CEO Interview with Wizz Air, CEO, Jozsef Varadi

Transcript

Peter:

Very warm welcome to Jozsef Varadi, CEO of Wizz Air. Well known to everybody on CAPA Live, I'm sure. Welcome to CAPA Live again, Joe. Good to see you.

Jozsef Varadi:

Thank you.

Peter:

Joe, let start with two numbers that sort of intrigues me around Wizz Air. One's a 100 and one's 500. The hundred has six [inaudible 00:02:55] after it. And that's the one that apparently you get as a bonus, if you can double your share price, is that right?

Jozsef Varadi:

Yeah, that's correct. But I think, it put things in perspective, Peter. So earning that reward would require me to create close to $10 billion of shareholder value. So this is a good percent of that shareholder value creation. And this is not only me, but I think the whole management team is put into it to align interest between management and shareholders, the board of directors. I think it's a great thing. It is a high risk, high reward. I may end up with getting nothing, but I'm very happy to take that, but that's not a matter of money in my mind. This is a matter of an intellectual challenge. This is the time for which to step up and make a difference in good times. Everyone kind of looks good in difficult times. You really sense the difference. And I think this is our kind of lifetime opportunity to make a real difference coming out of Covid-19. And, this is what we have been doing. It's great to have that reward, but we are not doing it for that.

Peter:

Well, this is one of those times when in bad times, not everyone looks good, but you seem to be looking pretty good at the moment.

Jozsef Varadi:

We are very resilient and is on the basis of being liquid, being investment grade credit. One of the four airlines in the world, even today, despite all the difficult circumstances and being the lowest cost producer in the industry. And this is in commodities, lowest cost [inaudible 00:04:39]. So that's where you have to be and this is where we are coming from. And that what makes us resilient and that what makes us fit for 500, your second number. And 500 is the size of the airline, in terms of a fleet to operate 500 aeroplanes by the end of the decade, that would require us to more than triple the current size of the business. And as said, I think we are good to go given our resiliences, given our strengths, I believe we will be a better airline, a more formidable competing force coming out of Covid, than what we were getting into it. And we are just creating a path we titled as with 500 to deliver a fleet of 500 aircraft in the next nine years.

Peter:

So Joe, you [inaudible 00:05:28] accreditable target and probably not at all unrealistic, I have to say with the growth profile you followed so far. You are sitting, I believe in Abu Dhabi, at the moment. How many more do you see with that 500 aircraft? Do you see many more bases of that nature, as a result of that?

Jozsef Varadi:

When we consider an airline and we kind of project the airline nine years down the line, how that 500 aircraft shall be operated, in my mind what I see is that porbably half of it, will be operated in all four markets in [inaudible 00:06:08] . A quarter of it be operated in selective markets in [inaudible 00:06:13], and the remaining quarter will be put into new markets going east. And one of that pillars is Wizz Air Abu Dhabi, that might be more to come in the coming years. And it is coming through a highly diversified network designed, a well expanded and extended footprint of the airline Abu Dhabi, today, we are flying, but over a thousand route of which over 400 were launched during the last 18 months during the pandemic.

Jozsef Varadi:

So we've been very agile and we've continued to be agile going forward, but we are going to be very picky and very selective on the market opportunities. And we are going to be pursuing the markets where we believe we can actually implement the business model, on behalf for [inaudible 00:06:59] without compromises.

Peter:

So when you talk about going east, how far east would you go? Would you go beyond the middle east?

Jozsef Varadi:

Time will tell us. This is a moving word, who would've sought six or seven years ago that Wizz Air, would become the largest international airline in Israel. And that is the case because the market opened up. Who would've saw it a few years ago, that we would be flying an airline as a joint venture with the Abu Dhabi Government. But now this is the case. So as times are changing, as things are moving over we are acting on these newly rising opportunities.

Jozsef Varadi:

So I don't really want to predict the world how that's going to look in 5 years or 10 years from now, but certainly we keep an eye on all these developments. Over time, I believe the market's going to be more coordinated, more liberalised, and we are going to have better and more access to certain markets. That has been the case over the last decade and why shouldn't that continue to bigger case. And certainly as that happens, we would be taking advantage of our positions and our leverage to move quickly on these opportunities. But the very latest I can tell you is Ukraine signed an Open Skies agreement with the European Union and immediately pretty much next day, [inaudible 00:08:19] and other aircraft to be deployed in the country, acting on this opportunity. We would do it likewise in other cases as well.

