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Welcome to the Wizz Air 2019 First Quarter Results. [Operator Instructions] Please note that today's conference call is being recorded. And I would now like to hand over to Jozsef Varadi, CEO of Wizz Air. Please begin your meeting.
Good morning, everyone. Thank you for joining this conference. So let me just start by -- [regarding] the announcements that we are making today. So we are reporting on the first quarter of fiscal '19 year in which we delivered record passenger numbers with record revenue. We delivered 20% growth, which is quite high compared to the balance of the industry.Net profit came in at EUR 50 million. I think you need to take into account the Easter impact when you compare the two years as far as the operational disruptions and related costs. And we believe that this EUR 50 million net profit performance is a solid performance and in line with management's expectations.We continued to be very disciplined on managing our costs, so we are one of the very few airlines still seeing ex-fuel CASK declining in our business. So we clearly believe that our costs are under control, and again unlike some of the other carriers. We started operating Wizz Air U.K. in May. As you know, the airline was licensed by the U.K. authorities and we received the AOC, and we started operations in May. Very quickly we have scaled up operations to seven aircraft. We've already announced [indiscernible] operations, so one more to come, and you might be expecting more news coming out of the pipeline in the coming days. And also, we started the [re-elevate], which is the first step of a major expansion in Vienna. I mean, clearly you see that it is becoming an overheated market. Nevertheless, we are very confident in our strategic ability to compete and win, given that we are bring the lowest cost [production] to the market [and] significant scale. So we believe that, after the dust settles down, you will see a few structural winners, and we will be one of them. We [reached] the 100 aircraft milestone in the reporting period. At the moment, we have 104 aircraft flying the fleet. As [indiscernible], it's a good milestone to pass, but obviously, we remain very focused on delivering further growth in the business. And based on this performance and the visibility what we have on the current trading environment, we are reconfirming our previous guidance.Moving on to Slide 2, you see the operating metrics, so significant growth. Obviously, that was followed by staff growth, as well. We have 1,000 more people, [25%] more people today than what we had a year ago. We ramped up load factor with an additional point to [99%] (sic) (92%). But clearly, where we suffered the pain is punctuality. And this is simply resulting from a much tougher operating environment than ever before, mainly driven by ATC issues, strikes, closures, [indiscernible], airport issues. I mean, it has not done any favor to the industry.If you move on to the next slide, just to [ dimensionalize ] the issues about what we are suffering, but I think this is pretty much in line with what other airlines are seeing. The cancellation rate quadrupled in the period. We had to cancel 145 flights as a result of some external forces. As said, punctuality is down 7 points to 74%, and long delays have doubled in the period. And if you think about it, of the 8.6 million passengers we carried in the period, 26% of them were not delivered to their destination on time, within 15 minutes. So essentially, all these disruptions have been affecting over 2 million passengers. So this is very significant and very fundamental. And this is clearly triggering the initiative that we put forward with other airlines to raise our noise on the matter, because this is undermining not only airline performance, but the poor performance of the industry vis a vis the customer. This is not what customers expect. This is not what people want. And the industry needs to change and needs to [adapt]. And when you look at the cost side of the problem from our perspective, our disruption-related compensation cost tripled to EUR 9 million in this period versus a year ago.Moving on to the next slide, just a few words on the [network design] of growth. The pattern has not changed fundamentally. You see that almost 90%, 88% of the growth capacity has been deployed on increasing frequencies on existing services, or joining existing airports, joining [with us]. So we launched 11 new airport pairs of existing airports, [delivering] increasing frequencies on 79 routes. But at the same time, we kept carrying the local [strength] to new airports and new countries. We opened up five new airports in the network, and we also entered into new countries, namely Austria and Estonia, in the reporting period. And you can also see the geographical split of the new capacity allocation. Obviously, we remained very intact on building connections between Central and Eastern Europe and Western Europe, but at the same time, we have been developing some other links inside Central and Eastern Europe and from Western Europe to further east to other markets.So with that, I will just pass over to Iain, who is going to take us through the financial insights.
