Wizz Air CEO: Our profit is €0.03 per seat per kilometer

Josef Varadi Photo: Kfir Ziv

Jozsef Varadi talks about slim profit margins, rude Israeli passengers and drunk and violent British passengers.

Jozsef Varadi, CEO of Hungarian airline Wizz Air, knows exactly what you are thinking, even five years after the launching of the open skies policy, when you hear the words "low cost." "With us, a ticket costs less than €50 on the average," he says, and when asked what a passenger can bring with him on the plane at this price, he laughs, and answers, "Himself, more or less."

Yes, he already knows all the jokes: on a low-cost flight, you pay much less, but you have to pay even for the polluted air you breathe on the flight. Here is one piece of news you will get from this interview, however: starting on October 29 (yes, after the Jewish High Holy Days), Wizz will fall in line with the other low-cost airlines - it will no longer charge for bringing baggage onto the plane (it currently charges €10-20 when paid in advance and €35 at the airport). "With our competitors, it's included in the price, but the way I see it, it's more correct to pay for what you use," he says candidly." "That's the feedback we get from the market, however, and we're acting according to it."

"Globes": Did you also get feedback from the market that after all, if you include all the services you pay for on low cost flights, in the end you get to the price of a regular flights?

Varadi: "Legacy (regular) airlines have a single price, but does it include more than what I'm offering? The coffee that you buy on legacy airline flight is the most expensive coffee that you've ever drunk."

But in the end, don't you make a bigger profit when the passenger buys food and adds luggage to the ticket?

"That's not true. I make a profit from it, but we recycle the investment. Our profit margin is low all along the chain."

So how do you make a profit?

"There is a calculation. It's a little complicated, but it's basically measured by flight kilometer per seat. On short flights of up to two hours, the calculation is €0.03 per seat per kilometer. That's how it is on Wizz, and that's how it is on airlines like Ryanair. For medium companies, it's €0.06 per seat, and on legacy airlines, it's €0.10 per seat. That's what defines the difference."

What proportion of the company's expenses goes for personnel?

"10% of expenses. I know, that's a very low proportion, and not because we don't pay our employees. We're simply more productive and efficient, and outsource many things, for example maintenance of the planes and ground services. We have 3,500 employees, and with 85 airplanes, it's 41 employees per plane."

For the sake of comparison, El Al Israel Airlines Ltd. (TASE: ELAL) has 6,000 employees and operates 43 planes - 140 employees per plane.

How would you describe Wizz Air passengers?

"I divide our passengers into three groups: those traveling for studies or work, leisure passengers, and businessmen. It's interesting that this segment has become our customers, because people think that businessmen are inclined to fly more on regular flights."

What happened?

"What happened was a turnaround in awareness. There are businessmen who are ashamed to fly on luxury airlines, because it's expensive and doesn’t fit the cost-cutting agenda of many companies. Business passengers currently account for 10-15% of low-cost passengers, but in monetary terms, their share is larger, because they buy more expensive tickets (flexible tickets that can be canceled)."

"Is this distribution right, or do you want to change the balance?

"I don't care if it's a leisure passenger or a business passenger, because today, leisure passengers can also buy a more expensive ticket. We're not chasing after a specific type of customer, but we're taking steps to increase the leisure and business passengers segment, at the expense of migratory passengers (studies and work). It's not that we're doing anything specific to change the balance, but the composition of our products is such that every passenger can choose what he wants on a flight, such as food and refreshments."

1.4 million passengers

Varadi is convinced that the future of the aviation industry will feature a model increasingly similar to the one utilized by the low-cost airlines. It's a trend reflected in sub-brands, such as El Al's Up, KLM's Transavia, Lufthansa's Germanwings, and Air France's Joon, which is designed to appeal to young passengers.

"The reason why legacy airlines are moving in the low-cost direction is simple: the lower the operating costs are, the easier it is to show good results. From the standpoint of efficiency, market cap, and growth potential, Wizz is now reporting the best results in the industry."

The figures back up his statement: Wizz is currently one of the largest low-cost airlines in Central and Eastern Europe. It operates 85 A320 and A321 Airbus jets, and offers over 500 routes connecting 142 destinations in 43 countries. In recent years, the company's annual growth has been 20%, and since it held its IPO on the London Stock Exchange in 2015, the share price has almost tripled. The airline's current market cap is just over €3 billion.

In the preceding financing year, Wizz Air carried 23.8 million passengers, who poured over €1.5 billion into the company, added 12 planes to its fleet, and finished the year with a €225 million net profit. In the first three months of 2017, the number of passengers rose 25%, compared with the corresponding period in 2016, and its revenue soared 29%.

During the five years that Wizz Air has operated in the Israeli market, the company has flown over 1.4 million passengers. Last July, Wizz Air flew almost 70,000 passengers, 76% more than in July 2016. This important news for Wizz Air's image - for the first time, it was ahead of easyJet in activity at Ben Gurion Airport.

