Wizz Air Holdings Plc (WIZZ) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Wizz Air Q1 Results Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, József Váradi. Please go ahead.

Good morning, everyone. Thank you for coming to this -- for this meeting, and I also welcome everyone online. But this is to report the first quarter of the current financial year. If you could just move the slide, please. So we delivered 30% more capacity in the first quarter versus pre-pandemic levels. Unit revenue was gradually building up month-on-month. Clearly, it was a difficult quarter overall, taking odd events into account. Let's not forget that, that was the time when the company had to reallocate a significant portion of its capacity, originally designated for serving the Ukrainian and Russian markets across the rest of the network. That took some time to implement it. It was generally a big ramp-up period for the business. That's a period when we were ramping up utilization to deliver 30% more ASKs in this period. Also, this is a period when we started experiencing significant input cost rises like the fuel spike and also towards the end of the period, we started seeing some significant disruptions coming through the underperformance of the supply chain, so kind of a difficult period. The Q1 ticket revenue was minus 12%, while ancillary revenues continue to grow significantly in the magnitude of 14%. Fuel costs basically doubled down in this period relative to fiscal '20. We put in place some insurance hedges for the current financial year and started systematic fuel hedges for the next financial year as of fiscal '24. Right now, we are hedged on 20% of our fuel requirements in the next financial year. Ex-fuel unit cost came in at EUR 2.62 per ASK, including EUR 0.22 for flight disruptions. As I said, we started encountering significant events on this field, resulting in a number of flight cancellations and obviously significant compensation costs to passengers. We ended up the quarter with EUR 285 million of operating loss. Net loss was EUR 453 million. The difference is majorly the unrealized FX exposure that didn't affect the cash performance of the business but affected the P&L. The company remained in a very strong liquidity position at EUR 1.6 billion at the end of the period, maintaining investment-grade credit as a result. We believe that we have a continuous revenue momentum, and we are expecting a significant profit, operating profit to be delivered in the current quarter of the financial year. So moving on with the slide. So you can see the key business metrics here. But obviously, passenger numbers went up very significantly, 4x the numbers of the same period in the previous financial year. We continue to expand our operating footprint in terms of operating more aircraft -- 16 more aircraft plus 26 more airports and 2 more countries. We consolidated some of our base operations, a number of bases we opened up during the pandemic got consolidated as a result. We have been receiving a number of awards. But clearly, this period was marking a significant expansion and diversification of our network footprint. Moving on to the next slide. This is an overview of market shares in our core regions in Central and Eastern Europe. Overall, we managed to be at 5% market share gain in this period. So our overall market share in Central and Eastern went up from 18% pre-pandemic levels to 23% in the quarter, and you can see the overview market by market. In most of our countries, we have been gaining market share positions. And in the balance of the countries, we have been holding market share positions. And with that note, I would like to hand it over to Jourik.

Thank you, József. So good morning also from my side. I think the financials have been released a few weeks ago. So I guess no surprises here. Numbers are consistent. So from a revenue point of view, you'll see revenue quadrupled indeed versus the base period. Obviously, not a great point of reference, but still a very strong revenue performance at 17% up versus the same quarter pre-COVID. From a profit point of view, there's really 3 factors coming into play. So clearly, we've mentioned the RASK. We'll reference the CASK numbers in a minute, which are 40% higher, mainly driven behind the high input cost. And clearly, from a reported point of view, we were affected by the strength of the dollar. The balance sheet rate at the end of June was EUR 1.044 billion, and the only reason why I mentioned that is because today, it's somewhere below EUR 1.02 billion. So whereas we have seen a significant loss in the first quarter, we may continue to see in the current quarter another EUR 100 million or so of these unrealized FX losses should the euro be at the same position versus the dollar at the end of September. Again, these are not cash losses. These are purely translational effects into the P&L. And once the market hopefully at some point in time moves to more of a risk-on mode, these will start reverting as well. Cash position, I think a very strong performance on cash, growing another EUR 200 million versus the position at the end of the year. Now moving to CASK. So if you look at CASK, so as mentioned, I mean, the CASK for Q1 increased in total 40%. That's obviously extremely considerable. The key driver of that was the doubling almost of the fuel CASK. The average fuel price for the quarter was $1,240 per barrel. So just to put it in perspective for you, what's driving these numbers? If you look at ex-fuel CASK, it was at EUR 2.62. As József mentioned, EUR 0.22 was driven behind disruption. So if you strip those out, you basically get to Q1, let's say, pre-abnormal disruption cost of around EUR 2.40. It's still EUR 0.13 higher than where we used to be pre-COVID. But if you look at the first quarter, we operated around 10% lower utilization of our assets of our, let's say, of our crew, then we did pre-COVID. And that's really the key difference between where we are or where we were pre-COVID, so the disruption and the utilization versus where we are today. So these things, as you see, as you see further on the presentation, they will be normalizing. They are normalizing as we speak. And obviously, we should trade out of those up charges as we move week on week. Looking at cash, I mean cash is moving to EUR 1.6 billion. Clearly, we keep operating with the same principles on the network, especially also in the first quarter, focusing very much on profitability. We'll talk a little bit more of where we see the RASK increases, et cetera, when it's coming broad-based across the network. So we're able to deploy our network as we have laid it out. And we don't need to make compromises on our strategy because the cash performance across -- comes broadly across the network. The company is investment-grade with Fitch and Moody's. And obviously, the liquidity growth this quarter got a boost from the growth of the company at 30%, helping both, let's say, payables and the unflown revenue, which is actually what you see in the next slide, in Page 8. So you can see here the bridge on cash. You see the outflow on the operations, which includes, obviously, the lease payments, which is kind of a fixed cost, which you have in any case, which included the disruption cost. You can see a very strong inflow from unflown revenue from payables and a small EUR 20 million outflow linked to some quarterly phasing on predelivery payments. So all in all, strong cash performance. With this on unflown revenue, the booking window is -- used to be around 20% lower than pre-COVID, so when we reported last at full year. Today, it's around 10% lower versus pre-COVID window. So we still have 10 points -- 10% to go to fully close the gap with the booking window pre-COVID. So there is more upside potential here. Actually, it's quite a good performance if you think about it, given the amount of news. There was on disruptions given that some countries during this period, right? And June were probably still peaking on COVID, and we're kind of coming out of that. So the industry is normalizing on disruptions, infection levels or cases. There's less detrimental impact from a hospitalization point of view already, but obviously, people may not travel if they have been infected. So all of that, we're trading out of it. It's a very different situation to be in going forward than where we were last quarter and surely where we were last year, where we were going into August and September in the peak of a health crisis with restrictions as a consequence. So a very different set of circumstances looking at summer. From a revenue performance, you can see that we had an excellent performance again on ancillary, growing EUR 4 per passenger. We're on Slide 9 here. That is EUR 1 ahead of our targets, whilst we want to grow ancillary EUR 1 per passenger per annum versus -- and that's obviously would be EUR 3 per passenger increase versus as [indiscernible] EUR 4 per passenger increase. We continue to see that strength carry through for summer. Ticket fares were down around 12%, as we've mentioned. Again, this is where we have seen the sequential improvement with very tough numbers in April and May as we ramp up, as we were seeing the impact of the recasting of the network as a consequence of the war in Russia and Ukraine -- between Russia and Ukraine. But if you look now forward, we continue to see that strength in ancillary for summer, and we see obviously the ticket fares reverting, becoming double-digit growth on ticket fairs. And this is giving us the confidence to guide Q1 at a RASK increase of more than 10%, just above 10% with July, probably going to be around 11% RASK increase. And that is on the 30% growth. That's a very strong number. You see similar numbers reported by some other players in the industry, but of much lower growth or sometimes even of declines. So that basically means that not only on our core markets but also on the expansion markets, we're able to see those very strong fare increases. And that just speaks to the fact that there is strong underlying demand and strong maturity where we have expanded. And with that, handing it back to József.

