ICELAND AND THE OUTSIDE WORLD: - The Reykjavik Grapevine



Published August 8, 2003



When Icelanders agreed to pay taxes to the king of Norway in 1262, one of the conditions was that the King continue to send ships here. Iceland´s lifeline to the outside world may have seemed considerably more important than independence at the time.

After the start of the Norwegian period, fish became, for the first time, the most important export. Markets opened up in the Baltic as the area became Christian (Catholics, of course, were not allowed to eat meat on Fridays and hence fish became a popular substitute) and the Norwegian port of Bergen became incorporated into the Hanseatic trading system. This, however, did not lead to an increase in living standards. Quite the contrary, the climate became harsher and crops could no longer be grown at the same time that some families became very wealthy from the fish trade. The rich became richer and the poor poorer.

When the bubonic plague devastated Norway in the mid-14th century, shipping to and from Iceland virtually ceased. It was not until over half a century later that this changed when the English discovered that there was a lot of fish in the seas surrounding Iceland, and ships came here in such quantities that the period has come to be known as the “English Century.” Iceland was now, after the Kalmar Union of 1397, under the suzeranity of the king of Denmark and the king tried to stop this interference. His emissary, who was sent to see what could be done to stop Icelanders collusion with the Englishmen, some of whom traded and others plundered, writes: “Those who are considered chieftains in this country are foolishly subsceptible to prayer, drink and bribery, but still the simple and poor common people believe them and are duped.” Such is progress, that at least they are not as subsceptible to prayer any more.

No fish, no freedom

In 1490 the king of Denmark set a new policy, and from then on Englishmen, Dutchmen and Germans were allowed to trade if they were granted the proper permit. At the same time, laws were set stipulating that those who did not own their own livestock had to become tenants for someone who did. Hence, the poorer labourers were from then on forced to work for the wealthier landowners who now owned their labour, and this precluded people from making a living out of fishing. What fishing there was was only done during time off from farmhand duties, and the catch belonged to the landowner. The new laws were probably set to prevent competition for labour from the foreigners who were now granted entry into the country, and for the same reason their stay was legally limited to summertime only. This system prevailed to a large extent in Iceland into the 19th century.

By then more and more ships started coming from abroad, and the number of traders grew. The main import was sugar, followed by hard liquor and coffee beans. The main export was wool. Trade with outsiders was finally given free in 1855. Until then, most traders had been Danish, as those who were not had to pay heavy duties. Trade continued to be in the hands of Danes until later in the century, when new markets opened up in Britain and Spain and these were exploited by locals. New laws were also set that prevented traders from owning more than one store in each town, thus preventing monopolies. Free trade was one of the main goals of Jón Sigurðsson and those struggling for Icelandic independence. Living conditions improved considerably as the 19th century wore on, fishing became evermore important, and boats became both bigger and more numerous.

Independence won…and lost?

In 1914, a shipping company, Eimskip, was formed. Its founders were well aware that Iceland had lost its independence centuries earlier because it did not control its own shipping and were determined not to let history repeat itself. The company became known as the “dream child of the nation,” and everyone, rich and poor, bought stocks so that it might prosper, the rich, of course buying somewhat more than the poor. At the time, it´s owners totalled 13.000 in all, at a time when the population had not yet reached 100.000. Five years later, many of the same men sat at another meeting and formed the first Icelandic airline. Its fleet consisted of a single Avro-504 bought from Britain, but this had to be sold a year later due to lack of funding. Other attempts were made at founding an airline, but it wasn´t until 1937 that an airline that prevailed was founded, this time at Akureyri. A year later it bought its first plane and in 1940 it moved its headquarters to Reykjavík and became Flugfélag Íslands (the Icelandic Airline company), and its undertakings continued to grow. Meanwhile in 1944 3 young Icelandic pilots studying in Canada bought their own airplane and brought it home, hoping to get a job with the airline. When this turned them down, they formed their own company, Loftleiðir, and this also met with success. Both airlines were domestic, but in 1945 Flugfélag Íslands decided to move into international flights as well. In order to do this, it needed more capital, and this was raised by asking Eimskip to buy its way into the company, with about a quarter of the shares. Eimskip agreed on condition its president come from Eimskip. Thus started a long association between the main shipping company and the main airline company, and the first international flights were flown to Scotland and Denmark. A year later both companies started chartering flights to the USA, and considerable competition reigned between them on both domestic and international routes.