Morning, everyone. I don't want to downplay sort of the operational challenges, but essentially, the world hasn't been changed since we last came to the market about eight weeks ago. Our business is in great shape. So yes, we are seeing a little bit of cost headwind on disruption costs to the tune of EUR 1 million, EUR 1.5 million per month. This is probably going to be more, one would hope, a seasonal effect, so clearly the skies are congested during the summer, but, as you go to the winter, hopefully that pressure will ease.So in that context, the world hasn't really changed. Our business is in great shape. We were able to deliver 20% passenger growth. We were able to get more passengers on airplanes, so we increased our load factor to 92%. We knew there was going to be no Easter effect, so the Easter effect we've always sort of highlighted as around about 15% to 20% -- EUR 15 million to EUR 20 million for Easter. And we've also been signaling that we have been having some headwinds on our ancillary. I think we underestimated this to some extent, but we've made the actions accordingly. And we're starting to see that coming through, certainly in the [sell] revenue, but also you have more of that that gets [flown], and we'll start seeing reversal of that.So putting that in context, and maybe a little bit of a profits bridge, last year, we made EUR 58 million. If you apply growth rate of 20%, you're looking at EUR 70 million of net profit. Knock off the Easter effects, EUR 17 million or so, and EUR 2 million on the disruption, and that gets you to EUR 49 million, EUR 50 million, which is pretty much [bang-online]. So to reinforce József's point that actually Q1 came pretty much in line, and all of our businesses, are performing very, very well.Moving on to the revenue slide, to Slide 7. Again, I think in the context of what we've achieved, so we were pointing to around about flattish RASK for the first quarter, and we delivered minus 1.4%. That's a really good result, given there was no Easter. We are growing at 20%. We're growing much faster than the competition. Load factors are higher. We're taking larger aircrafts, so this year we've got 31 A321s versus last year's 19, so an extra 10% of our seats are supplied by these much larger aircraft. We took 19 so, year-on-year, we have 19 additional aircraft. This is Q1 last year. We're flying further, so an additional 1%. So we're over 1,600 kilometers, which, again, is 25%, 30% longer than the competition, as well.So in the backdrop of all of these pressures to the business, you're seeing the demand. And to be able to deliver a flattish RASK I think is a very strong performance. On top of that, you are seeing the disruptions. The disruptions themselves, in terms of the revenue environment, where it really starts to impact is the late book [of] market. So by simply having to rebook passengers onto another 145 flights, essentially you are losing that last-minute high yield traffic. So that's just a bit of an annoyance. And as we've been flagging, that the unit revenues in our bags has been declining because we changed our cabin bag policy last October. The annual effect will start to reverse come October. And we've also taken some new initiatives. Back in June, we introduced a new policy with our priority boarding. So you're certainly starting to see some improvement on that one, coming forward.So on the whole, I think in terms of the revenue environment, it remains very robust. And we were very pleased with what we saw in Q1. Now looking ahead, there's no reason to say that we see things otherwise.Moving on to the next slide, my favorite slide on the cost side of the equation, I think, again, a very strong performance. I don't think there's many airlines out there that can say that we continue to drive our costs lower. Now this is even before we started to look at the NEO aircraft, which we take into delivery in Q4 of this year. Those engines burn 16% less, or at least 16% less fuel. And on the ex-fuel CASK, the ownership side of the equation still looks incredibly compelling. So more to come on that further in the year.The only item I would highlight are [indiscernible] staff costs. Again, we signal that, taking 17 aircraft in 17 weeks requires a significant ramp-up in the organization. And at the same time, creating a brand new airline in terms of Wizz U.K. requires additional training and recruitment for that U.K. business. So we always expected a slight increase on staff costs. That should start to normalize as our delivery schedule, I would say, [smoothens] out and our U.K. business starts to operate normally.The only item to flag, then, is on the other expenses, which is where you're seeing that incremental -- or that trebling of disruption costs. So on the whole, a very strong performance on the cost side of the equation.On Slide 9, some of the ancillary. I think