Wizz Air Holdings Plc

Good day and thank you for standing by. Welcome to the Wizz Air Holdings PLC H1 F23 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded.

would now like to hand the conference over to your speaker today with their ceo joseph paradi please go ahead thank you very much uh welcome everyone um you ladies and gentlemen who are on the ground and also those who joined this conference over video first of all let me introduce uh Jan Malin to you, new CFO of the company. So this is reporting the first half of financial year 23. The financial year started on 1st of April. Let me just take you through the key highlights first. In the last quarter, the summer quarter revenue was up by 40% versus the same period with pandemic, fiscal 20. And overall, H1 was up 30% versus the comparable period prior to the pandemic. So it's not only that we recovered from the pandemic, but we delivered significant growth of the business. probably for the first time in our history, unit revenue also grew despite a very high capacity growth by 11% in Q2. And that compares to actually minus 10% in the first quarter of the financial year. You recall that in the first quarter, we were really pushing hard in terms of COVID recovery on the one hand and adding capacity to especially our new market activities. If it's that performance, in the second quarter was 374 million positive despite higher, significantly higher input costs and with that the H1 EBITDA came out as 218 million Euros. Obviously we got hit hard by rising fuel costs. Our fuel cost went up 84%. versus the same period pre-pandemic. You recall that we were quite light on hedges relative to our competitors and the market, so we got disproportionately hit by the rising fuel price. Destruction was another phenomenon flowing through this period, putting significant cost pressure on the business as a result. Ex-fuel costs went up 18% largely driven by destruction costs dealing with the underperformance of the supply chain and also that affected our ability to operate our completion rate and made significant financial damage to the business. At the same time, liquidity improved in the period and closed the period with 1.63 billion euros of cash on hand resulting from the strong summer operation Fitch reaffirmed our investment grade credit. I think that's great news given the state of the industry and the challenges that we have been encountering, especially in the recent period. So we are very pleased with that outcome. And the good news is that we continue to access very low-cost capital when it comes to aircraft financing. You recall that we take quite significant volume of aircraft We are subjected to aircraft financing and we are still seeing very high demand for our assets based on our credit that we are bringing to the party. When you look at the key business metrics, our fleet grew 17 percent through 168 aircraft. versus the previous financial year, obviously passenger number is up three times, given that we are out of the pandemic due to the very strong ramp up and growth, additional growth was what we believed. So clearly coming out of the pandemic, this became a more robust, larger business with bigger impact on the market, certainly on our markets. So demonstrating that you look at the market share positions of the airline. On a total fee basis, our market share went up from 17% to 23% compared to pre-pandemic level performance. And you can see that market share growth has been fairly consistent across our incumbent market. And we managed to add new markets to the franchise for Albania. has been a very successful market acquisition. But also if you look at Italy, we tripled our presence in Italy over the last two years, taking advantage of the COVID situation and some of the market turbulence in the country. But fairly consistently, we have been growing our impact on every one of our markets. And with that, let me hand it over to Jan and I will take it back up to him.

Thank you, Josef. Good morning and thank you for the opportunity to introduce myself. My name is Jan Malen and I joined as Chief Financial Officer on October 1st. I'd like to thank this audience for the opportunity to present and I also want to thank my predecessor, Jurek, for his service to Wizz Air. We saw strong performance across several indicators this summer, with revenue coming in at $2.2 billion for the first half of the year, two and a half times for the same period last year, and 31% higher than the same period pre-COVID. This was generated by revenue per available seat kilometer of $4.48 for the half year, 32% higher than last year, and 2% higher than pre-COVID levels. Driven by the dramatic improvement in second quarter RASC, up 11%, versus minus 10% in Q1, both measured against pre-COVID levels. EBITDA came in at $218 million for the half-year, 33% higher than last year. The half-year EBITDA results were helped by Q2 EBITDA of $373.7 million, which was more than double last year's Q2 figure of $182 million. We reported a net loss for the half-year, and again, a large part of that was due to foreign exchange losses of $269 million, of which $285 was unrealized. given by a strengthening dollar. Cost per available seat kilometer was higher than pre-COVID levels, and this is attributable to dramatically higher fuel costs, as well as continued disruptions in the second quarter, although at a reduced level versus what we reported in the June results. Ex-fuel costs decreased compared to the same period last year, and we expect that trend to continue as we have stabilized the operations and, are no longer incurring the same level of expensive disruption costs as we gradually return to historical utilization levels by the end of this fiscal year. In order to get our cost structure back in line with F20, the two focused areas we have as a company, aside from relentlessly driving our low-cost culture, are one, reducing disruptions to within target KPIs, which as you can see in the other expense line increased to 0.1 cents versus at 20. And two, returning to historical levels of utilization, which means higher ASKs while maintaining almost the same fixed cost, which will benefit a number of these line items, crew costs, airport costs, on route charges, maintenance, depreciation costs, and overhead costs. Recruiting is strong during the period. As cash grew from around 1.4 billion to 1.6 billion euro, despite the usual unflown revenue unwind that happens in the summer. The drivers for this almost 250 million euro cash increase in the first half was a strong business performance in Q2, including improvements in working capital as we scaled the business. We also had modest returns of pre-delivery payments, which generated a small inflow in the first half. When looking at our revenue composition, here you can see the breakdown of ticket revenue and ancillary revenue. With ancillary 18% higher than pre-COVID levels on a per passenger basis, at 38 euro per passenger, or around 60 euros per pack, which is well ahead of our one euro per passenger per annum growth target. Ticket revenue per passenger has also exceeded pre-COVID levels and notably has rebounded 35% when compared to last year in the same period. We continue to see opportunity in both categories for Upside. Now back to Joseph. Thank you.