Peter:

So I've asked you this before Joe and obviously strategies evolved over time. How much connectivity do you foresee as you go along connectivity in-terms of connecting at particular points in that network?

Jozsef Varadi:

Conceptually I'm somewhat struggling with this whole connectivity. I know that the [inaudible 00:08:55] on industry has been built around connectivity. I'm certainly seeing that point to point is going to be increasingly activating concept, especially in short and medium world. If you look at the world maybe 10, 15 years ago, point to point was a matter of flying for up to two hours. Now, comfortably you can fly 5, 6 hours. I took yesterday, Budapest to Dubai flight about over 5 hours. People were happy, the flight was full. I don't think we had any issues. And it just makes sense, not only from a consumer perspective, you save a lot of time, certainly from an economic perspective but also from a sustainability point of view, connecting people requires a lot more takeoff and landings, and that will use the air much more.

Jozsef Varadi:

So I think the world should be pushed towards point to point flying as opposed to connecting flying. Now, obviously connectivity has its own limits. I'm not certain that you can connect Sydney or you not be connecting Sydney with, I don't know, Los Angeles. Certainly, you need to think about the [inaudible 00:10:02] slightly differently. But I would be that a large portion of the worlds flying could be developed without connecting people through hubs. So I personally think that the next challenge of the industry in the coming decades will be how to fly around hops and how to create a more robust point to point network, which makes a lot of sense for the consumer as well as for the environment.

Peter:

Right. Just a matter of interest. What's the cheapest fare between Budapest and Abu Dhabi.

Jozsef Varadi:

If you have a look at [inaudible 00:10:40] you can get it for 20 bucks.

Peter:

[inaudible 00:10:43] You know, though, Joe, of course that you are encouraging more people to fly, don't you?

Jozsef Varadi:

Yeah, we do because we are simply more efficient and I think people should fly us. Let me tell you one interesting number. If today, Euro was operated on the base of the Wizz Air business model, flying Wizz Air aircraft, the carbon footprint of the industry would be 34% lower than what it is at this point in time. It's just showing how more efficiently we are and how more sustainable our operations can be for the industry so, yes, we are encouraging people to fly more with this, and ultimately you can say that they should be flying less with inefficient airlines if they feel responsible for the environment.

Peter:

It sounds a bit facetious, but there is an argument that some of the large carriers in Europe are using, isn't it? And, it seems to get some traction too, with journalists and with the travelling public, it seems to me quite [inaudible 00:11:47]. Do you have that feeling?

Jozsef Varadi:

I think the industry is somewhat broken in terms of interest. The legacy carrier interest is very different from our interest. Our interest is to look at aviation on the base of efficiency, their interest is to look at aviation on the basis of company's corporate emission. So they try to corporatize the issue. We try to look at it from the perspective of efficiency. I think we are right, because that's the way you need to look at. Where you buy a fridge, for example, what do you look at? You look at the energy consumption of the fridge, that's a unit based measure. You cannot look at the [inaudible 00:12:28] on the base of airline X, how big of an impact that airline is making on the world. You need to look at how efficiently that airline is operating and what is the footprint it creates when it comes to poor passenger numbers or per mile numbers, depending on how you measure it.

Jozsef Varadi:

So I think that issue has to be resolved and we are beating around the bush at this point in time. There is a have low being going on. I know that some OEMs, even the regulators were attempting to come up with some efficiency, measures. Those initiatives got boycotted by legacy carriers because simply their interests are not served on that basis. We emit 50% to 70% less per passenger, in comparison to the legacy carriers in Europe. But at the same time, they all want to come up as champions of the industry driving sustainability, but they are in a pretty bad place to accomplish that. But at the moment, I think the world is a mess and it comes to sustainability. We talk a lot about it. We greenwash a lot at the moment, but I don't think we are reacting together the right way. So that needs to be sorted out.

