Iceland’s tourism eruption is getting cold

The volcano island in the North Atlantic was saved by a huge climb in tourism growth during the financial crisis. Now the tourism is losing its stamina, and that means downsizing in the most important industry in the country.

Don’t have time for the whole thing? Push play and get a brief introduction to the situation and the people it already concerns. 

By Jeppe Højmark Mikkelsen and Emil Rosborg

Keflavik/Reykjavik, Iceland: It’s about 8pm on a Monday evening when the newly arrived tourists step out of the airport in Keflavík. The chilling wind, coming all the way from the North Pole and Greenland, leaves a fresh sensation and red cheeks on people’s faces. It’s dark and remarkably quiet for an airport at this time of day. It’s the low season.

A lone man is smoking a cigarette on the bus parking lot, surrounded by dozens of coaches. He is waiting to take this group of tourists to their hotels in Reykjavik about 30 minutes from here. His coach with the big “Reykjavik Excursions” sign is the only one with the engine running – all the others have no driver at this hour.

As the growth in number of tourists visiting Iceland slows down, some companies stop expanding and instead cut down on staff and expenditures while others merge in order to survive. Tourism is Iceland’s greatest export and if the growth turns negative, as some reports have suggested, it would have significant consequences on an economy, that has become heavily reliant on tourism over the past ten years.

The boom has left the building

When the financial crisis struck in 2008, Iceland was among the countries that was hit the hardest. Due to an economy dependent on banking loans that suddenly couldn’t possibly be paid back, the country was put in an unfavourable position on the brink of bankruptcy.

In 2010, Iceland reached global attention when the volcano in Eyjafjallajökull spat out enough volcanic ash to sabotage flight traffic across Europe and the North Atlantic Ocean. Finally, when the ash clouds had cleared, Iceland experienced an increased interest from tourists, wanting the experience of the great icelandic nature.

Since then the number of tourists coming to Iceland has annually grown by 25 percent. The most extreme growth was in 2015 and 2016 where the growth rate was about 30 percent and 40 percent, respectively. And this development would prove to be Iceland’s way out of the financial crisis.

But now the tourism boom is rapidly losing its momentum. Landsbankinn, the biggest bank in Iceland, has declared it over and the state-owned national airport service provider, Isavia, expects 2018 to make the lowest growth in tourist arrivals in eight years.

report made by Arion Bank, a bank that services 30 percent of all accounts in Iceland, expects only minor increases, if any, in tourist arrivals, but concludes that a decrease could happen as well.

Growth went from blessing to headache

This development is causing concern to Björn Ragnarsson. He is the CEO of Reykjavik Excursions, a family-owned company with 50 years under its belt, that provides coach driving from airports and arranges tours into the mysterious Icelandic nature. The company enjoyed great success during the tourism boom, going from 20 busses to 100 and from under one hundred employees to about 400.

Björn Ragnarsson has been the CEO of leading tour organizer Reykjavik Excursions since 2017. PHOTO: Emil Rosborg.

The company expanded rapidly, but those days are gone now, as the increasing flow of tourists is slowing down and the competition is getting increasingly more fierce – something that Ragnarsson has already experienced since he got the job as CEO last year.

“Last year we suffered quite a loss. We have had to lay off 10 percent of our people and cut in our overtime salary, so it’s tough being in the tourism industry right now,” Ragnarsson says.

The Icelandic Travel Industry Association (SAF) is a union representing Icelandic companies in the field of travel and tourism. According to SAF’s press officer, Skapti Örn Ólafsson, Reykjavik Excursions is not a single case. It can, because of the recent development, be assumed that some tourism companies will have to shut down in the near future, Ólafsson explains. He adds that while some companies are closing, others are joining forces in merges.  

Currency and oil prices are to blame

The slowing down in tourist arrivals had to come at some point. If the number kept growing by 30-40 percent a year, all tourists in the world would end up going to Iceland.

But it isn’t totally incidental that it’s happening now. Senior Lecturer in economics at University of Iceland and former Minister of Economic Affairs, Gylfi Magnússon, says that part of the explanation lies with the Icelandic currency, Króna (ISK), which has grown a lot since 2010.

“Iceland has become fairly expensive, and that’s mainly due to the appreciation of the currency. The tourists seem to be reacting by making shorter visits, and some by not coming at all,” Magnússon says.

According to the report from Arion Bank, one of the main reasons for the slowing growth in tourist arrivals, is that the Icelandic airlines are not expanding their route network as fast as before.

Professor of economics at the University of Iceland Gylfi Zoega explains that this lack of expanding is largely due to the increase in oil prices.

“There is an underlying factor in this – the price of oil. The distance from Iceland to Denmark is not measured in miles, it is measured in the cost of oil to get you there. If the price of oil is low, the ticket is cheap. But if it is high, the ticket should become more expensive.”

The price of oil went down a lot from 2014 to 2016 and so did the Icelandic flight tickets, but when the oil price rose again, the Icelandic airline companies did not follow suit. The low-cost carriers Icelandair and WOW air are responsible for about 80 percent of the flights going in and out of Iceland and after the price of oil rose, their ticket prices stayed roughly the same.

