%, followed by Íslandsbanki, with approximately 21%.

5 3 Clearer focus Following the financial restructuring, it is clear that the Company will now be based on the values that faded away during the economic upsurge. The Company s business operations will be based on diverse flight and tourist services. There is complete consensus within the Board of Directors and among the Company s owners regarding this point. Concurrently with the shift in focus, Icelandair Group s business model will be simplified, and the Company will emphasise on airline and tourist services, where Iceland will be the cornerstone of an international route network. The Company will strive for organic growth. This work has already begun with an increase in the number of Icelandair s destinations and the airline s route network will be served by 14 Boeing 757, an addition of two aircraft. With its continued growth, Icelandair will establish itself still further as a strong airline operator in the North Atlantic with Iceland as a hub. I welcome these changes, and I believe that they will place the Company in a better position to serve its customers. From now on we will concentrate on doing what we do best: airline operations and extensive services to travellers; our business model reflects these two pillars of the Company. We cannot anticipate that the results of 2011 will match those of The rising fuel prices will increase cost, and it is likely that the proposed increases in tariffs and taxes will have a negative impact on demand. In addition, wage contracts with all of Icelandair Group s employees have expired, and that situation entails significant risk. Nevertheless, I am optimistic that the conclusion of wage bargaining will lead to an acceptable solution for all. Competition will also increase this year, as an estimated 13 airlines will fly to and from Iceland next summer. The long-term prospects of the Company are favourable, as it is well organised and following financial restructuring the balance sheet is on sound footing and the liquidity position is strong. Icelandair Group is the most important travel service company in Iceland. Through its subsidiaries, the Company holds a good position in international air travel, domestic air travel, the hotel market and various areas of tourist services. We are proud of our position, but we do realise that with this position comes great responsibility, which can best be addressed through continued advances in the interests of Icelandic tourism. Icelandair Group will continue to be a strong force in Icelandic travel services. The responsibility of the Company consists both in maintaining the flow of tourists to Iceland through vigorous promotion and in supplying Icelanders with the best available travel services. Notwithstanding the challenging environment of the near future, I can only be optimistic on behalf of the Company. This is due not only to the completion of the financial restructuring of the Company, but also the favourable winds that I believe Icelanders can take advantage of to strengthen the country s tourist industry for the future. Finally I would like to thank our customers, shareholders, the Board of Directors, the management and all employees of Icelandair Group for their contribution to the great results of 2010.

6 4 President s Address Björgólfur Jóhannsson, President and CEO The year 2010 was in many ways a good year in the history of our Company, and business was generally good, notwithstanding the disruption caused by the Eyjafjallajökull eruption. The operation of the Company was successful, and concurrently with normal operations the financial foundations of the Company were substantially strengthened with the addition of new and powerful investors to our shareholders group. Following the changes, the Company is now active in the stock market again. The Company is currently backed by over 1300 shareholders. In reality, the number of shareholders is far greater, as the country s largest pension funds and thereby the majority of the population are stakeholders. The Company is now well funded, which is extremely important in our business. There has been turmoil in some parts of the world significantly impacting fuel prices. A recent profit forecast from Icelandair Group reveals that in spite of the announced plans for growth, EBITDA for 2011 is projected at approximately ISK 3 billion short of the record set in Fuel costs accounted for about 20% of the Group s total expenses in 2010, and price increases have a direct impact on the Company s profitability. On the other hand, the booking status for the summer months is good. The favourable results last year were by no means a self-evident outcome. Even though the world at large may have been taking small but firm steps out of the recession, the going has been rough for many Icelandic companies. We need to face the fact that the resurrection of the Icelandic economy is still in its early stages. This makes it even more satisfying that the operations of the Company in 2010 were solid. EBITDA for the year was ISK 12.6 billion, far in excess of projections. The improved performance was primarily a result of the significant increase in Icelandair s passenger revenues. The Company s success in 2010 has attracted attention and it now appears that 13 airlines will be offering flights to Iceland next summer. We welcome the increased competition. It is written that the best defence is a good offence, and we intend to meet the increased competition with all our resources. Icelandair recently announced a 17% increase in capacity in We will open a year-round hotel in Akureyri next June, a very welcome addition to our hotel operations. Air Iceland has been making good progress in its flights to Greenland, and Loftleidir-Icelandic has achieved good results in its marketing efforts. One of the biggest factors in Icelandair Group s success in 2010 was the Company s ability to respond swiftly to changed circumstances. Even though the flight disruptions resulting from the volcanic eruptions were costly in the short term, I am convinced that in the long term the eruption will increase the number of tourists visiting Iceland.

7 5 After the collapse suffered by the Icelandic stock market in the months before and after the banking collapse, it is clear that it will take some time to regain the trust that was lost. We take that role very seriously, and I am of the opinion that improved corporate governance, transparency in business operations and clear disclosure of information to the market is a prerequisite for investors to put their savings in stocks. It is a great responsibility to manage a company which is listed in the Stock Exchange, and I can promise that the Board and management will contribute their every effort. The Board of Directors of the Company recently began exploring the possibility of listing Icelandair Group s shares in another stock exchange in the Scandinavian countries. This would take the form of a dual listing, with the Company s share listed in two stock exchanges. This decision of the Board reflects our belief that Icelandair Group can compete in the international market, and it is our view that there would be demand for a company like Icelandair Group in the Nordic stock exchanges. The economic collapse should teach Icelanders the importance of spreading risk. One of the most important long-term tasks in the Icelandic tourist industry will be to increase the number of tourists visiting Iceland in the fall, spring and wintertime. If we look at Icelandair Group s history, the first and the last quarter of every year have always been difficult, and the gross margin has been negative. However, the operating results in the last quarter of 2010 show us beyond any doubt that by pooling our efforts we can go from defence to offence in difficult times. Icelandair Group is a knowledge company in the best sense of that concept. We base our operations on the decades of experience possessed by our staff who for tens of years have been improving work processes and discovering more effective and efficient methods in the operation of our business and development of our route network. This knowledge has been passed down from person to person, employee to employee, and the company is still dominated by the pioneering spirit that has characterised it and its predecessors. It is on this foundation that Icelandair Group has built its operations on the eastern and western coast of the United States and throughout Europe. It is on the foundation of the trust that we enjoy in the international market that we have succeeded in building up hotel operations, aircraft charters and tourist offices. And it is on this sound foundation that the Company will continue to shoulder its responsibility as the largest and most important travel organisation in the country. Last but not least I would like to express my appreciation to all employees of Icelandair Group for their outstanding work in the year 2010.

