30-May-2017 3:22 PM

Wizz Air: Central/Eastern Europe's largest airline turns 13; profit margin dip not auspicious

Analysis

Wizz Air celebrated its 13th birthday on 19-May-2017. It has grown to be the biggest airline in Central & Eastern Europe (excluding Russia and Turkey), with a compound average growth rate in ASKs of 24%, and in passenger numbers of 23%, over the past 10 years.

In summer 2017, and across its financial year to Mar-2018, Wizz Air is accelerating its growth rate. It has 26 new routes and 117 new destinations this summer. In Jun-2017 it will open its first aircraft base in Western Europe at London Luton.

Alongside this impressive growth, Wizz Air has also established a track record of healthy profitability. After a patchy start, it has now spent three years as the second most profitable airline company in Europe, after Ryanair, as defined by operating margin.

Shortly after its 13th birthday Wizz Air reported its FY2017 financial results, which revealed a small decline in its (still very healthy) operating margin for the first time in five years, as unit revenue fell faster than unit cost. The airline has plenty to celebrate, but those of a superstitious mind will hope that this anniversary does not prove to be an unlucky 13.

Wizz Air's growth is accelerating in summer 2017

Wizz Air is accelerating its growth plan this summer. In Nov-2016 it had planned to operate 83 aircraft across its network in summer 2017. By Dec-2016 it had indicated plans for an additional three, taking the planned total to 86 aircraft, and this has now risen once more to 87. This compares with 73 aircraft in summer 2016 - an increase of 14 aircraft, or 21%.

The airline's planned ASK growth for the financial year to Mar-2018 (FY2018) is similar to this fleet growth rate, although a little higher at 23%, as there will also be a modest increase in average stage length. This compares with its ASK growth of 19.7% in FY2017.

Wizz Air specialises in routes that link Central & Eastern Europe with Western Europe. All but one of its 28 bases that will be in operation this summer are in Central & Eastern Europe. The exception is the new base at London Luton, due to open on 18-Jun-2018 with one A320 based there, although Wizz Air is already the number two airline at the airport (behind easyJet).

Wizz Air: number of aircraft based in each country, summer 2017

Wizz Air's number of new routes for summer 2017 has grown from a figure of 70, announced in Nov-2016, to 89 planned in Jan-2017, to 117 now. Wizz Air also has 26 new destinations compared with last summer (see graphic below).

Wizz Air new destinations: summer 2017

Poland, Romania and Hungary remain its top three countries

Poland is to remain Wizz Air's biggest centre of operations in terms of the number of aircraft based in the country, with 23 aircraft this summer, followed by Romania with 22, and Hungary with 12 aircraft.

These top three markets will account for 57 of Wizz Air's aircraft - 66% of its fleet this summer. They are important territories in its battle with Ryanair for the number one ranking by capacity in Central & Eastern Europe.

Wizz Air is the biggest airline by seats in the region (as defined by Wizz Air to exclude Russia and Turkey, which are different markets), but Ryanair has also been targeting the region for growth.

Ryanair is the number one airline in Poland, while Wizz Air is number one in Romania and Hungary. Ryanair is number two in Hungary, but is in fourth place in Romania behind third placed TAROM and second ranked Blue Air, the fast growing Romanian LCC.

See related reports:

Varadi: Blue Air's growth "not sustainable"

According to data from OAG, Blue Air's total seat numbers will grow by 64% year-on-year in the summer 2017 schedule - faster than any other European airline group in the top 30, by seats. In addition to strong growth in Romania, Blue Air has embraced the pan European LCC model with a more geographically expansive strategy.

Its second largest base, after the Romanian capital Bucharest, is in the Italian city of Turin, and Larnaca in Cyprus is also an important base. At the start of the summer 2017 schedule, Blue Air added a third non Romanian base at Liverpool.

Wizz Air CEO Jozsef Varadi told analysts at the company's FY2017 results presentation on 25-May-2017 that he did not believe that Blue Air's growth was sustainable or profitable.

"[Blue Air] is positioning itself for sale or a capital transaction," said Mr Varadi, "I don't believe it has the necessary strength to be a long term player in the marketplace".

