Icelandair in tailspin from Atlantic-hop fare wars

The "hippie express" is a trouble. Icelandair, which established its reputation in the 1960s by selling the lowest-priced seats to Europe -- often to long-haired young men and women -- has become a victim of the air-fare wars over the north Atlantic.

The carrier has been operating in the red over the past year, and now, according to Paul Helminger, secretary of state for foreign affairs in Luxembourg, which is Icelandair's European destination, "the situation is nearing a crisis."

Luxembourg officials, in fact, concerned about the continuation of air service to the duchy, made a visit in January to Reykjavik, Iceland's capital, to talk to Icelandair officials.

"We were trying to determine under what conditions they could continue to operate," Mr. Helminger relates.

For its part, Icelandair, through a spokesman in New York, says it has no intention of withdrawing from the North Atlantic runs: "We are in no imminent danger of stopping transatlantic travel," the spokesman says.

The line has already begun to tighten its belt, however. After posting about a $10 million loss in 1979, and a slightly lower loss in 1978, the airline has begun to lay off employees. So far some 30 to 40 have been let go in New York and about 200 in Iceland. There are talks about further cuts.

Icelandair, which is privately held, has been beset by a number of problems. First, the small airline has faced an increasingly competitive atmosphere in the battle to attract passengers on the N orth Atlantic routes: An Icelandair round-trip ticket between New York and Luxembourg now costs $399. But Braniff Airlines offers a New York-Brussels round-trip fare of $391, and Capitol Airways offers a $409 fare three times a week. Also, the Laker Skytrain sells round-trip tickets to London for $320. Thus, Icelandair's lock on the discount air fare market has been broken.

Second, the small airline ended up flying DC-10s and DC-8s on its transatlantic runs. When the DC-10s were grounded after the 1979 accident in Chicago, the line was left in a difficult position. It eventually ended up leasing the DC-10s to Air Florida for three years and it put one of its DC-8s and one Boeing 727 up for sale.

At the same time, the company got caught in the cost squeeze that has affected all airlines. Jet fuel has soared in price. But for Icelandair the price spiral was worse, since the fuel it used in Iceland was bought in Rotterdam at spot prices. Spot-market prices for fuel have been markedly higher than contract prices. A sizable portion of Iceland's oil supplies also come from the Soviet Union, which has based its oil prices to Iceland on the Rotterdam spot market.

Icelandair's poor on-time record has further hurt it. This is not entirely the line's fault, since the Luxembourg airport is in a fog-prone area. But it has embittered many passengers who have sat through long delays.

The line has also been hurt by its lack of landing rights in Europe. Since it is not a member of the International Air Transport Associaito (LATA) and does not abide by its fares, it cannot land elsewhere in Europe on flights from the United States. And it must stop in Iceland on three out of its seven US-to-Europe runs, adding time and fuel expense to the flights. The four nonstop flights, in fact, are new and were approved by Luxembourg authorities in the hope that they could "help save the operation."

Icelandair has talked to the Luxembourg government in the past about the possibility of flying from the Middle East, such as from Bahrain, to Luxembourg and then to the U.S. However, the Luxembourg authorities have indicated that they strongly oppose the possibility of having "feeder" routes shuttle passengers into the duchy.

Theo Breisch, an official of Luxair, another privately held airline operating out of Luxembourg, also opposes the use of Luxembourg for feeder routes. "It would be against the best interest of Luxembourg," he maintains. "Should Luxembourg give away its own air rights to a third country?"

Still, for Luxembourg the loss of any transatlantic service from the US would be a major blow. "Icelandair flew to Luxembourg when no other airline would," Georges E. Hausemer, director of tourism for Luxembourg, says, "and for that we are grateful." Luxembourg officials are dubious that any major airline would agree to land in Luxembourg if Icelandair did not continue transatlantic service. "The IATA carriers have remained aloof," Mr. Hausemer says.

Icelandair, which changed its name from Icelandic Airlines late last year, also operates two hotels in Reykjavik and a car rental service and some tourism services in Iceland. The company also has a 57 percent interest in Eagle Air, a small Icelandic air charter company, and controlling interest in Air Bahamas, which has Luxembourg-to-the-Bahamas runs. The company is also a one-third owner of Cargo-Lux, a profitable air cargo operation based in Luxembourg. All of its non-transatlantic operations are reportedly profitable.

Although Icelandair is a privately held company, its loss would be a major blow to Iceland. Observers expect that its finances worsened, it might be able to obtain new funds from the Icelandic government.