Tourism in Iceland Investing in Iceland's growth engine - GAMMA
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Tourism in Iceland
Investing in Iceland’s growth engine
2018
3 Tourism in Iceland Investing in Iceland’s growth engine GAMMA Advisory gcm.co.uk Editor Hafsteinn Hauksson, M.Sc. Finance and Economics, Economist Contributors Gretar Brynjolfsson, M.Sc. Finance, Corporate Finance Solvi Blondal, M.Sc. Economist, Economist Thora Helgadottir, M.Sc. Economics, Economic Advisor Thordur Agust Hlynsson, M.Sc. Finance, Managing Director Layout and design H:N Markadssamskipti | hn.is Published in London 2018
4
Contents
4. Foreword
7. Introduction
8. Executive Summary
I. Overview of Icelandic tourism II. Key sectors and opportunities III. GAMMA Advisory
10. The surge in tourism 46. Recent trends 78. Key staff
12. But why travel to Iceland? 48. Air travel 80. Global reach and experience
14. Iceland is a safe destination 54. Hotel and accommodation 84. Services
16. The outlook for Icelandic tourism 64. Buses and tours
22. Profile of tourists visiting Iceland 66. Car rentals
26. Financials in the tourism industry 70. Infrastructure
28. The evolution of Icelandic tourism
30. The economic impact of tourism
36. Policy challenges posed by tourism
38. Iceland in the movies
40. Iceland has further options
5
Foreword
Mr. Ólafur Ragnar Grímsson
Chairman of The Arctic Circle
and former president of Iceland
The vision of a sustainable world, where the
splendor and the majesty of nature is preserved,
where clean energy and air without pollution,
where freedom, peace, democracy and equality
are the pillars of progressive society, has in recent
years become the dream of young generations
on all continents.
The millions who have visited Iceland in the
second decade of the new century have found
in the country a hope that such a reality could
indeed be achieved; a model which inspires
in multiple dimensions and contrasting colors
and characteristics.
Iceland is the youngest country on Earth
in geological terms, where the creation described
in the Book of Genesis is still taking place.
It is where the American and the Eurasian continents
6
meet and where the melting of the glaciers due to – are now the focus of growing interest, helped Economic Forum in Davos, the status of being
climate change can be directly observed. It is the by the splendid photos and films brought back a pre-eminent European platform for such
home of a nation which decided to bid farewell by the new visitors, due to the many programs on economic, political and social engagement.
to fossil fuel with respect to electricity production television and in the global media, strengthened All these elements constitute an important
and house heating and has for decades celebrated by the thousands of pictures shared every day contribution to the analysis presented in this
being the first in the world to achieve the 100% of the year by the tourists with their friends report, why a small country in the North is now
target for clean energy. on multiple social media platforms. among the most fashionable destinations in the
world, a location of the fastest growth in tourism
The growing number of young people from This growing interest in the North and the Arctic and air passenger transport in the Western world.
America, Europe and Asia, who now visit Iceland in can be witnessed every October in Iceland at the
all seasons, indicates a fascinating transformation Assembly of the Arctic Circle, attended by over It is important to understand the causes, the
in global tourism. Even a short conversation will 2000 participants from more than 60 countries, patterns and the directions because thus we gain
reveal that they are on a mission; 21st-Century leaders of governments, business and science, a better understanding of our future; how people
explorers examining new paths for their own who enter into a new democratic dialogue with from every part of our planet want to join journeys
societies; seeking proof that a transformation environmentalists, indigenous representatives, towards a better and more sustainable world.
towards their ideals is indeed possible. young leaders and activists. It has become
the largest and the most dynamic annual
The northernmost regions of the planet – the gathering on the future of the Arctic and
vast territory commonly known as the Arctic the North, enjoying, together with the World
7 Icelandic country road
8
Introduction
Glacial lagoons of the purest blue, waterfalls become one of its hottest tourist destinations. this report is intended to help international
the size of skyscrapers, desolate black sands For Iceland, the tourist boom couldn‘t have come investors make sense of the state-of-play
and white geothermal springs. You’d be forgiven at a better time. After suffering a large decline and opportunities presented by the tourism
for thinking Iceland is the most in output following the great recession of 2008- industry in Iceland. Among other things,
beautiful country in the world. That’s what 2009, Iceland has posted one of the world‘s the report analyses what could have caused
Icelanders themselves have always thought strongest economic recoveries, aided by the huge the sudden interest in Iceland, how it has
anyway. Indeed, Gunnar of Hlíðarendi, a 10th boost to export receipts provided by tourism. impacted the Icelandic economy, and what
century Icelandic chieftain and one of the heroes That‘s how Iceland got its groove back. opportunities may exist in key sectors following
of the Icelandic Sagas, was so moved by the recent developments. It concludes with a brief
beauty of his homestead that he couldn‘t bear But the rise of tourism has also brought its set overview of the range of services GAMMA
to sail away from Iceland to flee from his enemies, of challenges. Infrastructure and capacity have can offer investors and corporates interested
even though it would have saved his life. come under pressure, highlighting the need for in exploring opportunities in Icelandic tourism,
greater investment into roads, airports, hotels combining international corporate finance
The rest of the world was a tad slower to catch on. and transportation. The inflow of hard currency experience with on-the-ground sector insights
In the 50 years from 1950-2000, only four million has caused the domestic currency, the króna, across our offices in Reykjavik, London
foreign tourists visited Iceland - in total. to appreciate handsomely, making Iceland a more and New York.