8 6 The fleet The fleet is the Group s largest asset and a core operating resource. In 2010 a total of 34 aircraft were involved in the Group s operations. The most common type of aircraft in the operation is the Boeing 757. These aircraft are operated in the Icelandair and Icelandair Cargo route networks and by Loftleiðir Icelandic. In 2011 two Boeing 757 will be added to the Group s fleet. Air Iceland operates six Fokker 50 and two Dash 8-100, all of which are owned by the Company. In March of 2011 one of the Dash aircraft was damaged while landing in Greenland. Air Iceland is working on finding a replacement. Icelandair operates a single-type fleet of Boeing 757 aircraft in its international network. The type fits extremely well with Icelandair s route nework. Also, a single-type fleet creates significant cost efficiency in terms of maintenance and training for crew and mechanics. The Group invests considerably in its fleet in order to sustain and improve passengers flight experience. Aircraft manufacturers, such as Boeing and Airbus, are currently preparing the introduction of the next generation of narrow body aircraft. In due course, Icelandair Group will unveil it s plans for the successors of the Boeing 757. Until then the Group intends to keep its current fleet. Fleet overview summer 2011 GROUP Owned Leased B B B Fokker F Dash Total 17 19

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10 8 Financial restructuring of Icelandair Group Over the past two years the Company has been working on improving its debt maturity profile and equity ratio. On 21 October 2010 the Company and its lenders finalized and signed documentation relating to the restructuring. Formal closing of the financial restructuring took place on 10 February Since the documents were executed in 2010, the restructuring is fully accounted for in the Group s balance sheet at the end of Background of the Financial Restructuring The Group undertook major cost-cutting measures in the first half of More than 500 staff redundancies were followed by capacity cuts and renegotiations with suppliers. Around the same time, orders for four Airbus 330 cargo aircraft were cancelled, which reduced the Group s commitments by USD 450 million. The cost-cutting measures taken in 2008 were among the main reasons for the Group s ability to cope with the downturn in 2008 and early However, the balance sheet of the Group was set in a period when the owners and the Board of Directors focused on acquisitions and cross-border expansion. The balance sheet was not self-sustainable, in particular due to the high level of leverage, and it was a major problem for the Group even before the financial turmoil in Iceland in the autumn of Although the daily operations of the Group largely went according to plan in 2009, financial expenses were a drain on the Group s cash flow. It had been evident for some time that the balance sheet needed to be restructured. The collapse of the banking system in Iceland late in 2008, along with the worldwide recession, also affected the Group s operational landscape, especially as domestic demand dropped significantly. Strain on cash flows followed due to termination of the Group s banking services coupled with severe outflows of cash to meet an ever-growing demand for cash collateral by international financial institutions to replace bank guarantees. As a consequence, it became more challenging for the Group to meet its refinancing needs since its liquidity largely dried up after the financial turmoil of the Icelandic economy in Overview of the Financial Restructuring The major components of the financial restructuring of Icelandair Group were: New shares issued for cash consideration in the nominal amount of approximately ISK 3.3 billion at the price of ISK 2.5, which equals approximately ISK 8.2 billion in market value. Icelandair Group s largest creditors converted debt in the amount of approximately ISK 3.6 billion into shares based on a price of ISK 5 per share, which corresponds to a subscription to ISK 720 million new shares. In 2010 Icelandair Group sold non-core assets to its creditors for the amount of ISK 7.6 billion. The gains on the sale of the assets amounted to ISK 4.2 billion, but taking taxes and translation difference into account, the impact on equity was positive by ISK 1.3 billion.

11 Icelandair Group 9 Icelandair Group focuses on the international airline and tourism sectors. The operations of the Company are split into two business segments: route network and tourism services. The main focus of the route network is to operate flights based on the Hub and Spoke concept between Europe and across the Atlantic to North America via Iceland. The focus of the tourism services is on catering to the growing demand for extensive services for tourists in Iceland and on offering a wide variety of support services relating to airline operations. Tourism in Iceland Offering broad services to tourists as a one-stop partner Icelandair s Route Network Holidays from Iceland Servicing Icelandic vaca oners Leasing, trading and ACMI Capacity solu ons for interna onal passenger airlines and tour operators To Via From Cargo Services Op mizing opera ons U lizing belly space and route network

