Wizz Air SWOT: Ultra LCC builds on profitable growth

Summary:

• Strengths: Low costs, rapid growth, number one in Central/Eastern Europe (CEE), young fleet, ancillary revenue, load factor, financial track record.
• Weaknesses: Seasonal earnings, only one base in Western Europe.
• Opportunities: Fleet orders, further growth potential in C/E Europe, further ancillary potential.
• Threats: External events, Ryanair, yield dilution, cost creep, fuel price changes, Brexit uncertainty.

WIZZ AIR STRENGTHS

1. Wizz Air has very low unit cost
Based on its FY2019 results (year to Mar-2019), Wizz Air has the lowest unit cost among European airlines, defined as cost per available seat kilometre (CASK), according to CAPA calculations.
Alongside Ryanair and Pegasus, Wizz Air is one of only three ultra-low cost airlines in Europe. It has a longer average trip length than the other two, which should give it the lowest unit cost (as it does, in fact).
This low level of cost per available seat kilometre is based on a highly efficient business model, which includes a focus on secondary airports, high average aircraft utilisation and high labour productivity.
Low unit costs are fundamental to Wizz Air's business, allowing it to charge low fares and thereby to stimulate demand.
2. Wizz Air sustains rapid growth
Wizz Air's low costs and low fares have allowed it to achieve sustained strong growth. Its annual passenger numbers grew at a compound average growth rate of 18.7% in the decade from FY2009 to FY2019 (March year end).

3. Wizz Air is number one in Central & Eastern Europe
Wizz Air is the biggest airline by seats in its focus market of Central/Eastern Europe (CEE).
In the 12 months to Mar-2019 it had 16.3% of all seats in the region, compared with second placed Ryanair Group's 12.7% and a 6.2% share for third ranked LOT Polish Airlines (source: Wizz Air Annual Report).
Among LCCs in CEE, Wizz Air had a seat share of 38.6%, ahead of Ryanair's 30.2% and easyJet's 6.1%.
Moreover, Wizz Air was in the top three operators by seat share in all 13 CEE countries where it has a base (number one in five of them, number two in four, and number three in four).
4. The airline has a young fleet
Wizz Air Group's fleet has an average age of 5.1 years as at 4-Jul-2019, according to the CAPA Fleet Database. This compares with 14.3 years for all European airlines and is younger than its leading LCC rivals Ryanair Group (8.0 years) and easyJet (7.4 years).
5. Wizz Air has the highest level of ancillary revenue in Europe
In FY2019, Wizz Air generated 41% of its revenue from ancillary activities - higher than for any other European airline. Wizz Air passengers each paid EUR27.6 for ancillaries, compared with EUR16.9 for Ryanair (whose ancillary revenue was 31% of the total).
Ancillary revenues not only help to keep ticket prices low, thereby stimulating demand, but also tend to be high margin activities.
6. Wizz Air has grown its load factor to a very high level
Since 2010 Wizz Air has increased its load factor by almost 10ppts and with improvement in every year, to reach 92.8% in FY2019. In Europe, only Ryanair (96%) and easyJet (93.1%) achieved higher load factors in the same 12-month period.

7. Wizz Air's track record of profitability is strong
As a result of its low cost base and strong demand, Wizz Air has developed a good track record of profitability. FY2019 was its eighth successive year of positive net profit and its 10th successive year of positive operating profit.
Its 12.9% operating margin was second only to Ryanair, which reported a 15.7% pre-exceptional margin.
Consensus forecasts from S&P Global Markets Intelligence and published on marketscreener.com as at 4-Jul-2019 predict that Wizz Air will jump ahead in FY2020, with an operating margin of 14.9% versus 11.9% for Ryanair.
Wizz Air Group also has a strong balance sheet. At the end of FY2019 its cash balance of EUR1.3 billion was equivalent to 207 days of revenue, which is a substantial liquidity cushion
WIZZ AIR WEAKNESSES
1. Wizz Air's earnings are very dependent on the summer months
As is the case for the industry in general, Wizz Air's earnings are highly seasonal, with its profits relying on the summer half year, 1H (April to September).
In FY2019 1H accounted for 100% of full year net profit, and the winter half year merely broke even.
2. Wizz Air's bases are highly skewed to CEE
Although Wizz Air has reported in the past that it generates a similar proportion of its revenue from points of sale in Western Europe to those in CEE, all but one of its 25 bases for aircraft and crew are in CEE (London Luton is the only exception).
Although this reflects its origins and market focus on CEE, the majority of its routes are between CEE and Western Europe (488 out of a total of 609 routes, 80% of the total, in the week of 1-Jul-2019 according to data from OAG).
This paucity of Western European bases may restrict its operational and scheduling flexibility.