Then something happened. Since 2010, tourist expensive destination (although tourists can
numbers have surged. Again, four million new at least be thankful they don‘t have to pay for Valdimar Armann,
tourists visited Iceland, but this time it only took the country‘s beauty with their lives, as CEO of GAMMA
the three years between 2014-2016. Iceland, Gunnar of Hlíðarendi did!). Compiled by the
one of the coldest countries on the planet had seasoned professionals of GAMMA Advisory,
9
Executive Summary
The background, state of play and opportunities
in Icelandic tourism
1. Tourism is booming in Iceland, 2. Industry at a crossroads, 3. How GAMMA Advisory can help
generating strong growth with ample opportunities GAMMA has a dedicated corporate
Tourist arrivals in Iceland have increased The surge has attracted a large number advisory of 15 professionals located across
fivefold since 2010 to 2.2 million in 2017. of entrepreneurs and upstarts in air-travel, the US and Europe, including a team on the
The tourist surge has helped Iceland achieve accommodation, car-rental, tours ground in Reykjavik with native knowledge
an exceptional export-led economic recovery and entertainment, often leading of the tourism sector, enabling us to provide
since its 2008 financial crisis. to significant innovation. a comprehensive investment solution
A number of factors triggered the surge, The industry remains fairly to international investors interested in
including a volcanic eruption, film fragmented, however, pointing exploring opportunities in Icelandic tourism:
and TV, the rise of social media to consolidation opportunities. 1. Deal sourcing and origination
and successful marketing campaigns. International investors and global travel 2. Advisory services and transaction execution
With sensible policy choices, tourism is set brands will likely take advantage of entry 3. Co-investment and consortium formation
to become a permanent pillar of the Icelandic opportunities in the coming years as early
economy year-round as Icelandic nature and entrants and domestic VCs seek to divest and exit.
northern lights continue to attract tourists. Furthermore, investment is urgently needed to
The number of inbound tourists in 2018 maintain the road network, airports and other
is forecast to reach 2.5 million. basic infrastructure after years of low investment,
possibly under public-private partnerships.
10 I. Overview of Icelandic tourism
11
A key driver of Iceland’s shift in fortune
Massive surge in tourist arrivals since 2010
has bolstered Icelandic growth
Tourist arrivals in Iceland (‘000)
The sum total of tourists who visited
Gradual growth Surge
Iceland in the last 12 months outnumbers 2.400
the local population 7-to-1. 2.200
More tourists visited Iceland in 2.000
1.800
2008-2016, than over the 60 preceding years.
1.600
The #Iceland hashtag has been used 7,223,464 1.400
times on Instagram – and counting 1.200
At peak numbers in summer, as many 1.000
800
as one in five people on the island is a tourist.
600
Almost every other car sold in Iceland 400
since 2008 has been bought by car rentals. 200
0
One out of every ten cars on the streets
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
of Iceland is a rental.
Source: Icelandic Tourist Board12
Confluence of factors triggered surge
Notoriously difficult to discern which of these
factors played the biggest part
Eyjafjallajökull volcanic eruption Shooting location for film and TV Coordinated marketing
For weeks, the international media was plastered Iceland became the setting for a flurry of high- The industry collaborated with the authorities
with awe-inspiring images of Icelandic nature profile films and TV series, showcasing Icelandic on the Inspired by Iceland campaign, and started
following the Eyjafjallajökull eruption in 2010 landscape, including Star Wars, Game of Thrones, to promote winter tourism and northern light
(and again following the less disruptive 2011 eruption The Secret Life of Walter Mitty, Prometheus, safaris to draw in tourists during the shoulder
of Grímsvötn) providing invaluable exposure. Oblivion, Interstellar, Justin Bieber’s I’ll Show You season. The effect has been to reduce
and more. Global celebrities frequently praise seasonality and attract additional tourists.
Expansion of seat supply the country on talk shows.
Airlines flying to Iceland have multiplied The rise of social media
from eight in 2005, to 29 in 2018, massively Supportive exchange rate Visitors to Iceland frequently become
expanding availability of air travel to the island. Following bank failures in 2008, the Icelandic spontaneous brand ambassadors via social
A strategy of repositioning Iceland as a hub króna fell substantially, making Iceland a relatively media which, coupled with a global increase
between Europe and North-America has played inexpensive destination – although it is becoming in social media usage over the last decade, has
a vital part in catalysing the expansion. less so with the recent appreciation of the currency. boosted awareness of Iceland as a destination.13
But why travel to Iceland?
Top attractions in Iceland according to Tripadvisor
83% of inbound
tourists name Icelandic
nature as the main
reason for their visit
The Blue Lagoon Gullfoss Waterfall Thingvellir national park
Jökulsárlón lagoon Vík black sand beach Fjaðrárgljúfur canyon Northern lights14 Glacial hikes are a popular activity among tourists
15
Iceland is a safe destination
Icelandic people are friendly towards travellers. as being a low-threat location for crime (Iceland in the world. Iceland operates highly trained
The Nordic countries are the safest destinations 2017 Crime & Safety Report). Iceland has had first response teams. In addition, independent
in the world to visit. According to the 2017 Social a murder rate of less than one per year for several associations have an extensive role in rescue work
Progress Index, Denmark, Finland, Norway decades (0.9 per 100,000 inhabitants). Not only in Iceland. Thousands of volunteers dedicate
and Iceland are the four safest destinations. does Iceland have an extremely low homicide themselves to work for the ICE-SAR rescue
Most travellers take this into consideration, rate, violent crime or perceived criminality – teams. Their joint mission is to prevent accidents
especially in the light of recent terror attacks the country scores high in all sections of basic and save human lives and valuables. To fulfil
in various European holiday destinations. human needs and foundations of wellbeing. that role there are groups of volunteers always
Iceland has been named the world’s most peaceful To name but a few: access to electricity, clean available, night and day, year-round. The ICE-SAR
county by the Global Peace Index and the U.S. (natural) drinking water, clean air, and access to rescue teams include thousands of people
Department of State has assessed Iceland internet and phone coverage are the highest who are always available when needed.16 Culture night in Reykjavík
17
Outlook: Growth to continue at slower pace
Likely that exchange rate will facilitate
adjustment through relative prices
Tourist arrivals are generally Based on allotted landing slots at major The ISK exchange rate is seen as a mechanism
airports, operator Isavia forecasts that the helping tourism adjust smoothly to capacity
forecast to increase in the number of inbound tourists in 2018 will increase constraints; by fuelling an appreciation of the
medium term. However, by 11%, reaching 2.5 million. Analysts have króna, tourism may already be self-regulating
speculated that growth might approach high the flow of tourists through relative pricing,
many analysts expect growth
single digits from 2019 onwards. This is positive as Iceland becomes a more expensive destination.
to converge to more sustainable news; moderate growth is more manageable, Should appreciation start deterring tourists,
levels from the break-neck reducing the risk of severe infrastructure lags, the demand response will, in turn, limit the
overcrowding at tourist sites and intolerance of potential for further appreciation and help keep
pace of recent years. tourism among the native population. tourism at a sustainable level.18
Tourists love Iceland ... Growth in tourist arrivals
Forecast
45%
“Why wouldn't anyone want to spend
40%
2 weeks driving through what looks like the set
35%
of Lord of the Rings and Game of Thrones?”