it's fair to say we slightly underestimated the impact on the checked-in bag. We knew that, by removing the charged cabin bag, what the impact would be. But essentially, what was happening is everybody was turning up to the gate with their bags. And given that we want fast turnaround times, essentially that checked-in bag is suffering. We have changed the policy. We are seeing the impact. Will it be sufficient to fully compensate for the bag? Unlikely, but I think, certainly from October of this year, we'll start to see positive territory on our net ancillary.What is also important to highlight is that 18% of our ancillary now is essentially what people want to pay for. People never really like paying for the bags. They consider it punitive. So again, another strong performance on the value-add.Moving on to Slide 10, I think this is something more for the future in terms of the strength of our balance sheet and what we can do with that, the firepower in terms of potentially owning aircraft. As I said, in calendar year next year, we'll be taking 30 NEOs, 20 the following year, so there's certainly a lot of benefit coming through from that. It's still undecided in terms of how to purchase those aircraft, or to lease those aircraft. What I would say is that the investment grade that we were awarded at the beginning of the year is having a significant impact on the financial community. We're now seeing the increased strength of the business. So cash generation remains very strong. It's a very cash-generative business.Moving on to the last slide in terms of guidance, one thing to flag is we have seen fuel prices grind higher into Q1. And as a result, we've decided that we [would] trim up capacity into the fourth quarter a little bit, so in the third quarter, as well. And we don't grow for the sake of growth. And I think we've always said that 15% is probably the long-term structural growth rate. That's what's reflected in our delivery schedule. But clearly, we'll be looking to grow as fast as we can but maintain margin. We are seeing a little bit of margin pressure purely driven from the fuel caps. As a result, we're trimming a little bit the capacity in the fourth quarter. So I think you should take that as a positive signal that we are showing some financial discipline. And we've always said that, if we have a phenomenal summer, then we'll [indiscernible] a little bit faster in the winter. If you see a few pressures on the horizon, then we'll obviously trim that a touch [further]. I think, still, delivering an 18% year-on-year growth I think is a fantastic target to achieve.So with that, operator, maybe I'll hand over for Q&A.
[Operator Instructions] The first question is from Mark Simpson.
In terms of just a couple of questions, on the unit cost improvements, obviously start with the minus 1% for the year. Labor, we saw 14% unit cost inflation in the Q1. But I think previously you talked about 8% to 9% for the year, and on the depreciation, a 5% unit cost improvement for the year. I wonder if you could just take us through some of the line items in terms of expectations behind that overall minus 1% improvement.And on the ancillary side, you've obviously changed the bag policy. I'm wondering if you can tell us, on the ground, what's happening in terms of your premium ticket sales, penetration rates, and what you think may happen on that front.
On the unit cost side, I mean, labor, no change. We always knew we had these 17 aircraft coming. We always knew that the training period had been extended, because, essentially, it's an awful lot of pressure on the operations. We always knew that we had Wizz U.K., and the U.K. [CDAA] have slightly different training requirements, so we knew that there would be additional training on that. So I think, in terms of modeling, unchanged from that guidance that we gave a couple weeks ago.
Yes, I think it's important to know that, where you look at labor cost, I mean, it is inflated in a way, because it is not structurally because of the increase. But you are seeing some of it is structurally because we had to increase pay to pilots and that sort of stuff. But a significant part of it is related to the Wizz U.K. ramp-up. And you recall we had this program of 17 aircraft for 17 weeks, and we had to hire significant number of pilots and cabin crew for that program in advance of the deliveries, obviously inflating labor cost in the reporting period. But once we are kind of phasing that program out, and as we will have completed the deliveries of those aircraft, I mean, you will see that issue moving away from us.
And on the depreciation of fairly [indiscernible] calculation, I think we're trimming a little bit of capacity. You may see a little bit [off there], but I would just stick with exactly what we guided eight weeks ago.
And on the ground in terms of penetration rates in the premium?