Because of this the airlines earn less money per passenger. According to WOW air’s own projections, they will have lost between 8-13 USD per passenger by the end of the year.

Airline collapse could lead to major decrease in tourists

The report from Arion Bank sets up a “worst case scenario” where the capacity of a major airline such as WOW air disappears. In this situation, the report estimates that the development in tourist arrivals will have a negative growth of -17.8 percent in 2019.

Arion Bank works with different scenarios for the economic development in the country. Here is a comparison between the pessimistic ‘worst case scenario’ and the ‘base case scenario’. (Y-axis: number of tourist arrivals. X-axis: year over year). From Arion Bank report:

Gylfi Magnússon says that trouble with the airlines will definitely spill over into tourism in general, and the rest of the economy will feel the effects of that. Tourists are not just generating demand in tourism, they also cause demand in other industries such as food, clothing and gasoline.

“The average household will notice that their cost of living goes up and their purchasing power goes down. Some might also find it harder to find a job when an industry that has been hiring a lot of people will suddenly start to lay off people.”

Magnússon emphasizes that the industry has been hiring a lot of foreign labour force, which would function as a kind of buffer regarding the job market.

Both Zoega and Magnússon agree that, though the consequences are unpleasant, this wouldn’t cause a collapse like the one of 2008.

Base case brings pros and cons

According to Arion Bank, it is at the moment hard to determine which way the tourism industry is about to go. Factors such as the possible WOW air bankruptcy, union wage negotiations and Brexit all come into play, but regardless of which scenario the industry ends up in, it’s going to have consequences.

In Arion Bank’s “base case scenario”, the growth in tourist arrivals settles in a small, but nevertheless sustainable growth each year. According to Skarpheðinn Berg Steinarsson, Director General of the Icelandic Tourist Board – a body under the government responsible for the field of tourism – this situation could provide a welcomed breathing space for an industry that has skyrocketed the last couple of years.

Steinarsson explains that in the period of substantial growth, more and more people saw opportunity in going into tourism and investing in tourism.

“A growth of 25 percent a year is not sustainable. Now we have reached a point where the growth is manageable. I think this is more about finding the right level, and maybe some companies would be in need of downsizing. That’s a logical consequence of the growth we have had,” Steinarsson says.

But the downsizing does not come without a price. The number of people employed in tourism has been rising over the last decade. Today 13-14 percent of the Icelandic labour force work in tourism. Like it has already happened in Reykjavik Excursions, this downsizing could mean layoffs in the industry.

This combined with the fact that the slowing tourism industry has already taken its toll on the value of the Icelandic Króna – which has fallen quite a bit since last year without being near the low level it had before the boom – is a bad omen for the average Icelander, says Gylfi Magnússon:

“This is definitely not good news for the average worker, the weakening of the currency reduces purchasing power for the Icelanders. The overheating of the labour market may be reduced – that is only helpful for the companies, but it is definitely not helpful for the workers.”

Politicians watching development carefully

The recent development has also gained attention and caused worry in the Althingi – the Icelandic parliament.

Smári McCarthy is a Member of Parliament from the Pirate Party and a member of the Economic Affairs and Trade Committee. He finds that it’s necessary for the Central Bank to start actively stabilizing the value of the currency so that the prices won’t rise as much.

“The króna has gotten stronger and that means people’s money don’t go as far when they come here. The government decided that they were going to be okay with the continuing rise of the Króna,” he says.

It’s also necessary to establish an honest conversation between the state and the tourism industry about the slowdown. The development is not all bad news, but it will be, if politicians keep ignoring the situation, says McCarthy:  

“Right now everybody is trying to keep a good poker face on this. We need to start treating this slowdown as a reality. If we do that, we can maintain a quite high level of prosperity and at the same time offer much higher value of service to people who want to come here. If it becomes less attractive, people feel like they don’t get their money’s worth.”

In the other end of the aisle sits Njáll Trausti Fridbertsson. He is a Member of Parliament from the government party “the Independence Party” and Member of the Industrial Affairs Committee, which is responsible for tourism.

He says that it’s important to remember that tourism makes up 42 percent of the export and that it’s not healthy for a country to be that dependent on one industry. Tourism has today claimed the position of Iceland’s “super-export”, a position previously held by fishery and the banking sector. Considering how that put Iceland in trouble in the past, Fridbertsson calls for a more diverse Icelandic economy:

“Tourism is becoming a very strong concern in the economics of Iceland. In the long run you don’t want to have a business that is that strong. You don’t want to put all your eggs in one basket,” he says.

The end of the honeymoon

Back in Björn Ragnarsson’s office, a strong Atlantic wind is banging on his windows. He apologizes for them being dirty and tainted by salt water stains. He explains that he worries about the future and that he knows that the slowdown is probably healthy in the long run, but that he finds it hard to be the man who has to act on the consequences of it:

“The most important thing for this business is the employees. The company wouldn’t be what it is without them, so it impacts you when you have to see a friend go, because he has been laid off.”

At this time, he cannot say what is going to happen. He does not know whether the industry will take a big decrease, or if it will slow down in a less dramatic way.

Either way it’s going to have consequences that the honeymoon of Icelandic tourism is over.