12 10 The Subsidiaries Icelandair Icelandair s business strategy is based on the geographical position of Iceland on the flight route between northern Europe and North America. By combining in its aircraft passengers visiting Iceland, passengers departing from Iceland and passengers travelling across the Atlantic via Iceland, Icelandair has managed to expand its network steadily. Icelandair will connect 23 European cities with 8 North American cities through the company s hub in Iceland in its 2011 summer schedule. The network is based on a 24-hour rotation, with morning and afternoon connections in Iceland. Icelandair is a key component on the scheduled airline side of Icelandair Group. It aims to be the airline of choice for travel to and from Iceland on the grounds of its efficiency and flexibility, and a unique and exciting alternative for air travel across the Trans Atlantic. Icelandair s mission is to operate a first-class airline and maintain a reliable quality service through the experience and knowledge gained throughout the years. In 2010 Icelandair carried 1.5 million passengers on its scheduled flights between Iceland, Europe and North America to 26 destinations, a significant increase over In 2010 the company operated a fleet of 12 Boeing 757 aircraft during the summer season, and will be operating 14 in the summer of In 2010 Icelandair introduced Brussels (Belgium) and Trondheim (Norway) as new destinations, and as of 2011 Icelandair adds Washington DC, Gothenburg, Billund, Hamburg and Alicante to its list of destinations. Icelandair operates under an Air Operators Certificate issued by the Icelandic Civil Aviation Authority and is, as such, considered European Aviation Safety Agency (EASA) compliant. Icelandair is regarded as an Icelandic carrier and has route rights in accordance with this status. In addition to aircraft flown on its scheduled network, Icelandair operates aircraft on behalf of Loftleidir-Icelandic and Icelandair Cargo, thus securing economies of scale. The Group foresees the utilisation of the current aircraft fleet for the next 7 10 years. Icelandair Technical Services provides maintenance and technical services for the Icelandair fleet and is an integral part of the company. Most of the work is performed at the Service Centre at Keflavik Airport, but maintenance is increasingly carried out abroad because of increased international flight operations. Operating on three different and independent passenger markets (The Trans Atlantic market, From Iceland market and To Iceland market) gives the company a variety of options in network and revenue management. Apart from marketing and sales efforts, demand for air travel mainly depends on the economy, exchange rates, destination popularity and the cost of flying. A key ingredient of a successful airline is its network and revenue management, the strategy of maximising revenue by controlling capacity, booking flow and pricing. Icelandair uses a new and advanced revenue management system and has recently added further resources to the revenue management. These implementations have yielded significant revenue improvements. Operating in different markets makes the company less vulnerable to fluctuations in demand for any particular market segment. Continued emphasis is placed on a lean organisational structure, quick decision making and flexibility as the company works constantly on optimising the route network and looks at new markets. Volcanic eruption On 14 April 2010 a volcano in the south of Iceland known as Eyjafjallajökull started erupting clouds of black ash. The whole world soon woke up to the consequences, as airspace was closed down all across Europe, affecting flights throughout the world. For five days it was the world s biggest media story. All eyes were on the images of the powerful bursts of fire and ash coming out of the crater and on the geographical maps showing the distribution of the ash cloud. With air traffic coming to a standstill, millions of passengers were stranded all over the world.

13 11 For Icelandair, this was a great threat. On the very first day, as the scale of the situation became known, Icelandair activated its emergency response system. The strategic decision was made to keep operating the network for as long as possible and to use all available tools and tactics to get the message across that Icelandair was open for business. With triple daily crisis committee meetings at the company s HQ the flexibility of all was tested as defence was turned to offence. In order to get passengers closer to their destinations special rescue flights were organized to the very few airports that remained open, such as Glasgow in Scotland and Trondheim in Norway. Then, as European air space was opening up, Icelandair s home hub airport in Keflavik closed down, and the whole hub operation was moved to Glasgow Airport, along with 200 staff to run the temporary operations, for 10 days. Up to 36 flights per day and 4-6 thousand passengers of all nationalities were carried during this 10 day period, with shuttle flights to Akureyri Airport in north Iceland and busses running 24/7 to Reykjavik. With over 150 schedule changes and tens of thousands of passengers affected during a three-week period the importance of communication was pivotal. Over 80 press releases were issued in several languages during the period, and 250 online web updates were posted on 19 sites in 15 languages. This was supplemented by over 200 updates on Twitter and Facebook and a 200% increase in the number of answered telephone calls and text messages sent to passengers. Regular daily contact was kept with key tour operators and travel agents. Icelandair managed to get the message across that it was doing everything possible to help its customers through the situation and get people to their destinations. Only 20% of passengers needed to cancel their trips during the period, and compensation requests have been minimal. But the volcanic eruption also had the potential to drastically change the perception of Iceland as a tourist destination. It could be seen as dangerous, unsafe, complicated, - a stay-away place. In the world media dramatic scenes from this small area of Iceland were mixed with chaotic queues in major airports. The question was how this catastrophic event that created an image of a closed and uninviting country would affect

14 12 Icelandair, with a home airport just 100 kilometres from the volcano itself. In the short term, all operations faced the threat of shutdown and abandonment by customers, with the resulting loss of important revenues. In the long term, the image of Iceland as a tourist destination might be irreparably harmed. Therefore the threat concerned not only the entire tourist industry, but the whole economy of this small country. Cancellations of Icelandair flights and bookings at hotels, hostels and other tourist services in Iceland from the global market occurred more or less overnight. Tourist arrivals fell by 22% in April. According to attitude surveys in Iceland s main markets, interest in Iceland as a tourist destination also declined. Incentive trips were relocated or cancelled, and congresses and conventions saw an immediate drop in delegate numbers. Unless tackled, this trend would have cut tourist numbers by a projected in 2010 alone, a hefty figure for a nation of people. Immediate action was required. A few days into the eruption, on April 19, Icelandair accordingly approached the Icelandic government with the idea of joining forces to launch an immediate communication and marketing campaign to revitalize bookings and avoid a potential disaster in the summer high season. Involving the Icelandic government, the City of Reykjavik and all the leading players in the Icelandic tourist industry, this collaboration was quickly established and the country s largest-ever campaign was launched in May with a 4.5 million EUR budget just six weeks after the eruption started. The main message was that Iceland was up and running, more interesting and welcoming than ever. The Inspired by Iceland drive rested on a belief in a strong, coherent, innovative and integrated campaign based on conventional advertisements, social media and PR. This was an extraordinary project, and the first time ever that a unified and rapid communication response to an unprecedented situation by the tourist industry and various government bodies had been accomplished.

15 13 The objective was to mitigate the negative impact of the volcanic eruption on the tourist industry and to maintain the previous season s high levels of visits. The target markets were in Europe and North America. It was intended to enhance Iceland s image as a tourist destination by taking advantage of the media attention it had gained internationally through the volcanic eruption. The objective of saving the summer high season for tourism was achieved, with figures for travellers coming to Iceland equalling the number for 2009 which was the highest in history. Longer-term results also show that people are now more likely to visit Iceland in the future and are more positive towards Iceland as a travel destination. Birkir Hólm Gudnason is the CEO of Icelandair. Icelandair Cargo Icelandair Cargo is an air freight service provider offering services to and from Iceland based on a strong route network. Icelandair Cargo is a low-asset company, leasing aircraft and buying capacity from other sources. The freighters are registered to Icelandair s Air Operators Certificate (AOC) and crews are leased from Icelandair. Aircraft maintenance, warehousing, cargo handling and part of cargo sales are outsourced. Icelandair Cargo was established in late 1999 and is the largest air freight service provider in Iceland. The company bases its business on scheduled services between Iceland, Europe and North America supported by charters and wet leases (ACMI). In addition to marketing and selling space on its own freighters, Icelandair Cargo sells cargo space on Icelandair s passenger aircraft. Icelandair Cargo has 5 Boeing freighters in its fleet. The company uses 1-2 cargo aircraft to operate its schedule and 3-4 cargo aircraft to operate its ACMI product offerings. The company offers its customers competitive and quick global services through interline and special pro rata agreements with other airlines. The operation is supported by trucking networks in Europe and in the USA. Sales are mainly handled by Icelandair Cargo staff in Iceland. The New York branch takes care of sales for the Americas. The company has its own subsidiary, Icelandair Logistic, located in Belgium

