Company Reports

We relaunch coverage of Wizz Air with a no moat rating and fair value estimate of GBX 2,100, driven by strong capacity growth and improved business fundamentals.

Wizz Air is one of Europe’s fastest-growing airlines. It increased passenger numbers from 10 million in 2011 to 40 million in 2020. This growth was achieved by adopting Ryanair’s low-cost strategy and focusing on Central and Eastern Europe, where rising incomes have fueled demand for air travel.

We are dropping coverage of Wizz Air. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Wizz Air’s late fuel-hedging policy is biting into its short-term profitability and cost competitiveness. The group increased operating losses to EUR 284 million in the first fiscal quarter of 2023, from losses of EUR 108 million a year ago. Excluding fuel, unit costs are nearing precoronavirus levels, but the airline’s unhedged position has fully exposed it to a 94% increase in fuel unit costs. Fuel is now 45% of total costs, versus 35% before COVID-19, and drove total unit costs 40% higher compared with normalized prepandemic unit costs. Yields are rising by double digits across the industry, but we believe it will be at least another year before the airline is on a fuel-cost comparable basis compared with peers.

Wizz Air is the one of the fastest-growing European airlines, focusing on serving the Central and Eastern European markets. The airline has quadrupled passenger numbers from 10 million passengers in 2011 to 40 million in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market in an economic region which is experiencing high levels of growth in income. New routes in fast-growing Eastern Europe and market share growth in Western Europe, coupled with a firm grasp on cost containment, should drive double-digit profit growth over the medium term.

Wizz Air is the one of the fastest-growing European airlines, focusing on serving the Central and Eastern European markets. The airline has quadrupled passenger numbers from 10 million passengers in 2011 to 40 million in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market in an economic region which is experiencing high levels of growth in income. New routes in fast-growing Eastern Europe and market share growth in Western Europe, coupled with a firm grasp on cost containment, should drive double-digit profit growth over the medium term.

Wizz Air’s full-year 2022 results conveyed a cautious undertone due to industry disruptions caused by staff shortages, which could spill over into the busy summer travel period and harm the strong demand recovery. Management expects to generate a loss in the first fiscal quarter and provided no further guidance about full-year profitability. If the summer period does not result in expected profitability, we believe the airline is on track for another full-year loss as the second half of the year is seasonally weak, even at the best of times. The group also has the weakest hedging position among peers, which could exacerbate cost pressures if energy prices remain elevated. In the longer term we believe the group has a solid growth story and a structurally low-cost base helped by its strong Airbus A320neo order book of fuel-efficient aircraft and one of the youngest fleets in Europe.

Wizz Air is the one of the fastest-growing European airlines, focusing on serving the Central and Eastern European markets. The airline has quadrupled passenger numbers from 10 million passengers in 2011 to 40 million in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market in an economic region which is experiencing high levels of growth in income. New routes in fast-growing Eastern Europe and market share growth in Western Europe, coupled with a firm grasp on cost containment, should drive double-digit profit growth over the medium term.

We lower our fair value estimate for no-moat Wizz Air to GBX 5,800, from GBX 6,800, as we prolong the recovery in air traffic, lower our long-term growth rate, and incorporate higher fuel costs. The group is highly exposed to the Central and Eastern European region that could see negative demand implications from the evolving war in Ukraine. We lower passenger traffic for the 2023 financial year to 43 million passengers, from 51 million, and also decrease our five-year growth rate for passenger numbers by 2 percentage points to 13% per year, from 15% previously. Higher fuel costs will hurt profitability in the near term as the group is largely unhedged.

Wizz Air is the one of the fastest-growing European airlines, focusing on serving the Central and Eastern European markets. The airline has quadrupled passenger numbers from 10 million passengers in 2011 to 40 million in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market in an economic region which is experiencing high levels of growth in income. New routes in fast-growing Eastern Europe and market share growth in Western Europe, coupled with a firm grasp on cost containment, should drive double-digit profit growth over the medium term.