30%
“Iceland is paradise on earth!”
25%
“A unique unspoilt destination
20%
offering spectacular scenery”
15%
“No other countries can beat its landscape beauty.”
10%
“Good mix of city night life and outdoor activities.” 5%
“Amazing scenery, nice people, nice food.” 0%
"The landscapes change so much and so fast, -5%
there are moments in which you feel 2010 2011 2012 2013 2014 2015 2016 2017 2018
as if you were in another world." Actual Arionbanki Isavia
"Best trip our family has ever been on. Real exchange rate (Trade Weighted Index, current=100)
We barely scratched the surface 110
and all want to return."
"Geological wonderland. Desolate but 100
beautiful landscapes. The land of the Sagas."
90
... but not Icelandic prices 80
“I think Iceland is quite expensive
70
as a travel destination.”
“It's a little bit too expensive.” 60
“It's rather pricey.”
“It's so expensive!” 50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
“I found the prices downtown
at times outrageous.”
Source: Icelandic Tourist Board, Central Bank19
Winter tourism has reduced seasonality
Share of tourists visiting in June, July or August Growth in tourist arrivals
55% 50%
50% 40%
30%
45%
20%
40%
10%
35%
0
30% -10%
2010 2011 2012 2013 2014 2015 2016 2017
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
High season (June, July and August) Shoulder season (other months)
Much like other global tourist destinations, international marketing campaign the following winter but other winter activities have also
seasonality has historically been a key challenge year to promote Iceland as a year-round inspired travelers, including glacial treks,
for Icelandic tourism. In 2010, close to half of destination. As the figures above demonstrate, snowmobiling, heli-skiing, super-jeep safaris etc.
travelers visited the country during the summer the campaign has had significant success in This has led to increased efficiency in the tourism
months of June, July or August. The travel positioning Iceland as a winter destination, sector, as utilisation of capacity steadily improves
industry, with support from the government, significantly reducing seasonality. The Northern year-round.
the City of Reykjavik and others, launched an lights are the main attraction during the high
Source: Icelandic Tourist Board20
Still room to grow
2016 visitor numbers in selected global tourist destinations (millions)
90
80
70
60
50
40
30
20
10
0
France
USA
China
Spain
Italy
Turkey
UK
Germany
Thailand
Greece
Russia
Poland
Netherlands
Hungary
Croatia
Ukraine
Portugal
Sweden
Denmark
Switzerland
Ireland
Australia
Norway
New Zeland
Estonia
Israel
Finland
Georgia
Lithuania
Azerbaijan
Latvia
Iceland
While the growth in tourism has indeed been fast those of the Baltics or minor Eastern European year. It is evident that only a small fraction of the
in Iceland, it is still a minor destination in a global destinations, rather than the tens of millions 800 million annual tourists originating in Europe
context. Although the 1.8 million visitors to travelling to major European destinations such and the Americas – key markets for Iceland –
Iceland in 2016 is a substantial number compared as France, Spain and Italy. Iceland’s 1.8 million have visited the country, pointing towards
to the country's population of 330 thousand, the visitors in 2016 account for only 0.3% of the 616 continued opportunities for growth.
absolute number of visitors is comparable with million tourists who visited Europe during the
Source: UNTWO21
The IMF on Icelandic tourism
As part of its latest Article IV review, the Empirically, surges in tourism Air connectivity, a stronger tourism
International Monetary Fund (IMF) published a tend to be durable. driver in small island economies,
Selected Issues paper assessing the sustainability can be further leveraged, for instance
of Iceland’s tourism eruption. IMF notes that Where declines in tourism have occurred, by introducing direct flights to mega-market China
tourists do not seem to be mainly driven by rising
they are usually associated with political turmoil, (an option reportedly under review by airlines).
incomes at home, nor have they been deterred
crumbling infrastructure, overcrowding
by rising costs on the back of the appreciation of
in tourist sites, environment degradation, Tourist satisfaction and likelihood to return are
the króna – which leaves Iceland’s tourism boom
largely unexplained by standard econometric or losses in price competitiveness. very high with 95% of tourists reporting that
models. Rather, Iceland’s natural wonders, their expectations were met, and more than 80%
welcoming atmosphere, general safety, improving The global trend toward adventure reporting likelihood of returning.
connectedness and social media outreach have tourism should continue to favour Iceland.
drawn in visitors. Going forward, IMF predicts Tourists tend to compensate for higher costs
tourism is likely to grow less rapidly than in recent Sensitivity to price increases tends by reducing spending or shortening visits (inten-
years, yet remain at strong levels, citing the
to be less pronounced for high-end sive margin), rather than cancelling
following supportive factors:
destinations, such as Iceland. trips (extensive margin).22 Reynisdrangar cliffs in southern Iceland
23
Profile of tourists visiting Iceland in 2016-2017
Based on Board of Tourism's
semi-annual survey of visitors
Although tourists frequently name Reykjavik North-American visitor numbers have come Surveys overwhelmingly
as one of the most memorable aspects of their trip close to quadrupling between 2014 and 2017,
to Iceland, surveys overwhelmingly indicate that making US nationals the biggest group of indicate that Icelandic nature is
Icelandic nature is the single biggest attraction to inbound tourists in Iceland. Under 35‘s make up the single biggest attraction to
foreign visitors. Summer is still roughly half of visitors, often travelling along
foreign visitors.
the most important season for Icelandic tourism, with their spouse or friends – perhaps suggesting
with larger numbers of tourists and longer stays. that Iceland's success as a tourist destination
However, winter tourism has seen the strongest is a marker of millennial preferences and
growth, as ever more visitors are attracted consumption patterns.