16 14 handling sales in the Benelux countries, while General Sales Agents (GSAs) oversee other markets. The company has GSAs in all larger and growing markets in Asia and most of Europe. Approximately 90% of exports from Iceland consist of fresh seafood, whereas imports include produce, high-tech products and spare parts. For a number of years Icelandair Cargo has carried express freight for TNT, DHL and FedEx to and from Iceland and within Europe. Gunnar Már Sigurfinnsson is the Managing Director of Icelandair Cargo. Icelandair Ground Services Icelandair Ground Services (IGS) provides comprehensive airport ground handling services for airlines and passengers at Keflavík International Airport. IGS was formed in 2001, but airport and ground operations in Iceland have been a part of the airline operation since the foundation of Icelandair Group s predecessors. IGS provides aircraft ground handling services for all types of aircraft, a first-class flight kitchen and bonded stores, a state-of-the-art cargo centre and a restaurant and bar division in the Leifur Eiriksson Air Terminal. IGS is a service provider enabling airlines and other customers to receive all the services they require through a single provider. Icelandair is by far the largest client of IGS, although the company has also been contracted by other airlines. Opportunities for growth go hand in hand with the growth in the number of flights and the number of passengers passing through the airport. Gunnar S. Olsen is the Managing Director of IGS. Air Iceland Air Iceland is a dynamic airline which has set for itself the goal of creating a flexible and powerful airline servicing the West Nordic countries and assuming responsibility for scheduled domestic flights within Iceland as well as routes from Iceland to Greenland. Air Iceland offers fares, based on codeshare agreement to the Faroe Islands all year round. Air Iceland was formed in 1997 when Icelandair Domestic merged with Flugfélag Nordurlands; thus the airline traces its roots back to 1937.

17 15 Air Iceland offers flights to four destinations within Iceland, covering all major towns. Air Iceland flies from Reykjavík to Akureyri, Egilsstadir and Ísafjördur. Air Iceland offers flights to five destinations in Greenland, with year-round routes to Kulusuk, Constable Pynt and Nuuk, the capital of Greenland. In the summer, Air Iceland offer flights to Narsarsuaq and Ilulissat. Air Iceland operated six Fokker 50 and two DASH aircraft in Air Iceland holds a strong position on the Icelandic domestic air transport market. After a stagnating period demand has been growing again on the company s main routes and is expected to remain so. The busiest routes are from Reykjavík to Egilsstadir and Akureyri. Air Iceland plans to grow and increase profitability by offering the best available services to the Icelandic market and the tourist market in Iceland. Demand is good for all destinations in Iceland and in Greenland, the company s most promising external market. Air Iceland aims to bolster its position as an airline servicing the West Nordic region. Árni Gunnarsson is the Managing Director of Air Iceland. Loftleidir-Icelandic Loftleidir Icelandic is a capacity solution company for the international passenger airlines and tour operators. Loftleidir-Icelandic was formed as a subsidiary of Icelandair (Flugleidir - currently Icelandair) in 2002, although international charter operations had been part of the general operations of the airline and its predecessors for decades. It has developed from being a marketing vehicle operating in the international ACMI (Aircraft Crew Maintenance and Insurance) and charter markets, to become a capacity solution provider. The company has expanded its horizon beyond the aircraft types traditionally operated under the Icelandair AOC. The company currently operates AM (Aircraft and Maintenance), ACMI and full charter contracts in Europe, Africa, the Middle East and North and South America. Furthermore, Loftleidir-Icelandic has established itself as a VIP business class operator by operating first-class flights around the world where the interior of the aircraft is in an exclusive VIP configuration. The company had five Boeing and five Boeing aircraft at year end 2010.

18 16 In mid-2003 Loftleidir-Icelandic added its first widebody aircraft when it introduced a Boeing 767 to its fleet, which opened up new markets. This led to an increase in the proportion of ACMI projects at the expense of all-inclusive projects, which has helped to increase profitability and reduce sensitivity to external fluctuations. This trend has continued, with longer term AM leases becoming ever more prominent in the company s contract portfolio. The company has been successful in establishing itself on the European market and enjoys increasing visibility in both the North and South American markets. Furthermore, the company has been successful in penetrating the CIS (Commonwealth of Independent States) market where demand for western-built aircraft continues to grow. Loftleidir-Icelandic will seek to use its extensive market knowledge to widen its spectrum of services further, in order to secure continued growth in revenue and profitability. In addition to the current charter, ACMI and AM operations, the company has increased its brokering activities, both in terms of arranging for third-party dry and wet leases and aircraft brokering. Gudni Hreinsson is the Managing Director of Loftleidir-Icelandic. Icelandair Hotels Icelandair Hotels is a hotel chain in Iceland, renowned for its continued commitment to extensive and profitable hotel operations. The company offers both an international brand (Hilton Reykjavik Nordica) and the well-established domestic hotel brands (Icelandair Hotels and Edda Hotels). Originally, Loftleidir, a pioneering Icelandic airline, began operating a small hotel at Keflavik Airport in 1962 and subsequently built Hotel Loftleidir in Reykjavik in After being a part of the airline s general operations for over 30 years the hotel arm was turned into a separate and distinct subsidiary in Icelandair Hotels run the Hilton Reykjavik Nordica, 2 Icelandair Hotels and 10 Edda Hotels. In addition 5 Icelandair Hotels and 3 Edda Hotels outside of Reykjavik are franchised. Therefore Icelandair offers in total 21 hotels. Edda Hotels is a chain of 13 summer hotels which all sit on the doorsteps of the country s most visited natural wonders and historic sites. Most of Edda

