Wizz Air to recover in one year, vs 2-3 for airline industry - Varadi

Summary

• Travel restrictions are different in each of Wizz Air's 45 countries, but most people are "excited about travel opportunities", according to Mr Varadi.
• Mr Varadi does not expect a lasting impact on demand for air travel and anticipates "normal capitalism" will return.
• No change to Wizz Air's LCC model, which "does better in a recession".
• Partnerships and alliances "create complexity and cost". Airline/manufacturer relationship "won't really change".

Wizz Air operated 3% of its normal capacity in Apr-2020

Wizz Air's Apr-2020 traffic figures, reported on 5-May-2020, told a stark story of an airline operating against the backdrop of coronavirus lockdowns across Europe. Its passenger numbers were down by 97.6% year-on-year and its load factor tumbled by 17.3ppts, to 74.7%.

Nevertheless, Mr Varadi regarded the filling of almost three quarters of its seats as "doing quite well" - although comparison is hindered by a lack of many other European airline traffic reports for Apr-2020.

Finnair's load factor was just 23.9%, with passenger numbers down by 98.7% year-on-year.

Ryanair Group (the biggest airline group in Europe by passenger numbers in 2019) carried just 40,000 passengers in the month, a year-on-year decline of 99.6% and broadly half of Wizz Air's number, but did not give its load factor.

Travel restrictions are different in each of Wizz Air's 45 countries

Of course, as for all airlines, Wizz Air's massive fall in traffic was the result of government-imposed travel restrictions to fight the spread of coronavirus.

This lead to a haemorrhaging of bookings and in addition, an increase in the number of noshows.

This was exacerbated by the fragmenting of crisis response regulations. Mr Varadi noted that, out of Wizz Air's 45 countries of operation, all had different restrictions and interpretations of restrictions.

Even under lockdown, Wizz Air's small traffic volumes demonstrated that the airline was still experiencing demand, which can be stimulated by service, by fares and by hygiene factors.

In order for demand to make a full recovery, Mr Varadi called for the removal of restrictions.

"We need there to be no flight bans and movement freed up, although there will be different standards, in terms of masks and hygiene. We need a level playing field by governments. We don't yet know what bailouts mean - a more nationalistic approach with other factors also favouring national airlines? We need to see how that plays out."

Most people are "excited about travel opportunities"

Mr Varadi characterised travellers in three groups currently.

First, accounting for "almost half", were people "celebrating that we are back in the air". The second group were those who "like that we are back, but have questions". The third group, accounting for not more than 10%, were what Mr Varadi called "scepticals".

He considered that most people were excited about travel opportunities, especially after spending time under lockdown restrictions.

The Wizz Air CEO did not expect a lasting impact on demand for air travel from the lockdown. In his view, restrictions were a short term panic reaction and politically motivated.

"Normal capitalism" will return

He anticipated the resumption of "normal capitalism and normal principles" of the industry.

"Asset economics will prevail", added Mr Varadi, "airlines can't operate on the basis of suboptimal economics - even in good times, the industry underperforms relative to other industries".

There would be a six-month period of concern addressing issues such as physical distancing, but "not profoundly changing the industry on a long term basis". Eventually, a vaccine and other interventions would "control the issue".

Furthermore, Mr Varadi asserted that restrictions could not remain in place until a vaccine is found.

"Countries can't economically stay in lockdown and continue to finance this model", he said. "You can lock people down a few weeks, not years."

No change to Wizz Air's LCC model, which "does better in a recession"

Responding to a question from the online audience about whether Wizz Air would need to adapt its LCC point-to-point model if restrictions endured and several other airlines received government assistance, Mr Varadi was adamant that there would be no change to its business model.

Younger people are more positive about returning to travel and tend to be more price sensitive. According to Mr Varadi, Wizz Air has the youngest customer profile of any airline in Europe.

Mr Varadi conceded that a recession will have an impact on airline industry demand. However, he argued that LCCs would do better in a recession, the impact of which would restructure the industry, and that Wizz Air would emerge as structural winner.

"Recession means even lower cost", he said, "and to dilute model is the kiss of death".

Wizz is managed for cash and not just "paper profit"

Going into the crisis, Wizz Air had the strongest liquidity position among European airlines (see the CAPA analysis report: Wizz Air & Ryanair lead Europe on liquidity for COVID-19).

This would mean that if travel restrictions were to remain in place for longer than anticipated, and "even if Wizz Air is still not flying in 20 months, we will still be in business".

Wizz Air also has one of the highest profit margins among European airlines, but Mr Varadi said the crisis underlined the need to manage the business for cash, rather than "paper profit".

"As a business, you need to be cash rich, resilient. Airlines that think they are always going to be relevant and supported by governments - that paradigm must be discounted. You need efficiencies - operational, economic and in cash generation."

