Wizz Air is on the right side of history, both commercially and environmentally – CEO József Váradi

Last November, when it seemed that the Russian-Ukrainian war may be nearing a ceasefire or even peace, the price of Wizz Air’s stocks fluctuated up to around 5 percent at time – it looked as if the investors were struggling to decide how significant this news was for the company. How important would Ukraine be for Wizz Air?

If there is an airline in Europe for which Ukraine is important, it’s called Wizz Air. We were the only non-Ukrainian airline flying in Ukraine before the war that also had a base in the country. We even flew into the country the night before the war broke out. As soon as this becomes possible again, we will be at the starting line, ready to fly. So Ukraine is absolutely a strategic question for us.

What would be a manageable timeframe for this, is it even possible to plan for it?

We have serious plans in place, with several dozen planes. We are calculating with millions of passengers. It will largely depend on how quickly the system, air traffic control, airport and passenger services and aircraft services can be re-established. This is subject to financial and staffing conditions. I think this will happen gradually. We are ready with aircraft, routes and personnel.

Four Wizz Air aircraft got stranded in Ukraine when the war broke out. What happened to them?

One of the four was in Lviv, and three in Kyiv. We flew the one in Lviv to Poland, and the other three are still in Kyiv, but we removed their engines, transported them by road, and are using them. Otherwise, the planes in Kyiv are completely intact, but when we want to put them back into service, we will have to carry out the maintenance program specified by the manufacturer, which will take several months. But our operations in Ukraine do not depend on these three planes, as we have 256 planes.

In order for you to be able to start operations in Ukraine again, the war must end first. As someone with a master's degree in military science, what are your thoughts on the conclusion of the war?

Personally, I believe that we have reached the point where this war is actually over, and it is now up to the parties involved to find a way to officially bring it to a close. Resources have been depleted, and nothing is really moving forward in strategic terms. I think everyone needs to find a message of victory that they can sell at home. In my opinion, we are very close to the end.

Is a return to Russia part of the company's plans?

Of course. We used to operate in Russia, but whether we do so again depends on how and to what extent Russia will reopen. At the moment, European airlines are not allowed to fly to Russia, but if that changes, we will examine the situation.

There is debate about whether the drone flights disrupting European airports have anything to do with the war. Have there been any examples of this disrupting Wizz Air's operations?

I don't think this is related to the war; it was an existing problem before as well, although the war has obviously accelerated the development of flight drones. This is becoming a matter of aviation regulation, to which the whole world is still seeking an answer. We have had 49 drone-related incidents, none of which caused flight cancellations or delays. Most of these are related to the smuggling of cigarettes from Belarus to Lithuania using drone-like balloons. These are causing serious disruptions, there have even been airspace closures, and the airport in Vilnius has had to be closed, which also affected our operations. Something needs to be done about it for sure; I think that much more decisive action is needed in these kinds of cases.

Although it has not yet entered into force, the European Parliament has voted in favour of allowing everyone to carry one piece of hand luggage and one piece of luggage weighing up to seven kilograms aboard European flights free of charge. Are you preparing for this?

Regulation is one thing, feasibility is another. On aircraft such as the ones we operate, storing that many bags in the overhead compartments is not possible. There is simply not enough space physically. And if we start using all available space for luggage storage, it would present safety issues, as evacuating people in an emergency – when every second counts – would become impossible.

They have already started introducing such baggage rules in Spain.

The Spanish have indeed gone the furthest on this by imposing huge fines on airlines, but all of the fines have been overturned, so these rules are not legally binding.

So for now, there is no need to draw up a business contingency plan to address a potential loss of revenue from baggage fees?

The cost of flying is largely dependent on weight, and we believe it is fair to say that passengers should pay based on the weight of their luggage. However, if this type of regulation comes into force, ticket prices will rise, and even those who do not carry luggage will have to pay for it.

Is there a future for the classic low-cost model? Following the bankruptcies in the US, many are beginning to question this.

