Ryanair and Wizz: Implications of Moderate and Fast Growth Plans May/Jun 2023

The fortunes of Europe’s two ULCCs — Ryanair and Wizz Air — diverged dramatically during the pandemic. Will they converge in the future?

Ryanair carried 168.6m passengers in FY2023 (year to March 2023), which was 19m more than in FY2020, the last pre-pandemic year. Post-pandemic, it was able to ramp up operations and add capacity without the disruption that affected most other airlines. Ryanair minimised staff redundancies during the pandemic, striking deals with key unions whereby employees were retained in return for temporary pay cuts, and implemented a policy of rotating its flying crew on the greatly reduced services, so keeping their licences current.

Wizz saw commercial opportunities from the pandemic; its plan was to pursue growth aggressively, building up its A321neo fleet rapidly and entering new markets where the incumbents were perceived to be weak. Passengers carried in FY23 totalled 51.1m, 17m more than in FY2020, although its average load factor was 88% compared to 93% at Ryanair.

However, the upturn in traffic at the two airlines was associated with two contrasting financial results. Ryanair produced a net profit of €1.43bn, a 13.2% margin on revenues of €10.78bn, a remarkable turnaround from the (€355m) net loss of the previous year. Wizz reported a net loss of (€535m), a -13.7% margin on revenues of €3.89bn, only a marginal improvement on the previous year’s loss of (€642m).

Much of Wizz’s dire financial performance is related to a decision made in 2021 to go to a policy of no hedging on fuel and currency, because it had lost out on its previous hedging positions. This proved disastrous when fuel prices surged and the euro weakened against the dollar; total unit costs rose about 40% compared to pre-pandemic. Ryanair by contrast has been fully hedged.

Last year Wizz reinstated its jet fuel and currency hedging policies, and it hopes that the losses of the last two years will come to be regarded as “exceptional”, and focus will shift to the airline’s more robust cashflow performance (see tables).

However, the damage to the balance sheet has been done: by March this year Wizz had slipped to a negative net value of (€358m), with total debt and other liabilities exceeding total assets. Ryanair, by contrast, has a very strong balance sheet with shareholders equity of €5.6bn. It also has €4.6bn in cash and near cash compared to €1.4bn at Wizz.

Financial prospects in the near term for all European airlines are positive, characterised by a surge in post-pandemic demand, a strong yield environment and a moderation in unit costs. Wizz CEO József Váradi has stated that for FY 2024 he expects the airline to grow ASKs by 30%, push up load factors to over 90% and achieve a full-year net profit of €350-450m, which will go a long way to restoring the balance sheet. Ryanair has highlighted its strong fare performance in the first quarter of FY2024, but Michael O’Leary is being very cautious about projecting for the full year. However, the transport analysis team at Barclays, now led by Andrew Lobbenberg, refreshed by his gardening leave, reckons that Ryanair’s revenues in FY2024 will be €13.9bn, 12% up on FY2023, and pre-tax profits will reach €2.5bn, a 30% improvement.

Regional fortunes

A fundamental problem is indicated by these two graphs which show changes in scheduled seat capacity between 2019 and 2022 for the two ULCCs on their respective 20 top country-pairs. For Wizz, the devastating effect of Russia’s invasion of Ukraine can be seen in the Ukrainian and other eastern European markets. Only Romania shows a consistent growth pattern.

Wizz set out to exploit the pandemic by taking an opportunistic approach, and it did grow its overall capacity markedly during this period, but its strategy of entering new markets with uncertain demand and, in many cases, offering low frequencies, soon found its limits, causing the airline to close some of its new bases in Italy and the Balkans as well as pulling back in the UK and Norway. Wizz has resolved to change this strategy by focusing almost totally on building presence, ie multi-daily frequencies, in its existing markets. Finding new markets is challenging. Its major expansion this year has been in the Albanian market, undoubtedly underserved but with limited potential.

There is also its Middle East operation. It is in the process of building its Abu Dhabi-based fleet to 15 units, and is hoping to exploit the opportunities offered by the opening of the Saudi market. These opportunities may, however, be only temporary as Riyadh Air, having committed to 72 787s, is poised to place a narrowbody order with either Boeing or Airbus for 150 MAXs of A321neos (see Aviation Strategy, Dec 2022 ).

Ryanair has concentrated most of its growth efforts into the Italian market, both domestic and international, taking full advantage of the downsizing of the ever-declining Alitalia and its tortuous evolution into ITA (see pages 13-16). Over half of Ryanair’s 737-8200 deliveries were placed in Italian markets, and the airline estimates that it now has a market share of over 40%.

