Shares in budget airline Wizz Air (WIZZ) gained 1.3% to £27.72 after it stuck to its full year profit guidance, despite being hit hard by the coronavirus pandemic.
In a post-close trading statement, the Hungarian low-cost carrier said it expects to report underlying net profit of €350-355m for the year to 31 March 2020.
That’s despite March 2020 traffic being down 34% year-on-year and the airline currently operating at just 3% of its pre-coronavirus capacity.
The company had raised its guidance to the aforementioned range in January after better than expected trading.
BIG HIT FROM OIL PRICE CRASH
Wizz Air added that, as a result of the crisis, it would recognise exceptional costs of €70-80m for the period from January to March this year due to losses on its fuel hedging contracts, meaning it now expects to report full year statutory net profits of €270-280m.
The company also declined to provide any guidance for its current financial year to 31 March 2021.
Hedging contracts allow an airline to agree to buy a certain amount of jet fuel at a predetermined price in the future in the hope that prices don't rise.
Airlines typically hedge the majority of their fuel requirements for the next two years to protect against rising prices. Fuel used for transportation accounts for around 60% of the entire global oil market, according to Forbes.
However, oil prices have plunged since the coronavirus crisis began due to a collapse in demand thanks to lockdowns and travel bans, as well as a price war between Russia and Saudi Arabia who are continuing high levels of production despite the lack of demand.
As a result, most airlines have hedged their fuel needs at a much higher cost than the current oil price, meaning they face big losses from the ‘ineffectiveness’ of their hedging strategies.
Despite the hedging losses, Wizz Air insists it has ‘one of the strongest’ balance sheets in the airline industry and boasts of ‘excellent liquidity’ with €1.5bn of cash at the end of March 2020.
COST-CUTTING MEASURES
In the short term, the airline said it ‘continues to actively adjust capacity to market conditions’ and is reviewing aircraft allocation on a market-by-market basis ‘as opportunities arise’.
It also said it is working with suppliers to reduce contracted rates and ‘improve payment terms’, and will gradually return 32 older leased aircraft by the end of its 2023 financial year as existing lease contracts expire.
As markets normalise, the company expects to maintain its plan to grow capacity by an average of 15% a year and added that the launch of Wizz Air Abu Dhabi is progressing in line with its initial timeline.
In further cost-cutting measures, Wizz Air made 1,000 positions redundant, representing a 19% reduction in its workforce, and for the current financial year boardroom pay will be cut by 22% while salaries of pilots, cabin crew and office staff are reduced by 14% on average.
