When the U.S. military built Keflavik airport in the middle of World War Two, nobody would have thought that Iceland would go on to become a major tourist destination. Expanding it therefore makes sense, but the country also needs to consider how other parts of the island will cope with millions more visitors.
A tourist boom has caused traffic at Iceland’s Keflavik airport to grow more than five-fold over the past nine years, with a predicted 10 million passengers this year. Now Iceland’s main entry point to the world is preparing to accommodate twice as many.
The airport expects to invest about $1 billion over the next 7 to 8 years to make room for new airlines and routes as it touts itself as a hub between Europe and the U.S. Domestic carriers Icelandair and Wow Air have opened routes to mid-size cities in North America, while Delta, United, American Airlines and Air Canada have or will soon start flying out of Keflavik, which was built by the U.S. military during World War II.
The airport will pick up the pace of investments after spending about 39 billion kronur ($372 million) since 2011, and will need the help of foreign investors as it takes its biggest steps, according to Bjorn Oli Hauksson, managing director of ISAVIA, the state-owned company that operates all airports in Iceland. This could involve issuing bonds, he said.
“It is simply a question of when in the next three to four years we will give the signal for the biggest step which will be a new finger for Keflavik,” he said in an interview.
Surrounded by black, barren lava fields, there’s plenty of room for Keflavik and other operations to grow. Its vision of the future includes an “Aerotropolis” that would stretch all the way to Reykjavik, some 30 kilometers away.
Hauksson says this expansion will require a broad slate of investments. “There are many ways to choose from but it is clear that foreign investors will play a part in the build up in Keflavik,” he said.
The government has been refraining from taking out dividends to allow for investments and has, in that sense, increased its equity each year in a valuable asset, Hauksson said. “It is up to them what they want do,” he said. “They could decide to keep it or they could decide to put it on the market. You may say that Keflavik airport is like the family silver.”
As a gateway, Keflavik is a key part of Iceland’s tourism boom, which has been instrumental in helping the country resurrect itself after the 2008 economic collapse. The central bank expects economic growth have expanded 3.7 percent last year, after a blistering 7.4 percent in 2016.
While serving as a hub for travelers from Europe to North America, the airport operator is also looking to develop Keflavik as a cargo airport, according to Hauksson.
Building cranes are now one of the main features of the landscape. Total public investment has not been greater since at least 2004, according to Statistics Iceland. Government investment increased 30 percent in past three quarters from a year earlier and municipalities invested 50 percent more in the same period, with the city of Reykjavik almost doubling its investments in 2017.
Icelanders are pouring on spending after it exited capital controls last year. There’s a pent-up demand of at least 400 billion kronur to fix infrastructure after years of neglect following the economic collapse.
The government, which took office in November, expects investments to increase by 21 percent over the next five years, but has also flagged that it’s aware that too much spending could breath too much life into an already hot economy.
Hauksson says he’s optimistic that the new government will be on board to expand Keflavik but that the size of the projects demand caution.
“We haven’t before experienced an infrastructure build-up on this scale within one company in Iceland,” he said.
©2018 Bloomberg L.P.
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Photo Credit: Check-in desks at Keflavik airport. Iceland is looking to expand the facility. Bloomberg