There are huge differences between America and Europe. In America, traditional airlines – American, Delta, United, plus Southwest, which I would also include in this category- account for 85 percent of the domestic market, which in terms of passenger numbers is roughly equivalent to traffic within Europe. In Europe, low-cost airlines already have a 50 percent share of the market, and traditional airlines have lost the dominance they enjoyed 20-25 years ago. In America, however, they have been able to maintain this dominance. Conventional airlines are performing better financially in America, while in Europe the opposite is true. And I think the most important thing is who is capable of growth. In America, the traditional sector is the driving force behind this, while in Europe, the only growth is coming from discount airlines.

As far as we are concerned, the core of our business model lies in how efficiently we can operate our assets and mobilize the human resources assigned to them. We made the strategic decision to fly new aircraft and Wizz Air now operates one of the youngest fleets in the world. This comes at a price, as these aircraft are not cheap, and in order to be economically successful, they need to be regularly operated. One of the problems is that the aircraft are grounded due to engine issues, meaning that 15-20% of the fleet is not being used, which goes against the very essence of the business model: if I bring a high-capital-cost resource into the system, I have to fly it as much as possible to make sense in terms of cost per unit.

On the subject of engine problems, analysts tend to say that the loss of capacity is offset by the financial compensation that Wizz Air is receiving from the manufacturer, Pratt & Whitney, so this problem alone would not justify the poor financial performance seen since then.

I think analysts have failed to understand the complexity of the system. On the one hand, there is no compensation for our total loss of revenue or profitability. The compensation is largely limited to our direct costs associated with the grounding of the engines. No one is talking about the secondary costs or the opportunities lost because of this problem. It is the new GTF engines and the aircraft that go with them that are being grounded, which represent the highest level of technology and have the lowest operating costs on a per-unit basis. If I lose that capacity, I have to bring in older CEO aircraft, which consume 17 percent more fuel and are, say, 10-12 years old, and their maintenance costs are higher than those of a brand new NEO aircraft, which I may have bought only two months ago but it is now grounded due to engine problems.

When this engine problem first arose a year and a half ago, overnight, a fifth of our fleet was grounded, along with 20 percent of our pilots and flight attendants. We still have to pay these people, as we don't want to lose them because we will need them when we get the aircraft back. Or another example: since I have estimated when I will get the engines back, I am extending the lease on the older CEO aircraft. And hat will happen next? I will not return them during the planned maintenance cycle, which will result in a sudden surge in maintenance costs, and I will operate my airline at a structurally higher cost level than before.

It was precisely these skyrocketing maintenance costs that caused a major uproar when the quarterly report was released last summer, causing Wizz Air's stock price to fall by 27 percent in a single day. Analysts assumed that the return of the CEO aircrafts was related to old contracts that the management must have known about but failed to disclose.

No, that's not true. When the engine problem arose, at first we didn't know exactly how much of our capacity we would be losing, nor what kind of deals we would be able to make to replace it. We had to manage our costs and our capacity simultaneously, as competitors were attacking from all sides. We started negotiating all kinds of solutions, such as extending the leases on certain aircraft or returning old aircraft from operation as soon as possible because they were putting too much pressure on the expense structure, given that they were not being compensated for at fleet level by the new technology, which was sitting on the ground. When you return an aircraft early, you are bringing future maintenance costs forward. When you extend a lease, you may enter a cycle where you have to incur a large maintenance cost and must immediately amortize that cost. So it is not true that these were included in previous contracts.

How does the compensation received from the engine manufacturer compare to the losses and costs already outlined?

It's roughly half of it.

Another criticism from investors is that Wizz Air was growing too fast, and that this is what caused the profitability problems. In light of the recent announcements about base closures, the sale of some aircraft, and a more modest growth rate, were they right?

Critics are always very clever after the fact. In the current geopolitical and supply chain situation, talking about an increase of 15-20 percent is indeed unrealistic. It's more realistic to expect an increase of around 10 percent. But we made the previous plan in 2017 based on fleet deliveries, and at a time when there was no war in Ukraine or the Middle East and there were no GTF engine problems. If that same context, which seems rather trivial from today's perspective, had remained throughout that period, no one would be talking about growth problems today, because the business model would simply have continued on its course. Circumstances changed, corrections had to be made, and we made those corrections.

According to the company's new strategy, the plan is to refocus on Central and Eastern Europe. Is there enough growth potential here? The region's population is declining, and competitors are growing stronger here too.

