Covid Crisis Hits Low Cost Carriers But Wizz Air Seizes The Opportunity

Airlines across the world are being crippled by the Covid crisis. The low cost carrier (LCC) model is arguably amongst the most robust and has proved resilient in the face of many previous crises. I believe it is likely that LCC’s will be structural winners again, but looking at the European market, the responses to the crisis by the three leaders in this segment are very different. Wizz Air’s ambition is in stark contrast to the stance of its rivals, Ryanair and easyJet. So, what explains the difference of approach and is it rationale?

Ryanair less bullish than usual

Ryanair remains the largest and most profitable LCC in Europe by far, operating over 450 Boeing 737-800 aircraft, flying 149 million passengers in its last financial year to the end of March 2020 and generating profits of 1 billion euros ($850m).

As Europe moved into lockdown, Ryanair was almost completely grounded from the end of March until July when it began to reintroduce around 40% of its normal capacity. By virtue of its sheer size, it still flew over 4 million people in July but this represented a fall of 70% versus 2019.

Capacity build up plans hit

A progressive ramp up was planned, reaching 70% of last year’s capacity by September, but Ryanair has been hit by a number of factors meaning that this will not be achieved. Firstly, it is handicapped by a tight quarantine regime in its home country Ireland, a market to which it is heavily exposed. It is also a major operator in France, Italy, Spain and Portugal, all markets which ordinarily would be at their peak in the summer months. However, spikes in virus infections have led to ad hoc and short notice quarantine requirements imposed for visitors returning from these countries, by the UK. Given the UK’s importance as a source market, this has severely dampened demand and reduced customer confidence in booking. Because of these factors Ryanair has now announced it will cut its planned September and October capacity by 20%.

On top of this, Ryanair has fewer aircraft than it had originally planned this summer, due to the ongoing grounding of the Boeing 737 Max. Around 60 of these aircraft should have been delivered but none have been received. Whilst in the circumstances this turns out to be strangely advantageous, the normal rapid growth and the addition of new routes and bases for which Ryanair is known, is not happening currently.

None of this inhibits Ryanair from negotiating with its 200 plus airports for better terms, with the threat or promise of moving capacity around the chess board, so it can still exploit new opportunities. For now though, contraction not growth is the watchword, fewer not more passengers over the coming year.

easyJet battles shareholder tensions

As if the Covid crisis was not enough to deal with, easyJet’s own response has been driven by internal factors as much as by the impact of the virus itself. The airline is the second largest European LCC, operating over 300 Airbus A320 family aircraft and flying 96 million passengers in its financial year ended September 2019. Profits were £427 million ($559 million).

easyJet began its restart flying programme in mid June, with activity limited to only 10 of its aircraft, serving mainly the French and UK domestic markets. It has stepped up activity since then and had planned to be at 40% of normal capacity by September, already considerably more cautious than Ryanair. It faces the same market challenges as its larger competitor, meaning that it too, may fall short of its targeted activity levels.

However, beyond this it has experienced a few torid months of shareholder relations which are exerting their own downward capacity pressures. easyJet’s billionaire founder and largest shareholder Stelios Haji Ioannou, has been pushing for the airline to halt growth, which he argues is damaging profitability. He wants to see outstanding orders for over 100 additional Airbus aircraft cancelled.

Whilst the company has not acceded to all of his demands, it has indeed announced that it will reduce the number of aircraft in its current fleet, other disposals will be considered when aircraft leases expire. In the coming months easyJet will have at least 30 fewer aircraft in its fleet while deliveries of 24 aircraft will be postponed beyond 2025.

Shrinking not growing

All of this means that easyJet is unable to maintain its current network size and shape even if it wished to and wasn’t cutting capacity in the face of the Covid crisis. It is having to cut existing routes and aircraft and crew bases. The closure of UK bases in Newcastle, London Stansted and Southend Airports will take place in September. It is likely that its German base in Berlin will shrink considerably.

It could choose to out seek new opportunities but the price would be to sacrifice existing activity. Given that a fundamental part of easyJet’s strategy is to maintain number one and two positions in key slot constrained airports, it has its work cut out simply defending these positions as other airlines see an opportunity to move in and claim territory.

Wizz Air chooses its moment

Like its rivals, Wizz Air has strong credentials, flying 40 million passengers and delivering a 281 million euro profit ($331 million) for the financial year to the end of March. Its own response to the Covid crisis stands in contrast to its LCC rivals with expansion being the watchword But how does this stack up?

Capacity ramp up

As the Covid crisis has progressed WizzAir has wasted no time in ambitiously restarting its flying programme. It has moved more quickly to higher levels of activity than its rivals, by July it was operating almost 75% of planned capacity and carrying 47% of its normal traffic.

One particular advantage which it enjoys is that the core CEE (Central and Eastern European) markets which are the heartland of Wizz Air’s operation attract a very high number of VFR (visiting friends and relations) customers who want to travel on a regular basis. This gives it some protection (though far from complete) from the uncertainties surrounding pure discretionary leisure travel.

Multiple new base announcements

Not only has it returned capacity quickly but a succession of new routes and bases have been announced. In June alone, Wizz Air announcecd four new bases in Milan, Larnaca, Lviv and Tirana, all had short lead times to start up with services commencing in July. In the UK two new bases have been announced at Doncaster/Sheffield and at London Gatwick Airport, both opening in the autumn. Around 200 new routes have been launched.

On the face of it this may look like a crazy pace of expansion but in my view it is defensible. Firstly, the airline has judiciously redeployed existing capacity, 22 aircraft in the current fleet have been moved to enable these new opportunities. Secondly, in the case of several of the new bases, the amount of initial capacity is conservative with only one or two aircraft being allocated to start up operations.

Ambitious fleet growth

Wizz Air is also smaller than either Ryanair or easyJet, so its expansion starts from a lower base. That does not mean it is a small airline, its fleet already numbers over 120 Airbus family aircraft. It has an order book which will take it to 275 aircraft by 2027. Furthermore it intends to maintain these plans despite the Covid crisis. No order cancellations or deferrals.

It is also shifting the balance of its fleet towards larger aircraft, moving from the A320 with 180 seats, to versions of the A321 with up to 239 seats. This will further strengthen its capacity growth. The larger type already accounts for around 50% of the fleet and rises to almost 90% by 2027. Ryanair will still remain far ahead based on its own projected fleet growth, but Wizz Air’s size will increase relative to easyJet, due to the latters growth constraints.

New horizons

It is clear that Wizz Air is moving increasingly beyond its core CEE territory and is confident in coming up against its rivals in some of their more established leisure markets in Western Europe. This is a calculated risk but with the benefit of a very low cost base overall and specifically the lower unit seat costs which its increasing number of Airbus A321’s will drive, the airline appears well placed to handle any challenges. it is undoubtedly only too aware of easyJet’s shrinking capacity in the years ahead.

In another step which will diversify its risk, Wizz Air Abu Dhabi will start operations this autumn as a joint venture with local partner Abu Dhabi Development Holding Company. The Gulf is no stranger to LCC airlines, several already operate successfully in the region. This presents a whole new set of operating conditions and challenges but equally a completely new set of opportunities which, based on its track record, Wizz Air looks capable of exploiting.