by Iceland‘s northern lights and winter experience.24
Nationality of visitors Duration of stay Average: 10.3 nights Average 6.8 nights
USA 40%
UK
Scandinavia 30%
Germany
Canada 20%
France
China 10%
Other
0%
1-2 nights 3-4 nights 5-7 nights 8-11 nights 12-14 nights >15 nights
Summer Winter
The vast majority of visitors are travelling Although students make up roughly a fifth More than 9 out of 10 tourists visit Reykjavik
for leisure, with MICE (Meetings, Incentives, of visitors, around 70% have a university degree during their stay. Most also venture outside
Conferences, and Events) accounting for and more than 40% identify as professionals or the capital, particularly during the summer when
a minor portion of the overall market. managers. Close to 80% describe themselves as conditions for driving are good, with the south
Iceland is increasingly establishing itself having average, or above average household income. and north of Iceland being the most popular
as a high-end destination, particularly as the Word-of-mouth seems to be an important factor regions.
country has become less affordable with driving tourism, as over half of respondents name
the krona going up in value. Consistent with recommendations from friends and relatives
its brand image, survey evidence suggests and social media as giving them the idea
visitors to Iceland tend to be more affluent. of traveling to Iceland.
Source: Icelandic Tourist Board25
Purpose of visit
100%
80%
60%
40%
20%
0%
Summer Winter
Vacation Attending event Visiting friends/family Education/research
Conference Business
Did the trip meet expectations?
100%
80%
60%
40%
20%
0%
Summer Winter
To a great extent For the most part Neither to a great nor small extent
To a rather small extent To a very small extentSource: Icelandic Tourist Board
Education/Research
Special event
Personal occasion
to Iceland tend to be more affluent.
Horse riding
survey evidence suggests visitors
Consistent with its brand image,
Visit friends or family
Factors impacting decision to visit
Spa & wellness
Stopover opportunity
Offer/low airfare
Culture/History
Always wanted to visit
Icelandic Nature
100%
50%
0%
26
Geysers Glacial Lagoon
Reykjavík Geysers
Most memorable aspect of visit (name 3) Summer
Food & Restaurants Golden Circle
Hiking Most memorable aspect of visit (name 3) Winter Food & Restaurants
Blue lagoon Reykjavík
Whale watching Waterfalls
Waterfalls Natives / Hospitality
Glacial lagoon Blue Lagoon
Natives / Hospitality Nature/Landscape
Nature/Landscape Northern Lights
30%
25%
20%
15%
10%
5%
0%
30%
25%
20%
15%
10%
5%
0%27
Industry financials improving
Margins have lifted as efficiency improves
Some segments of the tourism industry, e.g. banks’ overall portfolio, underlining the limited There is evidence that the tourist
transportation and accommodation, are capital systemic risk posed by the sector. Financing has
intensive. These segments in particular stand to largely happened outside the banking system, sector has become more efficient
benefit from the surge in tourist numbers and e.g. via alternative investment funds or limited on the back of scale economies,
reduction in seasonality, as it leads to higher partnerships. Domestic pension funds are the
lifting margins.
occupancy rates and better capital efficiency primary investors. Despite ample opportunities
year round. There is evidence that the tourist in the tourist sector, not just for the deployment
sector has become more efficient on the back of capital but for the transfer of networks
of scale economies, lifting margins. and knowledge, foreign investors are largely
Although lending to the tourism sector has absent from the stage.
increased, loans to the industry still compose
a fairly small segment of the commercial28
EBITDA margins in exporting sectors Exporting sector aggregate revenue
30% 600
25% 500
20% 400
ISK bn.
15% 300
10% 200
100
5%
0% 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Tourism sector Marine sector Production of metals Tourism typically has relatively Tourism sector Marine sector Production of metals Corporate revenue in tourism
low margins, although there has sector has more than doubled
been significant improvement over the last decade at 2016 prices
Equity ratio in exporting sectors Commercial bank lending to tourism industry, ISK billion
80% 200 20
60%
150 15
40%
100 10
20%
50 5
0%
-20% 0 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2015 2016 2017
Tourism sector Marine sector Production of metals Improving financials have FX (left) Indexed - ISK (left) Modest lending growth
resulted in steadily increasing underlines limited systemic
Non-indexed - ISK (left) Percentage of corporate loans (right)
equity ratios risks stemming from tourism
Source: Statistics Iceland, GAMMA Advisory. Based on corporate tax filings.29
The evolution of Icelandic tourism
We predict that the tourism industry is entering a phase of consolidation
Pre. 2010 2011-2013 2014-2017
Dormant market dominated Surge in tourist numbers Investor capital employed
by incumbents attracts upstarts to fund expansion
Tourism is of limited relevance A large number Significant improvements
to the Icelandic economy of entrepreneurs enters market in financial results
Few dominant incumbents in key Market fragmentation Capital increasingly available
sectors (air travel, accommodation, Significant product innovation, as investor comfort grows
tour operators and car rentals) not least in regional markets Financing largely through
Limited product innovation Earnings funded growth - private equity market
limited access to funding Expansion of operations,
hurdle to expansion with market leaders emerging30 2018 and beyond Consolidation and international entry Founders and seed investors weigh options for exit Significant opportunities in reaping synergies via market consolidation Entry of international players brings new perspectives and global expertise
31
Economic recovery: Iceland vs. the World
Strong export-led growth, fuelled in large
part by surge in tourist arrivals
GDP (Index, 2008=100) IMF Forecast
After suffering one of the largest declines
130
in GDP among advanced economies following
the great recession, Iceland saw stronger
120
recovery than most developed markets.
In addition to the implementation of a mix 110
of orthodox and unorthodox economic policies,
the Icelandic recovery has been heavily aided 100
by an ongoing boom in tourism since 2010,
which has seen the number of tourists 90
come close to quadrupling.