Thank you, Jourik. Let me just elaborate on a few metrics affecting the performance of the business and kind of how we see the way forward. So I'd like to take on operational performance, flight disruptions. Obviously, this is of high interest to everyone, further elaborating on the revenue line of the business, reinforcing of fleet and network growth and also to talk a little bit about sustainability and leading the pack with that regard. So let me start with the operational performance of the air. And obviously, it's been an incredibly challenging period primarily due to supply chain performance deficiencies. I have been asked the question a number of times whether or not Wizz Air has been fully stopped to be able to deal with the situation. Yes, Wizz Air has been fully stopped throughout the whole period. You may recall that for the last 9 months, we have been kind of warning the industry that we are seeing demand recovery pretty imminent as soon as governments remove COVID restrictions, and is being confirmed in every single market we operate from by for whatever reasons. I think most of the industry believe that this is going to be a slow, gradual recovery to normal demand over years, and some predictions were suggesting that maybe 2026, 2027 will be the year of recovery. Now reality is confirming that demand is back immediately overnight once governments remove restrictions. And we have been investing into our organization. You can see, for example, that we've got 6,350 people as we speak, working for the company. This is against 4,000 a year ago. So we have been building more than 50% organizational growth during the last year. And also, this number exceeds the pre-pandemic levels by around 25%. Of course, we have been growing the business in terms of flights. We have been recovering utilization, not to a full extent as Jourik said, given the operating environment as we had to adjust capacity to create more slags in the system to be able to recover against some of these operational disruptions. We have been adjusting the model quite significantly and quite large scale, taking down the flight volume, redesigning flight duties, creating additional spares in the system, added significant resources to our planning and logistics departments, also improving capacity in call centers, creating daily fire breaks in the schedule, also affecting boarding procedures to make sure that we are, in the end, minimizing customer disruptions. So we are trying to put the customer in the forefront of everything what we are doing to make sure that we protect the interest of the traveling public. Obviously, that costed us utilization. That costed us capacity, but we are able to fly. But if I look at the lost adjustment, we have been making adjustments in 2 waves, taking down the intended growth from 140% in the second quarter to roughly around 130%. And the last 5% capacity adjustment is actually coming in net neutral to financial performance because, obviously, we are able to yield up that squeezed capacity, and we are able to save compensation cost. So net-net, it's financially neutral to the business. Having said that, it is still undermining utilization, which remains a further opportunity for the company to play on going forward. If you look at how flight disruptions have been affecting the business over the course of the last period, you see some significant events undermining our ability to operate properly, mainly ATC-related issues or airport related matters. I think the latest on that was the Luton, the runway meltdown, which I've never heard over 20 years of my career that the runway can meltdown, but Luton managed to prove that. So we are dealing with all these hiccups in the system. And systemically, we have been dealing with changing in labor shortages at ATC and in the airport environment in handling and therefore security. You can see the trend line now that there is some level of normalization coming in. Obviously, most of it is because of our investment into our own resilience, more strikes, more buffers to make sure that we are able to deal with these options. But also, we are expecting efforts to continue to invest ATC, to continue to invest and see some benefits coming through this, especially the post summer peak period. Jourik talked about revenue. I think revenue is a strong side of the equation for Wizz. And really, the key highlight here is that we are growing this business 30%. Our competitors are here down versus pre-pandemic level like EasyJet are growing 15%, but we are growing 30%. And we are seeing the same unit revenue trend here, which is just underpinning our diversification strategy that it is not only the incumbent market that keep the business going and create value for the company, but also, we are seeing the very same trends through the new markets, Italy, the investments in the U.K. by acquiring slots, the expansion of Abu Dhabi, entering the Albania market. We are seeing very similar trends coming through what we are seeing in the incumbent markets. And you see that genuinely, we have a revenue momentum months and months, and we believe that we're going to be able to maintain that momentum. Obviously, one of the question you could -- questions you could have is how a possession inflation -- possible inflationary pressure on consumers could affect bookings, especially going into the winter period. I believe that empirical suggests that when it comes to high inflationary period, even recession times, actually the low-cost sector is winning in the industry because people tend to downgrade. They [ steer ] travel, but prepare to pay less for travel, maybe they shorten their trips. And it is more at the detriment of the legacy carriers than low-cost carriers. And this period, actually low-cost carriers continue to be in market shares market position. So this is not a bad thing for Wizz Air if this is what's happening. The fleet continues to be our strategic strengths and a huge source of competitive advantage. We believe that there is no better aircraft than A321neo. Our fleet at the end of the period consisted of 157 aircraft. We took 8 new A321neo deliveries, and we retired 4 old A320ceo aircraft in the fleet. The fleet continues to get younger. 