Icelandair! FI! ICE!

KEFLAVIK -- In a country just 4-5 hours from the US and under three from Europe, Iceland is the alternate airport for the dozens of 747s, 777s, A340s, 767s and A330s that cross the North Atlantic each day.

Yet for the flag carrier that serves the planet's newest landmass, the 757 is king. The narrowbody workhorse known for its overpowered engines and rocket-like takeoffs is the heart and soul of Icelandair, which flies a mix of 13 two-class wingletted -200s (176 seats), as well as a single stretched -300s (224 seats). While carriers like Continental, Delta, American and even British Airways have found their 757s fill a transatlantic niche, Icelandair has known that one carrier's niche is another backbone.

While the fleet's newest aircraft was built in 2002 - its 757-300 (TF-FIX) - the carrier's fleet of 757-200s are an average of 16 years old. Icelandair CEO Birkir Gudnason was interviewed by Flight International sister publication Airline Business in July and shared his thought on the future of Icelandair's fleet:

'On the fleet front, Icelandair is looking at an eventual replacement for its 757s. As many 757 operators know, this is not a straightforward task. "The 757 is the perfect aircraft for our network and location," says Gudnason. However, in the 2015-2020 timeframe, the phase out of the 757s will need to start. "We are in that process now with an order to be placed in 2012 or 2013," he says.

Icelandair is looking at aircraft with 150 or more seats and might even split the order between two types as there is no one aircraft that can do the job it wants at present, says Gudnason. One solution could be to lease aircraft from its sister company, Icelease, which is listed as having three Boeing 787 purchase options, but no decision has been made on this possibility, he notes.''

This is no easy decision for a carrier that made its name on O&D traffic through its Keflavik hub. Indirectly, the carrier's role in the North Atlantic is not entirely different from that chosen by Emirates strategy with Dubai. Connect two distant cities within four to eight hours of its hub while provide easy transfer access and layovers long enough to provide passengers to see and spend money in your country. Yes, there are obvious differences, but the foundations remain the same.

But back to the dilemma facing Icelandair. Much has been said about the 757 replacement market by Boeing and Airbus, with offers of the 737-900ER and A321 to replace the aging single aisle. Though as has frequently been said, the 4000nm range of the 757 with its 201-seats in two classes, has no equivalent in the market today.

Boeing and Airbus are making a hard play to be the 757 replacement aircraft, but its 737-900ER and A321 still lack the legs to capture the 4000nm market. One of the benefits of the 757's design is found in the optimization of its configuration, specifically the fact that the aircraft doesn't have to carry fuel to carry fuel. On, flights between 3,500-4,000nm aircraft carry just the fuel needed for the trip, unlike longer-haul flights that carry extra fuel to accommodate the added fuel weight of the aircraft.

The addition of sharklets to the A321 and the CFM56-7BE engine and aerodynamic improvements to the 737-900ER will provide each a 3.5% and 2.5% improvement in fuel burn, respectively. These are near term improvements with sharklets available in 2013 and the -7BE engine available in mid-2011. Airbus claims 3,200nm range with max passengers and Boeing claims 3,265nm, each with two aux tanks as options, getting each within about 80% of the 757's range.

These options will be available for its fleet renewal and the range of both may just barely meet the requirements for Icelandair's longest route (3148nm) from Keflavik to Seattle, which the carrier started last year after SAS pulled its Copenhagen flight.

Though with 2015 to 2020 in mind, the conversation shifts significantly to what Boeing and Airbus are planning for the next round of their dueling narrowbodies.

A recently released a study by Air Insight examining the operating cost improvement of an A321 with Pratt & Whitney PW1000G engine hanging under its wing. Air Insight says the improvement in operating cost justifies the A321 be the first, not the second, member of the A320 family to receive new engines.

Airbus is keenly aware of the dilemma Icelandair and carriers like United, Delta, Continental, American and US Airways face as their fleets of 757s - at an average of 17 years old - ready for retirement. Over the past year, Airbus has sharpened its focus to capture this replacement market.

The report claims a 15% improvement in SFC over the existing CFM56-5B and IAE V2500A engines that power the A320 family today and would add a significant range improvement, or equivalent fuel savings, over today's routes. P&W's Bob Saia, vice president next generation product family, estimates the overall improvement in fuel burn would be in the range of 13-14% once the aircraft is adapted for the new powerplant.

John Leahy, Airbus chief operating officer customers, says the NEO (new engine option) would mean four possible choices for customers, with today's two existing V2500A and CFM56 choices along with a P&W (possibly IAE) geared engine and a CFM Leap-X option.

Boeing is not sitting still either and has said replacing the 757 is part of Mike Bair's 737 Advanced Development study going on now, however, any new narrowbody would almost certainly not be available on the near-term end of Gudnason 2015 timeframe. Company CFO James Bell indicated recently that the re-engining of its 737 would yield only a single digit improvement for customers, potentially indicating further short term improvements to the type coupled with a longer-term clean sheet design moving forward.

For Icelandair, with no perfect match to its 757s, going from a single type to two different types to capture its routes today, as well as growth for tomorrow, would change the airline's operations significantly. With two aircraft types, overall maintenance and pilot training requirements would undercut Icelandair's low cost base and significant flexibility.

Whatever the carrier decides to do with its fleet, Icelandair's 2012 decision may be a bellwether as the industry looks to replace an aircraft that today remains irreplaceable.