80
Iceland’s economic recovery
2005
2007
2009
2011
2013
2015
2017
2019
is one of the strongest among Iceland Nordics Baltics G7 Iceland’s economic recovery
advanced economies in the world. is one of the strongest among
advanced economies in the world32
Unemployment (%) IMF Forecast General government debt (% of GDP) IMF Forecast
20% 140%
120%
15%
100%
80%
10%
60%
40%
5%
20%
0% 0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Iceland Nordics Baltics G7 In line with growth and job Iceland Nordics Baltics G7 Goverment debt has been
creation, unemployment has reduced dramatically
fallen to pre-crises levels
Current account balance (% of GDP) IMF Forecast
In large part thanks to its robust,
10%
0% tourism-driven balance of payments,
-10% Iceland finally managed to fully lift
capital controls in 2017 without issue.
-20%
-30%
2005
2007
2009
2011
2013
2015
2017
2019
Iceland Nordics Baltics G7 Current account balance has
been consistently in surplus,
bolstered by tourist receipts
Simple averages. Nordics: Denmark, Finland, Norway and Source: Central Bank of Iceland, IMF.
Sweden Baltics: Lithuania, Latvia, and Estonia G7: Canada,
France, Germany, Italy, Japan, UK and USA33
How tourism has affected the economy
The biggest exporting sector, accountable for
large share of recent job creation
Exports by source (ISK bn.)
ISB Forecast
Tourism is now Iceland’s biggest generator 1.400
of hard currency, driving its export-led growth 1.200
since 2010. Tourism added close to 12 thousand
1000
direct jobs in 2010-2016, or over half the Icelandic
economy’s aggregate job creation over 800
the same period, attracting foreign workers. 600
It may therefore appear that Iceland is too
400
dependent on tourism, but in fact tourism
constitutes significant diversification of the 200
economy’s sources of income. Before the tourism
0
boom, Iceland got most of its hard currency
2010
2011
2012
2013
2014
2015
2016
2017
from exporting fish and aluminium, so having
Tourism Aluminium Seafood Other
a third pillar in tourism is welcome.34
Real annual export growth by source, % CBI Forecast
Net migration (% of pop. aged 20-59)
12 4
10 3
8
2
6
1
4
0
2
-1
0
-2 -2
-4 -3
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2010
2011
2012
2013
2014
2015
2016
2017
Tourism Aluminium Marine products Other exports Exports Foreign nationals Icelandic nationals Total
Jobs in tourist sector
30.000 16% Tourism added close to 12 thousand direct
25.000
14%
12%
jobs in 2010-2016, or over half the Icelandic
20.000
10% economy’s aggregate job creation over the
15.000 8%
10.000
6% same period, attracting foreign workers.
4%
5.000
2%
0 0%
2010
2011
2012
2013
2014
2015
2016
2017
Percentage of labour force (rhs) Number of jobs (lhs)
Sources: Statistics Iceland, Islandsbanki Research, Central Bank of Iceland35
Tourism has lifted equilibrium ISK rate
Iceland keeps running trade surpluses
despite recent krona appreciation
Tourism has delivered a boost to By providing a permanent boost to export Tourism has therefore simultaneously fuelled
revenue, tourism has raised the equilibrium the appreciation and rendered it sustainable,
Icelandic households‘ purchasing real exchange rate of the Icelandic krona. by allowing the economy to continue running
power via krona appreciation. Simply put, this means that a rise in the krona current account surpluses. As the figure
exchange rate (which is partly a consequence illustrates, had service exports grown only at
of FX inflows from tourism receipts) has a modest 5% annually (dotted line), a trade
not led to a build-up of external imbalances deficit would have emerged in 2016. Thanks
and unsustainable external dynamics like in to the increase in exports, however, the trade
previous appreciation episodes. balance has remained firmly in surplus (solid line).36
ISK exchange rate vs. trade balance
250
200
150
100
50
A fall in the ISK exchange
15% rate following 2008
helped wind down external
10% imbalances by moving the
trade deficit into surplus.
5%
0% Thanks to tourism, the trade
surplus has remained robust to
-5% recent appreciation. If tourism
had not provided a boost to
-10% export receipts, the recent krona
-15% appreciation would have led to a
build-up of external deficits.
-20%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
GBPISK USDISK EURISK Trade balance Trade balance, assuming 5% annual growth in service exports
Sources: Central Bank of Iceland, GAMMA Advisory37
Interrelated policy challenges for authorities
Challenges Current status
1. Taxation and Raising revenue to build capacity Attempts to build consensus
regulation and maintain infrastructure around targeted tourist levies
Building incentive-compatible (such as “nature pass”) had limited success
and efficient collection system Other ideas floated include airfare levies
Maintaining growth-conducive or raising VAT to par with other industries
regulatory regime To date, no holistic tourist
tax policy framework
Battling the effects of overcrowding Marketing efforts made significant
2. Flow and resource at individual tourist sites strides in attracting tourists during the
management Preserving unspoilt nature shoulder season and reducing seasonality
Promoting destinations outside capital area Proposals to manage crowds
and diverting crowds to less visited sites by charging tourists to visit key sites has
Increasing productivity met with resistance from local population
by reducing seasonality
Ensure tourist safety38
Challenges Current status
3. Infrastructure Overcoming accumulated infrastructure Investment for airport enlargement
investment deficit of post-2008 era amounts to USD 200 million in 2016-2017
Maintaining quality of road network and USD 3-400 million in 2018-20
Ensuring that capacity at key airhubs, Public pressure to increase investment
such as Keflavik Airport, keeps up Merits of Public-Private Partnerships
with arrivals increasingly entering policy space
Addressing concerns that the appreciation Broad consensus that equilibrium
4. Exchange rate of the Icelandic krona is crowding exchange rate has risen, and that
and economy out other exporting sectors the currency is facilitating economic
Managing economic upswing adjustment to shift in fundamentals
so as to ensure its sustainability Openness to immigration
has reduced stress on labour market
Fiscal prudence through long-term
planning; windfalls used for debt reduction39
Iceland in the movies
Other worlds and alien landscapes
With its amazing landscapes, glaciers, beaches and In recent years, producers have chosen Iceland Winter‘s War, Noah, Prometheus, Oblivion,
untouched highlands, Iceland is the perfect place as one of the main shooting locations for many Interstellar, The secret life of Walter Mitty, Fast
for feature film and TV productions, commercials, popular movies and TV shows, including Game of 8: The Fate of the Furious, Transformers: The last
music videos and photo-shoots. The Icelandic Thrones, Vikings, Fortitude, Star Wars: The Force knight, Transformers: Age of Extinction, Sense 8,
government also offers a 25% tax rebate on Awakens, Star Wars: Rogue One, Star Wars: The Last The Last Witch Hunter, Flags of our Fathers, Letters
production costs. Jedi, Blade Runner 2049, Marvel‘s Captain America from Iwo Jima, James Bond: Die Another Day, Lara
– Civil war, Marvel‘s Thor 2: the Dark World, Croft: Tomb Raider & Batman Begins.