4.9 years average fleet age, I think that makes us the airline operating the younger fleet of aircraft of size in Europe and probably in the world. Also, we have been upgauging from A320 to A321. The average seat count is 214 now. Obviously, this is a source of economic advantage on unit cost coming through the engineering design of the aircraft. Our fleet program remains intact. We are not deferring aircraft deliveries. Obviously, we are subject to supply chain issues on the OEM side, and we might be subject to some delays. But this is a fairly programmatic aircraft delivery program. We are taking 40 to 50 aircraft deliveries a year. And even if there is a shift of a few months here or there, the plan remains intact going forward. If you look at the way we have been growing the business in the current period, I think we are now resuming the normal growth pattern being focused on increasing frequencies on existing routes. So roughly 3 quarters of growth capacity manifest in the form of frequency increases, 24% by joining the dots, connecting existing airports, but we continue to deliver new airports, new countries to the franchise to make sure that we continuously diversify our fleet network. So we believe this is a very safe way of delivering growth. So the major investments are behind us. We made those investments during the COVID period. So by having that backbone created, now we are putting the meat on the backbone to make sure that we are benefiting from those early investments. And we started seeing results coming through, as Jourik mentioned. We are getting very similar revenue patterns through the new markets as from the existing markets. We remain focused on our environmental commitment. This is a leadership area for Wizz Air given the fleet, what we operate. Given the act of what we operate, it has been increasingly recognized by the World who are -- organizations who are focused on environmental impact on sustainability. We also performed our first slide with sustainable aviation fuel that was a blended fuel from Bucharest to Lyon. I see that was taken very well. We were the only airline actually operating full commercial flight of their airlines, brought in empty aircraft. So that, I think, kind of suggest the commitment of Wizz Air versus the rest of the industry. We remain ambitious with regard to our sustainability targets in 2030. And you can put that in perspective versus our competitors. We believe that we have performed a lot better than the rest of the industry in terms of unit carbon impact relative to other airlines. Also, we have been further diversifying our management in terms of gender diversity. As we speak, 36% of our management consists of female leaders and managers in the company. And actually, that number continues to rise. So Wizz Air is a good place for diversity. Let me have a few highlights on the current quarter on Q2. We are looking at delivering capacity growth of 30%. It was intended to be bigger. But because of the capacity adjustments to create resilience against operational disruptions, we took that growth down, but it is still a very significant 30%, and we are expecting to deliver over 40% capacity growth in the second half of the financial year. Again, if you run the math in terms of aircraft count and utilization, you could come up with a bigger number than 40%, but we are keeping reserves for operational disruptions to make sure that we continue to protect the consumer and the integrity of our operating platform. But we shall see how that plays out, whether or not that could give us more scope for growth, but we are planning roughly around 40%. We are maintaining a relatively high crew productivity and fleet utilization around 12 hours. Our target is more than that. We will be looking at 2.5 hours, but the concession here is again put against the operational disruption. So we need to see the environment to improve significantly before we can go above. But I think that's a huge reserve for efficiency improvement for the airline. We were talking about the revenue environment. We are seeing RASK improvement of around 10% in Q2 versus fiscal '20. And we believe that some of that momentum may just fall into the second half of the financial year, but visibility is very limited at this point in time. We are expecting 90-plus percent performance on load factory in July and similar numbers for the rest of the quarter, underpinning the strong consumer demand for our services and our products. Ex-fuel CASK is approaching historical levels. I mean, we are still having deficiencies of -- on CASK [ resetting ] from the lower than intended utilization. But once we are fully back up into historical utilization levels, you will see the CASK levels improving. We are expecting to deliver significant profit in the financial quarter. And as said before, we continue to extend our jet fuel hedge and carbon emission coverage for fiscal '24. Right now, we are hedged on 20% of our jet fuel requirements for the period. But in a way, we are playing catch-up, and we will continue to place layers of hedges going forward. And given the uncertainties around disruptions and the macro environment at this point in time, we are not providing further financial guidance for the year. So with that, let me just wrap it up. So Wizz Air, we believe, is in a good place to continue to strengthen its leadership in our core markets and also benefit from the investments into new markets. And all those investments and strengths will continue to keep us on track for delivering the strategic growth pattern of the company. Operational disruptions are normalizing to some extent, largely because of our own investments by entering the operating model and partly because we are seeing investments also made by third parties into the supply chain to make sure that the situation is gradually improving. We clearly see momentum on revenue and yield, and we are building on that momentum going forward. Ex-fuel unit cost is at target. Assuming full utilization, it is, at the moment, compromised because of the supply chain issues. But once we are seeing a further normalization of the supply chain, we're going to be putting utilization back to historical levels. And we believe that at that time, we would be back in ex-fuel, of course, that was pre-pandemic. Fuel CASK become level playing field as of fiscal '20 (sic) [ '24 ] due to our resumed systematic hedges going forward. We are having a strong liquidity at EUR 1.6 billion, and we feel good about the prospect of liquidity going forward. And we believe that our fleet remains our strategic source of competitive advantages going forward and that unlocks the lowest cost and lowest carbon intensity commitment of the company. With that, I would hand it over to Q&A.

