In recent times, the share price performance of Wizz Air Holdings (LSE:WIZZ), the FTSE 250 budget airline, has been markedly inferior to that of its nearest rivals. Whereas easyJet and Jet2 have seen little change in their stock prices over the past three months, Wizz Air’s has fallen by 43%.
But this could be an opportunity. Its share price is now 50% below its 52-week high, achieved in June. And it’s 77% lower than its all-time peak of March 2021.
Challenges
To assess the investment case, I’m going to start with some of the risks that Wizz Air has to contend with.
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Firstly, demand for air travel might be impacted by a global (or regional) economic slowdown. And intense price competition could affect the already tight profit margin of the low-cost carrier.
Then there are possible operational issues like air traffic control strikes, staff sickness, bad weather, lack of airport access, security incidents, the failure to obtain insurance cover, reduced availability of engines and the closure of airspace due to conflicts.
And financial risks — including the rising cost of fuel, fluctuations in exchange rates, increased borrowing costs, additional regulations, further carbon taxes, rising landing fees and delays in new aircraft deliveries — could all affect the airline’s bottom line.
If that’s not enough, there’s also the possibility of another pandemic.
But before I’m accused of being overly gloomy, I’d like to point out that these are the risks identified by Wizz Air’s own directors. Given their assessment, I’m surprised they want to run an airline, let alone get out of bed in the morning.
However, to be fair, all of these issues could affect any carrier. And yet investors appear to have more concerns about Wizz Air than they do about its peers.
Unable to fly
That could be because its operations have been badly impacted by problems with the supply of engines from Pratt & Whitney.
During the quarter ended 30 June 2024, an average of 46 aircraft were grounded, out of a total fleet of 218. Net profit fell to €1.2m, compared to €61.1m, for the same period in 2023.
Although it received some compensation from the engine manufacturer, it’s not enough to fully cover the lost revenue. And there’s the incalculable reputational damage caused by flight cancellations.
However, I’m sure these issues are going to be resolved soon. The airline should then resume its growth story. It carried 21.4% more passengers during the year ended 31 March 2024 (FY24), than in FY23.
It also increased its load factor by over two percentage points.
And encouragingly, the company’s directors remain committed, with two of them buying shares in August and September.
Final thoughts
However, there’s another problem that affects Wizz Air much more than its rivals. And that’s its level of indebtedness.
At 30 June 2024, its net debt was 3.9 times its EBITDA (earnings before interest, tax, depreciation and amortisation).
At 31 March 2024, the balance sheets of easyJet and Jet2 show a net cash position. Even International Consolidated Airlines Group, which was impacted by the pandemic more than most — and had to take on a lot of debt to survive — has a gearing ratio of one.
Therefore, until I see a sustained reduction in Wizz Air’s net debt position, I’m not prepared to invest.