Thank you. Thank you, Jan.

I would like to take you through some of the key initiatives and focus areas of the company going forward. I think that's important for your understanding of what we are expecting from this business to deliver in the next six months and beyond in the next financial year. First of all, if you look at the operating environment, I hope you can read this, but the last period, especially the summer period, was full of events. Much of it was generated by ATC activities, strikes here or there. First the Italians went out and then the French and the Italians again. So it's been a complete zoo with that regard, mutually affecting the ability of airlines to operate. Also, we had the famous runway meltdown in Luton, which was an event never heard of before, but we had to deal with that too. So as a result, we suffered a profound impact in terms of financial damage to the business or ability to complete the flight. Now, the good news is that if you look at the performance in October, other than the Italians deciding to go out again, they are back to normalized levels. So no more extraordinary structures. And I also think that our model is becoming increasingly resilient given some of the changes we were discussing last time. So no more disruptions affecting the business in October, and we hope that this can be sustained and the old norm is also the new norm going forward. That's a significant event because if you look at our cost exposure during the summer period, that was largely driven by disruption-related exposures. So if you look at utilization, utilization is the other issue we are dealing with. So coming out of COVID on the one hand and dealing with all the disruptions arising from the dysfunctional supply chain forced us to lower utilization. We had to cancel flights last minute, but also we had to adjust capacity to be able to deal with the environment. This summer, we operated and achieved utilization of roughly 11 hours and 49 minutes, and that kind of compares to historical performance of 13 hours in the period. So you can see that utilization came out suboptimal, and certainly completion rate 95.5% compared to 99.5% at historical level. So that was kind of the magnitude of issues we were dealing with. So we operate at suboptimal utilization level during this period and that obviously creates the upside going forward. We continue to fleet the newer program. We continue to take new aircraft deliveries. Also phase out all the aircraft so the fleet age keeps improving so the fleet is getting younger. and the seed count there, the seed count is increasing as a result of gauging. That creates significant economic upsides for the business. Obviously, that kind of a cost upside are there to offset some of the headwinds that we are facing in the industry, especially coming through post-inflation imposed by various labor-related activities like ground handling on the one hand, but also of state monopoly charges like ATC. We continue to benefit from very effective financing deals available to us. We are much into Asia for financing aircraft on Japanese market and Chinese market. Two-thirds of all financing is coming through Japan, a third from China. We are seeing actually increased interest and activities for our assets. I mean, let's not forget that this brings through the best asset to the market, the A321 neo-aircraft, and being an investment great, only very few airlines have that credit rating in the world, create unique opportunities for us to tap into low-cost capital. allocating aircraft financing increasingly towards Euro financing. That's a way of hedging our dollar exposure, obviously. And so we are getting more and more Euro financing for fleet financing. And at the same time, we are facing all dollar financed aircraft. So we are rapidly improving the Euro exposure with that regard. Also very important, given the unfavorable interstate environment, that 94% of our existing fleet are subject to fixed interstate. So we are unaffected on those financings by the changing interstate environment. Also important that we secured, based on a commitment, 300 million PDP-backed financing facility which obviously creates an additional layer of liquidity for the business should we need it. We feel comfortable with our liquidity position, not only today, but also on a going forward basis. But we think that given the uncertainties and the volatility of the market, it's better to have more financial buffer in the system.

Our network has become further diversified during this period.