József, Jourik, it's Jaime Rowbotham from Deutsche Bank. 2 questions. For a low-cost carrier to grow and take market share during a recession is obviously very plausible, helped by people trading down as you alluded to. But doing so can be quite expensive because it can be hard to get the kind of pricing you need to offset cost headwinds and prevent losses. So are you happy that you have sufficient balance sheet strength to withstand such a period in case that's what happens next? And second question linked to that. Lufthansa revealed yesterday that they'd offer their ground staff wage increases of between 6% and 10%. And today, they're all on strike. What's the current situation with in terms of staffing and wage cost inflation?

Maybe I would just take the second question first and Jourik can elaborate on the first one. So we had been heavily investing into our staff in various ways. First, we have been growing head count significantly. As I said a year ago, we were roughly around 4,000 people in the company. Now we are 6,350 highest head count, pre-pandemic was roughly around 5,000. So we are significantly up on organizational capacity. At the same time, I think we were the first airline reinstating pre-pandemic salary levels. First for the cabin crew, secondly for the pilot community. I mean many of our competitors are still on cost salaries, and they are still on the aftermath of COVID measures those companies have taken. This is the recognition of the inflationary environment. And also, we said that, that's an investment which is worthwhile to improve the morale of the group, given the incredibly distressing operating environment. I mean let's not forget that these people show up at work and they may get dragged into doing nothing for 2, 3 hours because of ATC delays. And it is just a very distressing lifestyle going through this. And we said, we needed to make investments against that. That also, we have been systemically reviewing especially local salary scales for cabin crew to make sure that we are going with the market when it comes to the inflationary pressure of the local market and we have been adjusting salaries across the board. So we have been on an investment cycle when it comes to staff. And on that basis, we believe that we are probably in a lot better position than most of the other airlines who might have been playing it a lot stricter than us. So I feel pretty good about the morale of the company, to commitment about organization, our people, the resilience of the system, especially now as we have made some adjustments to capacity.

Yes. Jaime, on the first point, if you look at liquidity of the company, it's at EUR 1.6 billion. We have summer ahead of us. So operationally, that should further build. Maybe there will be some outflow that will offset some of that because of unflown revenue as you look forward for the second half. But essentially, the key uncertainty ahead of us is kind of the second half, which is 6 months to bridge. That's not a long period. As of F '24, this is a level playing field. There's a lot of strength. The platform of Wizz will really come to full fruition as we have a level playing field on fuel costs as we will have the same operating platform on revenue. And whatever strength we may have lost and obviously, we have lost versus pre-COVID in terms of balance sheet, we'll very quickly rebuild that as we get into F '24. So yes, we are confident. And if there would be apocalyptic scenarios over winter, there's things that we can do with the operation to make sure that we minimize any outflow from the operation.

Sathish from Citigroup. I've got 3 questions here. Firstly, on your -- given your eye exposure to the VFR market, can you give some color on what does the recovery looks like within that particular segment for you? And where is it that compared to pre-pandemic levels? And the second one is, sir, on the balance sheet. So first of all, what is the leverage target that you need to do to maintain the investment-grade credit rating? And also, any color on working capital recovery as we go into the full year -- into the next 3 quarters? That will be helpful. And then the third one is around the capacity. Obviously, you said that you built the resilience. So how confident you are operating at 40% given you actually cut back in Q1 to 30%? And do you see any downside risks there? And also how flexible you are with that capacity you felt potential downturn into the winter? Yes.

Okay. Maybe I'll take 1 and 3. So with regard to the VFR traffic recovery, VFR has been pretty strong across the cycle. So if you look at the breakout of COVID and how the various flows got impacted by -- to COVID restrictions, actually VFR has been, by far, the most resilient segment. Now obviously, we are seeing some restructuring of VFR traffic. I mean, U.K. is interesting. I mean, obviously, you have certain immigration measures put in place by the country, especially post Brexit. That has some impact on VFR flows, but we are kind of moving capacity around to make sure that we serve the people wherever they go, and we have flights for that. So I mean, actually, this is not a very difficult segment to manage to be honest. I mean, you just need to understand the dynamics of where people go and you serve their needs on that basis. And we have been doing it forever, to be honest. I mean we've just been following our people and their path. With regard to overall capacity 40%, whether or not this is sustainable. And actually, if you run the numbers, you could end up with the conclusion that actually we should be growing around 49%, given the aircraft count and given the utilization targets what we have in place. So we are already creating contingency for the operational disruptions with the 40% level. But we are not going to fly for the sake of flying. We are going to fly for financial performance. So cash management, liquidity management remains the -- remains a very important guiding principle for the business. And our ability to adjust flying capacity has been demonstrated throughout the pandemic. I mean if you just look back what happened in March 2020, we were operating 100% of capacity. In April, we went down to 3%. In August, we were 80%. November, we were 10%. December, we were 100%. So we can manage capacity probably a lot better than any other airlines in terms of going up and down, wind down according to market demand, according to operating conditions. So we're going to be adjusting capacity according to the market conditions. We are not going to grow for the sake of growth. But we -- at this point in time, given what we are seeing, given the market strength on revenue, given the currently assumed cost environment, we feel quite comfortable that this capacity planning is intact from a market standpoint as well as an operational standpoint. And we have sufficient reserves to be able to operate the airline despite assumed disruptions here or there.

