It’s always struck me that we Brits have something of a blind spot when it comes to the broad Eastern Europe region.
The invasion of Polish plumbers and builders might have animated more than a few newspaper headlines but general public awareness of Eastern and central Europe, let alone the Balkans, remains pitifully low.
In fact, bar the odd visit to Prague, the gas chambers in Poland, perhaps Krakow and arguably Budapest, most Brits I would wager have never visited anywhere east of Berlin or the Alps.
This blind spot also has a business impact.
Talk to investors focused on the travel sector, for instance, and they’ll wax lyrically about the potential of the BRICs, talk up prospects in the very alien culture of China (now a target for Thomas Cook in partnership with Fosun), excite about India and its complimentary culture and language and perhaps even guardedly discuss opportunities Russian once you know who has stopped rattling his sabre.
Bu Eastern Europe mostly draws blank looks. Countries like Poland are familiar as is the Czech Republic but once we head into the two Bs, the Baltics and the Balkans, I struggle to think of any major business in London I’m aware of that is playing regional growth trends.
This peculiar state of affairs is, I would argue, a dangerous form of myopia if only because once the Greek affair starts to fade back into its rightful position as a minor irritant, the secular growth story that is Eastern Europe will emerge front of stage.
And even that catchall term - Eastern Europe - does the region a grave injustice. The Balkans, for instance, contain within them a fascinating mix of fairly advanced and developed (Slovenia) through to real frontiers (Albanian, Kosovo and Macedonia) countries with EU states Rumania and Bulgaria somewhere in the middle.
So, it’s against this fairly disappointing backdrop that I recently found myself marvelling at one of Britain’s most successful travel businesses, Wizz Air. Now I realise that to describe Wizz as British might strike some as slightly dubious.
It is after all Hungarian based, with a network spanning approximately 35 countries from over 17 bases in nine Central and Eastern European countries.
Its CEO is the distinctly un-English sounding Josef Varadi and it’s a clear growth play on the Eastern European region with flights to over 96 destinations stretching from the Baltics down to the bottom of the Balkans – with our very own Birmingham being the latest gateway into a network that has recently expanded to new destinations in Slovakia and Boznia Herzegovina.
But Wizz Air is now listed on the London stock exchange – it floated very successfully back in February of this year – with an accompanying board packed full of experienced travel industry veterans and a market cap of £850 million.
Crucially Wizz Air is expanding like crazy bringing ever more flights into the UK from the region, broadening and deepening the already extensive links between the UK regions and parts Eastern European.
In fact, I’d argue that Wizz Air’s network roll out has the ability to be game changing – why can’t the weekend destination or summer holiday market in the UK start to offer a much more extensive range of good value Eastern European destinations?
Skiing to Bulgaria may be moderately well known but what about the Carpathians for downhill or the Baltics for cross country? Stag weekends to Budapest may be slowly growing in popularity but the Balkans, for instance, contain an astonishing variety of fantastic destinations featuring glitzy glamour and trendy bars.
The growth of UK-Eastern European travel options would be fantastic news for Wizz Air, already one of the most profitably airlines in Europe.
Some basic stats should suffice to explain this remarkable growth story. Wizz has been growing its top line at 15% annually for at least the last few years, having only been founded back in 2004.
Its balance sheet is one of the strongest in the low cost carrier (LCC) sector, with significant cash reserves. Its margin is also growing, and last stood at 10.2% and at the last set of results its net profit trebled to €89 million.
Yet the most fascinating number for me is its CASK (cost of available seat km) which is one of the lowest in the industry – according to analysts at the Centre for Aviation Wizz’s CASK is now the second lowest in Europe, after Ryanair, having fallen by 41% between 2005 and 2010.
On the revenue side it’s also worth noting that Wizz boasts some of the best ancillary revenues per customer in the industry. Again, according to Centre for Aviation, since 2010 ancillary revenues per passenger have increased by 81% against ticket revenue per customer which has increased by just 16% over the same period.
Given these startling numbers it’s no wonder that the City and its investors have lapped up the Hungarian based airline. Virtually every analyst in the City now rates the airline as either overweight or an outright buy.
That’s helped push the share price forward from its listing price of £12 a share to the current £16.10 in the space of just four months. At 16 times forward estimates for profits in the coming year, Wizz is now valued by British investors not far off Ryanair’s 17.8 times earnings, an impressive number for an airline that is still so young.
But perhaps that enthusiasm is justified as investors smell a great medium term growth story. The biggest opportunity isn’t perhaps the obvious growth story of the diverse set of national economies, rather the fact that in all bar one of its key markets (Poland), Wizz and its main rival Ryanair aren’t up against a big national carrier.
That leaves the market wide open for Wizz and Ryanair to fill with low cost tickets to a dazzling array of destinations. Yet this obvious opportunity will also require a massive expansion in capacity.
The airline already boasts a relatively young, and cheap, fleet of 54 Airbus A320s – all used via off balance sheet leases – but it’s just announced orders for an additional 110 A321neo Airbus planes with deliveries to start in 2019 plus the potential for another 90 Airbus planes later. This is a massive expansion of capacity for a market that is indisputably growing at a rapid rate.
But it’s at this point that the cynic in me begins to emerge. An ecstatic City welcome, highly rated shares and a great balance sheet are one thing, but surely Wizz will struggle to make much headway with its CASK rates ?
Obviously lower oil prices will be a boon but I struggle to understand how much more fat is left to cut. Unlike Ryanair, Wizz also doesn’t have the opportunity to quickly rebrand itself from cheap and a little nasty to cuddly and friendly.
Wizz’s customers, trained on cheap fares, are unlikely to respond to a campaign that in effect says you’ll pay more for a bit better service. And all that capacity expansion surely accelerates Wizz’s date with destiny namely its epic battle with Ryanair.
Wizz may not face national carriers in many of its key markets but it does face the one airline in Europe with even lower costs, an even more aggressive growth strategy and the determination to wipe out all its competitors in a race to the bottom in terms of air fares.
Wizz has already alerted the City to guidance that suggests that FY 2015 numbers will suggest slower profits growth of less than 20% but I’d be keeping a more beady eye on 2016 numbers and beyond.
Relentless capacity expansion, and a rebounding economy in central and Eastern Europe could feed through into an outright price war with Ryanair.
In fact, one can almost imagine a not too distant future where capacity in key national markets is growing at a frantic rate, ancillary revenue growth has stalled, prices are falling, and costs increasing as Wizz has to start spending lavishly on marketing.
In this scenario Wizz will need all that balance sheet strength to withstand the mighty Ryanair onslaught.
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