Peter:

Yeah. That acting together issue is a big one, isn't it? If the industry's going to be taken credibly and if there's going to be transparency, it's important to have a common voice unlikely though, that might seem. Joe let's jump subjects, WizzyJet, EasyJet and Wizz. I'm not sure how serious that bid was and obviously EasyJet, took a different beast from Wizz, different cost base and so forth and you've talked about that. Would you make another shot at EasyJet and if not, or if so what other opportunities are there?

Jozsef Varadi:

To jump on, one more Peter, I'm not going to talk about this, but what I can tell you is that Wizz Air, is designed as an organic business model. We have been growing this business on an organic basis, very clean and efficient, and this is the baseline going forward. So when we are talking about Wizz 500, that assumes an organic gross plus of course, if you have an interest in [inaudible 00:14:48] of the market, but [inaudible 00:14:50] may happen in many different ways, it can happen on the base of M&As. It can happen on the basis of acquiring assets.

Jozsef Varadi:

We have been demonstrating our ability to participate in [inaudible 00:15:05] in two ways. One is competing and winning competition and backfitting markets of [inaudible 00:15:14] airlines or acquiring assets. And we've done it a few times, acquiring airports, whether we ever going to end up in a M&A kind of activities, I don't know. This is not a priority for the company, but at the same time, of course, given the size of our business, we need to keep an eye on the market. And, we may need to position ourselves for certain opportunities, but, let's just throw the [inaudible 00:15:39]. And so far so good. I think we've done well, growing this business organically, we remained focused on growing this business organically. If something happens of interest to the business, we will consider it of course.

Peter:

That said, Joe, you did make an offer for [inaudible 00:15:58] make an offer for EasyJet, which was considered by them to be somewhat low. Probably in a lot of cases, airlines are going to get worse from here, aside from your own and perhaps Ryanair, and this isn't something that's going to happen in five years time. This is something that's likely to happen in the next year or two. When you talk M&As, how much of your thinking time is occupied with that, when you look at what's going on around you?

Jozsef Varadi:

I think to move on from this point, I'm not going to get into it. You are trying for it very carefully coming into it from another angle, but you are not going to catch me on this. So we need to move on from here.

Peter:

Okay. So with Wizz Air Abu Dhabi, let's talk about that. Recently the rubbers really hit the road there. You've really started implementing what you planned, even though it was a bit too late. Tell us how things are going.

Jozsef Varadi:

We are very excited about Abu Dhabi. Probably strategically, even more excited than before because we are seeing a reset in the industry here. You see the [inaudible 00:17:13] are restructuring. They are reviewing the strategic plans, and that may create more and bigger opportunities for Wizz Air Abu Dhabi. The first few months over here, I would say, have been difficult, from an operational ramp-up perspective, given the restrictions prevailing in the marketplace. But now we are coming out of the [inaudible 00:17:36] and we can do what we are really good at to fly people from A to B as efficiently as possible at the lowest possible cost. And now we are on track. We are ramping up operations. We continue to launch new destinations. We are assessing new market opportunities. So yeah, I think we are on the way.

Jozsef Varadi:

And, I hope that continuation of the process is going to remain undisrupted going forward. But you see that we are still in a volatile world. Europe is not doing too well when it comes to, to the spread of coronavirus. So I wish I see what happens here. I have seen the system acts very responsibly, has safety measures in the country and now as people are vaccinated, and the country did an excellent job in pushing vaccination rates pretty high here, it is a much more protected environment to operate airlines. And, hopefully we can take the benefit of that.

Peter:

Are there any routes in and out of Abu Dhabi that have surprised you either positively or negatively?

Jozsef Varadi:

It is a very diverse market opportunity, I would say. Obviously flying from Europe, especially [inaudible 00:18:53] is a home run for us, but we are seeing significant interest in Wizz Air Abu Dhabi, whether this is the GCC or Russia, CIS, we are working hard on getting to the subcontinent. We are not yet flying that market, but it's just a matter of time and we will get there. So the interest for Wizz Air, the interest for low cost flying, the consumer interest for efficient flying are totally genuine concepts here in Abu Dhabi pretty much is the same as anywhere else in the world. So I think we've got very strong reception by the market, by the travelling public here, flying out from Abu Dhabi, also flying in [inaudible 00:19:37]. We are seeing a lot of interest in people wanting to come to the UAE, wanting to come to Abu Dhabi.

Peter:

Let's go back to Europe. We sort of hit a bit of a wall just in the last two or three weeks as far as I can see, but things were looking very positive before that, Joe, where are we going from here?