Yes. And on your balance sheet-related question. So clearly, I mean, I just gave some perspective on the current quarter, right? So we should be able to build some more liquidity coming out of the summer. Then you go into the second half. In the normal year, second half is, let's say, profit neutral, maybe slightly loss making for an airline. So we will probably burn a little bit of cash during the second half, given where we're at under, let's say, the current macroeconomic conditions. Obviously, if there's changes, could be less or more. But then really, it's really all down to F '24. And if you look at the F '24 numbers, if you look at the pricing platform that is out there, the hedging that we have in place, you can see that we immediately get maybe next year at the high end of the leverage ratios, but then the year after fully back at the low end of the leverage ratios, which are required for our own targets, including for rating agencies. So we feel quite comfortable on that. I think nobody is looking at point in time. People are looking forward. And I think we've said previously that there was comfort being sought on what we will be able to do on the pricing platform over summer. I think we're proving that we can be out there with the other airlines despite the higher growth, and we'll continue to prove that as we go month-on-month. So I think that gives you the right level of comfort on the balance sheet as well.

It's Harry Gowers from JPMorgan. I've got 2 ones. Just on the -- first one on those market share slides. The places where it's increased the most, Albania, Bulgaria, I think. What you see in those markets is a case of local operators across Eastern Europe are struggling? And then just on the cost. With the utilization slightly lower in Q2 and winter now, I mean, how should we think about the non-fuel CASK in terms of that journey of getting back towards pre-COVID levels?

Maybe to take the market share question. I don't think we are a market share-driven company by definition. And COVID, to some extent, has reshuffled some of the competitive capacity in certain markets. So Albania is clearly one of those markets. Local airlines basically disappeared, and we got that to fill the vacuum. Bulgaria is also similar to some extent. So of course, we are taking advantage of the market situation, but we are not necessarily market share-driven. But the consequences of our growth is translated into market share gains. And as I said, we have been gaining significant market shares in Central and Eastern Europe as we speak, and we are up 5% versus pre-pandemic levels. But we are not driven by market share. So we don't have a market share target for any of the countries. It is more of a consequence of what we are doing organically and genuinely.

Yes. Maybe just building on that, and you can see that from what happens in the industry, right? If you look at summer capacity is down 15 points for the market, if you then up in capacity, obviously, you grow in certain of the markets, if you look at some of our competitors in Bulgaria. Bulgaria is down 45% in capacity. [indiscernible] is down 25% in capacity. So even just us holding or slightly expanding in some of these markets leads to almost by accident, let's say, to those market share gains. On your question on utilization impacts and Q2 costs. So if you look at it, I mean, as outlined during the main presentation, the 2 key drivers of the cost upcharge versus fiscal '20 pre-COVID were really disruption costs and utilization. Disruption costs will be still there to some extent during the month of July. It's -- week-on-weak, it's sequentially improving. We should be trading out of this during August and September. The utilization impact, we will have maybe not 10 points impact over the second quarter, but maybe still 5% differential versus where we used to be in F '20. So those 2 factors will be at play during the second quarter but to a much smaller extent. So that's why you should kind of use for the second quarter ex-fuel CASK cost.

Maybe just to come back to overall capacity in light of market shares in Europe. So if you look at the projection for the industry, it is expected that the European airline industry build a roughly 90%, 95% closer to 90% capacity versus pre-pandemic levels in the second half of the calendar year. And our numbers would be around 140 mark with that regard. And that doesn't mean that we are blowing our minds in our existing markets. I mean this is really the investment coming through in terms of entering new markets and expanding our operations in new markets, but we are resuming capacity in incumbent markets basically to pre-pandemic levels. So the objective of the financial year is to get back to where we were prior to COVID-10 in each of the incumbent markets. So obviously, where we are seeing some strengths or competitive advantages or kind of market vacuums, we are feeding those and we are acting on those. But most of this 40% growth is from the new markets, the new investments, [ like ] Italy, Abu Dhabi, Albania, buying slots in London. These are the sources of that growth.

It's Andrew from HSBC. Can I come back on the CASK, which you were just discussing. I know you're talking about productivity being 5% below in Q2. But you said in the second half, it's going to be 10% below, no, because you're holding back. So I mean, you've got that pressure on unit cost and then you've got inflation because you've told us how much you're paying your people who you care for so much. So how does that balance when we've got inflation building, we have got productivity being held back deliberately for disruption? How confident are you? Or is it just that the growth in aircraft gauge can magically deliver the pre-pandemic CASK? Second question would be just around PDPs, CapEx and whether you're going to finance them. So what impact that has on the cash flow as we ponder the balance sheet? And then the final question would be around governance, I guess. So on Friday, I think your Chairman bought a big slug of shares 3 working days before this announcement of results. So just curious to understand what rules govern the buying and selling of stock by Board members or other insiders?