I think very positive. I mean, certainly, essentially just for those that know essentially, if you take -- if you want to take your bag with you through the entire journey, you have to take priority boarding. That was implemented on 20 June, if I remember. I would say we've seen a more than doubling on that product, so a very positive effect. I think there's still going to be some refinements in terms of ensuring that there's less checked-in bags or bags that are coming to the gate, so we're having conversations with the ground handlers to make sure that policy's enforced. That should also start to introduce on the checked-in bags. But generally speaking, a more than doubling of that product.
To penetrations rates of ?
26%
26%. And then, final question, just follow-up on just the labor side, staff retention rates, or churn rates on the pilots, not the expansion of the network but in terms of where you're at on that. Are you kind of close to the 5% that you'd like to be?
Well, a little above that. We are expecting to be around 6.5%. It's a little better than what we used to have, but little [indiscernible] than what we are targeting.
The next question is from Damian Brewer.
Damian Brewer, Royal Bank of Canada. Three questions, please. First of all, just coming back to the labor question, could you give us some idea of [if you feel like] what the steady state labor unit cost growth is, please? Secondly, you highlighted disruption costs, but your aircraft, or your sectors per aircraft, looked like they were down slightly in Q1. Could you talk a little bit about the way the Board or the management think about the trade-off between increased crewing and decreased utilization versus the EU 261 costs you can incur? And then, how do you strike that balance?And then, the very final question. If we look at the calendar first half of the year, you grew ASKs 21%. Net profit is 27% year-on-year. So it seems like your incremental net profit for ASK was up something like 6%. Your guidance for fiscal '18, '19 at midrange has about 18% growth and 18% net profit growth. Apart from fuel, is there anything else in there that we need to be aware of in terms of seasonal cost effects that could affect the remaining three quarters of the year?
Thanks, Damian. Maybe I'll take the last one and the first one. I actually missed part of the second one. So in terms of the last one, I think your observation's correct. On the seasonal effect, not really. I think there's nothing. Fuel is probably the big, big headwind, or rather question mark, I should say. Last year, we did actually have fairly significant disruption costs in terms of the [indiscernible]. The cancellation was [exceptional] because of the weather. If we have a slightly milder winter, then maybe you'll see a little bit of upside on that. But the reality is there's nothing on the horizon.On the labor cost, I suppose maybe the starting point is the A321. You still need two pilots, just one extra cabin crew for that aircraft. So you're seeing a 17.8% unit cost improvement because of the A321. Do we expect to see some inflation continue? Probably, but we believe that the aircraft [on that], as we take more of the A321s. And the A321 neo has another nine seats again. So again, you'll start seeing some improvement on that.So from a true cost perspective, we believe we can absorb any inflationary pressures coming from the industry with these superior aircraft.
Okay, maybe I'll take discussion cost-related [matter and how describe the] balance vis a vis Regulation 261. The problem here is that, obviously, asset utilization, aircraft utilization is inherent to the business model, and this is very core to our strategic approach to the business. So definitely, we want to maintain the model what we have been deploying today. [But] I think we need to strive to balance this is around creating reserves in the system. You can do it in different ways, and this is exactly what we are doing to see how to create a greater degree of [indiscernible] to recover from these [indiscernible], because this is a very defined model. It's a highly optimized model, which works very well under normal circumstances, but once the circumstances change and they become sub-optimal, obviously that could break down the model. So I think that's what we need to figure out here.But certainly, we are not trying to ease the utilization. I think it's very important that we stay intact on that. But there is one particular issue which I've seen occur has been affecting us recently, and this is the Airbus delivery performance. We have suffered some delivery delays versus the [indiscernible] program. And [as there is that], that made quite a significant impact on our ability to operate. So we did not want to change the schedule last minute, so we operated the schedule. But essentially, because we didn't get the aircraft delivered, we didn't have any spare capacity to recover from operational disruptions, creating further issues. But as we are resuming more of a normal delivery schedule now, that issue should be going away.
The next question is from James Hollins of Exane.
