The airline industry is highly sensitive to the global economic outlook. Record-breaking highs for the industry in 2019 were, of course, crushed by Covid-19. Now, geopolitical uncertainty driven by Russia — coupled with volatile fuel prices — have been adding to the downward pressure on profits. The Wizz Air (LSE:WIZZ) share price has now sunk to less than 2,000p. However, low-cost airlines, particularly Wizz Air, have been utilising their market position to make operational changes that look to make them a competitive bet going forward in an uncertain market.
Key challenges facing Wizz Air
It has been difficult for Wizz Air to influence the costs of landing fees, maintenance, and fuel over the last couple of years as these costs were dependent on the number of flights it operated. Consequently, cutting crew costs has proved pivotal for low-cost airlines like Wizz Air, with staff predominantly paid flexibly by the flight hour and not a fixed full salary.
During the pandemic, European low-cost airlines took on £9.18bn in debt in order to raise funds to rescue cash flow. As a result, rising interest rates will ultimately stunt recovery, increasing the cost of debt.
With rising liabilities, there is also an increased importance placed on liquidity. Money tied up in assets certainly threatens this, especially with added pressures on airlines to reduce their emissions and invest in cleaner aircraft.
How is Wizz Air best positioned?
Wizz Air’s reported operating loss for the second quarter of 2022 was 285m euros, with CEO Jozsef Varadi stating that the “Ukraine war dented our momentum”. This certainly doesn’t instil confidence in me. Yet the ultra-low-cost airline has seen its liquidity “strengthen significantly to 1.6bn euros” in the same report.
Compared to competitors, Wizz Air has been the most aggressive in trying to generate cash inflow through sale and leaseback transactions. This is where an airline will buy aircraft directly from manufacturers, proceed to sell it to a leasing company for more than they paid and then lease it straight back for an agreed period.
As a result, the average age of Wizz Air’s fleet of aircraft is just under five years, making it the youngest of any major airline. Not only does this mean assets are converted to cash more regularly, enabling Wizz Air to respond to industry changes more quickly, but a younger fleet ultimately means lower maintenance costs.
Wizz Air is not without its faults, however. It has had to cut flights due to its lack of fuel hedging and data from the Civil Aviation Authority shows it had the biggest share of flights delayed in 2021. Yet, the share prices of Wizz Air and competitors like Jet2 and easyJet have all suffered fairly equally this year. I believe with some of the most aggressive cost-cutting measures, and its adaptability, it could grow much stronger than competitors.
Consumers are still uncertain and suffering from the effects on inflation. The rising costs of air travel will likely only grow their demand for cheap tickets. It will then be a case of how much can they stomach a compromised service?
Although I don’t currently have a position in Wizz Air, I will be looking to buy once the share price sees some sustained recovery from its current slide.