Sure. Let me start with governance. I don't think there is any insider information issue, which is involved here. There was no any news that would have been affecting the financial prospect of the business anyways. Yes, we have been trimming some further capacity. But on a financially neutral way, as said, on the one hand, we save on disruption costs. And on the other hand, we are yielding on the business where we squeezed our capacity. And that was done in a financially neutral way. We have a very robust governance code dealing with insider trading matters dealing with share trading matters. And this process has been totally compliant with the restriction. The formal restriction what we have is on periods when we are reporting the full year and the half year results, not the quarterly results. But we are paying extra attention to every single share trade request by any of the senior leaders of the company as well as the Board of Directors. We have a very robust approval process. Actually, when it comes to the shares trading, it is approved by the Chair of the Audit Committee. So I think I can assure you that this has been greatly scrutinized and applied and implemented with full responsibility and taking our sensitivities into account. And I don't know what threshold do you apply. I mean I don't think there is a 3-day threshold or a 5-day threshold or 1-day threshold. But we are very confident that it was a due process followed with no -- any suspicion of insider trading involved here.

Joe, if I may. On the threshold, it's 2 days after notification, which has been fully respected. When the company was notified, it was not today that the Chairman traded, and we did announce within today of notification. So building on Joe's point, we definitely follow due process.

Maybe if I just come back to the first question on the CASK impact. I think the current deteriorating factors are clearly utilization on the one hand, utilization productivity on one hand and disruption cost on the other hand. The inflationary pressure, I would say, is pretty much offset by the productivity gain of the aircraft. I mean, let's not forget that we are trading A320ceo aircraft for A321neo aircraft. And if you look at it from an inflationary or staff inflationary perspective, the A321neo riding 239 seats, we require the same number of pilots and only 1 more cabin crew, which is already a productivity gain versus the A320 flying 180 seats. So there is a significant labor productivity gain just coming from the technology of aircraft, that offsets the inflationary pressure there. So I think we are less worried about the inflationary pressure. The real question is disruption costs on the one hand. And as we say, we are trading that for utilization, aircraft utilization, but we need to see some structural improvement in the system to be more confident to move the line up back to historical levels.

And just on the balance sheet, as we mentioned in the last call, in the next 18 to 24 months, you shouldn't expect any major PDP movements, pre delivery payment movements for the company. There may be some minor core devaluations depending on the delivery stream. And if anything, PDP could be even an upside. I mean, we have EUR 800 million worth of PDPs deposited. So that's clearly a large asset on the balance sheet.

Carolina Dores from Morgan Stanley. 3 questions from me. First, do appreciate all the work you're doing and hopefully, things will improve. But assuming we get a recession and if the euro weakens, you have dollar exposure in your debt, I'm assuming all the cash is in euros, but please correct me if I'm wrong. How committed are you to keeping -- I guess how important it is the investment-grade rating for you and what is, I guess, plan B? My second question is on hedging of CO2. Are you doing any given that you have a larger exposure, I understand the peers? And third, if you could give us an idea of what material operating profit means. I guess, typically, over the past quarters, consensus was, I guess, overestimating results. At around EUR 200 million of operating profit, do you think we are getting it right for the next quarter?

If I may just give my perspective on your first question. What's the investment grade worth for the company. I guess your implied question is whether or not we would be backing investment grade with equity. I don't think there is appetite for that. Another thing that is need for that from the company's perspective, from the Board's perspective or the investors -- existing investors perspective. We have been kind of calculating the net worth of the investment grade. That's roughly around 40 basis points if you want to put it that way on access to capital. Investment grade is something which, obviously, we are very proud and then we do a lot for protecting our positions and to maintain investment grade. But I guess it's not going to happen at any price.

On the CO2 hedging, we are forward. But for the full year, and we continue to buy almost a year out. So that's the policy for the company. And on operating profit, and we're not guiding, but I think if you fill in your model the RASK guidance we give in the commentary on the [ card ], you can probably calculate where we'll net out. So I don't think your estimate is too far off.

[Operator Instructions]

Sorry, operator, we just have one more for the floor. Apologies.

[indiscernible]

Maybe starting with the pricing strategy. I mean, obviously, we need to take 2 things into account when it comes to pricing. One is the competitive environment. Who do we compete with? What kind of pricing drivers are out there from a market standpoint? And 2, is the input cost environment we are into to make sure that we protect profitability of the business. And these are the 2 forces we try to combine in our pricing strategy. I don't think we are on competitive at all. I mean, first of all, I mean, half of the capacity is -- more than half of the capacity actually is flying against high-cost carriers or no airline competitors. So our pricing power is probably a lot stronger. But where we compete, we stay competitive and relevant to the marketplace. I mean we are -- despite the fact that we have the hedge exposure in the current financial year, I mean we are very competitive versus any competing airlines and we make sure that we stay competitive. But we take into account the rising input cost factors and make sure that we are priced according to our input costs as well.

On net debt, I mean, we are not disclosing the balance sheet numbers for the quarter. But if you look at it, we have improved cash position and the fleet has expanded from 153 aircraft to 157 aircraft versus last quarter. So essentially, we slightly improved the net debt position versus previous quarter. On staff costs here, again, we have not really disclosed any inflation numbers on staff specifically. But in previous calls, we have mentioned that gross inflations will be for optimization of costs. Taking gauge into account, we're seeing double-digit inflation, so around 12%, 13% when we ran the numbers last. So first half may be somewhere in the ballpark or no, but clearly, there is inflation on some of the cost elements. And if you're not investing in new technology, if you're not investing in your network, that growth inflation will become also net inflation that we're able to offset that, as Joe alluded to earlier with the question that came from Andrew. Any questions from the line?

[Operator Instructions] Our first question comes from the line of Alex Irving at Bernstein.

