Investing in airlines is a risky business. The nature of the industry means it’s challenging for companies to control costs and price wars can quickly erode revenues.
Companies are now facing another severe threat in the form of climate change. As the world tries to get to grips with its hydrocarbon addiction, the airline industry is firmly in the sights of climate activists and policymakers who want the sector to clean up its act.
It’s difficult for legacy carriers such as British Airways owner IAG to adapt to rising fuel costs, falling ticket prices and demands for more fuel efficiency. However, for smaller, newer and nimbler competitors such as Wizz Air (LSE: WIZZ), the opportunity is there for the taking.
Wizz was incorporated in 2009 and, after a slow start, during the past six years the business has taken off. Net profit has grown at a compound annual rate of 27% as revenue has expanded at 18% per annum on average.
Wizz’s low-cost offering is why it’s so popular with customers. During the three months to the end of June (Wizz’s fiscal first quarter), the average ticket price was just €36.60. Where the company makes its money is selling ancillary services to customers. Costs such as food and drink on the flight and excess baggage charges amounted to €30.10 per passenger during Q1.
In fact, the company now makes nearly as much money from these services as it does from tickets. Baggage fees were €5.49 per passenger.
These extra costs don’t seem to have hurt the airline’s growth. Indeed, having flown with the airline last month, I can confirm the company provides a relatively good service providing you don’t want to take on extra baggage or change flight details at the last moment.
Even if customers are put off by Wizz’s extra charges, this isn’t showing through in the firm’s growth figures. According to the company’s September traffic update, passenger numbers grew by 20% year-on-year during the month and the load factor hit 94.5%.
What’s even more impressive is the business claims to operate with the lowest CO2 emissions per passenger/km among all competitor airlines. CO2 emissions per passenger fell 3.6% to 56.9 grams in September thanks to the higher load factor. This number should fall further as the company progresses with its plan to upgrade its entire fleet to more fuel-efficient planes during the next few years.
The bottom line
Over the past 10 years, Wizz has proven it has a successful business model that can be scaled up effectively. There are no plans to slow down any time soon. Earlier this year, the firm put an order in for 50 of the new Airbus A321XLR long-range aircraft to help it expand its network to more destinations.
Wizz has doubled net profit over the past five years and, as the company continues to expand, I think it could do so again over the next five.
Analysts are already forecasting earnings growth of around 44% over the next two years. And its fleet expected to expand by 42% over the next five years, it’s not difficult to see profits growing by more than 100% from current levels. If they do, I reckon the stock could double from current levels.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Wizz Air Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.