Will it be unlucky 13 for Wizz Air as operating margins slip?

Wizz Air celebrated its 13th birthday on May 19, 2017 a period during which it has grown to be the biggest airline in Central & Eastern Europe (excluding Russia and Turkey), with a compound average growth rate in ASKs of 24%, and in passenger numbers of 23%, over the past ten years. In summer 2017, and across its financial year to March 2018, Wizz Air is accelerating its growth rate. It has 26 new routes and 117 new destinations this summer, while this month (June 2017) it open its first aircraft base in Western Europe at London Luton.

Alongside this impressive growth, Wizz Air has also established a track record of healthy profitability. After a patchy start, it has now spent three years as the second most profitable airline company in Europe, after Ryanair, as defined by operating margin. However, shortly after its 13th birthday Wizz Air reported its FY2017 financial results, which revealed a small decline in its (still very healthy) operating margin for the first time in five years, as unit revenue fell faster than unit cost.

Wizz Air is accelerating its growth plan this summer. In November 2016 it had planned to operate 83 aircraft across its network in summer 2017. By December 2016 it had indicated plans for an additional three, taking the planned total to 86 aircraft, and this has now risen once more to 87. This compares with 73 aircraft in summer 2016 – an increase of 14 aircraft, or 21%.

The airline’s planned ASK growth for the financial year to March 2018 (FY2018) is similar to this fleet growth rate, although a little higher at 23%, as there will also be a modest increase in average stage length. This compares with its ASK growth of 19.7% in FY2017. Its only year of single digit ASK growth since FY2006 was FY2013, when ASKs grew by 8.4%. Its compound average growth rate since then has been 18.8% pa.

Wizz Air increased its seat capacity by 16.4% in FY2017, while passenger numbers grew by 18.9% to reach 23.8 million. Passenger load factor gained 1.9 ppts to 90.1% – the first time that Wizz Air has exceeded the 90% threshold, and a 6.8ppt improvement since FY2010.

The budget carrier has managed to combine its rapid growth with profitability since making a small net loss in FY2011. In FY2017 (year to Mar-2017) Wizz Air’s reported net profit grew by 27.5%, to EUR246 million. However, this comparison is distorted by items such as unrealised foreign exchange gains, the value of hedging instruments, and other exceptional items. Its underlying net profit, which is the basis for management’s guidance, increased by only 0.6% to EUR225 million – at the bottom end of its guidance range of EUR225 million to EUR235 million.

Although the operating result increased in absolute terms, the operating margin (profit as a percentage of revenue) fell by 0.8ppts, to 15.7%. While this remains impressive by comparison with almost every other airline in Europe, the small dip in its margin was its first decline since FY2013.

It is clear the airline has plenty to celebrate, but those of a superstitious mind will hope that this anniversary years does not prove to be an unlucky 13 for Wizz Air.

READ MORE… Wizz Air: Central/Eastern Europe’s largest airline turns 13; profit margin dip not auspicious