3 for me, please. First of all, seeing rationalizing basis, but as you continue to grow the fleet, you expect to add more of those planes into existing bases or to grow outwards. And if outwards, would that be more in Central and Eastern Europe? Would that be more in Western Europe or would you be looking elsewhere? Second question is on ancillaries, clearly, very strong in the quarter for passenger and tracking ahead of your EUR 1 per passenger per year target. Do you think that's sustainable? Or there are some nuances that would maybe take us down to the original glide path? And then the third, on Italy, specifically, please. So Ryanair called out your operation earlier in the week is having quite low load factors. Could you please provide a bit of color into how you see the performance of your Italian network and how that's evolving both through the summer and as routes mature?

Thank you. Maybe to start with your first question, how we are going to deliver growth going forward. I think we are totally consistent to what we have been talking about in terms of the geographical footprint, and how we would be diversifying our growth. We remain focused on Central and East Europe. Central and East Europe is our incumbent area. We are the market leader there, and we have been tapping into lot of strengths in those markets. And we believe that due to the low propensity of travel, Central and Eastern Europe continue to be the source of growth for the airline for a considerable period. I mean, let's not forget the propensity to add revenue Central and East Europe, it's roughly the third or roughly the 1/3 of the Western European level. So there's a long way to go. And obviously, this is a function of GDP development, and we will see how that's going to go. But we think Central and Eastern Europe will be a high focus area for the airline. And I would expect that most -- the major to the growth, we delivered through Central and Eastern Europe. Western Europe is fairly contained from a Wizz Air standpoint. I think we have been targeting certain markets, namely the United Kingdom, Italy and Austria. I don't think we are trying to make Wizz Air a broad-based Western European airline. We are pursuing very select market opportunities in Western Europe. And we will remain focused on these 3 markets going forward to follow through market opportunities with capacity increase that we are very excited about going East as said. Obviously, that's also a set of select market opportunities pretty much known to the regulatory environment and our ability to access capacity and markets through those investments. Abu Dhabi will continue to expand. And as said earlier, we might be looking at other market opportunities going further is, but these opportunities remain subject to the regulatory frameworks available for market success to us. And maybe coming back to the Italian question. Italy has been a strong performer for Wizz Air. We have built a fairly round core network now as an outbound carrier performing a domestic network in Italy as well as outbound leisure traffic for the Italian market. But also we had a strong inbound carrier having a historical inbound network, especially from Central and Eastern Europe flown to Italy. We are seeing very similar performance of the Italian market relative to the rest of the business. So we feel very confident about the performance of Italy.

Yes. And there was another comment from someone that 321neos would not have same loads as other airplanes. So maybe some people don't have those airplanes, so they don't have the data. We can also confirm that, that is not the case. I mean loads and fares are very consistent for the logical gauged aircraft and the other ones. So it's important to be data based on the discussion. On ancillary, yes, we believe that, that growth that we're seeing is sustainable. We're seeing it not only in the quarter we just closed, but in the quarter we're in. And we continue to see that strength for the rest of the year as well.

Your next question comes from Mark Simpson at Goodbody.

3 questions. First off, is there any covenant issue with regards to negative equity in terms of credit rating or your covenants with lenders? FX, you indicated there's another EUR 100 million potential loss on FX mark-to-market in the Q2. Are you looking to hedge FX going forward as you're going to do around your fuel exposure? And then the Middle East. You're starting your Saudi flights this September. I know it's a small operation to begin with. But could you give us an idea of whether you're being incentivized or how that -- how you're being incentivized to start that operation? And how quickly do you think you can expand to more major markets operating out of Saudi into the region and maybe into Europe?

On the first question, the answer is no. There's no covenant. On the second question, the translation impact we're highly unlikely to hedge. I mean, it's not our policy. We're not going to change it for the time being. Imagine if you would have hedged, that could have been a real problem. The transactional impact we're looking to step back into dollar hedging for transactional fuel exposure, but we'll do that at the right point in time. And we feel given where the market is now, that today is not the right point in time to do that. And then Joe on the third question.

Yes, with regard to the Middle East, I think we are gaining a lot of success to new markets. I mean, from Abu Dhabi, we have made some significant announcements to the Maldives to Kuwait. For example, very recently, we are also starting operating between Abu Dhabi and the Kingdom of Saudi Arabia. Saudi itself is announced [indiscernible] new rules to Dammam, and we are looking at further expanding that network. I think we are looking at Saudi as a market from the perspective of flying in [ borne ] from our existing base setup or airline setup. But we are also looking at ways of establishing a bigger local presence in Saudi on the right conditions. So this is continuous discussions with relevant parties. I would not like to elaborate on any incentives there because things are not yet in place. With regard to the routes we have, you might be aware that actually, Saudi has been overhauling airport costs on a structural basis, not for Wizz Air, but for every airline. And I think that it has created the incentives to come to market.

Our next question comes from Stephen Furlong at Davy.

Yes, just a couple from me. I just want to -- the CASK, the ex-fuel CASK performance once full utilization is in place, do you think -- I mean, [ EasyJet ] kind of comment on this. But by next summer, the industry will be back to normality, whatever that normality is in terms of disruptions, allowing you to operate full utilization. And then going forward, more medium term, I assume you kind of feeling is that on the ex-fuel CASK is kind of flattish in the context that any inflation is offset by gauge and company initiatives. And then I was wondering kind of more longer term, just looking at -- I know you have plans for -- in the decade to be kind of with 500. And I know you've added slots at Luton and Gatwick. But I'm also kind of aware that London remains a huge LCC market. And do you think that, I guess, 16 base aircraft in the London market is too light in that regard. It seems to be a challenge to get slots, nothing to do with you guys.