We continue to develop our core Central and Eastern European markets. We stepped up in Romania, opened the Federal Blue Air. By now, we are the third largest airline in Italy and we continue to push that market. Quite some activities in the Middle East by launching routes into Saudi Arabia, growing the Bizarro Abu Dhabi operation and entering some other markets. These markets tend to be counter seasonal versus the European market. We are much focused on cost to make sure that we always operate from the lower cost operating base when we are connecting base to base. And if you look at the profile of growth, actually 97% of our growth is delivered through existing airports. Only 3% are coming through new airport activities. If you look at the growth of the business from the perspective of what markets we are growing, I mean, clearly you can see that we have recovered our income from markets. So if you look at the markets which we operated back in summer of 19, pre-pandemic times, versus how much capacity we are allocating to these markets, nowadays you see that we are basically fully recovered. flight growth from 95 to 99 aircraft in those markets. And most of the growth of the company actually came through the expansion activities, new market activities during the COVID times. So we only had 11 aircraft on those markets and that got ramped up and grown up to 50 aircraft by now. So a lot of new market activities taking advantage of the COVID distress of the industry, but also recovered on the incumbent markets. Just a quick note on Romania. You know that one of our local competitors, Blue Air, went down a few months ago, leaving a significant market vacuum behind and we stepped up to backfill that vacuum. That's actually the kind of growth that we like because that's organic. It doesn't compromise our operating platform. And we have demonstrated a number of times how agile we are and how quickly we can move capacity around depending on the changes in the market, a place of changes in the operating environment. So Blue Air went down and we stepped up with adding five aircraft in Romania and we have further aircraft going into summer next year. So essentially we are taking over that market, obviously. We are just further enhancing our market leadership position in the country now to 59% in winter, coming from 41% before. Going East is a significant layer of growth for the airline. We discussed it before. It's not only that we are expanding the activities of this at Abu Dhabi, but we significantly stepped up on Saudi Arabia by launching 20 further routes from Europe into the country next to the Abu Dhabi operations. And we are seeing very strong market reaction to our activities, to our expansion in Saudi Arabia. And that's sort of phase one to expand ourselves as an inbound carrier. And we are now looking at and focused on phase two, You may recall that we announced and memorandum of understanding signed with the Ministry of Tourism in the country and on the basis we have been exploring greater investment opportunities in the country. We are still on track on that and hope to release some news on that front in the near future. Saudi is a very significant market. The country came up with, they call it Vision 2030, a highly ambitious agenda for building aviation in the country, crippling passenger traffic in the next decade. And they are looking at adding value to that vision, to that agenda. And if you look at the market today, there is a significant gap between the capacity of the industry in Saudi versus the aim for the industry in the next period. So we're seeing that we can put capacity against that gap and benefit from that drive in the country. Sustainability. Sustainability remains a very important agenda item for the company. I think it's interesting to see that they look at 20-30 targets of of Bizzare relative to Ryanair. Ryanair's target is a greater footprint than what we are delivering today. So today we are delivering 57 grams of carbon dioxide and Ryanair is only targeting 60 in eight years from now. Obviously we are a lot more ambitious than that. So Bizzare will continue to lead the pack on sustainability and carbon footprint in the future. A lot of it comes through the fleet renewal program. We will have a more efficient, technologically more advanced fleet and an up-gauge fleet to operate. But also we are looking at a number of FAAF initiatives, Sustainable Aviation and Fuel initiatives, not only on a commercial basis but also on an equity basis. and we are looking at ways of possibly investing equity into self-development to secure better commercial terms for us in the future, but also to drive the agenda of the industry with regard to flying green in the future. What are we expecting from the current half-year H2 of this quarter. We are expecting to deliver 35% capacity growth. That's in line with the capacity growth that we delivered throughout the first half of the financial year. At the same time, we maintain flexibility with capacity depending on demand. I think so far so good. We are seeing demand being robust. We are not seeing any kind of falling of the cliff syndromes, but many might have expected before, so we are quite confident in consumer demand for our products. Maybe other segments of the industry get affected differently than we have, but the thing that travel intent continues to prevail. People want to travel. They may trade from high cost to low cost, but that should be on our benefit at the end of the day. We are looking at delivering 11 hours of fleet utilization. This is still somewhat behind historical performance levels. It tends to be more like 12 hours in this period. So we are still somewhat inferior on utilization. But clearly, we are improving, and we are further closing on the gap going forward. We are expecting ROSC to improve in the second half of the financial year. looking at improvement of mid-single-digit relative to pre-pandemic comparable period. In terms of fewer costs, so in terms of ex-fewer costs in the second half of the financial year, we expect single-digit increase. That compares to 18% increase in the first half. So again, we are closing on the gap on ex-fewer cost exposure compared to fiscal 20. We're going to be eliminating the current competitive disadvantage to the market on fuel. I mean, we'll see how fuel price goes, but we're going to be hedged at comparable levels to our competitors. So as of April next year, we're going to be seeing level playing field with EFIGAB. So moving on to the next financial year, fiscal 2024, we are expecting exterior costs and utilization to be fully recovered. So in the financial year, we are expecting to perform pre-pandemic exterior costs and pre-pandemic utilization. Obviously, the two are greatly interrelated. And while we are expecting loss for the remainder of the financial year, we expect to return to profit in the next financial year. So let me just summarize the presentation. We believe ULCC, the ultra-low-cost carrier model, continues to prevail, probably even more than before, given the tougher environment, the tougher macro and economic environment. As evidenced historically, we believe that actually the low-cost, the ULCC model especially, is benefiting from the economic hardship because consumers trade from high cost to low cost. The COVID recovery in the current financial year will continue to flow through into fiscal 24, fiscal 25, and we believe that we will continue to benefit from new market acquisitions capacity growth on the one hand, and also the range stated on our cost performance going into the next financial year and the key efficiency metrics like utilization and group productivity at that time. We are confident in our pricing ability that we are able to price up versus the inflationary pressure on the cost side as evidenced in the second quarter of the financial year. seeing the trend flowing through the remainder of the financial year, and we believe that will continue to take place in the next financial year as well. And we will benefit from the maturity of our investments into new networks. As you can see, most of our growth is delivered through new market activities. They are yet premature investments, and as they mature, we will take financial benefits out of it. As I said, the cost platform will get reinstated in the next financial year, so we'll be back to historical normals and on fuel costs, obviously that's subject to a higher fuel cost environment, but we're going to be level playing field versus our competitors, which is not the case at this point in time in the current financial year. The fleet growth will continue to enhance our competitive positions in the market. We are converting into larger aircraft and more efficient aircraft given the technology that will continue to fuel competitive advantage for the airline relative to our competitors. And as said, we are seeing high interest and very attractive financing opportunities for those aircraft. And also our expected strong operational cash flow will allow us to start the leveraging through the next financial year. And with that note, thank you, and I will hand it over to question three.

Thank you. Hi, good morning. Thanks for the presentation. Alex Erring from Bernstein. Two from me, please. So first on ancillary, in the current quarter, it looks to be about more than seven years of passenger ahead of 2019, clearly quite ahead of your existing guidance of one year per passenger per year. How much of that is comprised of one-off factors in the quarter, and to what extent does this represent a sustainable level, please? Second question on unit cost. So we're seeing CASC-X in fiscal Q2, identical to CASC-X in fiscal Q1. Why is that as we are restoring productivity, and do you expect some of those cost setups to persist? Thanks.

Let me start with the cost line.