Wizz Air's growth is accelerating, but overall market growth will fall in C/E Europe in FY2018

Wizz Air added 3.7 million seats in FY2017, similar to the figure of 3.6 million that it added in FY2016. However, according to data presented by the airline at its FY2017 results presentation, a total of 22.7 million seats were added to the market in Central & Eastern Europe (excluding Russia and Turkey) in FY2017. This means that Wizz Air's share of new seats in its market was only 16% - a fall from 36% the year before.

In FY2018, Wizz Air's growth is accelerating. It plans to add 6.6 million new seats, considerably more than in recent years, while total market growth in CEE is expected to fall to 13.4 million seats. This will give Wizz Air 49% of new seats in the market in FY2018.

Central & Eastern Europe*: seat capacity growth by Wizz Air and the market, FY2013 to FY2018**

Fleet plan trimmed by two aircraft at end FY2018 and FY2019

Although Wizz Air's capacity growth and summer fleet size are accelerating, the number of aircraft in its fleet plan at the end of its financial year has been trimmed by two aircraft for each of FY2018 and FY2019 (years to March), compared with the plan last updated in Nov-2016.

The fleet grew from 67 aircraft at the end of FY2016, to 79 aircraft at the end of FY2017 (no change from the Nov-2016 plan). At the end of FY2018, the airline now plans to have 91 aircraft (93 planned previously), and at the end of FY2019 it plans for 99 aircraft (101 previously).

It seems that the reduction in the numbers for the end of FY2018 and FY2019 represents a minor modification to the delivery schedule, relating to delays in the A321neo programme as a result of engine issues, and also to Wizz Air's decision to take new A320ceo deliveries in a 186-seat configuration instead of the 180-seat version currently used.

The first A321neos are due to enter the fleet from FY2019, but Wizz Air now expects three in that year, rather than the nine previously anticipated. Problems with the Pratt & Whitney engines for the A320neo family have led to other airlines, such as JetBlue, Volaris and Spirit, reducing their neo orders, or switching them into A320ceo family aircraft.

However, Mr Varadi told analysts that there was time for P&W to solve the issues before Wizz Air's first deliveries. Calling the new geared turbofan engine a "disruptive technology with a hell of a potential", he said that the problems had been identified and were being addressed. He also expressed confidence in P&W's ability to achieve the necessary industrial ramp up to meet the order backlog.

Wizz Air has not updated its fleet plan in detail beyond FY2019. It had previously published details of an increase in the fleet to 154 aircraft at the end of FY2024, and has not indicated a change to this target.

Indeed, Mr Varadi said that the fleet plan will be "fully delivered". He said that the delivery schedule was continuously reviewed, and that there were always "ways to get more aircraft", including lease extensions.

Wizz Air fleet plan: FY2015 to FY2019

Wizz Air grew ASKs by 20% in FY2017 and took load factor above 90% for the first time

In FY2017 Wizz Air completed another year of double digit capacity growth, with an ASK increase of 19.7%. Its only year of single digit ASK growth since FY2006 was FY2013, when ASKs grew by 8.4%. Its compound average growth rate since then has been 18.8% pa.

The airline increased its seat capacity by 16.4% in FY2017, while passenger numbers grew by 18.9% to reach 23.8 million. Passenger load factor gained 1.9 ppts to 90.1% - the first time that Wizz Air has exceeded the 90% threshold, and a 6.8ppt improvement since FY2010.

According to data in its results presentation, 66% of its FY2017 seat capacity growth was on its already existing network of more than 250 routes, through increased frequencies.

New routes between existing Wizz Air airports accounted for 25% of its growth, and only 9% of new capacity was on new routes in new markets. The vast majority of new routes, 85%, were between CEE and Western Europe.

Development of Wizz Air passenger numbers (million) and passenger load factor (pax as % of seats): FY2005 to FY2017*

Profit grew in FY2018, but operating margin dipped slightly for first time in five years

Wizz Air has managed to combine its rapid growth with profitability since making a small net loss in FY2011.