Well, maybe I would start with the London issue. I mean the United Kingdom is one of the best open investment markets for Wizz Air, and we will continue to invest and we will continue to look for opportunities to grow capacity. Here, yes, we understand that London especially is a capacity-constrained market and asset acquisition is truly a cornerstone to their strategy. So we are looking at base of acquiring further assets in London. I agree with you that we would need more capacity. But I think it's a longer-term process, depending on how airports expand their own capacity and to what extent we can get access to that infrastructure growth. But also there might be market consolidations through asset acquisitions, which we would be interested in. This is what we have been doing so far. And we're going to be continuing both avenues in terms of pursuing further opportunities in London.

On the -- Stephen, on the ex-fuel CASK. So yes, surely, for next summer, you should assume a normalization of the operating environment. I think we are already seeing the industry investing in, let's say, in the system this summer. So this should normalize sequentially month-on-month a lot. For the next quarters, I think you should still assume, let's say, low single-digit inefficiency on the ex-fuel CASK because of the lower utilization. So…

The next question comes from Jarrod Castle at UBS.

Also 3 from me. Firstly, any update on retrieving your planes from the Ukraine or progress on insurance claims? Secondly, József, you've obviously got your incentive program with regards to the shares and the value being double from when it was granted. Any thoughts on changes to the terms? And then kind of related, any thoughts on share buybacks just given the fall in the share price, if you think that has value at these levels to undertake those? And then just lastly, just a nuance, but just interested in terms of 2Q RASK. Obviously you've given a clear number plus 10%. How should we think about the profile? Is RASK getting better as we move through the quarter or kind of evenly through the quarter or worse?

Thank you. With regard to the planes in Ukraine, no change. We continue to have 3 aircraft in Kyiv, 1 in Lviv. We have more access to the aircraft in Lviv. So that airplane has been maintained throughout the period despite being grounded. That's not the case for the Kyiv aircraft given the different degree of sensitivities there. But our understanding is that each of the planes remains intact. Obviously, whenever we can fly the aircraft, it would require a comprehensive maintenance program and approval program to get the airplane out of Ukraine, but no change versus the roster. But with regard to referencing your question to the value creation plan, whether or not we have any other sorts or change to the plan or considering share buyback. No, nothing. The plan remains in place as it was approved and there are no considerations as we speak for share buyback.

On the Q2 month-on-month sequential RASK, Jarrod, what we're seeing is we're comfortable on 10% for the quarter. I think I said earlier, 11% for July looks like a similar percentage for August. But then the booking visibility starts to decline. So this is why we have kind of given the guidance we've given. So we'll see what happens as we complete the booking cycle for summer. But for now, yes, the increase is very strong and is consistent for the 3 months.

Your next question comes from Alexia Dogani of Barclays.

I just had 2 questions on kind of network development capacity. It's been welcome to see your action on kind of capacity adjustments given kind of the current environment. When you look ahead for the second half and the winter season, how much more willing would you be to do more adjustments to trade off RASK with recovering CASK? So that's my first question. And then secondly, you've talked about industry competitive capacity gaps and margins that you're filling in. I mean, do you see those increasing near term and therefore, your willingness to backfill is higher in certain markets?

Thank you. Well, I mean, with regard to capacity management, I think this is really a matter of balancing supply versus demand from the perspective of profitability. I mean, we are in this business to create shareholder value. And our focus remains on profitability and liquidity, and that's going to be the guiding principle for capacity management. So I think we're going to be assessing the market situation, whatever it is, and we would be taking capacity decisions on that basis. As said, during the pandemic, as we very robustly demonstrated our ability to move capacity up and down depending on the changing market environment when it comes to managing financial performance. But shareholder value creation, financial performance be -- remain the guiding principle for capacity management. In terms of possible industry consolidation and the opportunity is created. I'm pretty sure that this is a significant impact on the industry, especially coming out of summer, going into winter. It's going to be a pressing environment on a number of airlines having limited liquidity, not having the cost in place to compete and we might be seeing some emerging opportunities as a result. As before, I mean, we are very entrepreneur. In that regard, we are market-driven. Should those market opportunities arise, we would be acting on those market opportunities.

The next question comes from Conor Dwyer at Berenberg.

2 quick questions for me. The first one, coming back to the EU ETS credit. Can you at all give what's the price at which you're buying these credits, excluding the free allowances? And are there any credit for FY '24 yet? And then secondly, Slide 13, it looks like the weekly book revenue. Over the last few weeks, it's kind of leveled off and if not sequentially declined a bit. Just given the pricing momentum, I would imagine towards the near end of the -- back end of the quarter accelerated. Has there been a bit of a volume drop off? And if not, is this just a product of you trimming capacity in certain markets?

Just on the carbon credits, we haven't disclosed the price. We purchased that. I mean we're having a relatively systemic buying program. There is volatility around the spot price, and we try to purchase at a frequent basis and time it in the right way. So I think if you look at, that's what we're purchasing up. I think other people are misleadingly disclosing prices, including free credits, which is not very helpful. And then on the weekly revenue progressions for F '24, we are about to start on F '24. So we have materially about for F '24. On the weekly revenue progression, I think it's part of the cycle. So we had a big increase in capacity, let's say, during the month of May, June, which then led to the increase in weekly, let's say, sold revenue. And then obviously, now the capacity level, the ASK level is more stable if you look at it across summer and into the second half. So it's normal that there's kind of a flat line. I think you shouldn't really try to read pricing into those. Weekly numbers in itself would be probably a little bit too high level. But yes, the ASK levels are stabilizing, so it's normal that weekly sales are stabilizing.

There are no further questions. Speaker, please continue.

Ladies and gentlemen, thank you for coming. Thank you for joining online. Thank you for your interest. See you next time.

Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.