19 17 Hotels facilities serve as student housing at boarding schools during the winter. Icelandair Hotels rents all the facilities that it uses for its operations. The number of tourists visiting Iceland has grown by more than 88% over the last 10 years according to the Icelandic Tourist Board, and Icelandair Hotels has increased its turnover by 50% in the last five years. Magnea Thórey Hjálmarsdóttir is the Managing Director of Icelandair Hotels. Iceland Travel Iceland Travel is among the largest tour operator companies in Iceland, offering a wide range of highquality services for travellers from all over the world. Iceland Travel organises a variety of vacation packages, scheduled tours, day tours and cruise services, as well as planning conferences, events and incentive programs. For over 30 years, the company has grown and prospered. Iceland Travel is a member of a number of domestic and international associations, including the Icelandic Travel Industry Association, the Iceland Convention and Incentive Bureau, the United States Tour Operators Association (USTOA), the Japan Association of Travel Agents (JATA), and many more. Iceland Travel also operates VITA travel. VITA s mission is to offer a variety of leisure tours to Icelanders travelling abroad through a high-quality service offered at a competitive price. VITA takes advantage of opportunities that arise through the company s partnership with Icelandair, thereby offering a secure and attractive option for Icelanders seeking services and assistance for organised groups and individual tours, such as vacation tours, golf and ski trips and city breaks. Helgi Eysteinsson is the Managing Director of Iceland Travel. Icelandair Shared Services Icelandair Shared Services handles accounting, reporting and salary processing for the companies within Icelandair Group. The company was established in 2002 and operates a support department for finances with the shared services concept as a cornerstone. This service involves accounting, collection, payments, payroll, tax reporting and preparation of financial statements, in addition to other specialised services for managers of the Group. Icelandair Shared Services offers also services to companies outside the Group, mainly through it s subsidiary Airline Services Estonia. The largest customers outside the Group include airlines, Air Baltic, Smartwings and Estonian Air. Magnús Kr. Ingason is the Managing Director of Icelandair Shared Services.

20 18 Financials Profit after tax ISK 4.6 billion EBITDA ISK 12.6 billion Revenue growth 10% Gain on sales of assets ISK 4.2 billion Total assets ISK 84.2 billion Equity ratio 33.7% Cash and cash equivalents and marketable securities ISK 13.0 billion Income Statement Icelandair Group returned the best results in the Company s history in 2010; a net profit of ISK 4.6 billion, as compared to a loss in 2009 of ISK 10.7 billion. EBITDA amounted to ISK 12.6 billion, ISK 4.4 billion higher than in The EBITDA ratio was 14%, as compared to 10% in the preceding year. This performance was much better than anticipated in the Group s original budget. The improved performance is primarily a result of a significant increase in Icelandair s transport revenues. Like most European carriers, Icelandair Group was affected by the volcanic eruption in Eyjafjallajökull in the spring of The total impact of the Ash Crisis on the Company s result is estimated around ISK billion. The Company and its staff showed unprecedented resilience and nerve during the situation. While virtually all airlines in Europe were paralysed for about a week, Icelandair Group managed to maintain its schedule by transferring its hub to Glasgow and flying to Akureyri instead of Keflavik. Operating income Total revenue in 2010 amounted to ISK 88 billion, representing an increase of 10% from Transport revenue in 2010 was ISK 53.9 billion, up by 10% from last year. The increase is explained by a significant growth in Icelandair s passenger revenues, due to an improved load factor and higher yields. The geographical location of Iceland on the shortest flight route across the North Atlantic enables Icelandair to serve three main markets: passengers travelling FROM Iceland, passengers travelling TO Iceland and Transatlantic passenger flying VIA Iceland. The number of passengers on the Trans Atlantic market grew substantially in 2010, accounting for 38% of the company s total number of passengers, as compared to 28% in Icelandair s total passenger increase was 14%, and the airline reported a record load factor of 78.4%. Aircraft and aircrew lease amounted to ISK 20 billion in 2010, growing by ISK 0.5 billion. Other revenue was ISK 14 billion, up by ISK 0.3 billion between years. REVENUE DISTRIBUTION EBITDA ISK million 14% 19% 14% 20% ,578 Other Aircraft and aircrew lease Transport revenue 47% % , , ,

21 19 Operating Expenses Total operating expenses in 2010 amounted to ISK 75.4 billion, as compared to ISK 72.2 billion in 2009, an increase of 5%. The two largest cost items are salaries and other personnel expenses and fuel costs. Together they account for 47% of the Group s operating expenses. Salaries and other personnel costs amounted to ISK 20.4 billion in 2010, increasing by ISK 1.7 billion from 2009 or 9%. The average number of full time employees grew by 1% to 2,197. Fuel cost increased by ISK 1.7 billion, which represents a rise of 13% from the preceding year. The average jet fuel price was 724 USD per ton in 2010, as compared to 568 USD per ton in 2009, an increase of 27%. Aircraft and aircrew lease decreased from ISK 12.8 billion in 2009 to 11.9 billion in 2010, or by 7%. The main reason is an investment in three aircraft in 2009 which were previously leased. Aircraft servicing, handling and navigation expenses increased by ISK 0.2 billion between years, or 4%, mainly due to the transfer of the Icelandair s hub to Glasgow during the flight disruptions following the volcanic eruption in Eyjafjallajökull. Maintenance costs decreased by approximately ISK 0.3 billion between years, or 5%. Depreciation and Amortisation Depreciation and amortisation amounted to ISK 6.3 billion. Depreciation of operating assets was 5.1 billion of this amount, amortisation of intangible assets ISK 0.4 billion and impairment ISK 0.7 billion. Financial Income and Expenses Net financial cost in 2010 was ISK 3.5 billion as compared to ISK 6 billion in 2009 a decrease of 41%. Financial income amounted to ISK 0.3 billion and increased by ISK 0.1 billion from Financial expenses decreased significantly between years, from ISK 6.1 billion to ISK 3.7 billion. The biggest contributing factor was the decrease in net foreign exchange loss from ISK 1.9 billion in 2009 to ISK 0.4 billion in In addition total interest expenses were reduced by 19%, from ISK 4.1 billion in 2009 to ISK 3.3 billion in 2010.