It is not as if there is no competition: the open skies revolution launched in Israel five years ago has caused a dramatic increase in passenger traffic to and from Israel. Over 140 airlines are competing for patronage from Israeli passengers. Varadi predicts that this trend will halt when the market goes towards consolidation (unification or concentration, depending on which socioeconomic side you are on). He says, "Some airlines will disappear, and we'll see more airlines unable to cope with the market conditions. All in all, it's a good thing, because the market has to be based on the conditions that it dictates by itself."

What about the consumers?

"In my opinion, they will profit from an efficient and competitive market, not only in the price, but also in better service."

Five years after open skies were declared in Israel, Ryanair, the airline most identified with the term "low cost," announced it was opening 15 routes from Israel, also at a price of €20 in each direction. Is this competition challenging for you?

"You won't believe it, but I really believe that competition is a good thing. Competition has shaped us very well, and it has created a different company than the one we would have been without competition. Competition is good not only for the consumer; it's also good for the airlines themselves in the sense of efficiency. We've been competing ever since we founded the company, and that's a good thing. You have to know, of course, how to manage yourself within the competition - what to change, and learning from this for the future. The problem is in situations in which you have no one to compete against. We're certainly not afraid of competition, and we'll be able to offer prices like Ryanair, and maybe even lower."

"Aiming at growth in Israel"

Wizz Air, like other airlines launching routes to and from Israel, is getting a grant from the Ministry of Tourism amounting to €250,000 a year for each route. The grants are given only for routes to new destinations, and at the discretion of the Ministry of Tourism. The idea is that the grant will be used for the airline's advertising expenses in order to market Israel as a tourist destination.

How much of an incentive are the grants for you to increase your business in Israel?

"The grant is not the main motive for launching new routes. There are other countries and airports in the world doing this, and it's important to realize that it's valid for the short term, because the grant is usually given for one year. We look at a longer term of five years, and we made decisions on that basis.

"The Ministry of Tourism is investing in the tourism lever in Eilat, and is subsidizing most or part of the price of the flight in the winter. It's a win-win situation, because airlines usually cut down on their activity during the winter, and we're looking for winter destinations other than for skiing, so Eilat fits in well here. This is also the reason why we have already launched five routes from the airport in Ovda, without waiting any longer."

You have 28 offices in Europe. Are you thinking about opening one in Tel Aviv?

"We're started discussions with the government. This is a process that doesn't end in one meeting, because you have to assess several things in areas that don't involve just you, such as security. The aim, however, is to increase occupancy and develop the market in Israel, and the opening of an office here is therefore an important step, because it facilitates cost cutting. We have the ambition to grow in Israel, which is a wonderful market for us."

easyJet has no base in Israel, nor do other low-cost airlines. This an unusual step.

"easyJet is not an airline that operates according to principles of establishing bases, but we have other aims in Israel. We'll station three airplanes here, and on the basis of a calculation of 40 employees per airplane, we'll hire 120 local workers. Together with the outsourcing workers, we'll directly and indirectly create 900 jobs. That will be efficient for both sides."

Order very, very early

It is questionable whether Varadi has seen the "Chocolate Flight" video clip, in which Israeli passengers are seen behaving extremely rudely, but he is aware of the stories about the Israeli mentality.

"The crew members say you are not easy passengers," he says diplomatically, "but we have also experienced British passengers getting drunk and violent. You have a different culture. Maybe you don't fit the definition of a European passenger, but our job is to deal with it. We like the market. There are difficulties, but we're coping, and for their part, the consumers are being educated. There is a mutual adjustment. For us, the most important thing is security, and in a case in which a passenger jeopardizes the passengers' safety, we won't take it lightly."

Is the market also being educated in the sense of reserving flights several months in advance in order to pay a price that is really low cost?

"Educating the market takes time, but in this sense, too, we're seeing a change, and the deal is simple: if you plan your vacation in advance and pay us in cash, you'll get a lower price."

How long in advance?

"It depends on the flight. In general, I can say that making a reservation more than 60 days before the flight date will get you a good price, and you'll pay more for reserving a flight in the last 30 days before the flight."

How much damage has the travel agent sector suffered from the growth of the low-cost sector?

"Our outlook with respect to travel agents is complicated. On the one hand, we get rid of the middleman and save the cost. In airlines that do pay the agents, it amounts to 10% of the ticket price. We work with several travel agents, and they can reserve through us, but they get nothing for it from us. They can put together packages with our flights; I have no problem with that. They can charge the passengers more, but not us. In the bottom line, 98% of our reservations are made directly by the consumer."

Published by Globes [online], Israel Business News - www.globes-online.com - on September 3, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Josef Varadi Photo: Kfir Ziv
Josef Varadi Photo: Kfir Ziv
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