Jozsef Varadi:

We have learnt that these journeys are rollercoaster going through Covid-19. You have some good periods and US business try to be very agile, to take advantage of that situation. But next day it can overturn and things may move to a totally opposite direction. And you have to be also agile to be able to adjust capacity according to some financial disciplines. We are very disciplined financially. So we are protecting financial performance, especially liquidity and cash performance. And that's the base of running this business. There is nothing more strategic than profitability and liquidity. Obviously, given the times and given the challenges we are seeing, we are more focused on liquidity at this point in time. And we have just been rolling out that discipline and whatever it takes, I don't know.

Jozsef Varadi:

We are now facing another wave of infections and obviously that to some extent, undermines travel demand. And also, we are seeing newly introduced restrictions by a number of countries, further effecting the interest of the travelling public in flying. I think we've kind of learned this process how to best manage it. But again, the key change I'm seeing is that Europe, is putting itself in a better pace through vaccination. Vaccination is the key issue to get rid of this coronavirus issue and history around coronavirus. Clearly rates are improving on vaccination. And even if people get infected, but they are vaccinated, they won't die. And they may not consume the health infrastructure to contrary as much as those who are non vaccinated. So we just need to continue to convince people to get vaccinated and move forward on that basis.

Peter:

Right. The other aspect to that, Joe, of course, is testing. You must run into all sorts of issues with testing, the different markets you operate to the price of testing, the various requirements around it. How are you dealing with that?

Jozsef Varadi:

Obviously, that's a limiting factor because, it adds to the cost of travel to the passenger. To be honest, I think testing is going to be somewhat put into a different perspective by governments. You are seeing a number of governments in Europe now are talking about the 2D compliance, which basically means that you can only comply by being vaccinated or recovered from Covid-19. So testing is no longer a way of compliance. So which I see how that concept is going to be rolled over. I don't think testing is going to be the long term prevailing way of dealing with this issue. I think this is going to come down to vaccination in the end. But clearly it's an issue and different countries approach testing differently. In certain places, testing is free of charges, certain other places it costs a fortune. And depending on how that plays out economically and regulatory wise, it affects demand quite significantly. But, the demand environment in Europe today is significantly better than what it was a year ago. So we are seeing some improvement, but, it is far from being as robust as in 2019.

Peter:

And, along that same line, Joe, the commonality of passports to use the word loosely, how are you handling that? Because you do operate to a lot of different markets and there isn't total continuity there, is there?

Jozsef Varadi:

What do you mean by that?

Peter:

Basically health passports, the green passport.

Jozsef Varadi:

Yeah, the green passport.

Peter:

Recognition of vaccinations.

Jozsef Varadi:

It is a continuing strain in the system that you have to deal with all the complexities. We are operating to 50 countries and not many apply the same standards, the same measures when it comes to measuring green passport or Covid compliance or things like that. So it is very difficult and it puts a lot of pressure on the operation of the airline and it also puts a lot of pressure on the value chain. If you look at airport's ground operations, those infrastructure providers are dealing with these issues very differently today than prior to Covid-19. It's a different service. It's a different workflow, but they have to complete putting a lot of timing requirements on processes. So it is quite a distressed system. And it is, I would say, quite a continuous failure globally, that we are unable to come to grips with this whole issue, at least on the basis of applying the same measures and implementing the measures the same way.

Jozsef Varadi:

Europe is getting a little better, I would say so. Clearly, you are seeing European Union, better coordinating efforts, the countries is still not perfect, but travelling inside the European Union has become significantly easier than before. Especially if you are vaccinated, but flying between the European Union and outside European Union is still challenging from a compliance perspective.

Peter:

In some ways you must be a little bit like the bee, buzzing from flower to flower. Can you play a role like that saying, look, standardise it, it makes it easier for me to fly to you, if you do, to bring your customers, to bring you tourist.

Jozsef Varadi:

It's difficult, Peter, because, if you look at how governments operate nowadays, the position of the Health Minister has been rising substantially. So governments have also become somewhat ignorant to some of the economic factors because overwhelmingly decisions are made not only on the basis of economic impact, but putting more on the basis of health impact and how the health infrastructure of the country can cope with the challenges the country is facing. It's very difficult. We may be like a bee going from one place to another, but making a real impact on government decisions is tough. It's difficult because simply that governments are so much inward looking on this issue. And they sort of arrived almost every decision on the basis of their infrastructure, the capacity of the healthcare system of the country and some of the other political motives, of course.

