One-Third of All Airlines Will Not Survive the Pandemic, Says Wizz Air CEO

Low-cost airline Wizz Air Holdings PLC CEO József Váradi entered the aviation industry in the wake of the September 11, 2001 attacks. Today, after surviving the global economic crisis of 2008, he is navigating the most turbulent skies the industry has ever known. In an interview with Calcalist, Váradi explains why at least 1,000 airlines will not survive the coronavirus crisis, and how Wizz Air's cash reserves will allow it to enter the vacuum left by the Covid-19 aviation industry victims.

You have recently renewed flights to Tel Aviv's Ben Gurion Airport. Which routes do you expect to renew next? Which will be last in line?

We have a great history of 16 years, but we have much more than just 16 years ahead of us. Despite all the difficulties and the problems that the world is facing today, we think Wizz Air is one of the structural leaders in the airline sector and will emerge from this crisis a better and stronger company and airline.

Right now we are flying at about 10% of our total capacity. We are sensing a demand for our service in many ways in our system and also from talking to various parties who understand customer behavior, and look at the way people are searching for holidays, travel opportunities and the like. We think people want to travel, people want to fly again. The problem, by and large, is not people’s intention to travel, but rather the restrictions put in place by governments, which makes things quite unpredictable. During good times, with no state restrictions, we operate in 45 countries. There are currently no two countries of those 45 that have imposed the same restrictions. The whole process has become totally uncoordinated, it's quite a mess and it makes it very hard for people to look past these issues, of how they can leave their country, how they can get into another country, and how their movements will be restricted. But we are determined that as soon as we’ll be able to start flying, we will. 

 

Do you think people are not afraid to fly? That they can't wait to take a holiday, and it is the restrictions that are holding them back?

Yes, we know from our own surveys and from our measuring of demand that people still want to get something out of this summer. They want to go to the beach, they need air, they need space, they need sunshine. Also, many families are dispersed all over and people want to unite, they want to visit each other. I think these are the travel segments that will recover the fastest. Wizz Air is conducting a small birthday promotion to mark it’s 16th birthday, discounting prices by 16% and we have registered huge demand. We are selling these promotional tickets at a rate of around 70% of a normal day prior to the coronavirus. It suggests that if the market is stimulated and airlines have good offers, people are eager to book a ticket and travel.

 

In the midst of a perfect storm, Wizz Air is launching new routes in Europe and Abu Dhabi, eyeing an expansion to Gatwick, and increasing its fleet size. All things considered, is this not risky?

We are aware that there will be a short term dent in demand resulting from coronavirus, and are trimming some of our capacity because of that, but we are not closing a single operating base and we are not closing a single route. We are just reducing the frequencies of certain routes. We are also continuing to take on deliveries of new aircraft and between now and June 2021, we will be taking on 22 new deliveries, substantially growing our fleet and capacity, and that's why we are launching new activities, new routes, and possibly new bases.

 

Abu Dhabi’s international airport is deploying state-of-the-art robot technology to ensure safe and hygienic travel during the Covid-19 crisis. Do you think other international airports will follow suit?

This is a decision an airport has to take, that a country has to take. Personally, I think life will settle down after the coronavirus, it's just a big hype at the moment. Obviously there are issues, but there is also a lot of hysteria and overreaction. Time will tell how this gets settled, but the world has been affected by all sorts of epidemics, pandemics, and viruses before and I guess that it will be the same in the future. The difference is just in form and magnitude. This time around the magnitude is big, but I think it's a part of life and we need to make sure that measures are put in place to protect travelers and keep passengers safe. Airports have to look after people’s health, and we on the airline's side do the same. Wizz Air has launched quite a few measures to better protect people such as wearing masks, eliminating touchpoints, and more.

Last Friday, ahead of Memorial Day weekend in the U.S., about 349,000 passengers crossed the security checkpoints at airports across the country, the highest figure in two months, but 88% less than 2019’s Memorial Day weekend. This summer, many American airlines have adopted a variety of precautions to minimize the danger of contagion, for example, passengers are asked to scan the boarding ticket themselves, rather than handing it over to the ground crew representative. Another step that companies are considering is eliminating the option of booking certain seats to avoid overcrowding during flights.

You have said that removing a middle seat from aircraft will "kill" airlines in the long term. So I suppose you will be filling up your planes and won't be taking any such precautions. Is this correct?

