Interactive Investor

Cloudy outlook for this no-frills airline

2nd June 2021 09:07

Richard Hunter from interactive investor

Nimble business model is its trump card, but it is at the mercy of uncontrollable factors.

Airline Wizz Air (LSE:WIZZ) has pulled all the levers in its control but unsurprisingly this was not enough to prevent a significant loss for the year.

With the starting point being a 75% decline in passengers, revenues also plunged by 73% leading to an overall loss for the year of €576 million (£497 million), as compared to a profit of €281 million the year before.

The load factor averaged 64% for the year (previously 94%), although since the end of the reporting period there was a slight uptick to 66% in May.

At the same time, recovery from the pandemic and a return to some kind of normality in air travel has slipped behind expectations, due to the varying speeds of vaccination programmes across Europe and also the remaining travel restrictions.

As such, the company does not expect to return to profit in the current year, anticipating just 30% capacity in the first quarter and, all things being equal, would then hope to regain profitability in the 2023 reporting period.

Yet there are some glimmers of hope among the despair which the pandemic has caused the airlines, and Wizz Air has been busy behind the scenes in preparation for the post-pandemic environment.

Total operating expenses have declined by 50%, and despite an average monthly cash burn of €61 million, the figure for the fourth quarter was a manageable €84 million.

In addition, the brief respite of summer 2020 enabled Wizz Air to demonstrate the benefits of its nimble business model, as it quickly ramped up to 80% of capacity for that limited period. At the same time, careful increases to both its fleet and its operating bases have arguably left the group in a better position to grow the business again when restrictions are lifted.

For the airlines as a whole, cash remains king in this environment. Wizz Air is adequately financed at present with cash of €1.6 billion and has strengthened its position through both fundraisings and access to government support.

Wizz Air remains at the mercy of factors outside its control before it can return to profitability. At the same time, the actions it has taken have put strong foundations in place and it saw a 42% increase in the share price over the last year.

That compares to a hike of 31% for the wider FTSE 250 and is evidence that there has been investor support in the background.

With the current outlook remaining cloudy, however, investor sentiment is rather more circumspect on prospects, with the market consensus of the shares currently stuck at a ‘hold’, albeit a strong one.

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