Germany’s boost in defense spending, announced Feb. 27, will benefit most European defense contractors and could lead to multiyear increases in the growth outlook for these companies. While it is early days and very difficult to quantify the exact impact, we expect to make positive adjustments to our defense coverage. Of the pure-play defense names, narrow-moat Thales, Dassault, and Leonardo trade at discounts to our fair value estimates while wide-moat BAE Systems trades at a premium. We don’t believe our revisions will change this ranking by much, and our preference is for Thales and Dassault. Despite the impact from a demand and cost perspective on the airline and commercial aerospace companies we cover, we don’t foresee any structural long-term changes to their prospects and as such don’t anticipate any major changes to our fair value estimates. We maintain our preference for wide-moat Safran and no-moat Wizz Air under our aerospace and airline coverage, respectively.

No-moat Wizz Air sounded an optimistic tone as it reported a third-quarter net loss of EUR 267 million, in line with management expectations. Revenue growth of 172% year on year reflects higher capacity and stronger load factors, which led to a 132% increase in passenger numbers compared with a year ago. Fleet capacity underutilization widened the operating loss to EUR 214 million, from EUR 142 in the prior-year comparable period. Capacity and demand will continue to be affected in the short term due to the spread of the omicron variant, but the group remains optimistic it can achieve capacity levels 50% higher than precoronavirus levels by summer 2022. Overcapacity in the market is expected to lead to yield pressure in the short term as promotional activity picks up once travel restrictions ease. We maintain our GBX 6,800 fair value estimate and believe Wizz Air offers the most attractive risk-adjusted upside among the European airlines under our coverage.

Wizz Air is the one of the fastest-growing European airlines, focusing on serving the Central and Eastern European markets. The airline has quadrupled passenger numbers from 10 million passengers in 2011 to 40 million in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market in an economic region which is experiencing high levels of growth in income. New routes in fast-growing Eastern Europe and market share growth in Western Europe, coupled with a firm grasp on cost containment, should drive double-digit profit growth over the medium term.

No-moat Wizz Air joins other European airlines in a return to profitability. The group generated EUR 57 million of operating profit in the fiscal second quarter, compared with a loss of EUR 139 million last year and a loss of EUR 109 million in the previous quarter. Free cash flow was positive in the first half, with total liquidity now at EUR 1.7 billion. Wizz Air carried 9.5 million passengers at a load factor of 80% in second quarter, reaching 81% of precoronavirus passenger levels, as the summer period in Europe saw a sharp recovery as travel restrictions were lifted. The group expects to report a loss of EUR 200 million in the third quarter, as it moves into the seasonally weaker winter period. The company is in high-growth mode as it continues to grow its fleet and expand its network. We maintain our GBX 6,800 fair value estimate and believe the stock offers the best risk-adjusted upside among our European Airline coverage.

No-moat Wizz Air expects a return to prepandemic capacity levels over the 2021 summer period as the group released a good set of results for the first quarter of fiscal 2022. Free cash generation was positive during the quarter, supported by cash inflows from advanced bookings for the summer period ahead, while liquidity remains robust at EUR 1.5 billion. The company reported an underlying loss of EUR 119 million, compared with a loss of EUR 57 million in the prior year comparable period. Management is hesitant to provide financial guidance for the full year and maintains a cautious tone regarding the outlook for the second half amidst the rise of new variants. We believe the group is taking a conservative stance and if the current trajectory remains on course, we might well see a surprise to the upside and break-even profits for fiscal year 2022.