22 Loans and borrowings 20 Balance Sheet Assets Total assets of Icelandair Group as at 31 December 2010 amounted to ISK 84.2 billion, as compared to ISK 89.1 billion at year-end in the preceding year. Operating assets amounted to ISK 27.6 billion, increasing by ISK 0.6 billion between years. Intangible assets amounted to ISK 21.2 billion at year-end 2010 vs. ISK 23.5 billion at the end of The decrease is mainly due to sale of assets in connection with the financial restructuring of the company. Trade and other receivables increased by ISK 4.8 billion between years and amounted to ISK 14.6 billion. The increase is mainly due to a share capital subscription of ISK 2.6 billion and an increase in other receivables amounting to 2.1 billion. Assets classified as held for sale at yearend 2010 are SmartLynx and the remaining share in Travel Service. They amounted to 2.8 billion, down by 14.7 billion from year-end 2009 as certain assets which did not form a part of the Company s core business were sold in the course of the financial restructuring. Cash and cash equivalents and marketable securities increased significantly, from ISK 1.9 billion at year-end to ISK 13.0 billion at the end of 2010 because of divestments and new share capital paid into the Company in the amount of ISK 5.5 billion. Equity At 31 December Icelandair Group s total equity amounted to ISK 28.4 billion, as compared to ISK 14.6 billion at yearend The equity ratio was up to 33.7% from 16.4% in The Company s share capital amounts to ISK 5 billion, increasing by ISK 4 billion shares during 2010 as part of the Group s restructuring process. The Company held own shares in the amount of ISK 0.25 billion at yearend Liabilities Total liabilities of the Group amounted to ISK 55.8 billion at the end of 2010 and were 18.7 billion, or 25% lower than in the preceding year, the main reason being the financial restructuring of the Company. Interest-bearing debt was ISK 24.6 billion at year-end, down from ISK 43.1 billion from the end of Liabilities classified as held for sale amounted to ISK 2.4 billion at the end of 2010 and consist only of SmartLynx liabilities. At the end of 2009 liabilities classified as held for sale totalled ISK 10.6 billion. Cash flow Working capital from operations amounted to ISK 12.9 billion in 2010, as compared to 5.4 billion in Net cash from operations was ISK 14.3 billion, increasing by ISK 5.5 billion between years. Cash and cash equivalents and marketable securites at 31 December 2010 was ISK 13.0 billion, up by ISK 11.1 billion from year-end Cash and cash equivalents receivables 14% 17% Other 11% Assets Distribution Operating Assets 33% Trade and payables Deferred income 10% 17% Other 10% Equity and Liability Distribution % Equity Trade and 25% Intangible assets 29%

23 21 Risk Management Various sources of financial and enterprise-related risks influence the Group s operations. The Board of Directors is responsible for defining policy measures to reduce the exposure of financial and enterprise risk. They outline the parameters and framework which need to be considered when managing risk, especially those arising from price volatility, liquidity fluctuations, asset management and corporate financing. An internal Risk Management Committee, chaired by the President and CEO, endeavours to reduce the risk exposure to the maximum feasible extent within the Board s policy limits. The main policy objectives outline the methods to be used to reduce costs and disadvantages arising from the unstable environment and uncertainty. To that end, the financial budget is used as a benchmark when evaluating market conditions and hedging strategies. In 2010 the Board of Directors updated the Risk Management Policy by shortening the time horizon for the exposure assessment from 12 to 9 months and by adding measures to reduce the risk of liquidity side effects caused by hedging. Although the policy revision is relatively minor it represents a recognition of the Company s improved enterprise flexibility in service provision and pricing techniques, which were put to the test in 2010 when an ash cloud impeded European flights and in 2008 when fuel prices reached historical heights and the bank crisis put liquidity under pressure. Foreign currency risk The Group seeks to reduce its foreign exchange exposure arising from transactions in various currencies through a policy of matching receipts and payments in each individual currency as far as possible. Any mismatch is dealt with using currency trades within the Group before turning to outside parties. The biggest currency mismatch is found in Icelandair, where the US dollar cash inflow falls short of dollar outflow by approximately USD 100 million due to fuel costs, lease payments and capital-related payments, which are to a large extent denominated in US dollars. This shortage is financed by a surplus of European currencies, most importantly the Euro and Scandinavian currencies. The Group follows a policy of hedging 40-80% of a rolling 9 month currency exposure and uses a portfolio of instruments, mainly risk reversals and forwards. Unusual market conditions following the 2008 bank crisis and added opportunity costs of hedging have limited FX hedging activities for the past two years. However, by the end of 2010 the Company had resumed hedging in accordance with its policy as banks showed increased interest and motivation and the Group s liquidity was up to adequate levels. Fuel price risk Jet fuel prices remained relatively stable in 2010, despite pressure from a more bullish market environment, as compared to the preceding year. Cost and liquidity aspects prevented the company from following the policy limits of 40-80% hedge ratios; yet, the seasonally high risk exposure over the summer months was covered in accordance with the minimum policy requirements. By the end of 2010 the Board of Directors had completed its revision of the Risk Management Policy by shortening the rolling hedge period from 12 to 9 months and confining the lower limits of the hedge ratios to the forward ticket sales. The company had started hedging part of the Q1 exposure by the end of Price of EUR in terms of USD ,7 1,6 1,5 1,4 1,3 1,2 1,1 1,