This was put to an end in 1952 when the minister of communications, Björn Ólafsson, divided up the domestic routes between the two, with the most profitable ones going to Flugfélag Íslands. Loftleiðir decided they could no longer continue under such circumstances, and so the Minister gave those routes meant for Loftleiðir to Flugfélag Íslands as well. The latter´s profits swelled, whereas the former laid off its employees. Debate raged within the company as to what to do next. Eventually it was decided to continue flights to the USA, but at lower prices than those offered by other airlines. Most other airlines were members of the union IATA, who had synchronised their prices to avoid competition, but as Loftleiðir was not a part of this, it could underbid others on the Europe-America route. This met with success, even though the route was longer. “We are slower, but we are lower,” became the company motto.

David takes the place of Goliath

The IATA companies disliked the competition, and some tried to put an end to it by influencing their governments, such as Lufthansa, which managed to get a ban on Loftleiðir´s advertising in Germany, and SAS, who twice managed to get a landing ban on Loftleiðir aircraft in Scandinavia. Always Loftleiðir prevailed, redirecting its traffic to Luxemburg, and economising by buying larger aircraft.

By the late 60´s, a role reversal had taken place. A small company, Air Bahama, challenged Loftleiðirs dominance of the low budget Atlantic market by offering cheaper fares, and this was duly gobbled up by Loftleiðir, now the Goliath to this new David, in 1969. But its dominance was soon to come to an end. In 1970, IATA loosened its grip considerably, and companies such as Alitalia were able to offer prices up to 25% lower than had previously been known.

In 1973, Flugleiðir and Loftleiðir merged to form Flugleiðir, or Icelandair as it is known abroad. The merger was painful for many within both companies, and it took six years before the companies finally adopted the new name and standardised uniforms. Icelandair continued to offer cheap flights between North America and Europe, but, ironically, it was very expensive to fly from Iceland, as the company held a de facto monopoly. Flights from Iceland to the USA, for instance, were much more expensive than the other way around. Hence the company benefitted travellers between the continents, whereas Icelanders had to pay high airfares to get anywhere.

The Octopus spreads it tentacles

Apart from Eimskip, stock companies have rarely succeeded here. Part of the reason may have been that ownership of major corporations was kept secret, which tended to make the public distrust them. When in 1990 ownership of Eimskip was made public, it turned out 40% of stock was owned by 15 individuals who controlled the board. The board had been buying up stock sold by shareholders without putting these on the market, something that in most other countries is considered insider trading and is illegal. The board had also been buying stock in other companies, notably about a third of Icelandair shares, and some people sat on the board in both companies. It had also gobbled up it biggest competitor, Hafskip, as well as Loftleiðir through the previously mentioned merger. Some people wondered whether Eimskip´s considerable proceeds should not be spent on lowering prices on traffic rather than overtaking other companies, as this would inevitably lead to more purchasing power among the general public. It seemed that about 15 families controlled virtually all traffic to and from the country. These were nicknamed “The Octopus,” as its many arms seemed to be feeding the same mouth. Its other two main pillars were the Shell oil company and the Sjóvá-Almennar insurance company. Its main rival was another conglamerate, Sambandið, often called the “Small Octopus” or “the Squid.” Virtually all fishing distilleries belonged to one or the other, and an understanding was reached regarding spheres of influence. By the late 80´s the Squid was falling apart, leaving the field to the bigger player.

The Fall of the Empire?

These days, the dominant position of the Octopus is under siege. Shell Iceland is currently under inspection for illegal price collution with the other oil companies, and is being bought up by Kaupþing. Other giants have entered the stage, such as Jón Ólafsson of the Northern Light Corporation, currently under investigation for tax fraud, and father and son run Baugur, who own the Bonus supermarket chain. Another father and son who´ve been making their presence felt are Björgólfur Guðmundsson and Björgólfur Thor Björgólfsson. Björgólfur the elder was former chairman of Hafskip, and was given a 12 month suspended sentence for embezzlement in 1991. Having then made a fortune in the beverage industry in Russia, they are currently buying their way into Eimskip. The Octopus has also been losing its interest in Icelandair, as vegetable giant Pálmi Haraldsson, also under investigation for illegal price collusion, bought into the company, as well as a daughter company of Baugur.

A new low cost airline, Iceland Express, began operations at the beginning of this year, and brought new competition into the airline market. Their destinations as yet only lie to London and Copenhagen, but this time the low prices are available to Icelanders as well. With competion in the skies above, Icelanders might finally get to develop a long term relationship with the outside world, rather than just sneaking a peak at it every now and then.


Go travel with Grapevine tried and recommended tours by Grapevine. Fund Grapevine journalism by booking with us.

Show Me More!