Wizz Air takes aim at aerial zombies created by state aid
Airlines are hard to kill. Even a global pandemic has done surprisingly little damage to what was already a zombie industry.
It may sound counterintuitive. Fragility is endemic to a sector with high fixed costs and where the need for working capital fluctuates strongly between summer and winter. The International Air Transport Association warned at the start of the Covid-19 crisis that 75% of airlines had cash on hand to cover less than three months of costs.
Before the pandemic, only about 30 airlines worldwide were profitable (defined by a return on invested capital exceeding the weighted average cost of capital), and most of them were based in North America. Below the top 30, according to Iata, debt already averaged 5.5 times operating income before fleet financing costs.
Yet 18 months later, the vast majority of European airlines are surviving. Forced strandings were not the imagined existential event for companies already structurally loss-making, in part because national governments were afraid of losing their flag bearers to foreign invaders. The victims are almost exclusively national operators who were already on the precipice.
Britain’s biggest failure has been Flybe, which collapsed last March at the very start of the pandemic, after its competitors opposed a state bailout. German Airways and Level Europe, owned by IAG, ceased to fly in the first two months of the crisis, but since then even weaker companies have been able to benefit from market support backed up by financial aid. ‘State.
Major European airlines have exploited debt markets for € 6.5 billion since the start of the year, according to Bank of America, which believes that even though all flights are on a standstill, they have enough cash. to last almost two years on average.
Wizz Air’s results on Wednesday were a reminder of how much it has cost to maintain the status quo. Net losses totaled 576 million euros for the year through March, but 84 million euros of cash consumption in the first three months of 2021 was easily absorbed. Last year, the Budapest-based group appealed to the UK government’s Covid corporate finance facility for £ 300million and raised an additional € 500million with a bond sale, which means that its total liquidity increased by more than 100 million euros compared to a year ago to reach 1.6 billion euros.
Wizz’s investment case involves a ticket pricing strategy that starts low and then accumulates the extras, a preference for smaller airports and a base in Eastern Europe, where regulations are less onerous than West. The failure and withdrawal of its competitors is an opportunity to quickly deploy development capital from its large balance sheet. Wednesday’s results indicated 2022 would likely be in deficit, but long-term growth targets were unchanged.
Shares are up about 25% from year-end 2019 level, suggesting Wizz is emerging from the pandemic stronger than he entered. Such strength can be misleading, however, as airlines tend to trade on momentum rather than profit. Peers Ryanair and easyJet have also been dynamic in recent months, as European vaccine rates have raised the possibility of a limited summer season.
What happens next is not clearer. Airlines’ capacity is operating at around half of pre-Covid levels at this time, but there is still little evidence of a more permanent withdrawal of capacity that would support expansion among low-cost operators without causing price war on key routes.
The big five Europeans – have bailed out Air France-KLM and Lufthansa, as well as easyJet, IAG and Ryanair – have entered the pandemic with limited pricing power despite controlling nearly four-fifths of available seats. This image hasn’t changed much yet. Even baskets like Alitalia, TAP from Portugal and Norwegian Air Shuttle have found ways to keep flying.
BOA estimates that by the summer quarter of 2021, European short-haul capacity will already have returned to 85% of 2019 levels. Ignore the potential passenger shortage and it’s almost as if nothing has changed – other than, of course, the cost to governments and investors of circumscribing an industry that barely worked to begin with.