So if you look at the business on the basis of unit cost SQL, basically, summer was affected by two major factors pushing costs up. One is disruptions, and that was a huge impact. very significant financial damage to the business. I mean, they got forced to cancel more than 5% of all flights and also all the associated financial consequences like EU 261, exposure, et cetera, drove a lot of costs in the system. The second issue in summer was the suboptimal level of fleet utilization and crew productivity. simply because in the operating environment, we were unable to operate with full schedule and we had to adjust capacity prior to going into the summer period. So we left significant revenue opportunities and we left significant financial offsides on the table as a result of that. Now, if you look at where we are today, so let's say this is winter 22-23, We believe that operational disruptions are behind us. Now we are running a normalized operation. Our completion rate is back to historical levels. So we are above 99.5% with that regard in October. And we're seeing that given all the changes we have been making to our operating model to achieve more and more robust operational efficiency, enable us to sustain that kind of an operating platform but we are still behind on utilization and productivity because that's part of the resilience, to be honest, what we are creating. So we are creating more bucklers in the system, not to fall into the same trap on operational reliability as we ended up in summer. So no disruptions, but still suboptimal utilization and productivity. So that's a drag, but we were up 18% on unit cost in summer. We're going to be mid-single digit this year. So we are closing on again. And going into the next financial year, we are expecting full utilization and productivity to be reinstated. And we are expecting a lot more resilient operating model versus supply chain deficiencies. We think there will be issues in the supply chain going into summer, but we should be able to a lot better cope with those issues than last summer. So with that regard, I would consider summer to be normalized. And with that, as we are reinstating all these efficiency elements, we believe that our cost performance should come in line with the cost performance of the business prior to the pandemic. Even you can argue that given the upgaging and given the renewal of the fleet, we should be seeing some offsides coming through the coastline. And that's probably true with that regard, but at the same time, we are also seeing significant inflationary pressure on labor-related elements of the business, and also monopoly charging, especially through airports and ATC. So there is a bit of an upset there. But in terms of our relative cost position versus the industry, I mean, we're going to be in a lot better place next year than where we are today. And that said, on fuel, we are basically equalized to competitors.

And to answer your question on the ancillaries, so we continue to see increased demand for that segment. And so as we match that demand, we also are trying out new products. Some of that involves new categories like a 26-kilogram bag, better flexibility in terms of sleep selection, pick who you want to sit with, things like that. And on top of that, we're deploying technology to do A-B testing to see what generates more popularity as well as machine learning to find out how we should be pricing that, as well as keeping a very close eye in terms of benchmarking, in terms of what other carriers around the globe are doing in terms of that category. So there's actually six euros higher on ancillary. That's well in excess of our target of one euro per year annual growth.

Hello, it's James Hollins from BNP Paribas.

A few for me please. Just following up on Alex's question, on the H2 RASC guidance, perhaps you could split that out between yield and ancillaries, or at least directionally would be great. The second one is on Gatwick. I was wondering how confident, I know you have a UK head here, how confident you would be on getting more Gatwick slots for next summer if that's the plan. Perhaps run us through your summer performance at Gatwick, obviously a big expansion for you. The third one is, you talk about 61% future allocation of leasing euros. Is it currently 100% dollars and is it all on edge? Thanks.

Maybe I would start with Gatwick. I mean, obviously, we had a very harsh operation at Gatwick this summer, largely driven by ATC and, to some extent, airport. I think we were as bad as all the others at Gatwick, if you want to put it that way. And we hope to see more operational resilience and more investments coming through Gatwick, especially on the ATC and airport side. So hopefully the situation will improve for next summer. Commercially speaking, we are very confident in the Gatwick platform. We've got a great reception for our products at Gatwick with long financial outcomes, despite all these operational issues at the airport. Now with regard to our ability to to acquire more slots. I think that's something to be seen, how the industry and the airline sector is developing with that regard, how resilient they are and to what extent slots may become available. I think we have a continuous interest in expanding our business in Gatwick, but that interest is clearly subject to our ability to access capacity and to acquire slots, and that's something to be seen. So at this point in time, I don't think I'm in a position to announce anything, but we have an ongoing interest for expanding our business at Gatwick.

And to your question on the RASC growth and the guidance there, we're not guiding on yield. In terms of the split between ticket and ancillary, the first half of the year was around 54% ticket versus ancillary, and we would expect that mix to continue. When it comes to the remaining half of the year, we took some capacity out of the system for a number of reasons. One is we are in a weaker seasonality period, as you'd expect with the winter season. But that is because we want to focus at this point on our pricing and making sure that we maintain that RASC growth so that when we return next summer to a competitive cost position, both in terms of fuel and ex-fuel, and the utilization increase and the upgaging of the fleet, it puts the airline in a better position for continuing growth.

So if we got to currency hedges, I'm not sure we have enough time to hedge the dollar at historical highs to the euro. So I think we just need to hold our breath and see the market turning over time. And we are a lot more focused on creating natural hedges in the system and essentially the 61% euro financing is delivering a natural hedge to make sure that we are bringing our dollar exposure more in line or dollar spending more in line with dollar revenues or at least eliminating that kind of a gap to an extent possible. So yes, I think at this stage of the game, we are focused on creating natural hedges as opposed to

could I also ask about the rough guidance just in terms of the phasing over Q3 and Q4 do you see it a bit better than the mid single digit in Q3 and then a bit below in Q4 or do you see it similar throughout the second half And secondly, Joseph, are there any other situations you're monitoring where airlines might be about to fall over, like Blue Air? Perhaps you could talk by geography if you don't want to name names. And finally, Jan, welcome. A highly predictable first question, but you inherit a balance sheet that's in negative equity. You've got net debt that at $3.5 billion is about 4.5 times the pre-crisis EBITDA. early days, but do you think it might be prudent to recapitalize given some of the macroeconomic clouds that are gathering going into 2023?