You know, personally, I don’t think this is a necessary measure for protecting the people. We think wearing masks is a bigger issue, and we actually made it obligatory for every crew member and every passenger who boards our aircraft to wear a mask, because it protects them from others, and protects others from them.

 

You need to know that the air quality aboard an aircraft is about the same quality as it is in an intensive care unit of a hospital. People always think that the air quality on a plane is very poor and hazardous. That's a misperception. If you take a tram or a coach, the difference in air quality is huge, or when you go to a supermarket, you are multiple times more exposed. There has not been a single case, anywhere in the world, in which a patient was proven to have been infected while on an aircraft. Airlines have carried people who were infected, but they were infected prior to their journey. So, I think it's very important to stress that even nowadays flying an aircraft is incredibly safe.

 

Will air tickets become more expensive due to the necessity for extra space between passengers and the lengthy process expected prior to boarding?

I actually think that air tickets will be cheaper. Since airlines will have to stimulate the market, they need to bring people back into the practice of flying. In order to do that, you have to motivate people. So, I think flying will be very cheap in the next six to 12 months. Airlines would rather sell cheap tickets than none at all.

The problem is that not all airlines will survive this crisis. It's going to be very financially stressful since airlines will earn hardly any revenue, but still burn through the cost of operations. To restart operations and survive, you need a lot of cash, you need a lot of liquidity. Not every airline is in the position to do so. I mean they are barely holding on by not flying, and there have been several instances of government bailouts, but once you restart again it will be very stressful for the whole industry. Only the financially strong airlines will survive this.

 

Lufthansa, one of Europe's largest airlines that owns subsidiaries in Germany, Switzerland, Austria, and Belgium, has announced it will permanently ground about 6% of its fleet. On Tuesday, the German government approved a 9 billion euro rescue package for Lufthansa. "It will be months before travel restrictions are completely removed and years before global demand returns to pre-crisis levels," Lufthansa's forecast in April said. Váradi shares the same gloomy predictions and believes that the global epidemic will filter out the weaker airlines.

 

So, what do you think the percentage of airlines that won't survive will be?

Personally, I think between a third and a half of the airlines in the world may go bust. That's a very big number. If you look at the world, there are more than 3,000 commercial airlines, I think easily a thousand or more can go bust in the next 12 months. 

What is the future of Business and First class in this uncertain environment?

I think the issue will not be the pandemic itself, because the pandemic is going to come under control at some point. I think the issue in the next year or two will be more about the economic recession following the pandemic. We know that in recession times, people migrate downwards from high cost to low-cost flying, so business class and first-class, are the tickets that will lose a lot of traction. I definitely think that airlines that are more focused on flying business passengers will have a harder time. This recession is the worst since the second world war, so I suppose we will be feeling it for the next two years at least.

You have said that young people were the first to board planes. Who will be next? Do you expect families will be traveling abroad this Summer?

The younger people are less affected by the pandemic and they are more adventurous and prepared to take risks, so this is the first type of passenger that will return. When it comes to families, it is hard to say how things will play out exactly, but I know that there are families that are divided because of the coronavirus, and I think they are going to reunite. People will also resume air travel for work purposes. If you look at it from a European perspective, many people work abroad, in countries that aren’t their homelands, because of the recession, unemployment will rise and those who can will be eager to return to the job they used to have. To do that they will have to fly. So I think visiting friends and relatives, and getting back to work will be the pillars of the recovery process.

What is your opinion about the Israeli market in which you are active? Will it be one of the first to bounce back? Israelis love to travel, especially with low-cost airlines. What will the Israeli recovery look like?

We love Israel, personally, Israel is one of my favorite markets. The moment the market opened and it became accessible to us, we were the first ones to move in with numerous routes to Israel. Now we have more than 20 routes flying to Israel. So we are very eager and very keen to add as many routes as we can back to the network. The issue is that from the Israeli side,there is still a lockdown place, so foreigners cannot enter the country until the 15th of June and that too is like a moving target, I don't know whether it is going to get extended again.

We are already flying a number of routes to Tel Aviv, and even by flying Israeli citizens alone, we are able to fly quite a lot of people. That is a financially viable position, otherwise, we wouldn’t be doing it. We see that Israelis are very eager to travel as much as they can. So, we hope that the restrictions will be lifted and it will be the people's own choice to make whether or not they want to fly. I am very positive that they will.