DC‘s Justice League, Jason Bourne, The Huntsman,40
Just absolutely stunning.
It’s just so vast and it just
seems to go on forever.
– Tom Cruise
In Iceland you get such scale,
It’s bigger than your imagination
– Tom Hiddleston
In Iceland I found this majestic landscape
which is a bit like time stood still. There are
these marvelous wonderful rock formations
and marvelous valleys and sweeping
expanses of lake.
– Ridley Scott41
Iceland has further options
Despite the rapid growth in tourist numbers, recent years, construction has expanded hotel even the most demanding travellers, including
large areas in the country remain completely capacity around the country. Some of them luxury vehicles, helicopters, luxury lodges and
uncrowded. The majority of tourists visit can qualify as luxury hotels, while others are hotels, high quality restaurants, and experienced
Reykjavík, Reykjanes Peninsula and South traditional three-star hotels. We believe that with guides as well as suitable activity options almost
Iceland. Some of the most popular locations are a more widespread distribution of tourists, the everywhere in the country. For example, US
approaching full capacity during high season, operational environment of hotels and activity based company Eleven Experience recently
with regards to hotel capacity and congestion at suppliers can be improved around the whole renovated an old farm in North Iceland to a high-
key sites (such as Thingvellir, Gullfoss and Geysir country, especially in the areas that receive fewer quality Luxury Lodge, Deplar Farm. The location
to name a few). At the same time, areas in West visitors today. Luxury and Private travel has of Deplar Farm is in a rural area far from any large
Iceland, West Fjords, North Iceland and East been expanding in recent years. All facilities are town and provides great opportunities for private
fjords can accommodate far more tourists. In available in Iceland to meet the expectations of luxury travel.42
According to numbers from the Icelandic
Tourist Board, the areas marked in green
include the most visited attractions and
locations of tourists so far. We estimate that
the areas marked in blue provide opportunities
for further tourism operations.43
Iceland is a hot destination
According to the Luxury Travel Guide Iceland world in terms of internet searches, travel media per cent in a year to $26bn, and it looks set to
was the best destination for 2016. Since 2010, coverage etc. Iceland has the fastest-growing enjoy “unrivalled growth” in the coming years,
Iceland's popularity has risen sharply, and it is now “brand” in the world, with its value rising 83 according to Brand Finance.
one of the most sought-after destinations in the44 Keeping up in the Blue Lagoon
45 Aldeyjarfoss, Breaking the icebound
46 II. Key sectors and opportunities
47
Recent trends in key tourism sectors
Characteristics Recent trends Opportunities
Air travel Iceland is a hub for local Increased supply Easy to gain exposure with
airlines Icelandair and WOW of seat capacity high degree of liquidity via
Trans Atlantic air routes Increased number of airlines publicly listed Icelandair
Direct flight to Iceland Increased number
offered by foreign airlines of destinations
Accommodation Mix of mainly domestic Booming demand Funding of new hotels
hotel chains and independent Supply is seriously lagging Gap in upscale market;
hotels and hostels Prices have risen dramatically no 5-star hotel available
AirBnB increasing Continent beating Synergies from merging and
market share occupancy rates streamlining smaller hotels48
Characteristics Recent trends Opportunities
Group Tour operators (oligopoly) Investment funds have acquired Opportunities to reap
Tour operators High prices and margins stakes in large local operators greater synergies from
– but increased competition Increased competition economies of scale
from foreign operators Business needs streamlining Merger opportunities
Shift from low budget New local entrants Smaller car rentals are seeking
Car rentals (Cheap Jeeps, SAD cars etc.) to the market to merge or sell operations
to new cars Mergers of car rentals to more established rentals
High degree of fragmentation have started to take place A lot of activity needs funding,
High utilization rate and prices i.e. near Keflavik airport
Basic infrastructure Lack of investment Toll roads and tunnels
Infrastructure worn down Lack of political understanding Large interconnectors
Lack of funding of public-private funding, Airport enlargement
Unclear vision for future although this is slowly changing
Outdated and inefficient49
Massive expansion of air travel options
Airlines are the lifeblood of Icelandic tourism
Air travel is both vital to Icelandic tourism Full service airline with elegant Fast growing low-fare airline with a cool and playful
and the primary mode of transport for inbound brand image, listed on Nasdaq Iceland. brand image, privately held by local tycoon.
tourists. There are currently 12 airlines servicing
Iceland year-round, rising to 29 in summer. 2016 Operating Data 2016 Operating Data
At peak times, direct flights are now available Size of fleet: 28 jets Size of fleet: 12 jets
from close to 90 destinations, mainly in Europe Destinations: 43 Destinations: >30
and North America. Despite the strong growth No. of passengers: 3,675,000 No. of passengers: 1,669,000
in seat supply from international air carriers, Seat occupancy: 82% Seat occupancy: 88%
the two Icelandic airlines, Icelandair Employees: 3,900 Employees: 720
and Wow air, accounted for roughly Sales: USD 1,286m Sales: USD 340m
80% of outbound seats in 2016. EBITDA: USD 220m EBITDA: USD 52m
Net profit: USD 89m Net profit: USD 39m50 Number of airlines servicing Iceland year-round 2005 2010 2015 2017
51 During high-season, 29 airlines service Iceland Starting summer 2018
52 Esja
53 Direct flights from Iceland Over 90 destinations
54
The fastest transatlantic route Reykjavik and New York per week,
During the high-season, there are three times with only London having more flights to and from
more flights departing from Keflavik airport New York. Since 2015, the number of departures
than from all Scandinavian cities in total. from Keflavik has increased by more than 80%.