Thanks. I think with regard to revenue and BRUSK, I mean, they don't have full visibility for the remainder of the period, but we have, I think, a very good visibility for the rest of the current calendar years, the next two to three months, and we feel very comfortable the market. I think you are kind of seeing the low season, how it comes in, and that's kind of November or December. You are seeing the high season, how it comes in. That's the Christmas peak. And we are seeing that kind of single-digit off-site coming through the system. And again, let's not forget that this is, again, the context of growing the business by 35%. With regard to the the last fiscal quarter, January, March, I mean, we don't have that level of visibility, but at the moment, we are not seeing any breakdown of trends, so I would be reasonably expecting the trends to continue. I think there is this kind of intellectual debate of what's going to happen to the consumer given, you know, the high gas price and inflationary pressure overall, but really what we are seeing so far is that people want to travel, and the trade doesn't come as... they stop traveling, the rate comes as maybe they lower kind of the standards of travel or the expenditure of travel by kind of trading from high cost to low cost on airfares, on hotels, maybe spending less time on locations than before. But this thing, and this is what we are experiencing, travel intent remains intact.

In terms of the balance sheet, so we generated a small profit with the quarter. And so that's a start towards reversing the negative equity position. And we expect that that trend will continue in F24 in a way that doesn't require us to raise additional outside equity. The benefit of our business is that we are nimble. We are able to capture opportunities as we see them and be able to deploy them. capacity or retracted capacity as necessary. So we see that culture, that flexibility applied to all elements of the business. So we would certainly not say that these measures are off the table, but we see no need for that based upon our liquidity and based upon the return to profitability that we forecast next year.

And then maybe just to make clear, I mean, there is no appetite for raising equity and We are having a strong liquidity position. We are confident in the profitability of the business going into the next financial year by improving the efficiency KPIs of the business. And yes, we understand the current leverage, but I think we will start significantly deleveraging the business going forward. And with regard to your question of market consolidation and what we are expecting, I I think it's hard to say, to be honest. I mean, we kind of say that the entry barrier to the airline industry is high, but the exit barrier is probably 10 times higher. I mean, God knows what happens to airlines. We don't know how governments act. We don't know how irrational private equity may play in. I mean, we have seen lots of movements with that regard. And to be honest, our business plan is not relying on market consolidation. If there is a consolidation opportunity happening, obviously, we would consider that, not necessarily in the form of M&As, but more in what kind of further organic opportunities, you know, that consolidation creates, like the blue air case, the airline goes down. In a very agile way, we immediately move capacity against that opportunity. You know, then slot opportunities arose. At Gatwick, we pursued those opportunities right away. So I think we would be very interested in those sort of consolidation drives. But again, I think market consolidation is highly unpredictable, especially in Europe.

It's one more point on the leverage. So as you know, we reaffirmed our pitch rating investment grade. Um, that was that was 1 of the topics that they drilled into and we were able to with the number of scenarios convinced them that that returned to a more balanced leverage ratio was, in fact, achievable. And that was on which they formed their decision.

I've got a few.

I think clearly seeing demand in tax across the peak, so maybe if you can give me a colour, whether you're seeing any weakening in demand across any segments or markets in particular. And then I think 94% of aircraft finances and fixed rate structures, is that actually going down over time? Are you having to enter into more variable leases on the new fleet. consumer demand to decide the extent of your expansion going forward. So how much flexibility or what mechanisms do you have to dial back fleet growth with Airbus?

Thanks. Maybe start from the back with Airbus. I think you also have to see kind of supply chain issues affecting other segments of the industry, not only the airline sector, but also kind of the supply of aircraft, both Airbus and Boeing, but I guess the whole manufacturing industry are subject to their own supply chain matters. And clearly, those supply chain issues have been putting pressure on the manufacturer's ability to deliver aircraft as ordered and as contracted. So we are seeing systemic delays across the board when it comes to aircraft deliveries. Now, when you put that in context, we are taking 32-quarter aircraft deliveries a year as we speak, and maybe 20% of those deliveries are affected. So we are still getting... you know, the bulk of those active deliveries, then we might be suffering a few months of delays on a portion of those active. And quite likely, that will be rolled over into the next period in the next financial years as well, depending how quickly the industry is going to be able to fix its supply chain issues. But given the current geopolitical environment, it's not overly favorable when it comes to supply chain management because of the economic interdependencies across regions and across countries. So we shall see. With regard to our own flexibilities, well, we have contextual flexibilities, so we can be sure that should we think that is the right course of action. But frankly speaking, I mean, if I look at the business today, we are still, I think, in a position where we see a lot more opportunities than capacity, but we have to execute. So we are still going very selective on the opportunities, and we are leaving actually quite some opportunities behind simply because we don't have capacity. So we are on the course that we are deploying the act of deliveries as they come. We don't necessarily want to go beyond that because it could just be probably too much in terms of overall growth. But at the same time, we are not yet seeing the need of – of deferring ourselves, you know, given big demand of the market. And also, you may want to see that in context of our lot more diversified geographical footprint. So if you look at what's there today, so we have presence in Western Europe, we have presence in Central and Eastern Europe, that's our core presence, and we have an increasing presence going east. I mean, the eastern markets are a lot more upbeat in terms of economic prospects going forward and probably in terms of consumer dynamics as well than Western Europe, for example. And now we have the ability to actually move capacity around within our system without necessarily relying on taking measures like deferring or canceling aircraft. So I think our own diversification is quite critical in creating those flexibilities internally inside our system. but also we can rely on some external flexibilities and contextual rights.