Peter:

Yeah. It's a very complex scenario. Joe, as you said, you're probably emission wise and efficiency wise, the most efficient in the world. At the same time, you can't rest on your laurels, you've got to be reducing your footprint as well. What measures are you taking up to 2030 aside from having a new aircraft? Are you looking at SAFs, looking at offsets, purchasing carbon, whatever?

Jozsef Varadi:

We are looking at everything Peter, but we have made a shortterm commitment onto 2030, that we would be reducing our footprint by 25%. 25% basically means that we would be operating at less than half of the footprint of the industry in Europe today. Already, we are very efficient. We are emitting 57 grammes per kilometre. We would further reduce it to something like 45 in the next few years. But if you really look at sustainability and the industry's environmental impact, you need to sync beyond kind of tactical manoeuvring. There is a lot of tactical manoeuvring happening at the moment. I'm really serious when we say, okay, that we fly an old crappy aeroplane, emitting carbon, like hell and then over the weekend, we go somewhere to plant a few trees and we are done with our responsiblity when it comes to sustainability. So that's a bit of a joke. There's a lot of greenwashing happening at the moment.

Jozsef Varadi:

The real solution of the industry is going to be around technology and the use of the technology, the industry will have to decarbonize the propulsion system and that's the ultimate solution to the problem. It requires engineering efforts. It requires and a lot of R&D and it will take some time. So, this is not fixed overnight, this is going to be a fix probably over the next two decades when the industry can put itself in shape that actually can claim real breaks through when it comes to sustainability. Personally, I think we are going to get there. There are R&D efforts having been made by some of the manufacturers, kind of early stage today. So which I see how that process is going to unfold, but we need to change the other technology, whether that's hydrogen or something else, I don't know. The engineers will tell us, but, along those lines, we will have to change technology.

Jozsef Varadi:

And, it is also very important that we use the existing technology the most efficient way possible. This is again, coming back to the point I made earlier, should Euro be operated on the base of Wizz Air operating platform already, the environmental footprint would be 34% lower than what it is today. SAF is interesting. In many other geography SAF is just unavailable and where SAF is available, it is priced seven times higher than regular aviation fuel. So it's just an economic nonsense at this point in time. So we need to figure it out if we are serious about SAF in the medium term, and maybe that's a bridging solution for further reduction of the environmental footprint, we need to figure out the economics of that initiative.

Jozsef Varadi:

Wizz Air, has always been in the forefront of innovation. We are one of the very few airlines in the world, that has been inducting new technology on a constant basis, even during the Covid times. Since the breakout of Covid-19, we have taken 37 brand new aircrafts, the A321neo aircraft deliveries. No one has done that in that scale. That is an aircraft that is not only economically more efficient, but environmentally far more efficient than any other existing technologies. So we have done our job by continuing our path to innovate. And we do so going forward, but I really see the structural fix of the industry, when it comes to sustainability is around technology and the use of technology. And we have to decarbonize the industry and we have to operate the industry more efficiently.

Jozsef Varadi:

So let me just give you a few examples. And I know that this is going to trigger debates. Why do we have to fly business classes especially on short-haul? A business passenger occupies a lot more space. Therefore, the environmental footprint of that passenger is much greater. Why do we have to connect short-haul flying, which was discussed, at the beginning. The environmental footprint of that passenger connecting through a hub is much greater than flying from one destinantion to another destination on a point to put basis. So we have to ask all those questions when it comes to sustainability. And I think that we require some of the airlines to fundamentally rethink their way of doing business and their business approach, and wish I see how politics and governments, we react to this, especially when they own an airline like this.

Peter:

And Jozsef, time is up. And that's a really nice place to end, I think, too. Yeah. Thanks for that. Some interesting points in there, and I do wish you well with your numbers, as well as particularly in the short term though, I hope Europe is going to start to perform and it does look like a tough winter though, coming up.

Jozsef Varadi:

Thank You, Peter.

Peter:

Thanks [crosstalk 00:32:30]

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