According to data from FlightRadar, global commercial air traffic has slumped. As the coronavirus spreads across the globe, more flights will be grounded, either because of consumer choice or orders from governments.
Faced with losing lethal amounts of revenue, airline bosses have made pleas for aid, for their firms, but also the industry in general. Airlines would be good candidates for avoidance for short-term investors, given the immediate outlook for the industry.
But long-term investors should not be so quick to bin all airline stocks. Every airline has seen its share price crash over the last month or so. After sifting through the wreckage, I think Wizz Air (LSE: WIZZ) is worth salvaging.
The calm before the storm
Wizz is a low-cost, pay-for-thrills airline, flying short-haul routes (2019 average of 1,635 km per flight) to and from central and eastern European (CEE) countries, where it is the market leader.
Passenger numbers have been flying higher, as have revenues. In February 2020, Wizz carried 2.6 times more passengers than it did five years ago. At the same time, Wizz has got better at matching capacity with demand. Load capacity, found by dividing seats sold by those available, has increased from 83.6% to 92.6%.
Wizz has assembled a young (average age of planes is just over four years) and fuel-efficient (newer airframes and engines) fleet. Keeping operating costs down, and getting passengers to pay for add-ons has seen profits rise in each of the last four years.
Things looked good for Wizz. CEE countries are growing GDP faster than other western markets, and Wizz was benefitting from the spillover into air travel demand. Then the coronavirus hit.
Flying in bad weather
In a trading update released today, Wizz announced that 85% of its fleet is grounded, and it has not ruled out the other 15% following suit. Wizz’s chief executive reiterated early pleas from airline bosses for government assistance for the industry. It sounds bleak for Wizz. However, solace comes in the form of the €1,501m in cash it had at the end of December 2019. That is enough to pay for over six months of normal costs.
Wizz has, like many other companies, cut fixed and variable costs where it can, and executives are joining in by forgoing their salaries for at least five weeks. With the cash pile and cost-cutting, Wizz’s chief executive is very confident the company will survive.
Unfortunately for Wizz, the ordinarily sensible practice of partially hedging fuel costs will bite. Jet fuel costs have sunk, meaning Wizz owes money on its hedges. That is usually offset by paying less to fuel planes, but most of the fleet is grounded. The cost is difficult to estimate, but it will reduce the amount of time Wizz can furlough its operations without going bust.
Another vote of confidence in Wizz’s ability to see this crisis through comes in the form of director dealings. The companies chief executive bought a sizable chunk of shares two weeks ago. The group’s chair bought a lot last week, and two non-executive directors made smaller purchases at the start of March. Those in charge are backing their words with actions.
Shares in Wizz are trading at 2,070p, over 50% below their February all-time high. There is a compelling case for a buy here, but it is a risky one.