So in terms of fleet financing, so I spent most of my career on the other side, being on the asset finance side. So in order to lock in fixed interest rates, someone's got to bear the cost. And so we look at this from an airline perspective as, you know, what is the benefit of having that interest rate and the currency locked in by someone else versus using our own tools to look at that. In the run-up to what we've seen, obviously, in terms of interest rate hikes, we've been focusing on fixing our rates to protect against future swings. However, as you know, later on today, there's another announcement on the Fed, and we may see some slowdown in terms of what's happening there. So we continue to monitor the situation and look at the overall portfolio. Not all of our portfolio is financed just by pure operating leases. We do have about 13% of our fleet financed by Japanese operating lease and French tax leases. Those technically do allow in certain cases for us to take ownership down the road if we wanted to. So we look at the blend overall and try and balance that just in line with our overall hedging policy. But it really comes down to the cost and the benefit. And at this point, we need to look at the market and figure out where that is likely to go.

I mean, personally, I think Western Europe is going to be the most difficult market. Central and Eastern Europe continues to converge economically, and we are seeing robust demand, especially in certain areas where we've had light historically, like Albania. Now we are Speaking of the pace, so we see that market reacting very well. I mean, Romania, we talked about, is a significant opportunity for the airline. And I think we're going to have kind of hyper demand going east. I mean, clearly those markets click pretty much immediately. And we are just seeing increasing demand there. And this is really what I meant. on being able to maneuver within the boundaries of our own geographical footprint, possibly diverting those from west to east, if that's what we have to do. But even looking at Western Europe, we are not seeing any fall of demand in Western Europe.

Can I just ask a couple of follow-ups? So firstly on financing, can you give us some colour in where the lease rate factors are today versus what you were getting in the market this time last year?

And then second one is just on cost and disruption. Given that sort of ATC strikes are clearly outside of the control of airlines and there's been underinvestment in the ATC system as a whole, what are you doing internally that gives you confidence that you can reduce disruption costs and also increase asset utilization if the operating environment doesn't improve? Because clearly the most sort of standard way to defend against disruption is to put fire breaks into the system, which then decreases your asset utilization. Thank you.

So maybe I would start with the ATC, especially the operating environment challenges. I don't think ATC is going to be in a dramatically better position next summer than it was last summer. Let's not forget that if the fundamental issue is lack of staff, the training cycle of the control is two to three years, so they are not going to fix it overnight. So I think we are we are exposed with regard to ATC stopping going into next summer. The other disruptive factor for ATC is obviously the war in Ukraine because a part of the European airspace is closed off and traffic is redirected. As a result, the new corridor that has to process a huge incremental workload which they are unable to really process. So my expectation is that ATC will crumble going into next summer. So the question is how we ourselves can create more resilience against that environment. And this summer we operated our schedule based on highly optimized rostering. So there is always a daily legal limit uh but you can put on your cruise how much they can fly and the kind of max vote on that so the only load i don't know let's say half an hour buffer versus reaching the legal limit now putting that model into the into the operating environment what we went through basically already even even before you start the rostering pattern quite likely you knew that the last fight would be cancelled because you're going to be running out of out of the legal limit Now we are changing that model to create a lot longer buffer in the system. So as opposed to relying on a few minutes, we would be putting in hours of buffers, breaking up the rostering, et cetera, et cetera, to make sure that we are just a lot more resilient against that. That will require somewhat more stopping, quite likely. But in terms of design, we would be a lot more resilient than what we were this summer. So I don't think that we are waiting for miracles to happen and just hoping that the environment is going to improve. We are actually resetting, if you want to put it that way, to make sure that our model remains intact and robust and operationally efficient given the challenges we are facing.

In terms of fleet financing, we actually offer a pretty attractive product. to the market. We have an investment-grade airline combined with one of the newest technology, clean-burning aircraft with efficient engines that have ever been produced. So that right there drives a lot of competition when it comes to our fleet financing RFPs. In terms of the overall lease rates, obviously what's been financed has been financed, and so this isn't affected by interest rate and movement unless, of course, there's floating rate agreements. In terms of going forward, we are not seeing, well obviously with the base rate increasing, the overall cost increases, but in terms of the margins or what's factored into the lease rate factors, we're not seeing dramatically, we're seeing a lower increase compared to the overall market in terms of what rates are doing. So what's happening is that a lot of that cost is being passed on to the lessor. However, we are seeing the shift of lessor appetite or the ability of lessors to be able to finance at those levels shift from Western to Eastern markets. And so as per Joe's slide, we had a majority of Chinese and Japanese investors step in at that point. And that's due to the fact that there's more expansionary monetary policies in those jurisdictions. And they have a different appetite for this sort of asset and this sort of credit.

So I guess now we can take questions from the audience on video.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. We will now take the first question, which is coming from the line of Stephen Furlong from Davey. Please go ahead. Your line is open.

Jan, you might just give me some more flavor in terms of discussion with the rating agency, Fitch, in terms of I presume they'd look through more cycles in the next 12, 18 months, free cash flow and those type of metrics. And then the second thing, I was just wondering about the GOE strategy. Do you think, Joseph, from preliminary budgeting but that type of business is a similar type of margin type of business to Western Europe or Central and Eastern Europe, or does it have, I guess, maybe higher unit revenue potential but also higher costs? I'm thinking of things like engine maintenance and things like that through the desert and stuff like that, or is it kind of similar? I'm basically just going to handle the KPIs of those types of businesses versus your existing operation. Thank you.