Keflavik airport is one of the best connection During the summer there are around 7-800
hubs between destinations in the US and Europe, departures per week to N-America and Europe
often making it the fastest option for trans and in the winter of 2017/18 there will be over
atlantic connecting flights. For example, in the 450 departures per week.
summer of 2018 there will be 56 flights between
Airlines are planning to add direct
flights to India, China and Japan
Seat supply (millions) Forecast
6
5
23%
4
20%
31%
3 23%
20%
18% 15%
2 14% 13%
21% 13%
33% 26% 5% 56% 46%
31% 24% 25% 65%
1 73% 69%
67% 69% 75% 74% 74%
76%
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Icelandair Wow air Others
Source: Isavia, Íslandsbanki55
Significantly improved hotel occupancy rates
Even in the face of large expansion of room supply
Most hotel supply in Iceland is concentrated in to the Harpa Concert Hall. As can be seen on the At least 30% of tourists reported having stayed
the three- and four-star segments, although there opposite page, room supply has been expanded at least in privately owned apartments
has also been considerable growth in the number handsomely since the start of the tourist boom, or houses in Iceland in 2016 in an annual
of hostel beds since the start of the tourist boom. with multiple new developments opening their survey. Surveys conducted by the Icelandic
In recent years new upscale lifestyle and boutique doors in recent years. Nevertheless, the increase Tourist Board suggest that the overall
hotels have opened. At the same time many other in supply is nowhere near enough to keep up with quality of accommodation in Iceland is
hotels have renovated to meet the expectations demand, as evidenced by the rising occupancy fairly high; incoming tourists in 2016 rated
of travellers. This applies to hotels both in rates in every quarter of the country. This is even their paid accommodation at 8.1/10, with 70%
Reykjavik and outside the metropolitan area. more remarkable in light of the increased of respondents giving ratings of 8 or higher.
Currently there are five-star hotels being built, competition from private residences via
i.e. at the Blue lagoon and a Marriott hotel next the rapidly expanding sharing economy –56
Average rooms on offer O.w. in occupancy
Source: Statistics Iceland57
58 View of central Reykjavík from Hallgrímskirkja church tower
59
Overcoming the seasonality challenge
Hotels in Reykjavik post continent-beating
occupancy rates, decent ADR
The Icelandic hotel industry Seasonality has receded, rendering capital risen further in 2017 due to the strengthening
significantly more productive as average currency. Reykjavik hotels are towards the higher
exemplifies how winter tourism occupancy has become one of the best among end of the pricing range in European cities
has helped boost capital European cities. Seasonality remains a challenge on average. However, it should be noted that
outside Reykjavik. The average daily rate in there exists significant seasonality in pricing,
efficiency in the tourism sector
Reykjavik hotels rose by close to 37% over 2013- with ADR’s approaching the highest in Europe
2016 due to a combination of krona appreciation during summer, while remaining relatively
and market pressures, and it is likely to have inexpensive during the shoulder season.60
Hotel room occupancy (%) Overnight stays at hotels and hostels
100 3.0
90
2.5
80
60
2.0
60
Millions
50 1.5
40
1.0
30
20
0.5
10
0 0.0
Capital area Rural Iceland Capital area Rural Iceland
January
February
March
April
May
June
July
August
September
October
November
December
2010 2016
Capital area, 2017 Capital area, 2016 Shoulder season High-season (Jun, Jul, Aug.)
Capital area, 2010 Average outside capital, 2017
Average outside capital, 2016 Average outside capital, 2010
European Hotels - Average Daily Rate (EUR) European Hotels - Occupancy rates
350 90%
300
85%
250
80%
200
75%
150
70%
100
50 65%
0 60%
Geneva
Zurich
Paris
Reykjavík (2017)
London
Rome
Reykjavík (2016)
Barcelona
Milano
Amsterdam
Dublin
Frankfurt
Reykjavík (2015)
Reykjavík (2014)
Lisbon
Vienna
Madrid
Berlin
Porto
Prague
Budapest
Reykjavík
Dublin
London
Amsterdam
Berlin
Prague
Barcelona
Budapest
Vienna
Lisbon
Porto
Zurich
Madrid
Frankfurt
Paris
Rome
Geneva
Milan
Sources: Statistics Iceland, PwC, Benchmarking Alliance.61
Hotel investment lags behind tourist numbers
Continued upward pressure on rates
and occupancy expected
Growth in hotel rooms has not managed
to keep up with growth in tourist arrivals.
In addition to leading to improved occupancy
and ADRs in Icelandic hotels, this has had a
spillover effect on the Icelandic housing market
via the sharing-economy. On average, 2000
homes are listed on AirBnb in the Capital area,
rising to as many as 2500-3000 during the high
season.We expect continued upward pressure on
rates and occupancy, as tourist arrivals are likely
to outpace increases in hotel building.62
Plans for hotel investment in Capital area
Tourists vs. country-wide hotel and hostel rooms
600 2,200-2,500 additional rooms planned until 2020 across more
12 month moving average index, 2005=100
500
than 20 hotel projects. Can service 190,000-215,000 tourists
annually at current occupancy rates and duration of stay.
400
This is equal to roughly 2/3 of the projected increase
300
in tourist arrivals in 2018 alone.