No-moat Wizz Air ended the 2021 financial year on a strong financial footing and is gearing up for a strong recovery. The positive tone is a departure from the rest of the industry--the company added 18 new bases and 255 routes, slashed cash operating costs, and increased available liquidity by EUR 400 million to EUR 1.6 billion. Revenue and passenger numbers for the year declined by 73% and 75%, respectively, while posting EUR 482 million of underlying losses, compared with a profit of EUR 345 million in 2020. First-quarter 2022 capacity is anticipated to be 30% of 2019 levels, but the group remains optimistic it can achieve 2019 capacity levels in the fourth quarter and potentially exceed 2019 levels for the 2023 financial year. The company expects to emerge with a lower cost base, underpinned by shrewd supplier negotiations and lower ownership costs as the group takes delivery of its outstanding A320/1 aircraft orders over the next five years. We don’t expect to make any meaningful changes to our GBX 6,800 fair value estimate and believe the stock offers the best risk-adjusted upside among our European airline coverage.

No-moat Wizz Air is the Goldilocks of the airline industry--big enough to matter to suppliers, but small enough to enjoy a substantial runway of profit growth before reaching maturity. We upgrade our fair value estimate to GBX 6,800, from GBX 5,000, and believe the market does not fully appreciate the company's revenue growth and margin expansion opportunities. The coronavirus pandemic brought air travel to a near standstill, while the International Air Transport Association forecasts airline traffic to only recover to 2019 levels by 2024. The conventional thinking adopted by the market is that low-cost airlines, or LCCs, should recover faster than network peers due to lower and more flexible cost structures, and robust balance sheets, while benefiting from a relatively sharper recovery in short-haul leisure travel. While most airlines will use the downturn as an opportunity to restructure costs, we believe Wizz Air's growth and cost-reduction opportunities are more sustainable in nature.

Wizz Air is the one of the fastest-growing European airlines, focusing on serving the Central and Eastern European markets. The airline has quadrupled passenger numbers from 10 million passengers in 2011 to 40 million in 2020. This growth was achieved by deploying a rigid and focused low-cost strategy and passing on the savings by lowering fares to attract an underserved leisure passenger at the low end of the market in an economic region, which is experiencing high levels of growth in income. New routes in fast-growing Eastern Europe and market share growth in Western Europe coupled with a firm grasp on cost containment should drive double-digit profit growth over the medium term.

Globally, airlines enjoyed a strong run in recent share price performance, with the average price appreciation of the six European airlines in our coverage of 17% over the past month. Aside from Ryanair and Wizz Air, which are trading above precoronavirus levels, the balance of our coverage remains below precrisis levels as the pandemic continues to challenge industry balance sheets and cash flows amid a prolonged recovery due to persistent travel restrictions. Besides, increased talk by governments of vaccine passports, which could pave the way for reopening travel, we find little fundamental news that has changed the sector’s prospects, and believe most of the price increases may be attributed to a rotation of capital into unloved sectors from high-flying tech names, which have seen a retreat from recent highs. EasyJet (fair value estimate: GBX 1,090) continues to offer the best risk-adjusted upside in the sector, while low-cost peers Ryanair (FVE: EUR 14.50) and Wizz Air (FVE: GBX 5,000) are trading above our fair value estimates. The legacy carriers, Air France-KLM, Deutsche Lufthansa and International Airlines Group, are trading well below our fair value estimates but come with very high to extreme uncertainty as they face a high probability of capital restructuring, which could hit equity values.

One wouldn’t think the aviation industry is experiencing its greatest downturn in history if you look at no-moat Wizz Air’s growth ambitions. Since the outbreak of COVID-19, the airline added 260 new routes, established 14 new airport bases, and took delivery of 17 new aircraft, with ambitions to double the size of the airline in five years. The group certainly has the order book and liquidity to back it up. Wizz Air is in the sweet spot of an airline’s life--big enough to matter, but small enough to be unencumbered by legacy agreements and unionization. Passenger numbers declined by 77% year on year in the third quarter of 2021, with revenue down at a similar rate to EUR 150 million. Stubborn staff and maintenance costs resulted in EBITDA of negative EUR 41 million, compared with positive EUR 130 million in the same quarter last year. Despite the uncertain outlook for a recovery in air travel, we believe Wizz Air is in a unique position to use this downturn to its benefit. Our fair value estimate of GBX 5,000 provides some upside to investors who buy into the growth story.