Thank you, Joe. So in terms of the Fitch process, we work off of a set of forecasts, and they look at both liquidity and the leveraging of the business, and particularly the deleveraging of the business. And as we stated in today's guidance, we expect to return to profitability in 2024, and that profitability then rolls forward and does, in fact, delever the business, bringing profitability up. and the leveraging into acceptable levels, which allowed them to form their own conclusion. Equity was one of the topics, but not the focus. It was the business's ability to deliver, and that was what gave them the comfort.

We got to recent expansion. I mean, just to put things in perspective, I mean, at this point in time, Around 6-7% of our capacity is deployed in the East, so we are not overly exposed with that regard. So with that, obviously, we are also learning the market. And I think so far so good. And in terms of margin expectations, they will be very similar to what we are achieving in Europe. I don't think there is any discrepancy with that regard. Certainly, it is a different operating environment. You can argue, especially from an engine perspective, it's a harsh operating environment relative to a benign European operating environment, and we are looking at ways of best setting ourselves up for the operational challenges. But to be honest, when you look at the business from a financial perspective, the real drivers of your business are around fleet utilization and crew productivity. and I think we should be able to achieve, and we are achieving already, but we should sustainably achieve similar levels of utilization and productivity flowing through those operations as what we are achieving in Europe, and I think that would be the fundamental driver of the business from a financial standpoint.

Thanks, and Joseph, thank you.

Thank you. We will now take the next question. It comes from the line of Muneeba Kayani from Bank of America. Please go ahead, your line is open.

Muneeba Kayani, please, your line is open.

Can you check your telephone is muted? Sorry, we will proceed to the next question.

We'll take a question from Gerard Castle from UBS.

Please go ahead. Your line is open.

Great. Thanks. Morning, everyone. Three from me. I'm just interested in kind of relations with staff now and With cost of living crisis, is there any increased pressure on unionization in terms of the commentary from there? Obviously, expecting a loss in the second half. Historically, you've been anywhere between flat and $100 million of losses in the second half. Directionally, I take it you're expecting more than $100 million of losses just given the building blocks. And then just also on EU Fit for 55 measures, you spoke a lot about sustainability, but where are things now in terms of the proposals? Thanks.

So I'll take the second question on losses. So we're not guiding anything more specific than what we've said so far, which is that we expect for the full year to end up in a lost position.

Okay. So starting with the employee engagement and various other issues affecting people's lives, I would say that obviously we went through a difficult summer and that affected the lifestyle of everyone in this industry, given the challenges of the operating environment, the issues with the supply chain. But now we are a lot more settled with this regard. In terms of pay and reacting to inflationary pressure of our employees, I think Bizarre has done probably outstanding relative to the industry. First of all, we were the very first airline reinstate in pre-COVID salary levels for both the pilot community and the cabin crew community, same for the office. One, two, we actually just launched kind of a solidarity bonus across the entire organization. All the employees are affected other than senior management. that we are paying out a bonus of 1,000 euros to address kind of the high energy bills coming to the employees. So I think we are very sensitive to people's matter. We are very sensitive to the adverse impacts coming from the environment and how that would affect, you know, the lifestyle and... and the spending ability of all the employees. And, you know, we really display this kind of a value of solidarity and try to be as helpful as we can be as a company. And I think we definitely are quite unique. I mean, I'm not aware of similar initiatives implemented by other airlines trying to help out employees with regard to the current circumstances. So I think we remain very focused on on employee welfare, understanding the issues of our employees. We remain very engaged. We periodically visit our basis. I periodically visit our basis twice a year to meet our remotely based people to create the opportunity for them to speak up and also to create the opportunity for management to directly interact with our people. We have a very strong people-counseling institution, which is like an alternative channel of of communication between management and our people on the ground to make sure that people really have the opportunities to say what they have to say. So I think we have a very dialogue-based and solidarity-driven culture in the company, and I think this is much appreciated. I mean, let me just give you one example. I mean, you know, the whole Italy event, crazy protesting in the airline industry and our people refrained from taking part of that event despite, you can imagine, all the push coming from external parties that would have been interested in creating mass inside this airline, but our people resisted completely and didn't get involved and we were the only airline unaffected with that regard.

Thank you. We will now take the next question.

I think we need to go back. There was one last question from Bank of America.

They will have to press star 11 again. If that's okay, we will proceed with Mark Simpson from GoodBuddy. Please go ahead.

Hi, good morning. Thanks for taking the questions, three as usual. First off, I just want to clarify Q1 versus Q2 fleet program. So you've pulled back your numbers a little bit over the next couple of years, so circa a 4% reduction in capacity in FY25 target fleet. That kind of gets you back to kind of 15% growth rate year-on-year. Is that what we should be kind of looking for thereafter? Is there any kind of reasoning behind that slight change? It looks to be really the mix in terms of AC20 neo or standard engines, A320s. And equally, on the 23% implied growth for FY24, can you tell us where that capacity will be deployed, if there's any continuation of the same, particularly, say, into Italy? Then in addition to that, disruption costs, apologies if I missed this, have you given a specific number that you think are disruption costs incurred this year that won't be repeated into next? And then finally on financing, we've talked obviously about leasing and the further reliance on the Far East in terms of leasing capital providers, but the bond program that you've been involved in before, Do you think the interest rates where they are at the moment preclude you going down issuing a further bond? And does that suggest you will continue just to seek financing via lessors?