200
100 Likely impact
0 Occupancy
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Average daily rate
Number of tourists Number of rooms
Spillovers to regional hotel market
Spillovers to housing market
Average no. of AirBnB accommodation in Reykjavik Capital area residential real estate price index
260
2500
240
2000 220
200
1500
180
1000 160
140
500
120
100
0 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2015 2016
O.w. in occupancy
Sources: Statistics Iceland, Islandsbanki Research, Registers Iceland63
Hotel sector: Key operators
Four large hotel chains with
a combined market share of over 50%
Close to 140 hotels are in operation in Iceland, of global brands being run by domestic is being built next to Reykjavik’s Harpa Concert
over 50 of which are located in the capital of operators under license. The hotel segment Hall and Conference Centre. The hotel, being
Reykjavik, with several more under construction. has seen strongest foreign investor appetite funded by SIA III (Icelandic PE fund), Carpenter
Although recent years have seen significant within the hospitality industry, with American & Company and other domestic and international
capital investment, new constructions have not investors PT Capital Advisors and JL Properties investors, will open as a Marriott EDITION hotel.
managed to keep up with the increase in tourist reportedly acquiring a 75% stake in KEA Hotels, There remain several attractive investment
numbers. The hotel industry comprises a mixture Iceland‘s third largest hotel chain, in 2017. opportunities in the space, both in terms of assets
of domestic hotel chains and independent Iceland’s first ever five-star hotel will open at in operation and development projects.
hotels and hostels, with a limited number the Blue Lagoon in 2018. Another five star hotel64
Largest hotel chain in Iceland operating Fosshotel (15 hotels), Started as a guesthouse in the city centre, the business
Grand Hotel Reykjavik and Hotel Reykjavik Centrum. has grown into a hotel chain of 6 hotels in Reykjavik city centre.
Most properties owned. Majority owned by Olafur Torfason Founded and run by the Oliversson family for over 20 years.
and his family. Two Icelandic PE funds (Kjölfesta and Edda)
bought together ~25% stake in 2015. 2016 Operating Data
No of hotels/rooms: 6/478
2016 Operating Data Sales: USD ~30m
No of hotels/rooms: 17/1,750 EBITDA: USD ~4m
Sales: USD ~91m
EBITDA: USD ~28m
Started with Hotel Kea in central Akureyri in 1999 Operating mix of international (Hilton, Canopy) and local (Icelandair, Edda)
and has grown since by adding 5 hotels in Reykjavik including hotel brands. Two new hotels to open in 2017/2018 under the Curio brand.
Hotel Borg and Apotek Hotel. Hotel Exeter will open in 2018. Fully held by Icelandair Group, an international airline company listed
Was acquired in 2017 by a group of investors led by Alaskan on Nasdaq Iceland.
based JL Properties and Pt Capital Advisors.
2016 Operating Data
2016 Operating Data No of hotels/rooms: 16/1,636
No of hotels/rooms: 8/624 Sales: USD ~101m
Sales: USD ~35m EBITDA: USD ~10m
EBITDA: USD ~9m65
Buses and tours: Key operators
The market for buses and guided
tours is highly competitive
Survey evidence suggests that over a third adventurous glacier excursions. The market for for acquired by Icelandic PE funds (Reykjavík
of tourists visiting Iceland will go on an organised guided tours is highly fragmented with several large Excursions, Hópbílar and Gray Line Iceland).
tour of some sort during their stay. That’s hardly players (70-100 coaches) and small niche companies There are significant opportunities for
surprising, considering the wide selection operating 1-5 coaches and super jeeps. There has consolidation, which will be driven by these
of activities to choose from, ranging from day been increased investor activity PE funds. Bus operators from Eastern Europe have
tours of natural phenomena, such as waterfalls and in the buses and tour segment, with the three also recently entered the Icelandic market, further
geysers near Reykjavik to northern light safaris and largest tour operators having recently been increasing competition in the space.66
Trex Hópferðamiðstöð is one of the largest Reykjavík Excursions – Kynnisferðir operates SBA Norðurleið operates 75 coaches from Akureyri
operators in in Iceland with 80+ coaches in around 70 coaches including the Flybus. (HQ) and Reykjavík. The company offers sightseeing
operation. Offering various day tours from Fully licensed tour operator and travel tours from Akureyri to North-East of Iceland.
Reykjavík. Trex is owned by 38 shareholders, with agent offering day trips and guided tours. SBA is majority-owned by Gunnar M. Guðmundsson
none holding more than 15%. Icelandic PE fund SÍA II bought 35% stake in 2015. and has a turnover of USD 10m (2015).
Total turnover of around USD 45m (2015).
Guðmundur Tyrfingsson (GT Travel) operates around Teitur has 42 coaches in operation offering a wide Hópbílar has a fleet of 110 coaches and city buses
50 coaches including 2 VIP buses. GT Travel is a coach range of travel services. Offers day trips to key sights ranging from 9 to 71 seaters providing services to
company, travel agency and tour operator in Iceland. and northern light safaris, as well as longer trips of up travel agencies, airlines, cruise-ships, school groups
GT Travel is a family owned company founded in 1969 to 5 days. Teitur is a family-owned company founded in and municipalities in Iceland. Founded in 1995 and
with a turnover of USD 5m (2015). 1963 with EBITDA of USD 1m (2015). bought by Horn III, an Icelandic PE fund, in 2016.
Turnover USD 18m (2016).
Snæland Grímsson has over 30 coaches and super Gray Line Iceland (Iceland Excursions Allrahanda) GJ Travel, established in 1929, is one of the oldest
jeeps in operation, offering shorter and longer tours has around 70 coaches in operation. The Icelandic tour operating companies in Iceland. The family-
ranging from airport transfers to fully escorted trips PE fund Akur bought close to a 50% stake in the run company has a fleet of 25 Mercedes-Benz
around Iceland. Snæland is a family-owned operator business in 2015. Rest owned by founders and coaches, ranging in size from 16 to 69 seats, along
founded in 1945 with a turnover of USD 20m (2016). current management. Total turnover close to with a few 4x4 Highland buses. It also offers tours
USD 34m (2015). to Greenland. Turnover USD 19m (2016).67 Car rentals: Key operators An overwhelming majority of tourists leaves the on car fleet size. The market is dominated by international capital of Reykjavik to see the natural sights to brands, operated under licenses by domestic car rentals with be found around the country. While many opt for a long established market presence. The rental fleet has seen organised tours, survey evidence suggests that over substantial growth in recent years, with much of the growth half of the tourists go exploring on their own via stemming from increased activity from small-to-mid market rented car – many opting to travel the famous ring operators. New upstarts have driven product innovation, with road, which literally stretches full circle around the a number of niche operators specialising in camper rentals island. The car rental business in Iceland is somewhat and caravans, particularly popular among budget travellers. fragmented, with over 100 operational car rentals. There exist multiple opportunities for consolidation, The largest car rental owns 4,480 vehicles, which particularly among mid-market operators. roughly amounts to a 20% market share based
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