Poland's population is actually growing, but in Europe as a whole, we basically have to factor in a stagnant or declining population. However, there is a massive difference in how much people fly in relation to each country's population. The level in Central and Eastern Europe is still only about one-third of that in Western Europe. As a rule of thumb, this increases by two to three times the GDP growth. As long as the economy is growing, people's standard of living and expendable income is growing too, which benefits this industry. In addition, spending one's time in a meaningful way has become more important, and in this respect, I think we are on the right side of history, because this is precisely the industry that can satisfy these growing ambitions and desires.

Another factor is that although the population is declining, life expectancy is on the rise, and we are seeing an increase in the number of retired passengers, whereas when we started out, our customer base was mainly young travelers. We have modeled all this, and even if we were to fly only to and from Central and Eastern Europe for the next 10 years, we would still be able to deliver the 10-12 percent annual growth we have set for ourselves without any problems. But we do have alternatives: we are particularly well established in the Italian and British markets, and we are present in the Caucasus, but we do believe that Central and Eastern Europe should be our main focus.

And how long do you plan to remain in your current role after more than 20 years as CEO? Is there a limit?

There have been limits set in the past, but I have passed them all. I'm not saying anything like that anymore. Right now, we need to first work out the problems we are facing. Once things clear up, Wizz Air's business model will be more competitive than ever. If we think about a future where we are flying the best technology, 100% Airbus A321neo, with no efficiency issues in execution, I think this business model is unbeatable. In two to three years, we will be talking about 100 million passengers and 300 aircraft. Let's compare this with other airlines: Lufthansa has just over 50 million passengers, British Airways has 50 million, Air France has 40 million, and KLM has 40 million. We are talking about figures which, in my opinion, will put us on a completely level playing field with anyone in terms of competitiveness, economies of scale, and operational efficiency, once the aforementioned problems are resolved and we complete the technological conversion from the CEO to NEO aircraft. We are two or two and a half years away from this, so it is possible to imagine Wizz Air flying at full speed.

Meanwhile, Michael O'Leary, the head of Ryanair, recently spoke about the impending bankruptcy of Wizz Air and pilot games in relation to the company's business model.

I think we've gone bankrupt at least ten times as far as he is concerned. One needs only to look at our numbers: we have two billion euros in cash, which is higher than Ryanair's liquidity ratio. I don't know what he's talking about. I get what he would like to see, which is to be the only airline so they can take over the entire market. But that's not the case anywhere, and it never will be. I don't know what to say to that, except that if he keeps blabbering on, we'll eventually file a complaint against him, and then he'll think twice about what he says.

Earlier, you said that you are on the right side of history. What about air travel from an environmental perspective?

When it comes to environmental protection being a strategic issue for the airline sector, we are definitely among those that take this issue most seriously. We operate the best technology in the most efficient way, which means that compared to our competitors operating in Europe, we are more efficient on a per-unit basis, i.e. per passenger per kilometer – we have the best emission indicators, well below the industry average. I believe that traditional airlines are on the wrong side of history in terms of sustainability: their business model is based on taking passengers to their destination with two flights, they operate business class, and they often use much smaller aircraft. Of course, one could counter this by saying that no one else is growing as fast as we are, and that as a corporation we are polluting the world more. To that I would say that then you shouldn't fly with Lufthansa or British Airways, but with Wizz Air, and that solves the problem.

I think that in the next 20-30 years ahead of us, we will have to be smart about how we get from A to B. At A, we will maximize environmental considerations through our operating model and technological commitment. These machines cost money, and I am investing in them to become more economically efficient and to be able to operate in a more environmentally conscious way. And we will get to the point where carbon-free technology is available. This will probably be hydrogen-based, but we have to get there, and I think this will be a transition period of at least 20-30 years. SAF*, or "sustainable aviation fuel," offers a solution for this transition period. There is a huge debate across the industry about whether this is an adequate strategy, whether it is feasible, and whether it makes economic sense, because it is three to five times more expensive than conventional fuel. In any case, we have invested millions of dollars in this in the US and the UK in order to increase SAF capacity worldwide and accelerate the transformation. In addition, we are working with Airbus as a pilot airline to define hydrogen as the next technology. I think we are doing the maximum we can.