In FY2017 (year to Mar-2017) Wizz Air's reported net profit grew by 27.5%, to EUR246 million. However, this comparison is distorted by items such as unrealised foreign exchange gains, the value of hedging instruments, and other exceptional items.

Its underlying net profit, which is the basis for management's guidance, increased by only 0.6% to EUR225 million - at the bottom end of its guidance range of EUR225 million to EUR235 million.

Revenue grew by 9.9%, to EUR1,571 million (slower than capacity and traffic growth). Wizz Air's operating profit (before exceptional items) was up by only 4.7%, to EUR247 million.

Although the operating result increased in absolute terms, the operating margin (profit as a percentage of revenue) fell by 0.8ppts, to 15.7%.

With only Ryanair still to report its full year results for the financial year nearest to 2016, this is likely to confirm Wizz Air's position as Europe's second most profitable airline by operating margin (Ryanair also has a March year end, but its margin can be calculated at 23.2% for calendar 2016).

Wizz Air's operating margin remains impressive by comparison with almost every other airline in Europe, but the small dip in its margin was the first decline since FY2013.

Wizz Air revenue, EBIT and net profit (EUR million): FY2005 to FY2017*

RASK fell faster than CASK in FY2017 in spite of strong ancillary revenue performance

The dip in margin came about because Wizz Air's unit revenue fell at a slightly faster rate than its unit cost. Calculated on the basis of total revenue and total operating costs, its RASK fell by 8.1%, while its CASK fell by 7.3%.

Wizz Air managed to offset some of the downward pricing pressure in the market with another successful year of ancillary revenue growth. The group's total ticket revenue per passenger fell by 14.0%, but ancillary revenue per passenger grew by 3.2%.

Ancillaries' share of total revenue increased to 42% in FY2017 from 37% in FY2016. This is one of the highest of any airline globally.

Wizz Air has a strategy of using ancillaries, in addition to low costs, as a tool for keeping ticket prices low. However, its falling fares were also a product of market conditions and strong capacity growth.

Wizz Air revenue per passenger* (EUR): FY2011 to FY2017**

Unit cost has been driven by fuel for several years; ex fuel CASK unchanged

Wizz Air's CASK only fell thanks to lower fuel prices: its ex fuel CASK was stable (+0.2%).

Wizz Air's ex fuel CASK has barely changed since FY2010, since when changes in total CASK have been driven by changes in fuel CASK. Its RASK has followed a similar pattern to its CASK, although it managed to keep growing modestly in the first two years of CASK decline (see chart below).

Wizz Air: total operating cost per ASK (CASK) and total revenue per ASK (RASK) (each in EUR cent), FY2005 to FY2017

Wizz Air expects RASK and CASK to increase in FY2018

In FY2018 Wizz Air expects RASK to increase by a low single digit rate of growth, and CASK to grow by 3% (with ex fuel CASK again broadly flat). This suggests that RASK growth is not expected to be higher than CASK growth and so, Wizz Air's margin looks unlikely to increase again in FY2018.

Even a low single digit rate of RASK growth may prove to be ambitious in the light of Wizz Air's accelerated capacity growth, although slower growth in its markets overall may help the unit revenue outlook. Moreover, its fiscal year will benefit from the occurrence of two Easters in FY2018 (Apr-2017 and Mar-2018), which is typically positive for unit revenue.

Mr Varadi said that demand was currently stronger than expected and the unit revenue environment was stable, suggesting that Wizz Air may be feeling less unit revenue pressure than some other European airlines currently.

Growth must be balanced with maintaining profitability

Wizz Air's fleet plan to 2024 is aimed at maintaining double digit growth rates, while also lowering unit costs by adding larger aircraft and aircraft with newer engine technology (A321s and A321neos) to its A320 equipment. After several years of flat ex fuel unit cost, another downward step will be important, particularly if the fuel price environment were to move adversely.

In 2016 Wizz Air was Europe's 13th largest airline group by passenger numbers, and fourth among European LCCs, but its growth was the fastest among Europe's top 20 airline groups. Its growth this year will almost certainly take it into Europe's top 20 in 2017, but growth will have to be balanced with maintaining its high level of profitability.