24 22 Interest rate risk A considerable share of the Group s outstanding loans is directly related to aircraft financing and denominated in US dollars. The Group has for some years followed a policy of hedging 40-80% of the interest rate exposure of long-term financing, with up to a 5 year horizon. Currently, foreign loans are hedged against interest rate fluctuations with fixed-rate loan contracts or swap contracts, where the floating rate is exchanged for fixed interest rates. Owing to capital restructuring, the Company has not been in a position to observe its risk management policy in 2010 but has been revising the hedge position to take account of the new payment profiles. Currently 20% of the foreign USD loan interest payments are hedged in terms of contractual fixed rates or swaps. Liquidity risk The Group s policy on liquidity risk extends to three asset classes determined by duration. Those classes are matched against the Group s liquidity preferences laid down by the Board of Directors on an annual basis. Classes one and two include the estimated minimum of accessible funds for immediate operational liquidity and reserve purposes. Class three includes assets of longer duration for strategic liquidity, such as medium-term investments. The amounts in each class of assets are targeted once a year with reference to a number of economic indicators, most importantly the annual level of fixed costs, and turnover. Credit risk Credit risk is linked to the amount of outstanding trade receivables, allocation of liquid funds and financial assets and agreements with financial institutions relating to financial operations, e.g. credit support annexes concerning hedging. The relative spread of trade receivables across counterparties is also crucial for credit risk exposure. The risk involved is directly related to the fulfillment of outstanding obligations by the Group s counterparties. The Group is aware of potential losses relating to credit risk exposure and chooses its counterparties based on business experience and satisfactory credit ratings. Industry-related risk factors At Group and subsidiary levels, management monitors and assesses the airline industry risk exposure which has historically posed uncertainty to normal operations. A part of the company culture stems from its long history, including a general recognition of the value of learning from past experience. Yet, in addition to the retrospective view, the management focuses systematically on potential threats from a prospective viewpoint as the environment is ever changing. The group operates and thrives on well established and defined markets. As such, they can be regarded as invaluable intangible assets which need attention The credibility and reputation of Icelandair is crucial for its market status and growth. But the markets are also sensitive to external factors, such as the macroeconomic elements Price of Jet fuel Price in USD pr. Tonne month USD Libor % 5% 4% 3% 2% 1%

25 23 governing aggregate demand. An economic contraction usually reduces the general purchasing power of potential customers and the demand for air travel. Airlines are prone to even greater vulnerability when it comes to other types of shocks which are more sudden and forceful. The current snowy winter in Europe and the ash cloud in early 2010 caused costly and unanticipated disruptions of such nature. Terrorist incidents and pandemics are also examples of events which need to be considered at all times. Those factors that can be analyzed and followed with respect to reasonable risk of occurrence and impact call for close monitoring and readily available contingency plans. The ash cloud experience put the risk management systems of Icelandair to the test and they proved successful. The company seems to owe its adaptive potential and flexibility of operations to its capable human resources, contingency policies and economies of scale. The quality of these responsive processes enable the company to cope with various other incidents and hostile industry factors, such as seasonality, competition, insurance and new taxes, e.g. carbon emission charges. Enterprise risk management Risk management has to secure a steady flow of information about all enterprise-related risks at the Group level and thus requires centralized mapping and registration of their inherent values and potential consequences. The Group s Risk Management Committee has placed increased emphasis on enterprise-related risk assessment in collaboration with Internal Audit and has focused attention on aligning risk registration across all subsidiaries for consistency and compliance. The objective is to enhance motivation in risk analysis and improve risk awareness, standardize risk assessment into numerical values and establish the Company culture that is needed to promote everyday risk awareness and risk-reducing measures. Operational risk The Group distinguishes between industry-related risks and those which expose the subsidiaries on an individual company level. Methods of coping with threats of disruptions and disturbances are more decentralized when it comes to operational hazards. Again, great value is found in the long and successful history of Icelandair, which serves as the foundation, as well as the benchmark, for many of the policies and contingency plans used across the Group. The computer and communication systems are crucial for sales and market activities but also for undisrupted internal operations. Productive equipment maintenance is needed to guarantee airworthiness. Third-party services may become bottlenecks in the production chain, whether relating to catering, ground services or flight control. Human resources need to be managed, labour disputes resolved and strikes prevented. The management resources constantly evaluate the risks involved and the consequences of the individual events taking place. Scenario projections are charted and contemplated and action plans launched based on the estimated outcomes, where collaboration is maintained between the Group and individual companies.

26 24 Corporate Governance Icelandair Group holds the view that effective principles of Corporate Governance are essential to assure shareholders and other stakeholders that the Company is doing its best to ensure sound and effective control of the Company s affairs and a high level of business ethics. Exercising good Corporate Governance will, in the long run, build a solid Company returning shareholders satisfactory profits on their investment. Corporate Governance serves to ensure an open and transparent relationship between the Company s management, its Board of Directors, its shareholders and other stakeholders. The guidelines on Corporate Governance issued by the Iceland Chamber of Commerce, NASDAQ OMX Iceland and the Confederation of Icelandic Employers, along with the Company s Articles of Association, and rules for Issuers of Securities listed on the NASDAQ OMX Iceland, make up the framework for Icelandair Group s Corporate Governance practices. It is the opinion of the Board of Directors that Icelandair Group is in full compliance with the Icelandic guidelines for Corporate Governance. Shareholders Meetings Shareholders exercise their powers at shareholders meetings, which represent the supreme authority in all the affairs of Icelandair Group within the limits provided for by the Company s Articles of Association and statutory law. All shareholders are permitted to attend shareholders meetings, express their views and exercise their voting rights. Shareholders may be represented by proxies, and they may be accompanied by advisors. The auditors of the Company and the President and CEO also have full rights to speak and submit motions at shareholders meetings, whether they are shareholders or not. Notices of shareholders meetings must specify the business to be addressed at the meeting. If the agenda includes motions to amend the Articles of Association of the Company, the substance of the motion must be included in the notice of the meeting. Seven days before a shareholders meeting, at the latest, an agenda, final submissions and, in the case of annual general meetings, the annual accounts, report of the Board of Directors and the auditor s report must be laid open for inspection by shareholders at the Company office. Each shareholder is entitled to have a specific item of business included on the agenda of a shareholders meeting, provided that such shareholder submits a written request to this effect to the Board of Directors of the Company with sufficient advance notice for the item to be included on the agenda in accordance with the Company s Articles of Association. Items of business which are not included on the agenda may not be accepted for final decision at a shareholders meeting except with the consent of all the shareholders in the Company, but a resolution may be passed to provide guidance to the Board of Directors of the Company. Lawfully submitted motions for amendments may be put to a vote at the meeting itself, even if they have not been laid open for inspection by shareholders. An annual general meeting is always permitted to conclude matters which it is required to address pursuant to statutory law or the Company s Articles of Association. Rights, Preferences and Restrictions on Shares All voting shares carry equal rights, and no privileges are attached to any shares in the Company. All the shares are freely transferable except as otherwise provided by law. Actions Necessary to change Shareholders rights. The Articles of Association may be amended only at a lawful annual general meeting or extraordinary shareholders meeting, provided that the notice of the meeting clearly indicates that such an amendment is proposed and outlines the main substance of the amendment. A decision to amend the Articles is valid only if it has the support of at least 2/3 of the cast votes and the support of shareholders controlling at least 2/3 of the share capital represented at the meeting, provided always that no other force of vote is required by the Articles or statutory law, as further provided in Article 93 of the Companies Act. The annual general meeting shall be held before the end of May each year. Board Practices The Company s Board of Directors exercises the supreme authority in the Company s affairs between shareholders meetings, and it is entrusted with the task of ensuring that the organisation and activities of the Company s operation are at all times in correct and proper order. The Board of Directors is instructed in the Company s Articles of Association to appoint a President and CEO for the Company and decide the terms of his or her employment.

