Join our community of smart investors

Wizz Air prepared for EU departure

The budget airline has secured the licence that means it can fly between the UK and the continent no matter what deals come out of Brexit
May 31, 2018

Budget airline Wizz Air (WIZZ), which specialises in flying to eastern European destinations, has made progress in two key areas over the past year. First, in early May Wizz Air received an Air Operator Certificate and operating licence in the UK. Second, credit ratings agencies Fitch and Moody’s started covering the airline, with both giving investment-grade ratings. The former gives the airline greater security around Brexit, while the latter improves its access to finance.

IC TIP: Buy at 3433p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

UK air operators' licence granted

Credit rating boosts access to cheap funds

Load factor keeping up with capacity

Dominant player in eastern Europe

Bear points

Fear of overcapacity in European airlines

Higher fuel costs

The air operators' licence from the UK's Civil Aviation Authority effectively establishes Wizz Air's UK base at London Luton airport. It’s a separate legal entity to Budapest-based Wizz Air, but will not report separate results. Chief executive József Váradi says customers won’t be able to tell the difference between the original and this new UK counterpart. Chiefly, the licence allows Wizz Air to continue to fly between continental Europe and the UK no matter what kind of aviation deal materialises from Brexit negotiations.

Second, Fitch and Moody’s have initiated coverage of the airline with “outlook stable” ratings of BBB and Baa3, respectively. This is investment-grade, even if slightly below those of the established Western operators, according to stockbroker Numis. Before this, Wizz Air had limited access to corporate debt, and so it has been forced to lease all its aircraft so far. The new credit ratings may give access to debt financing costs of 1-2 per cent compared with the 3-4 per cent it currently pays under its operating lease agreements. Numis estimates that this could add up to a third to post-tax profits by 2026 if Wizz owned 85 per cent of its fleet by then. 

Wizz also has its sights set on expansion. In the year to March 2018 the airline increased its capacity by nearly a quarter to 51.5m available seat kilometres and carried 29.6m passengers, while Mr Váradi expects to carry 20 per cent more passengers in the current financial year. Meanwhile, Wizz seems to have good control of prices – it dominates air travel in central and eastern Europe where it claims 42 per cent of the market, and on about 40 per cent of its routes it has no competition. 

Yet overcapacity in European airlines has been a sensitive subject over the past year, given the collapse of Air Berlin and Monarch. When asked what makes Wizz Air different, Mr Váradi says: "We’re making money,” adding that the company's margin of gross cash profits to revenue of almost 34 per cent is “industry leading”, although this was a 0.4 percentage point slip on the year before. Simultaneously, cash profits were up 22 per cent to €659m (£578m) for the year, while operating cash flow increased by more than a third to €417m. Additional capacity has not come at the expense of load factor, which increased by 1.3 percentage points to 91.3 per cent over the period. 

Fuel prices have been inching back up, which could put pressure on costs in the coming year. For the year just ended, fuel prices were 10 per cent higher and fuel unit costs increased 3.5 per cent to 0.93¢ per available seat kilometre in the period. Before any hedging, a $10 increase in the cost of a metric ton of fuel (currently about $610) would raise fuel costs for 2018-19 by $10m, although Mr Váradi says that 70 per cent of Wizz Air’s fuel supply is hedged over the next six months.

WIZZ AIR (WIZZ)   
ORD PRICE:3,433pMARKET VALUE:£2.50bn
TOUCH:3,431-3,433p12-MONTH HIGH:3,825pLOW: 1,922p
FW DIVIDEND YIELD:NILFW PE RATIO:13
NET ASSET VALUE:1,498pNET CASH:€980m
Year to 31 MarRevenue (€bn)Pre-tax profit (€m)Earnings per share (¢)Dividend per share (¢)
20161.43232177nil
20171.57235178nil
20181.95286217nil
2019*2.39346257nil
2020*2.77387287nil
% change+16+12+12-
Normal market size:300   
Matched bargain trading    
Beta:0.72   
*Barclays forecasts, adjusted PTP and EPS. £1=€1.14