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. Last Updated: 07/27/2016

New-Age Icelandair Turns Nostalgic

BALTIMORE -- They called it "the hippie airline.''

Long before People Express or Freddie Laker, Icelandic carved out a discount niche flying the backpack set to Europe.

Much has changed since the narrow-bodied planes, chock full of flower children, hopscotched their way from New York to Reykjavik and Luxembourg.

The airline, long since renamed Icelandair, has replaced its ageing fleet and added a fancy business class.

It serves four U.S. cities -- New York, Baltimore, and Orlando and Fort Lauderdale, Florida -- and flies to London, the Scandinavian capitals, and Hamburg, Germany, as well as to Luxembourg.

What has not changed much is the price: $348 buys a round-trip ticket to Luxembourg, compared to $295 in 1978.

The difference is that Icelandair no longer "owns" the discount market.

As it competes intensely for passengers, Icelandair is starting to appeal to its old customers of the 1960s and 1970s -- now corporate executives, politicians and university professors -- hoping to parlay a little nostalgia into sizable revenues

"The message is 'You've come a long way, and so have we,'" said Steinn Logi Bjornsson, the company's director for the Americas, during an interview at the Icelandair's North American headquarters in Columbia, Maryland.

Today, he said, Icelandair passengers tend to be middle-aged, highly educated professionals.

For a long time, Icelandair was more than a little ambivalent about its image as the hippie airline. "We were schizophrenic for a few years because we thought it embraced a negative image," Bjornsson said. "We probably weren't careful enough about cultivating the loyalty of this market.The people who ran the company after the '60s and '70s didn't realize they were losing a little piece of history," he said. "Now we want to build on the notion of who we were."

In promotional brochures to corporations, Icelandair is trying to capitalize on the "hippie" theme, and the same pitch soon may emerge in its mass media advertising.

"You may remember it as the 'hippie airline,'" reads an Icelandair promotion. "You and your friends took your first flight to Europe on this carrier. The hippies have grown up, and so have we. We're not called Icelandic Airlines, either, but we're definitely Icelandic. ICELANDAIR. Your airline of choice. Your best value to Europe -- always."

While best known among Americans, the hippie era was merely a part of the airline's history, which dates back to 1937, when Flugfelag Islands-Icelandair was founded.

In 1944, the year the Republic of Iceland was founded, Loftleidir-Icelandic was established. The two carriers merged in 1973 to form Icelandair.

Until British Airways went private in 1986, Icelandair was the only non-government-owned carrier in Europe. Yet it has been a vital part of the national economy, last year accounting for 6 percent of the gross national product of an island nation the size of Kentucky.

Last year Icelandair flew 1.2 million passengers -- four times the country's entire population.

Two-thirds of Icelandair's revenues come from markets outside Iceland.

Starting in the mid-1950s, the airline began taking advantage of a loophole in aviation regulations that had kept fares high on trans-Atlantic routes. Until 1978, it enjoyed a monopoly on low fares.

"The problem was not selling seats but satisfying demand," Bjornsson said.

But airlines deregulated. Icelandair survived only by cutting costs -- including one-third of its 1,500-person work force.

It bought smaller, fuel-efficient jets. And it concentrated on doing what it had always done best: creating a niche.

"They kept their airplanes properly sized to the market and kept their nose to the grindstone," said David Stempler, executive director of the International Association of Airline Passengers in Washington, a consumer group with more than 100,000 members. "They're a very smart and frugal airline."

Faced with intense competition on trans-Atlantic routes, Icelandair beefed up service to European cities and last year began flying within Scandinavia.

It created a hub-and-spoke system: every Icelandair flight from North America stops at its new Leifur Eiriksson air terminal in Keflavik in the morning to transfer passengers to European flights.

In turn, the European flights funnel into Keflavik for flights to the United States in the afternoon.

Today, the Iceland-to-Europe revenues outstrip the company's North Atlantic business.

In 1990 and 1991, Icelandair made a total of $9 million while other airlines were losing millions. And it lost just a total of $5 million during the 1992 and 1993 recession years.

This year, the airline is expected to make a $5 million operating profit.

While Icelandair cannot offer nonstop service to Europe, it is dramatically undercutting business fares by offering a two-for-one deal to business travelers.

And making connections in Iceland can be much more pleasant than at one of Europe's major airports.

Perhaps most significantly, the little airline is aggressively selling Iceland -- not as a stopover but as a destination.

In Europe, the island settled by Norsemen is surrounded by sagas and legends.

"Most people in Scandinavia and Germany have this little dream in their head that they'd like to see Iceland," Bjornsson said.

Americans are a much harder sell, but the marketing pitch goes like this: five hours from the east coast of the United States puts you in a sophisticated capital that has everything from Wagnerian operas to volcanoes. Blessed by the Gulf Stream, it is warmer in February than some frigid American cities.

If all else fails, Icelandair has one sure sales pitch for Americans, despite the fact that the official language is Icelandic.

"The taxi drivers speak English," Bjornsson says.