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Stock Spotlight: Wizz Air remains firmly grounded as sky-high fuel costs take toll

Wizz Air shares are down 56% year to date, while other budget airlines, such as easyJet and Ryanair, have seen a 20% to 30% drop in stock prices.

This can partially be attributed to the scandals that have affected the company, such as the controversy sparked by CEO József Váradi, who suggested too many of the firm’s pilots refuse to fly when tired.

Váradi was seen in a leaked video telling employees that too many were taking time off for fatigue, adding that “sometimes it is required to go the extra mile”. The European Union Aviation Safety Agency is currently investigating his comments.

However, Storm Uru and James Dowey, co-managers on the Liontrust Global Innovation fund, said the reasons for the “undeniably challenging” situation Wizz Air is in are far-ranging and complex.

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Coronavirus

Obviously, the effects of the coronavirus pandemic on airlines were considerable and firms have slowly been building back up passenger numbers.

Adam Vettese, analyst at eToro, said: “Wizz Air is in a considerably better place than it was a year ago, but it is still loss-making – and it is expected to stay that way into the busy summer period.”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, added that with the boom in holidays this summer, “Wizz Air is set to carry record levels of passengers, up 40% on 2019 levels”.

Nevertheless, she warned: “It is not proving an easy flight back into the sunshine because the airline, like many others, has flown into more turbulence as it deals with the cross winds of labour shortages, air traffic control disruption and the cost-of-living crisis.”

While investors had hoped that the firm’s misfortunes would lessen, Wizz Air reported that losses had widened factually from year to end March 2022 to €642.5m from €576m the year before.

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Streeter said: “The highly uncertain environment caused by ongoing waves of cancellations and disruption has unsettled investors, and worries have also been mounting about the toll soaring inflation will take on the confidence of the travelling public.

“The airline has warned investors to expect a loss for the first quarter as it deployed extra resources to try and minimise disruption. Although its crewing plans were back on track, the airline is still set to be affected by wider staffing issues affecting the industry, particularly in the UK, which are likely to continue acting as a drag on its recovery.”

Ukraine

The war in Ukraine has had far-reaching consequences, socially and financially. Among airline stocks Wizz Air has been especially damaged by the war because it has a “greater exposure to Eastern European countries”, according to Ismail Rashid, equities analyst at Charles Stanley.

Jonathan Fyfe, senior equity analyst at Mirabaud Equity Research, noted: “Wizz Air started the year with a strong number two position in Ukraine’s budget airline market, with a 27% market share, fractionally behind market leader SkyUp’s 29%.”

“In turn, that left Wizz Air particularly exposed to the immediate fallout of the war in terms of flight suspensions and cancellations. At the group level, those cancellations drove a high-single-digit reduction in Wizz Air’s total activity in March.

“That effect though was sharp but temporary, with Wizz Air’s Ukrainian fleet and staff having since being largely redeployed onto other routes. However, the secondary effects of the war, notably around the surging oil price, has caused more lasting damage.”

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Fuel prices

All analysts noted that the ongoing effects of the war, along with continuing supply chain issues, have negatively affected all airlines.

“All airlines, including Wizz, are dealing with soaring costs, largely because of the rapidly rising price of fuel, but also because they are having to restaff to deal with growing demand. Global supply chain issues are also making it more difficult to acquire new planes or access vital parts,” eToro’s Vetesse said. 

Liontrust’s Uru and Dowey noted that Wizz specifically has been badly affected by rising fuel prices, as “unfortunately, Wizz Air stopped hedging fuel in 2021 that could push out a return to profitability into 2024”.

Fyfe explained: “Many airlines were burnt by their hedging policies through the Covid pandemic, as hedging locked in high average fuel prices even as Covid drove a sharp fall in traffic.” However, while the cost of unwinding those hedges was painful for many, most European airlines stuck with these hedging policies, he said.

“Wizz Air was an exception, entering 2022 with a ‘no hedge’ policy. That policy has since been abandoned but the damage is done.

“At current spot rates, in CY 2022 Wizz Air’s blended fuel price is likely to be over $1,200/mt. That compares to an after-hedge blended price of around $850/mt for the likes of Ryanair, Lufthansa and EasyJet.”

Fyfe estimated the industry “typically needs to raise fares high-single-digits to offset the cash cost of fuel price inflation”. However, Wizz requires about a 30% price increase to offset costs, which he described as “likely unattainable”.

Future prospects

Looking to the future, most analysts agreed that while the airline may continue to face some serious problems in the immediate future, it was still well placed to benefit in the long term.

Rashid said: “The short term will continue to be painful as margins are pressured and losses mount up causing debt to increase. This could force an equity raise which will be damaging to existing shareholders despite current liquidity of over €1bn.”

He added: “The long term picture should be more positive as the company has invested to increase capacity and thus has the potential to deliver more earnings, with the shares trading at lows last seen during the initial outbreak of Covid.”

Vettese agreed: “While there are myriad issues facing the sector, we expect low-cost carriers like Wizz to outperform their more premium peers as inflation soars and travellers tighten their belts. That said, a return to profitability in the short-term will be challenging.”

Uru and Dowey also drew attention to the growth in capacity of Wizz. They added that “the key metric we are watching this summer and as we enter 2023 is load factors across Wizz Air’s operations”.

“For the business model to drive significant shareholder value creation, we need to see a return to 90% plus load across Wizz Air’s flights. So, we will be watching how many seats are filled up this summer season,” they explained.

“We expect the volatility in the stock price to remain in the shorter term but expect the management team to navigate this difficult operating environment and eventually prosper once conditions start to improve.”

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