Business units are responsible for managing day-to-day performance. As risk owners, the business units and shared functions identify and evaluate risks and make risk-informed decisions. The Audit Committee, on behalf of the Board, is accountable for reviewing and assessing the risk management processes. The Risk team, which reports jointly to the Chair of the Audit Committee and CFO, ensures that robust processes are in place for identifying and assessing the Company’s emerging and principal risks.

The international aviation market, in which Icelandair operates, is both highly competitive and sensitive to a multitude of macro-economic, sector-specific, financial, and enterprise-related risks that can impact the Company’s operations and its ability to achieve its strategic objectives. Many of these risks are outside the Company’s sphere of influence.

The Board of Directors is responsible for determining the Company’s risk appetite and defining policy measures to reduce exposure to financial and operational risk to corresponding levels. These policy measures outline the parameters and framework that need to be considered when identifying and mitigating risk. The Audit Committee, on behalf of the Board, is accountable for reviewing and assessing the risk management and internal control processes. The Risk Management Committee, chaired by the CEO, endeavors to reduce risk exposure to the maximum feasible extent within the Board’s policy limits.

Financial risk is handled centrally for all companies within Icelandair while day-to-day operational risk is largely managed by directors and line managers at the division level. Relevant risk owners are obliged to monitor and manage risks proactively and to include relevant information in the planning, steering and control processes.

Additional risks and/or uncertainties that do not currently exist, are not presently considered material, or of which the Company is unaware, may also impair operations. The policy and measures are therefore reviewed, and modified as needed, on a regular basis.

Credit risk

Credit risk is dependent on the likelihood of a counterparty’s default and the loss of their financial obligations. The Company’s credit risk principally arises from its holdings in cash and cash equivalents, marketable securities, which are kept with local and international banks with acceptable credit ratings, as well as receivables from customers. Counterparties are selected based on business experience. The Company monitors potential losses related to credit risk exposure and makes allowances for impairment through both a specific and a collective component. Icelandair has not experienced higher than usual credit losses in the past two years, despite the extraordinary operating circumstances.

Liquidity risk

Liquidity risk reflects the Company´s ability to fulfil its payment obligations associated with financial and operational liabilities when they come due. Liquidity risk management is based on a policy of minimum cash target levels deemed adequate under both normal and stressed conditions. The Company aims to maintain the level of its cash and cash equivalents and marketable securities equal to the estimated amount of three months' average fixed operating cost where 30% can be in the form of undrawn lines of credit. Cash flow requirements and their impact on cash levels are monitored by using rolling currency flow forecasts, which are updated on a regular basis.

At year-end 2021 the Company's cash and cash equivalents amounted to USD 204 million, and USD 58 million of marketable securities with trusted counterparties, in total USD 263 million. The Company further had access to an additional USD 52 million in revolving credit facilities from its local commercial banks. Finally, Icelandair Group had access to a USD 120 million credit facility with a 90% guarantee by the Icelandic government. The line, which was granted as part of the Company’s financial restructuring in 2020, was terminated by the Company on 7 February 2022.

Market risk

Market risk emerges from changes in market prices, such as foreign exchange rates, interest rates, carbon prices and fuel prices, as those changes will affect the Company’s cash flows or the value of its holdings in financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing returns. The Company holds some of its ISK holdings in mutual funds that invest in term deposits and bonds issued by rated domestic banks as well as government bonds. These investments fall within the agreed risk management policy.

Icelandair uses spot and forward trading, swaps and options in order to manage market risks and seeks to apply hedge accounting to manage volatility in profit or loss. All such transactions are carried out within the guidelines set by the Board of Directors.

The Company seeks to reduce its foreign exchange exposure arising from currency mismatch in the cash flow by netting receipts and payments in each individual currency and by internal trading within the Company. The shortfall of ISK is financed by a surplus of European currencies, most importantly EUR and Scandinavian currencies but also GBP and CAD. The COVID-19 pandemic has however temporarily changed both the cash flow and the balance sheet exposure. The share offering in 2020 was conducted in ISK and therefore the ISK short 12-month cash flow position shifted to a long position. As a result, ISK denominated financial assets were more dominant than before. The year 2021 saw a conversion back to pre-COVID-19 exposures.

The Company paused its rolling foreign exchange hedging program from early 2020 until the second half of 2021. The Company has resumed its regular foreign exchange cash flow hedging program although pre-COVID ratios have not yet been reached.

The Company follows a policy of hedging 40-80% of the interest rate exposure of long-term financing with up to a five-year horizon. Currently, foreign loans are hedged against interest rate fluctuations using fixed-rate loan contracts or swap contracts, where the floating rate is exchanged for fixed interest rates. When evaluating the interest risk exposure and the optimal level of protection, account is taken of the Company´s level of interest-bearing cash and marketable securities and various other offsetting economic factors. Most of the Company´s funding consists of floating rate instruments.

Icelandair is exposed to fuel price risk. The Company's fuel price risk management strategy aims to provide the airline with protection against sudden and significant increases in oil prices while ensuring that the airline is not competitively disadvantaged in the event of a substantial price fall. Icelandair strategy as reflected in its currently approved hedging policy is to hedge between 40% and 60% of estimated fuel consumption 12 months forward and up to 20% from 13-18 months forward. However, the Company temporarily halted all fuel hedging at the outset of the Covid-19 pandemic and has not entered any new hedge positions since February 2020.

The Company's pre-COVID positions were restructured in July 2020 with the last of the pre-existing contracts maturing in July 2022. Icelandair closely monitors developments in the oil market and may resume hedging activities as opportunities arise. The hedging policy allows for both swaps and options traded with approved counterparties and within approved limits. All pre-existing hedge positions were forward contracts. Any new fuel hedging contracts will likely include some type of stop-loss mechanism to limit the associated risk.

Since the beginning of 2012 all airlines offering European destinations have been required to comply with the EU Emissions Trading Scheme (ETS), which commits them to secure carbon emission permits in proportion to their emissions of carbon.

Carbon emission is a fixed proportion of the fuel consumption, but the price volatility of carbon has been greater. Carbon prices rose significantly in 2021. Procurement of emission allowances has material effects on the cost of operations. Due to the COVID-19 pandemic and the lower-than-normal scope of operations, particularly in the first half of the year, along with the residual allowance from 2020, the free allowances provided by the ETS will materially counter the commitments for 2021. Therefore, the risk has been non-existent in 2021, as ramp-up progresses and usage will exceed the free allowance in 2022 the risk will arise again. Emission permits are mainly purchased using spot and forward contracts, and carbon exposure is subject to the same scrutiny and risk management as jet fuel.

In addition to the associated costs, minimizing the environmental impact of its operations is an important part of Icelandair’s business strategy as an environmentally conscious company. The Company adheres to the goals IATA has set to address the global challenge of climate change and monitors fuel efficiency and CO2 emissions from flight and ground operations accordingly.

The long and successful history of Icelandair and its companies is a valuable asset, which serves both as the foundation and the benchmark for many of the policies and contingency plans used across the Company. Methods of coping with threats of disruptions and disturbances are decentralized when it comes to operational hazards.

Management constantly evaluates the risks involved and the potential consequences of individual events. Scenarios are projected, charted and contemplated and action plans launched based on possible outcomes, where collaboration is maintained between the Group and its individual companies.