At the same time Ryanair continued its policy of airport churn, cutting capacity or pulling out of airports where it cannot get costs down to its required level. Last year Ryanair was deeply unhappy about German airport charges and pulled out of Munich, Stuttgart, Hanover, Düsseldorf and Frankfurt am Main.

Fast and moderate growth paths

The ULCCs’ longer term strategies are based on different growth paths — very rapid in Wizz’s case and moderate, at least compared to historical rates, in Ryanair’s case.

Building on the mega-order placed by Indigo Partners in 2017, Wizz Air last year exercised options of 75 A321neos for delivery in 2028-29 as part of its plan to be a 500 aircraft airline by 2030. Its fleet at the end of FY2023 consisted of 179 A320 family aircraft. Of its 365 firm orders, 13 were A320neos, 305 A321neos and 47 A321XLRs. With 239-seat A321neos replacing 180-seat A320ceos its total capacity will triple between 2023 and 2030 with an expected increase in passengers from 51m to at least 180m by 2030.

At the end of 2020, in the depth of the Covid-19 recession, Ryanair renegotiated the pricing on its 2014 MAX order for 135 units and placed an additional order for 75 737-8200s (as Ryanair designates the aircraft), the first MAX order Boeing received in the pandemic. In May this year Ryanair confirmed its long-awaited mega-order for 300 MAX-10s (150 firm and 150 options), half of which will replace older 737NGs and half allocated to growth.

Ryanair’s has been able to combine its bulk purchasing power with critical timing to win very deep discounts — we would guess its unit price for the 2020 order to be in the range $35-40m, roughly a 70% discount on the theoretical $122m list price. Negotiations for the MAX-10 were more prolonged and made more difficult as new customers like Air India and Riyadh Air placed mega-orders, but we would still expect a 60% discount on the theoretical list price of $135m, implying a unit price of around $54m and giving a total order value of about $16bn.

As at the end of FY2023 Ryanair was operating a fleet of 537 aircraft, all 737s NGs and MAXs except for 28 A320s at Lauda. Its firm orderbook consisted of 112 737-8200s, plus the 300 MAX-10s (assuming the options will be converted). With 197-seat 737-8200s replacing the 188-seat NGs by the end of 2024 and the 228-seat MAX-10 coming in from 2027, Ryanair expects traffic to hit 300m by FY2034, 80% up on 2023.

Ryanair expects to finance its deliveries, at least over the next few years, primarily out of cashflow. Wizz is reliant on sale and leaseback for its financing, and while the operating leasing market has remained remarkably strong, escalating interest rates will put upward pressure on lease rates and downward pressure on aircraft prices.

Traffic projections

This graph brings together traffic projections up to 2030 for the two ULCCs based on fleet plans and public pronouncements. Wizz’s “planned” CAGR is close to 20% pa whereas Ryanair is going for a stately 6% pa (and, as Michael O’Leary has observed, there will be some unexpected event that will make a mockery of these projections).

The implication of these growth lines is a little problematic; they indicate that, in terms of passengers carried, Wizz will be 72% the size of Ryanair by 2030 compared to 35% today. Is this trajectory feasible?

The two pie charts are based on scheduled seat capacity in 2022 and relate to the top 30 city-pairs (ie, all airports on all routes between two cities) for the Wizz and for Ryanair networks. It is noticeable that, although Wizz is the number one carrier on the majority of its top routes, overall Ryanair provides roughly the same amount of capacity on these routes.

By contrast, in the Ryanair top 30 city-pairs network, Ryanair is clearly the dominant carrier, dwarfing Wizz’s capacity. It is also significant that “other airlines”, which includes a large amount of Legacy capacity, occupy almost a half of Ryanair’s potential market.

It is not clear how Wizz can achieve critical mass in markets dominated by Ryanair. It could, perhaps resurrect the idea of a merger with easyJet, but easyJet seems to be going in a different strategic direction and might even end up as part of IAG. In terms of unit costs the two ULCCs are by some margin the lowest cost operators in Europe, and there is little between them — Ryanair’s costs are better when measured on a per passenger basis, Wizz’s better on a CASK basis — but in head-to-head battles Ryanair has the two great advantages over Wizz — market dominance and a very strong balance sheet.

However, it is possible that, influenced by the Ukraine war, we are underestimating the potential of the Central and Eastern European (CEE) market. Bernstein, which takes a very positive view of Wizz, calculates that structural demand in the CEE market will generate the requirement for 414 additional narrowbodies by 2023. Ryanair is likely to provide 105 of these additional aircraft and the network carriers and other another 61; this leaves a residual demand opportunity of 248 units, which is equivalent to 73% of Wizz’s planned fleet growth to 2030.

Unfortunately for Wizz, Ryanair announced in June that it was going to focus expansion on the CEE, targeting not only Poland, where it has a strong position, but also Romania, Bulgaria and Hungary.