WIZZ AIR OPPORTUNITIES
1. Wizz Air's fleet orders offer lower unit cost potential and possible network stretch
According to the CAPA Fleet Database, Wizz Air Group has outstanding orders for 255 aircraft (72 A320-200neos, 181 A321neo ACFs and two A321-200s), not including its A321XLR options, as at 4-Jul-2019.
Wizz Air has more aircraft on order than any other European airline. Its deliveries are all due by 2026.
This number is well over twice its current fleet in service of 114 aircraft. Wizz Air's fleet plan aims for a total of 276 aircraft in FY2027, which represents an average growth rate of 12% pa from the end of FY2019.
Over the same time frame the proportion of seats on A321 aircraft types will increase from 41% to 77% and the proportion of A320neo family aircraft in the fleet will grow from 2% to 93%.
The combination of greater seat capacity on the A321 types and the lower fuel burn from the more efficient new engines should lead to significantly lower operating cost per seat.
The A321XLR could allow Wizz Air to extend its network geographically beyond its existing range.
2. There is further growth potential in Central/Eastern Europe
Wizz Air's aircraft orders allow it to continue to grow. Its target market of Central/Eastern Europe offers attractive growth potential for a number of reasons.
First, the region is economically less developed than Western Europe and therefore its GDP growth rate tends to be higher.
Second, and related to the first point, CEE has a lower propensity for air travel than Western Europe, but this should increase as the economic wealth of the region grows. According to data from Wizz Air, the CEE population takes 0.5 air trips a year, versus 2.0 in Western Europe.
Third, transport links with Western Europe have grown as a result of the expansion of the European Union to include several Central/Eastern European countries in recent years. In addition, Wizz Air's network is geographically close to non-EU Eastern countries where it could benefit from any liberalisation in traffic rights with the EU (Ukraine and Israel are recent examples).
Fourth, the share of airline seats taken by LCCs in CEE is currently lower than in Western Europe. According to CAPA/OAG data, LCCs have 11.6% within Central/Eastern Europe versus 43.9% within Western Europe.
As the propensity for air travel grows in CEE, the value proposition of LCCs is likely to drive an increase in their market share - particularly given the relative lack of powerful large full service airlines in Wizz Air's main markets.
3. Wizz Air has further ancillary growth potential
As noted under 'strengths', Wizz Air already has a very high level of ancillary revenue. However, as a share of total revenue, ancillaries fell slightly from 41.6% in FY2018 to 41.1% in FY2019.
This suggests that the airline has the potential to increase this further, building on a strong digital strategy. Its very low unit cost allows low ticket prices, creating conditions for high ancillary spend.
WIZZ AIR THREATS
1. Airlines are exposed to external events
Air travel, regardless of the carrier, is vulnerable to geopolitical events and natural phenomena such as earthquakes and volcanic ash disruption.
Wizz Air's focused geographic exposure arguably mitigates this exposure relative to airlines with a more global network, although its Central/Eastern European focus gives it operations in countries that border areas of geopolitical risk.
With the LCC's hitherto unblemished record when it comes to fatal accidents, public perception could be adversely affected if Wizz Air were to be involved in a major crash.
2. Ryanair is a fierce competitor
Although Wizz Air is number one by seats overall in its target region, Ryanair often comes out ahead in countries where they both compete. According to Wizz Air's FY2019 annual report, Ryanair is bigger in Poland, Latvia, Lithuania, and Slovakia.
In addition, Ryanair is significantly larger than Wizz Air across all of Europe.
In FY2019 Ryanair's total operating cost per passenger was EUR47, which was 20% lower than Wizz Air's EUR58. This was broadly consistent with Ryanair's 23% shorter average trip length, but the lower absolute figure underlines Ryanair's ability to stimulate demand with low fares.
Wizz Air's A321s and neos should help it to lower its unit cost further, but Ryanair's 737MAX order will also be beneficial to its own unit cost.
3. Yield dilution could result from A321 deliveries
In addition to its beneficial impact on Wizz Air's unit cost, the A321neo is also likely to have at least some negative impact on yield because it has more seats to fill compared with the existing fleet.
Moreover, Wizz Air's deliveries will come when significant numbers of narrowbodies are due to enter European airline fleets.
4. Any cost creep could be a threat to Wizz Air
As noted above, Wizz Air has ultra low unit costs. However, its ex fuel unit cost has barely changed in the seven years since FY2012, after it had cut it by 43% in the seven years before that.
Wizz Air has shown strong cost discipline in keeping ex fuel unit cost low, but has not been able to reduce it further. Any upward unit cost creep would threaten its competitiveness, particularly if unit revenue softens.
5. Wizz Air is exposed to fuel price changes
Wizz Air Group is exposed to fluctuations in the price of jet fuel. In FY2019 its fuel bill jumped by 39% and accounted for 33% of costs.
For FY2020, it had hedged 54% of its fuel needs as of 31-May-2019, but it was exposed for the rest.
6. Brexit uncertainties remain
Wizz Air has established a UK subsidiary, Wizz Air UK, in order to retain traffic rights from that country to destinations outside the EU and to take advantage of any acquisition opportunities in the UK post Brexit.

Nevertheless, there are uncertainties surrounding the impact of Brexit on the UK's economic outlook, demand for air travel and market access issues.
Conclusions: Wizz Air has achieved much in 15 years
Building on its very low cost base and strong ancillary revenues, Wizz Air can profitably offer low fares and stimulate demand. Its focus on Central/Eastern Europe, which is underpenetrated by air travel compared with Western Europe, offers strong growth potential.
The airline faces strong competition from Ryanair, Europe's biggest airline and the only pan-European airline with unit cost that is competitive with Wizz Air's.
Nevertheless, Wizz Air is the leading airline in its chosen geographic market and, moreover, it has built this position profitably while always competing with Ryanair.
Wizz Air's fleet plan should set unit cost on a downward path, but it also locks it into double digit capacity growth for several more years. Yield dilution is a risk that should not be ignored.
Consensus forecast operating margin for Wizz Air of 14.9% in FY2020 would be a strong result, but below the 16.5% it achieved in FY2016.
Nevertheless, if Wizz Air does overtake Ryanair as Europe's highest margin airline group, that will underline the scale of its achievement in only 15 years since its establishment in 2004.