Warren Buffett recently told Berkshire Hathaway shareholders that he was selling positions in US airlines. The rationale was that the coronavirus crisis had decimated demand for air travel, yet the airlines have enormous fixed costs to pay, and hence they are burning through cash. Buffett might disagree, but I thought FTSE 250 member Wizz Air (LSE:WIZZ) was worth buying in March and I still do now.
Wizz is a low-cost, pay-for-thrills airline, with major hubs in Poland, Hungary, and Romania. The market for air travel in Central and Eastern Europe (CEE) was growing faster than average. Wizz was growing faster than most airlines, flying 2.6 times more passengers in February 2020 than it did five years before, and is the market leader in CEE. Can it return to growth once the coronavirus crisis passes?
Flight delays
Of course, the coronavirus crisis has grounded the majority of Wizz’s planes. In February 2020 a little over 3 million passengers flew with Wizz. Just 78,389 passengers took to the skies aboard Wizz planes in April 2020.
It is anyone’s guess when (or if) passengers will begin to fly as they did before the crisis hit. However, Europe seems to be readying itself for a relaxation of lockdowns and social distancing. Some Wizz routes have reopened, so perhaps April’s numbers will indeed be the low point.
Having a strong balance sheet should see Wizz through the worst of this crisis. By my calculations, Wizz had enough cash to pay at least six months of fixed costs. Wizz has also been confirmed an eligible issuer under the UK government’s Covid-19 corporate financing facility, meaning it can raise cash by selling short-term debt instruments. The facility is only open to firms that demonstrated sound financial health before the crisis, and Wizz did that.
If April is the low point for air travel, then Wizz will be just fine. If not, then it can weather the storm for another few months with its existing cash. It also has the option to raise funds if needed. Wizz, in my opinion, will survive, and not ruin its balance sheet in the process.
Clear air
Even without the pandemic, Buffett would lament the lack of an economic moat around airline businesses. There are significant barriers to entry in the airline business. However, for the low-cost carriers especially, a ticket from A to B is the same no matter what logo it bears, so the cheapest usually wins.
Wizz has an advantage because of its CEE operations. Ground fees and maintenance charges are lower there. Price wars are not as intense as with other routes. Things may change, but as of now, Wizz is the most significant player. Since Wizz has avoided share buybacks (unlike some struggling airlines) and doesn’t pay dividends, it has built its cash balances. Those cash balances should help it survive and consolidate its position in CEE aviation.
New Wizz routes connecting CEE to Abu Dhabi are planned for June. A new (if small) base in Ukraine should be operational in July. Wizz is already ahead of its peers on fleet age and carbon emissions per passenger, which is becoming increasingly important to flyers.
I think Wizz will survive and continue its impressive growth after the coronavirus crisis slump has passed, so I recently bought shares to hold for the long-term.