A new domestic airline1996
Substantial changes were made to domestic flights in the mid 1990s. The market was opened in 1997. Up until then the government applied a system of special licences to control internal commercial flights. Icelandair prepared for the changes by creating a new company especially for domestic routes. Flugfélag Nordurlands and Icelandair's domestic carrier merged to form an independent Icelandair subsidiary. Flugfélag Íslands, the fourth company with that name, entered the market.
A price war on the most popular routes broke out after the market was opened, and prices dropped by up to 40% while passenger numbers increased by only 20%. Having to run at a loss like this put some airlines out of business. Flugfélag Íslands did all it could to improve efficiency. The workforce was reduced and tickets were no longer issued. Passengers gradually began booking their seats on the Internet. These measures seem to have been effective, because in 2002, the domestic carrier recorded a profit of ISK 200m.
Passenger numbers reached 400,000 in 2006. Their destinations were Akureyri, Egilsstadir, Ísafjördur, the Westman Islands, the Faeroe Islands and the Greenland towns of Kulusuk, Narsassuak and Nuuk, in addition to Reykjavík. Flights also operate from Akureyri to Grímsey, Thórshöfn and Vopnafjördur. In 2007, the domestic fleet consisted of six Fokker 50s, two DASH 8-100s and one Twin Otter aircraft.