The Purple Dinosaur Killer: How Wizz Air is quietly earning industry-leading profit margins

Wizz AirUnlike that Cretaceous cartoon character Barney, Wizz Air is not—despite the look of its aircraft—a purple dinosaur. But it is a purple slayer of dinosaurs. It was instrumental, for example, in killing Hungary’s Malev. And to this day, it continues to make life difficult for eastern Europe’s legacy carriers, all of which are struggling.

By stealing business from incumbents and generating lots of new business with low fares, Wizz Air has quietly become one of Europe’s most successful airlines—quietly because it was a privately held company for most of its life. Now, however, its stock is publicly traded, and the company thus revealed in its prospectus a hearty $196m net profit in the final nine months of 2014, accompanied by a lofty 18% operating margin. Perhaps even more impressive, its operating margin for all of 2014, including the bleak winter quarter—a period for which net profit isn’t available but operating results can be extracted—was 14%, better than all but a half dozen airlines in the world. And if that’s not impressive enough, it managed such success while growing ASK capacity 20% y/y during the final nine months and somehow topping that with 22% revenue growth. Operating costs increased just 17%.

As one might expect from an ultra-LCC cut from the same cloth as Ryanair—one of those few airlines in the world whose margins still top those of Wizz—Wizz Air earns all its profits in the summer peak. In newly published information, it showed a $1m net loss excluding special items for the calendar fourth quarter, although its operating margin was positive 4%, not far below Ryanair’s 6% for the same period—any profits a European shorthaul airline can muster in the off-peak season are a bonus. Wizz says its average revenue per seat during the July-to-September peak is about 127% of its full-year average, while during its worst quarter—January to March—seat revenues are just 84% of its full-year average.

This past calendar Q4 was better than usual for Wizz, thanks to the collapse in global oil prices. Despite an active hedging policy, fuel outlays increased only 5% y/y, even as ASK capacity spiked 16% and revenues 18%. In late May, Wizz will report financial results for its fiscal year that ended last week, but it already affirmed that it “traded well” in even the lowly January-to-March quarter—the only quarter when it had an operating loss last year. This implies a strong fiscal year overall. Nor is Wizz Air’s success a new phenomenon…

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The first quarter of 2015 is now finished, and so is reporting season for the fourth quarter of 2014. Outside North America and Japan, Q4 and last year as a whole won’t be fondly remembered, scarred as airlines were by economic and foreign exchange distress.

Gol certainly experienced both last year. And conditions have worsened in the early months of this year. Nevertheless, through capacity discipline, plus the good fortune of having a main rival also practicing capacity discipline, Gol’s red-stained income statements of prior years have turned black, at least at the operating level.

Like all major Chinese airlines, Guangzhou’s China Southern did better in 2014 than in 2013. But margins weren’t strong, and they turned red in Q4.

Both of Taiwan’s major airlines were in the red last year, although both made money at the operating level. For that they can thank a rebound in cargo markets—finally.

A more open U.S.-Mexico air service treaty will finally take effect in 2016, which is a major door opener for Delta and Aeromexico—if, that is, antitrust regulators approve their application to form a joint venture.

Allegiant, Spirit and Copa, three familiar names at the top of most airline profit rankings, took the gold, silver and bronze medals, respectively, in the fourth quarter. In the heavyweight division alone—airlines with widebodies flying intercontinentally—Japan Airlines, American and Delta ascended the medal stand.

It won’t be long now before the next round of airline earnings reports begin, this time for Q1.

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