ii view: Wizz Air culls capacity

A green European budget airline whose shares are down by a fifth in 2020. Buy, sell or hold? 

Operational update

ii round-up:

European low-cost airline Wizz Air (LSE:WIZZ) today reduced its flight capacity for October down to half of that being operated at the end of 2019. 

The cut came in the wake of a second virus spike and a retightening of travel restrictions by many governments, and is likely to last through its winter season. July and August capacity had been running at 80% of 2019.

Wizz shares retreated by more than 2% in UK trading having fallen by around a fifth year-to-date. Shares for rival Ryanair (LSE:RYA) are down by a similar amount, while easyJet (LSE:EZJ) stock has fallen by more than 60%. Shares for British Airways operator IAG (LSE:IAG) are down by more than 75% in 2020. 

Wizz operates a fleet of 132 Airbus aircraft with an average age of around five years. It claims to be the greenest European budget airline, flying to over 150 airports across more than 40 countries. 

Its previously announced first-quarter results to the end of June reported a loss of €57 million compared to a profit of over €70 million for the same quarter in 2019 – hit by a 93% fall in passenger numbers under the pandemic. 

As at the end of June, Wizz held cash of €1.6 billion compared to cash of €3.9 billion at Ryanair and easyJet’s cash liquidity of over £2.2 billion. 

Having made its first flight back in 2004, last year Wizz carried some 200 million passengers. 

ii view:

A series of factors outside of management’s control, such as fuel costs, the weather and strikes can impact both operational and financial performance. Management action to try and combat such factors is a feature across the entire industry. Now, coronavirus has given the airline industry its biggest ever crisis. 

Today’s action by Wizz makes sense given a broad retightening of government pandemic measures and already frail consumer confidence in boarding an airplane. As with all airlines, given reduced passenger revenues but bills to pay such as wages and airport runway slots, preserving the balance sheet is now key.   

For investors, ongoing action to reduce cash burn offer reassurance. While fuel efficiency is important across the industry, Wizz Air’s focus on more economical craft and reducing its impact on the environment is also noteworthy. But for now, given the degree of outlook uncertainty, its hard to see the shares as anything but higher risk.  

Positives: 

• Cash balance of €1.6 billion at the end of June
• A focus on reducing CO2 emissions 

Negatives:

• Highly uncertain outlook due to Covid-19
• Many factors outside of management’s control can impact performance

The average rating of stock market analysts:

Buy