Growth is "an opportunity to restate our standing" in the industry

Wizz Air Group's current fleet numbers 121 aircraft (72 A320-200s, 41 A321-200s and eight A321neo ACFs, according to the CAPA Fleet Database).

Within a year this will grow by 14 aircraft, almost 12%, to 135, with 22 new deliveries and eight retired.

While the airline industry was "stepping backwards, cancelling and deferring", Mr Varadi regarded growth as "an opportunity to restate our standing" in the industry.

Many airlines would struggle to bring capacity back and demand would be lower overall, but Wizz Air could "come in and take space and stimulate the market".

Growth focus is Central/Eastern Europe as core, but to include W Europe and markets further east

Mr Varadi said that 70%-75% of Wizz Air's growth would be in its original network, with the balance coming from new markets, into which 40 aircraft would be moved.

The details of network expansion are still being analysed, but Wizz Air will stick to its core in Central/Eastern Europe, which will provide two thirds of its growth.

The group will also expand in Western Europe, where opportunities will arise from airline consolidation; and in markets further to the east, while will come from regulatory opening.

Wizz Air Abu Dhabi flights to launch in Jun-2020

One new market where Wizz Air has already launched sales is Abu Dhabi, with flights beginning to Budapest and Bucharest in Jun-2020, and Cluj, Katowice and Sofia planned for Sep-2020.

Wizz Air will be Europe's first LCC with direct flights to the UAE capital.

The airline is also considering other market opportunities from the UAE. "From Abu Dhabi in a six hour circle is half the world population", said Mr Varadi. "We can stimulate the market and create demand. Abu Dhabi aims to be a diversified economy".

Wizz Air Abu Dhabi is a joint venture with Abu Dhabi Developmental Holding Company (ADQ). It will operate a point-to-point model and there will be no partnership with another airline.

Just as Wizz Air Hungary is an EU airline with platforms across Europe, Mr Varadi sees the Abu Dhabi airline as a platform to cover a broader region over time.

"We will end up with three groups of airlines" as the industry consolidates

In Mr Varadi's view, the current crisis will catalyse European airline industry consolidation.

"We will end up with three groups of airlines", he said.

"One, a very small group - just a few airlines globally - will be self sufficient, profitable, with enough cash to get through without government intervention. Wizz Air will be in this group."

"Then, there are large national carriers propped up by governments on a discriminatory basis. The rest basically go bust, as they don't have resources".

Government bailouts "preserve inefficiencies"

Concerning government bailouts, Mr Varadi argued that such actions were short term and would preserve inefficiencies, rather than allowing market forces to push improvement.

"Why do governments do this? It's an undermining and distortion of market principles. They are spending tax payers' money, and spending much more than the market cap [of the airlines concerned]...Tax payers, as consumers, will pay again in higher ticket prices. Long term, it's structurally damaging".

Partnerships and alliances "create complexity and cost"

Counter to what he saw as a prevailing industry view that partnerships and alliances would help airlines out of the crisis, Mr Varadi said: "The politically correct answer is yes, but I think [the] exact opposite - we need to become more competitive".

A tie-up with other airlines creates complexity and cost, he argued.

"The consumer decides", he added. "Short haul flying is a commodity, needing efficiency. People vote with their pockets. Sitting around the board table deciding on cooperation screws the consumer. In commodities, lowest cost prevails. In alliances, there is no such thing as lowest cost, only highest cost.

Airline/manufacturer relationship "won't really change"

Mr Varadi did not foresee any significant changes in the relationship between airlines and aircraft manufacturers.

"Airlines are very fragmented, dealing with oligopolies and duopolies as suppliers", he said. "There is more concern about crisis management, but the relationship between airlines and manufacturers won't really change."

For Wizz Air, recovery will be "around a year - for the industry, 2-3 years"

Mr Varadi considered that Wizz Air was well positioned versus competitors to emerge strongly from the crisis, with its low costs allowing it to stimulate demand with low fares.

"Wizz Air is very efficient and new technology-based relative to the industry, which is old technology and high cost. Post virus, we will be a much better competitor, a better business relative to the industry", he said.

He predicted that there would be a significant difference in the speed and nature of recovery of different operators.

"The more pioneering, more entrepreneurial, more focused, more efficient players like Wizz Air will come out first. For us the recovery is going to be around a year - for the industry, two to three years".

Wizz Air has the cash to carry it through, an order book to provide growth capacity, and an established relationship with lessors to fund new aircraft through cash-generating sale and leaseback transactions.

All it needs now is the lifting of travel restrictions and the return of customer confidence.

For questions raised during the Masterclass, please see: Wizzair CEO Jozsef Varadi; CAPA Masterclass 6-May-2020

To sign up for CAPA's 19-May-2020 Masterclass with Mr Bill Franke, Managing Partner of Indigo Partners please register here