Maybe I would start, Mark, with the fleet program. I mean, to be honest, this is somewhat outside of our control. This is what we are getting from Airbus. So all the adjustments that you are seeing is not our own initiative. This is the revision of Airbus' deliveries. And we will see how that line is going to develop in the future. I mean, we have, of course, opportunities to affect the capacity ourselves. I mean, we could extend existing leases and we could lift This is from the market, but the problem with that is that either option would drive costs up quite significantly. So when you extend an existing lease, obviously you would be extending an older technology, which would be operated at a higher cost than new technology. And I think we are very keen on innovating the fleet because of economic efficiencies coming through that and because of environmental efficiencies coming through that. as opposed to sort of extending our run on existing technology. So what you are seeing is really the adjustments what Airbus has made to the delivery program as opposed to our own initiative. So we are holding the lines with that regard. Of course, we continue to evaluate our options available to us, but we are much driven by reducing the cost of operating the business And that can be a lot better achieved with newer technology than older technology.

I'll talk about the disruption cost question. So in Q1, we had disruption charges and compensation exceeding €60 million. In Q2, that came down to €30 million. And we would expect that trend to continue for Q3 and onwards into the end of the year. Obviously, if you look at our target of single digit X fuel cask growth for the year, and if you look at our cask breakdown on slide six, the disruption costs land in what's titled the other expense row. And in order to achieve that sort of cask target, we're gonna have to work on eliminating that everywhere possible, and we do believe that is achievable based upon the performance that we've seen in October and the operational improvements currently underway for the rest of the year.

I mean, that's $100 million in the year is what we're looking at, yeah.

Thank you for your help. I'm just on the bonds program.

Yeah, so we do have the capacity under the bond program, so it's not a matter of if, or sorry, yeah, it's a matter of if not, whether we can do it or not. And at this point, we think self-financing, as well as accessing other financing sources, like similar to what we've done in terms of putting a PDP facility in place and trading out of it, is a better course of action than issuing more expensive debt in this environment.

Yeah, I mean, I think it's important to see that we feel quite comfortable with our liquidity position. Certainly, the liquidity position going forward, both profitability is reinstated and we continue to grow the business. I mean, this becomes a significant driver of operating cash flow in the business. And as said, the secured commitments for the $300 million facility through possible PDP financing, which you can take as an insurance policy or you take it as effective cash for the business. We don't necessarily see further needs to take liquidity measures. We certainly don't see needs for taking equity measures with that regard.

Much appreciated. Really helpful responses.

Thank you. We will now take the next question. As a reminder, it will be star 1-1 on your telephone to ask a question. And the next question comes in the line of Monique and then Subhash from CT. Please go ahead. Your line is open.

Hi, everyone. My first question is on the EDP presentation. You have mentioned that you have a commitment of the $300 million. So can you please give some color on the terms of the arrangement? And my second question is on the liquidity assets and the net debt. So at what level of net debt will E-Vita be comfortable going forward to maintain your investment?

Okay, there was a bit of interference on the line, but I believe the first question was on PDP financing and the second was on the investment grade. So the source of PDP financing was the result of a competitive tender where we had both bank and non-bank, so insurance-backed sources bidding for the facility. In the end, we selected a single counterpart. We prepared to do the whole deal without underwriting What's interesting typically with PDP financing is that a lot of times it's tied to lessor activities. This is a standalone counterpart and someone that we have an existing relationship and someone that in particular I have a relationship with going historically. So we know them well and we know that they have the ability to commit to deliver. And so that is, as Joe said, additional insurance in times where we don't feel we need it, but it's nice to have. So the other question was on the ratings process, right? Could you please repeat the second question just to make sure we're answering it properly? We're not exactly sure what the level of debt is in order to meet each of their models, but we believe it's something around low twos in order to maintain a net debt to FFO, funds from operations ratio.

But I don't think the process works as such that there is a definite number and you either hit it or you miss it and you want to have the investment grade or you lose the investment grade. I don't think that's the way it works. I think this is more of a trend-driven approach to understand where the business is heading as opposed to really specifically targeting a very number. I mean, obviously, the numbers are indicative of the delivery of the trends, but I think the trend is probably more important than the very number itself.

Thank you. I would like to hand back over to Joe for final remarks.

Ladies and gentlemen, first of all, thank you for your interest. Secondly, I just want to wrap it up. We understand all the issues we have been encountering in the business, especially in summer and this year. Notably, the heavy operational disruptions affecting our ability to properly operate and the financial damage coming with that. Also, our exposure relative to our competitors on the metals, especially on fuel, and those matters basically drove two issues. One is higher cost of operations of the airline, and two is a competitive disadvantage in the current year. Now, we are moving past these issues, On all fronts, as we are approaching the next financial year, we are seeing operating cost units, cost ex-fuel, to come back to historical levels. And probably we're going to be one of the very few airlines in the world actually being able to operate at pre-pandemic ex-fuel cost levels. We are seeing that happening through the fleet renewal program, being able to absorb the headwinds. And at the same time, we're going to be at a level playing field vis-a-vis our competitors when it comes to the field exposure. And all that comes with, we believe, a robust market and certainly a lot more diversified geographical footprint, but we are having right now being able to maneuver inside that footprint to address various market dynamics should they become problematic or should they represent opportunities for the other company. So we're seeing that the fundamentals are getting reinstated on the one hand and the market flexibilities and market opportunities are over there to make sure that we continue to build our business, continue to deliver growth at expected level of profitability. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect.