Fitch Ratings has affirmed Wizz Air Holdings Plc's Long-Term Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook and senior unsecured rating at 'BBB'.
Wizz Air's 'BBB' rating reflects its solid credit metrics, strong market position in the rapidly growing market for air travel in central and eastern Europe (CEE), its cost leadership, supported by its ultra-low-cost carrier (ULCC) status, and the limited or no competition on over half of its routes. The rating is underpinned by Wizz Air's leading EBITDAR margin compared with Fitch-rated low-cost carriers (LCCs), very high liquidity ratio and strong net leverage. The rating also takes into account the execution risk inherent in its ambitious growth strategy and weaker gross leverage and coverage metrics than its LCC peers rated in the 'BBB' category.
KEY RATING DRIVERS
Managing High Growth: We believe that Wizz Air's planned capacity expansion of about 15%-20% per year over FY20-FY24 is manageable, given the growing travel market in CEE and the company's growth strategy through the combination of fleet expansion and retirement (once operating leases expire) as well as a focus on increased frequencies and connecting existing airports. In addition, the order book contains some flexibility in regard to delivery schedule.
However, execution risk remains high. The annual delivery of about 20 aircraft may stretch management's capabilities as well as internal systems and processes. To be successful in managing high growth, all areas of the company need to be in sync, which requires efficient coordination of aircraft delivery schedule, network management, human resources allocation and training as well as arrangement of financing.
Well-placed for Brexit: Wizz Air is well placed to weather Brexit's impact due to its strong credit metrics and liquidity profile, diversified route network, very active management of fleet allocation, obtainment of a UK airline air operator certificate (AOC) and FX hedging. The EU regulation on basic air connectivity and the report from the UK government confirming the principle of reciprocity should ensure basic connectivity for a short transitional period in case of a no-deal Brexit, providing some clarity for airlines' operations.
In our stress case for Wizz Air we assumed a significant drop in total yield (including ancillary revenue) and a reduction in load factor in FY21 with slow recovery from FY23 as well as a depreciation in sterling. As a result, Wizz Air's credit metrics could be under pressure in FY21 and FY22 with recovery expected in FY23. We would also expect the company to use the flexibility of its capex and capacity growth in case of a significant economic downturn.
Solid Financials: We forecast Wizz Air will maintain a strong credit profile despite rapid growth over FY20-FY24 with funds from operations (FFO) net adjusted leverage well below 2x (based on the multiple approach for operating leases) and FFO fixed charge coverage remaining above 2x. We expect margins to remain largely flat in FY20-FY21 with marginal improvement in FY22-FY24, mainly driven by our assumption of moderation in oil prices. The company is well placed compared with its peers based on its financial profile, although its gross leverage and FFO fixed charge cover remain weaker than peers.
Highly Competitive Cost Position: The key advantage of Wizz Air's business profile is its favourable cost position compared with LCC peers, including ULCC and cost leader Ryanair (BBB+/Stable). Wizz Air's unit cost (CASK) for the financial year to March 2019 (FY19) is lower than that of other rated European and US LCCs and is close to that of Ryanair. The low-cost base is an essential part of the LCC business model and it should provide a foundation for Wizz Air's sustainable growth and help withstand fierce competition and any external shocks. We expect deliveries of new and larger aircraft and increasingly efficient operations to help Wizz Air strengthen its cost advantage.
Strong Position in Growing Market: One of Wizz Air's key competitive strengths is its strong market position in the CEE region with good air travel growth potential. The company is a market leader in CEE with a market share of 39% in low-cost airline traffic (30% for Ryanair) and a 16% in overall traffic (including network carriers). Wizz Air's growth is mainly driven by stimulating demand through low fares and by general growth in the market, but it also benefits from weak legacy carriers in the region, many of which have either defaulted or been shrinking their operations.
Manageable Exposure to Competition: Wizz Air operates in a highly competitive market. We do not expect competition to subside, but the company's position is supported by its highly competitive cost base, scale and diversity and the limited direct capacity overlap with Ryanair. In addition, the company has limited or no competition on over half of its routes.
DERIVATION SUMMARY
As a ULCC, Wizz Air benefits from a very strong cost position comparable only with that of Ryanair among the rated LCCs. It has a strong market position in a growing CEE market. It operates on a smaller scale than Ryanair and Southwest (A-/Stable), but has already developed a large footprint in terms of the number of airports, countries and routes, which are on a par with its larger peers. The company also intends to maintain high growth rates through new aircraft deliveries. Wizz Air has a much stronger business and financial profile than Spirit (BB/Negative). It has a somewhat weaker business and financial profile than Ryanair or Southwest.
KEY ASSUMPTIONS
- Marginal decline in yields over FY20-FY24
- Oil price of USD65/bbl in FY20, USD62.5/bbl in FY21, USD60/bbl in FY22 and USD57.5/bbl thereafter
- Capex in line with company's projections
- No dividends
- Largely flat load factor at 93% over FY20-FY24
- Salary growth above median CPI growth in key bases
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Consistently positive free cash flow (FCF)
- Successful growth of operational scale while maintaining FFO net adjusted leverage below 1x
- Sustained commitment to conservative financial policies
- EBIT margins remaining in the mid- to high teens or higher
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- FFO net adjusted leverage above 2x on a sustained basis
- Failure to deliver on profitable growth strategy or significant pressure on yields resulting in the EBIT margin dropping below 12% on a sustained basis
- FFO fixed charge cover below 2x on a sustained basis
- Change in the dividend policy towards aggressive dividend payout at the expense of healthy credit metrics
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Wizz Air has a very strong liquidity position due to one of the highest liquidity ratios (cash/revenue) in the industry at 57% in FY19, which is comparable only with that of Ryanair among the Fitch-rated LCCs. The company currently finances all its aircraft with operating leases and had a very limited amount of debt on its balance sheet at end-FY19. Short-term debt was EUR0.3 million and total debt was EUR37.3 million (including Fitch's adjustment for convertible debt) at end-March 2019 and its cash position was EUR1,316 million.
We expect the company to maintain its conservative financial policy with no dividend payments. We forecast FCF to remain neutral on average over FY20-FY24 due to a rise in capex.
FX and Fuel Hedging: The company hedges its dollar and fuel exposure based on a hedging policy of a minimum 50% on a rolling 12-month basis and minimum 40% on a rolling 18-month basis. The company also has a discretionary hedging programme for sterling.
SUMMARY OF FINANCIAL ADJUSTMENTS
-Multiple of 7x was used for capitalising aircraft-related operating leases to reflect the useful life of aircraft of about 25 years
-We treat convertible notes as 100% debt and add back EUR8.3 million of equity part of convertible debt to the total convertible debt, which we calculate at EUR35.1 million.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg.