Wizz Air embarks on another war: Norway becomes the battleground
In September 2020, Wizz Air announced its tenth new base throughout the year. The opening of the Catania, Italy, base immediately prompted its competitors, mainly Ryanair, to fight back on the same routes. A capacity war had begun in the South of Europe – yet Wizz Air is determined to open up a second front – in Norway.
It announced its eleventh base in Oslo, Norway in October 2020. Oslo Gardermoen Airport (OSL) will initially host one Airbus A321 aircraft, while the second A321 would arrive in December 2020, József Váradi, the chief executive of Wizz Air, told local media on October 6, 2020. The Oslo-based aircraft would initially only fly domestic routes to Bergen Airport (BGO), Trondheim Airport (TRD), and Tromsø Airport (TOS).
Unlike in Italy, Wizz Air faces stiff competition from airlines that are even more established locally. If the crumbling Alitalia cannot hit back with a response of its own to the Hungary-based low-cost carrier, Ryanair definitely can – and it did. Yet the Ireland-based LCC group is not an airline that one would usually associate with Italy, despite the fact that Ryanair is the largest airline there in terms of passenger numbers. The situation in Norway is a bit more complex.
The main difference is that Norway hosts a few locally-established brands. Scandinavian Airlines Systems (SAS), in which the Norwegian government had a stake in, has one of its hubs in OSL. Norwegian Air Shuttle, despite being a low-cost carrier that gained its international recognition for its long-haul flights, is still based in OSL. Widerøe is a regional airline that primarily connects communities across Norway, but also flies from/to the three airports Wizz Air is planning to operate to.
Then there was the news that a former Norwegian Air Shuttle executive wants to establish an airline based in the Scandinavian country. The to-be-named carrier would reportedly launch in 2021, announced the former NAS executive, Erik Braathen. Incidentally, the news about a fresh carrier in Norway and Wizz Air’s expansion plans both came out on October 6, 2020.
“We were probably just as surprised as everyone else when Wizz came with the news. But what we see is that it is not just us who think Norwegian domestic is attractive,” Thomas Ramdahl, another executive working with the new airline, told the E24.no. “It is interesting that several have analyzed and seen that the Norwegian market is attractive. We are not afraid of competition,” added Braathen.
But behind the strong brand ties to the market, crumbling financial positions are apparent.
There are very few companies in the aviation industry that could boast a favorable financial position. Left to right, up and down, the industry has succumbed to the coronavirus-induced crisis. Wizz Air was one of the few that had a very fair share of cash going into the current downturn. Meanwhile, Norwegian and SAS were in a more precarious financial position.
Norwegian Air Shuttle did not welcome the crisis with open arms. It ended 2019 with NOK3 billion ($322 million) of cash, while its non-current and current liabilities stood at NOK57 billion ($6.1 billion) and NOK24 billion ($2.5 billion), respectively. The company started its shift from unprecedented growth to stable profitability with the FOCUS2019 program, which resulted in cost-cutting measures that saved the company NOK2.3 billion ($247 million). NOK2 billion ($218 million) of those costs were re-occurring. Program NEXT was subsequently put on the table – it would have resulted in Norwegian re-evaluating its whole network, which would have allowed the airline to continue its path towards profitability in 2020.
Throughout the crisis, the airline issued multiple warnings that it was running out of cash. In its H1 2020 report, Norwegian stated that the company would need a new injection of cash by Q1 2021 to “meet its obligations in the upcoming twelve-month period.”
“SAS did not meet two of its three financial targets for the fiscal year 2019, despite a strong fourth quarter,” stated President and Chief Executive Officer (CEO) of the Scandinavian flag carrier Rickard Gustafson. While its net income was SEK621 million ($69.9 million), its cash flow was negative SEK993 million ($111 million) throughout 2019. Its transition to an all-Airbus operator would have only showcased benefits in 2021, according to Gustafson, who added that by FY2023, the airline aimed to achieve efficiency improvements estimated at SEK1.5-2 billion ($168.8-225 million).
However, the airline’s management is determined to not let go of the Scandinavian market. One of the goals going forward in the post-COVID-19 world is to remain Scandinavia’s leading airline by prioritizing passenger flows within Scandinavia and to other European hubs.
Its main problem, particularly in short-haul flights will be its fleet. Around 20% of its destinations are optimal to serve with an aircraft that is sized between the A320neo and the Mitsubishi CRJ: a 120-1250 single-aisle jet, pointed out Gustafson. The Airbus A220 or the Embraer E2 family would seemingly slot-in perfectly here, but SAS has no outstanding orders for either of them.“To place such an order we need to certify that the benefits of single-fleet operations on all platforms remain intact and that the available aircraft types perform to the standard for which we are known,” added the chief executive. While recognizing the gap, he provided no indication of whether SAS planned to fill the orders in the short-term future.
The third Norway-based player, Widerøe, is navigating turbulent skies as well. The all-regional aircraft airline does not disclose its financial information publicly. However, according to Proff, a database consisting of Norwegian companies, the company has not achieved a profitable year since 2016. While in 2019 the regional airline almost returned to profitability as Widerøe improved its final financial report line from NOK48.9 million ($5.2 million) to NOK8.8 million ($950,364), its liquidity ratio of 0.65 is weak, concluded Proff.
Underlying problems and incentives
The fact that Wizz Air continues expanding throughout 2020 is truly something unprecedented, as the Hungarian low-cost carrier looks for revenue all across Europe. In Norway, much like in Italy, the domestic market seems to be recovering much faster. The Southern European country’s domestic volume is only 30% lower in August 2020 than during the same month in 2019, according to Enzo Fangrilli, a senior aviation consultant at 1Aviation.
Not hard to see the logic behind @wizzair's move into the domestic Norwegian market. Compared to international services hit by travel restrictions, domestic traffic there is holding up comparatively well. @cirium data: pic.twitter.com/S8Ka5Yo98S— Jonathan Robins (@jrobinsuk) October 7, 2020
As border lockdowns are whatever someone wants them to be in the current environment, as governments have failed to impose a unified approach, domestic flights have become a stable source of income for airlines. In Europe domestic flying is not the same cash-cow if we were to compare it to intra-United States flights. Thus, forcing yourself into markets where ailing airlines are present could be a good strategy, at least in the short-term. After all, Wizz Air’s newest base in Oslo will operate flights to some of the busiest domestic routes in Norway, according to Avinor, the state-owned airport management company.
Flights from Oslo to Bergen, Trondheim, and Tromsø, are the second, first, and fourth busiest routes in terms of their passenger numbers. Throughout 2019, airlines carried 5.3 million passengers from/to Oslo to these three cities. Furthermore, Avinor incentivizes airlines by paying out bonuses to airlines that contribute to passenger growth in the country. In 2018, the bonus was NOK12 ($1.29) per one additional departing domestic passenger compared to the previous year.
But Wizz Air is not invulnerable to the current crisis. The LCC downgraded its planned operational capacity from 80% to 60% in Q2 FY2021, with a further downgrade to 50% starting from October 2020.
“The protection of its solid balance sheet and excellent liquidity position as well as minimizing cost across all areas of the business remain Wizz Air's top priority. The Company has strongly improved its strategic position and its ability to respond to opportunities in its markets during the past six months,” argued the rebellious airline.
On October 6, 2020, the airline also entered into an agreement with CDB Aviation, an aircraft leasing company, for the sale-and-leaseback (SLB) of six Airbus A321neo aircraft. The move is usually done in order to soften the blow to cash reserves upon the delivery of an aircraft or to raise cash on an already-delivered aircraft. Four out of the six A321neos will be delivered in Q4 2021, while the remaining two will join the airline’s fleet in Q2 2022.
While the airline has been on a quest to expand like nobody else in the industry, the reality of the crisis still hit the carrier. How hard reality will hit the purple-colored Wizz Air, is a good question to ask.
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