What are Wizz Air's strong points that will provide it with leverage over competing airlines?

I can look at it from two angles: from a consumer perspective and from a business perspective. If you look at it from a consumer perspective, we are the lowest-cost producer in the industry so we can bring the lowest ticket fares to the market. We can be very cheap, hassle-free, very easy to travel with, so people feel they can always make a good deal from an economic standpoint. We are also flying the youngest fleet of aircraft, which is environmentally far more efficient than other airlines. We are greener, we have less impact on the environment, and I think the environmental concern is going to increase in the minds of societies and individuals as time progresses.

When you look at the business side of it, we are a very liquid business. Our liquidity is one of the strongest of any airlines. Even if we are forced to stop flying for two years, we will still be in business, because we have so much cash. That gives us a very unique position not only to survive the coronavirus crisis, but also to look at the opportunities arising from coronavirus. Since there will be less competition, there will be markets left behind by airlines that will create the opportunity for us to fly new routes or set up new bases. You will see in the next couple of months that we will be making some major announcements on getting Wizz Air into new markets.

What about the refunding of tickets purchased prior to the crisis? Have you managed to settle these issues with passengers that weren’t able to fly and got stranded?

We have fully automated this system, so basically the consumer chooses what they want to do. You can rebook your flight or you can keep the money in credit to consume at a later date. We are topping clients’ fare with 20% so your credit will be 120% for future bookings. Or, if you want to get your money back in cash, then you can choose that as well. We guarantee that within 30 days you will get your cash back. No one else in Europe is doing it except for Wizz Air. Everybody is struggling with the refunding, and if they refund, they are talking about six months, 12 months, or longer. One-third of our passengers select rebooking, another third retain the funds in credit and take advantage of the 20% incentive, and the remaining third take the cash.

How will the crisis affect low-cost airlines in general and you in particular, in the long term?

 

If you look at this industry, apart from a few airlines that were doing well in the good times and were able to build sufficient liquidity to weather a storm, the industry was very short on cash and very short on liquidity. If you were not able to accumulate sufficient cash in the good times, you are not going to do it when times are tough. The problem at the moment is a cash drain on the industry. If you are keeping the fleet on the ground you still have a lot of costs, you have to pay for some maintenance, you have to pay for staff. So there are a lot of costs even if you don't fly a single flight. But when you do start flying, your costs are going to increase dramatically, because you will be burning fuel, paying for air route charges, and people will pay you nothing because you will be half empty, and ticket prices will at first be very low because you need to stimulate the market. Restarting an airline is extremely expensive and I don't think It has been fully recognized and how challenging this is going to be for a number of airlines. Many won't survive.

Prior to joining the company, Váradi ran the Hungarian national airline Malev. When the Hungarians voted to enter the European Union in 2003, he identified an opportunity and together with five other partners, founded Wizz Air. The team of founders were determined to run the airline as a low cost competitor to RyanAir and EasyJet and with funding from American private equity firm Indigo Partners, they set their sights on dominating the market.

How were you able to be so unique with the liquidity model, being such a young airline? How has it been possible to maintain this model whilst building a new company?

I think we made a deliberate choice as to what airline we wanted to have and how we wanted to build the business. And one of the big issues with that was the cash. We have always been very focused on cash, many airlines were managed for profitability or growth not cash. A lot of the ego of chief executives and governments went into the airline industry. We have been very focused, very determined, and we came up with a model that is very scalable and profitable. We are one of the most profitable airlines in the world in terms of net profit margin, and very sustainable because we are flying the youngest fleet of aircraft of any airline. This makes us very efficient when it comes to crisis management, and when issues like coronavirus or others come about, we tend to be much more resilient than the rest of the industry.

Do you expect the airline industry will ever return to the volumes prior to the coronavirus pandemic?

Absolutely, in my mind there is no question about it. I mean look at 9/11, I just entered the industry at that time, and everyone believed that life had changed forever, and that people would never fly again. Two years later, I'm exaggerating a little bit, but no one remembered 9/11. There were some measures put in place, enhanced security and the like, similar to what we are doing at the moment, but the industry will return, people will return, and largely will forget about coronavirus. I don’t think that what is happening today is profoundly affecting people's desire to fly, and I don't think it's profoundly affecting the prosperity of air travel going forward.