On paper, Wizz Air (LSE:WIZZ) is the kind of FTSE 250 growth share I love. Leading position in a rapidly expanding industry? Check. Vast exposure to countries with strong economic growth? You betcha.
Yet that focus on the booming budget travel in European emerging markets also comes with problems. Right now, it leaves the airline extremely vulnerable as oil prices — and by extension its fuel costs — soar.
At 890p per share, Wizz Air’s share price is down 27% over the last month. It touched record lows of 870p earlier in the month.
Though it faces obvious risk, the question is: should dip buyers consider having a nibble at current prices?
FTSE 250 faller
It’s no surprise to see Wizz Air and its peers collapse in March. Fuel costs are a significant cost burden for all airlines, and right now the’re surging as the Middle East conflict hits oil supplies. Here, they made up roughly a third of total costs in the six months to September.
But it’s not just greater expenses that are troubling the airlines. Some are stopping flights to destinations impacted by the war, and are experiencing knock-on disruption on other routes. Wizz itself has cancelled flights to and from Israel, Dubai, Abu Dhabu, and Amman.
On 4 March, the firm warned of a €50m hit to full-year net profits on both these issues. For the 12 months to March, profits are now “expected to be in the range of +€25m to -€25m“.
In the event of a prolonged conflict, further downgrades are obviously likely. But this isn’t the only worry I personally have over buying the FTSE 250 airline…
Long-running problems
You see, Wizz Air was already under strain before the Middle East war began. Early March’s profit warning was in fact the third it’s issued in just over 18 months, driving the shares down by around 60% to current levels.
So what else has been weighing on the airline? Long story short, huge swathes of its fleet have been forcibly grounded due to power unit problems. Manufacturer Pratt & Whitney’s been paying compensation, but the problem is rolling on, and Wizz is still out of pocket despite those financial remedies.
This would be bad for any airline, naturally. It’s especially critical here given Wizz Air’s stretched balance sheet. Net debt was €4.8bn as of September.
Bottom line
Could Wizz Air shares be a top buy following its fresh plunge this month? For long-term investors, perhaps. Its Central and Eastern European focus could still deliver excellent returns over time as wealth levels there balloon, driving holidays demand.
That said, I won’t be buying the airline for my portfolio. In my view, the Middle East crisis — which is driving up fuel costs and hitting already stretched consumers in the pocket — adds too much risk for my liking. I’d rather buy other FTSE 250 shares today.