27 25 The Board of Directors and President and CEO are responsible for the management of the Company. The Company s Board of Directors must at all times ensure that there is adequate supervision of the Company s accounts and the disposal of its assets and shall adopt working procedures in compliance with the Companies Act. Only the Board of Directors may assign powers of procuration on behalf of the Company. The signatures of the majority of the members of the Board are required to bind the Company. The President and CEO has charge of the day-to-day operation of the Company and is required in his work to observe the policy and instructions set out by the Company s Board of Directors. Day-to-day operation does not include measures which are unusual or extraordinary. Such measures can only be taken by the President and CEO with the specific authorization of the Board of Directors, unless it is impossible to await the decision of the Board without seriously disadvantaging the operation of the Company. In such instances, the President and CEO is required to consult with the Chairman of the Board, if possible, after which the Board of Directors must immediately be notified of the measures. The President and CEO shall ensure that the accounts and finances of the Company conform to the law and accepted practices and that all assets belonging to the Company are securely safeguarded. The President and CEO is required to provide the members of the Board of Directors and Company auditors with any information pertaining to the operation of the Company which they may request, as required by law. The Company s Board of Directors consists of five members and two alternate members, elected at the annual general meeting for a term of one year. Those who intend to stand for election to the Board of Directors must inform the Board in writing of their intention at least five days before the annual general meeting, or extraordinary shareholders meeting at which elections are scheduled. Only those who have informed the Board of their candidacy are eligible. The Board of Directors elects a Chairman and Vicechairman from among its members, and otherwise allocates its obligations among its members as needed. The Chairman calls Board meetings. A meeting must also be held if requested by a member of the Board of Directors or the President and CEO. Meetings of the Board are valid if attended by a majority of its members. However, important decisions shall not be taken unless all members of the Board have had an opportunity to discuss the matter, if possible. The outcome of issues is decided by force of vote, and in the event of an equality of votes, the issue is regarded as rejected. The President and CEO attends meetings of the Board of Directors, even if he or she is not a member of the Board, and has the right to participate in discussions and submit proposals unless otherwise decided by the Board in individual cases. A book of minutes is kept of proceedings at meetings and must be signed by participants in the meeting. A Board member who disagrees with a decision made by the Board of Directors is entitled to have his or her dissenting opinion entered in the book of minutes. The same applies to the President and CEO. Auditing and accounts An auditing firm is elected at the annual general meeting each year. The auditor examines the Company s annual accounts, in accordance with generally accepted accounting standards, and has access to all the books and documents needed for this work. The accounting firm working for Icelandair Group is KPMG hf, and acting on their behalf are Jón S. Helgason, and Gudný H. Gudmundsdóttir. Insider Information The Board of Directors appoints a Compliance Officer and a Deputy Compliance Officer. The Compliance Officer s responsibilities are to ensure that all rules set by the Company regarding insider trading and insider information are observed at all times. Audit Committee The Group s Audit Committee oversees how management monitors compliance with the Group s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group s Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The committee shall oversee the annual account of the Company and the Groups consolidated accounts. The committee is responsible for evaluation of the independence and the eligibility of both the Company s auditor and auditing firm. The committee shall make suggestions to the Board of Directors regarding the selection of the Company s auditor.

28 26 The Audit Committee is appointed by the Company s Board of Directors in accordance with article 8.8 of the Articles of Association of the Company and is composed of three members: Katrín Olga Jóhannesdóttir, chairman, Herdís Dröfn Fjeldsted and Úlfar Steindórsson. Compensation Committee The purpose of appointing a Compensation Committee was to avoid placing the Company s managers in control of their own remuneration and, furthermore, to ensure that the management s remuneration is structured so as to serve the long-term interests of shareholders. The main tasks of the Compensation Committee are policy making with respect to the management s performancerelated bonuses, including stock options. The Committee conducts evaluations of management remuneration and monitors the management s acquisition of stock in the Company. The members of the committee are: Sigurdur Helgason, chairman and Finnbogi Jónsson. Members of the Board of Directors of Icelandair Group elected at the Annual General Meeting on 21 May 2010: Board members Sigurður Helgason, Chairman Finnur Reyr Stefánsson, Vice Chairman Jón Ármann Guðjónsson Katrín Olga Jóhannesdóttir Pétur J Eiríksson Alternate board members Kristín Einarsdóttir Magnús Magnússon Tómas Kristjánsson On September an extraordinary shareholders meeting was held where the following members were elected to the Board of Directors: Sigurður Helgason, Chairman Finnbogi Jónsson, Vice Chairman Auður Finnbogadóttir Katrín Olga Jóhannesdóttir Úlfar Steindórsson Alternate Board members, chosen without election: Herdís Dröfn Fjeldsted Magnús Magnússon Vilborg Lofts On 30 November 2010, Auður Finnbogadóttir resigned from the Board of Directors. Herdís Dröfn Fjeldsted, alternate Board Member replaced Auður.