A new domestic airline1996
Substantial changes were made to domestic flights in the mid-1990s. The market was opened in 1997 and up until then, the government applied a system of special licenses to control domestic 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, with prices dropping up to 40% while passenger numbers increased by only 20%. Operating at a loss like this put some airlines out of business, so Flugfélag Íslands did all it could to improve efficiency in order to remain in operation. The workforce was reduced, physical tickets were no longer issued, and passengers gradually began booking their seats on the internet. These factors were effective, and in 2002 the domestic carrier recorded a profit of 1.7 million USD.
Passenger numbers reached 400,000 in 2006 with destinations including Akureyri, Egilsstadir, Ísafjördur, the Westman Islands, the Faeroe Islands and the Greenland towns of Kulusuk, Narsassuak and Nuuk, in addition to Reykjavík. Flights also operated 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.