At Icelandair's annual general meeting last March, the company's CEO, Bogi Nils Bogason, spoke in his address about competition in scheduled flights to and from Iceland. He addressed, among other things, the operating environment for airlines operating in Iceland and compared it with conditions elsewhere in Europe. In his speech, Bogi expressed the view that he did not consider it realistic to operate two connecting airlines based at Reykjavik-Keflavik Airport in a sustainable manner. Competition among domestic airlines could, however, be beneficial, but in the long term, the operation would need to be sustainable. The CEO also noted that, apart from Keflavík, only one hub airport in Europe, London Heathrow, has two airlines based there.
These comments by the CEO of Icelandair can hardly be interpreted in any other way than that he believes there is no room in the market for two airlines offering scheduled flights between Iceland and destinations in Europe and NorthAmerica, where Keflavik Airport is a hub and also the home base for the airlines. Icelandair and PLAY are based on this model. The ideal situation, in the CEO's opinion, would therefore be for the connecting flight to be operated by only one airline—presumably the one he himself heads, Icelandair—and for competition in this market to cease.
These views from the CEO of Icelandair are somewhat disappointing, as it is generally recognised that competition is important, as it promotes lower prices and better service, thereby increasing consumer welfare and promoting efficiency in business. Competition also drives companies to streamline and combats waste. Furthermore, competition supports innovation and progress in business, leading to macroeconomic efficiency.
This competition takes place, for example, in scheduled flights to and from Iceland. It could be said that the competition began in earnest just over two decades ago when Iceland Express began flights from Keflavik to Copenhagen and London in early 2003. More European destinations were soon added, followed in 2010 by New York and Boston in the United States. This created the basis for a second hub system for flights to and from Iceland. Iceland Express, however, struggled as it faced aggressive measures from Icelandair, which involved repeated illegal undercutting. Likewise, smaller competitors in aircraft handling faced illegal practices from an Icelandair subsidiary in that sector, as access to cost-effective handling is a prerequisite for competition in aviation.
Then, Isavia and the government put a spanner in the works for Iceland Express by failing to arrange for the company to be allocated crucial handling slots. slots) to handle the connecting flight, but gave Icelandair priority in that regard.
WOW Air established itself in mid-2012 and, a few months later, the company took over Iceland Express. WOW Air also faced obstacles from Icelandair and the government, just as Iceland Express had previously done. However, WOW Air managed to expand rapidly and temporarily operated an extensive connecting flight network to and from the country. However, WOW Air went bankrupt in late 2018. In mid-2021, PLAY took over and now offers scheduled flights to destinations in both Europe and North America, with connections via Keflavik, competing with Icelandair.
Although this competition in scheduled flights to and from the country over roughly two decades has been uneven and eventful, e.g. due to the financial crash and the COVID pandemic, it goes without saying that the competition has, on the whole, had a very positive effect. Fares from Keflavík to Copenhagen and London fell by as much as 30-40% with the arrival of Iceland Express on those markets in 2003, and to Boston and New York in 2010, prices dropped by up to half. Price competition was further increased with the arrival of WOW Air and PLAY. These price reductions have led to significant savings for the Icelandic public and businesses, and have made travel more accessible for more people. Furthermore, lower prices and increased flight frequency have led to a significant increase in tourists, and tourism has now become one of the country's largest industries.
Competition from airlines based here has, in turn, attracted interest and created the conditions for foreign airlines to fly to the country. The competition provided by foreign airlines is important, but it is fragile, as their schedules change rapidly in line with the prevailing circumstances. For these reasons, competition from airlines based here, operating transatlantic connecting flights, is a mainstay of competition for flights to and from the country. It is not a given that Iceland will enjoy such convenient transport links as has been the case for the last two decades. Undoubtedly, there are no examples of a nation so small, in such a remote country, enjoying such a luxury. This unique position is reflected, for instance, in the fact that Keflavik Airport is almost the only gateway for those travelling to and from the country. The country's location between Europe and America, the initiative of Icelandair's predecessors in utilising that position to establish intercontinental connections, and last but not least, the willingness of other companies to create competition in this area of aviation, have all made this possible. It would therefore have serious consequences if competition from companies flying from here and providing connecting flights were to cease, and a monopoly in this area were to re-establish itself.
Does anyone, for example, remember the Icelandair Sunday rule, which meant that if a passenger bought a standard fare, they had to spend the Sunday night in a foreign city? Otherwise, they paid what was called a full fare, which was almost the same as the price of business class? Does anyone also remember when you could only buy a cheaper return flight ticket, from Iceland and back, even if you had no plans for the return flight, for instance, if you were emigrating? Not to mention the much higher fares of the past, when there was no competition.
Although it would be considered unlikely that comparable terms would be adopted again if only one airline were to operate here with a home base and some restraint from foreign airlines, it would not be to the benefit, neither for the general public nor for the tourism industry as a whole, if no competition were enjoyed in this important area of business.
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