Three from me, please. On Q2 RASK, I don't know if I missed it, you could give some guidance. You helpfully gave Q1 [and] full year. Particularly if you could maybe split out July, August and September in terms of how you're seeing the trends.Secondly, any particular area you're reducing your growth, 20% down to 18%, is that maybe from Vienna, or any particular area where that's coming out?And then, thirdly, a sort of more generic question. You're the first guys and girls I've spoken to since the legal action was pitted against -- brought to the EC using a sort of legal precedent of Spanish farmers, I believe. I was wondering if you could let us know, maybe not call it quantitatively, but is there a chance is there success of that? Have you, as a group of European airlines, had a warm feeling that using this legal precedent, et cetera, would actually potentially give any grounds for success in actually getting the European Union to do something about the ATC strikes?
I'll take the RASK question. I think Q2, I mean, back, we guide around up 3% on the RASK environment Q2. I think that's fairly safe assumption. In terms of breakdown, July was slightly softer. Now, I don't think we can really play the World Cup card, because Hungary, Romania, Bulgaria, Ukraine went to the World Cup. Poland got knocked out quite quickly. So I wouldn't say there there's a particular World Cup effect. But I think, when you look at it on a quarterly basis, I think there'll be no change to that. And again, H2, we were guiding around about 4% increase in RASK. If you trim capacity a touch, maybe there's a little bit of upside on that one. So that's how I'd look at the RASK environment. But again, the world hasn't significantly changed since we last spoke to you.
With regard to the growth question, how we are trimming capacity, [well], we are not [indiscernible] we are targeting a market, and certainly not Vienna. I mean, when we compete, we compete hard and formidably. So actually, we are quite excited about the Vienna market, as we are bringing in the most [indiscernible], the lowest operating cost compared to our competitors. And we are very confident that we are well positioned strategically and structurally for bringing that market base. Yes, it is over capacity at the moment, but [indiscernible], and we will come out stronger from that. So we are very committed to Vienna. We will continue to [post] that. So certainly we are not going to take any capacity out of that market. So this is just a genuine trimming of sort of [indiscernible] capacity to make sure that we protect the profitability of the business, but we are not targeting for particular markets.With regard to the commission plan, or the EU plan, well, I mean, I think the starting point is that they believe that we have a system operating the aviation infrastructure in EU, which is very [indiscernible]. If you think about it, ATCs, which are state monopolies, and many of the airports which are also controlled by the State, can do whatever they do without really taking responsibility for that. And the entire financial burden is put on the airline operators, and they suffer the consequences with [really] consumers. And essentially, the airlines have no ability to kind of [indiscernible] in a significant way to really address this issue.And it is, I think, just try to raise the voice and raise the game from the airline standpoint, that this issue has to be dealt with, not for the benefit of the airlines necessarily, but for the benefit of the consumers, the many hundreds of millions of consumers. I mean, as said, just in the reporting period, 2.2 million of [Visa] customers got affected. If you look at it industry-wide, I mean, the [indiscernible] effect [drove it around about] over 100 million people. And those people are also voters of countries and voters of Euro [indiscernible], so I think that is a [serious] mistake [indiscernible] which needs to be recognized by the various stakeholders. Likelihood of success, I don't know. I mean, this is truly not going to be an easy process, but it is a way of starting building pressure on the system to really address the structural deficits of the way our European aviation infrastructure is operated.
Next question is from Andrew Lobbenberg.
It's Andrew from HSBC. Can I ask something about the decision to pull back the capacity? I mean, I see the logic in it, but I think, in your prepared remarks, you mentioned about fuel grinding higher. And yet, compared to where fuel was at the time of the full year results, it's in the same place, or marginally down. So, just what's motivating the pullback in that context?Can I ask a question about the Brexit? What are you thinking about in terms of managing the ownership and control risks? [Ryanair] talking about disenfranchising non-EU shareholders. How do you think you will go about managing the EU ownership and control requirements post-Brexit?And then, a third question on Ryanair Sun, which is -- got five incremental aircraft [into Poland] this summer and is now going to have 10 incremental aircraft for the coming winter. I appreciate you're not a charter airline, but you are flying on some competing routes down to the beaches. So are you seeing any competitive tension from the growth of Ryan in that Polish market?
Maybe I'll take the U.K. question, Andrew. I mean, the pullback in capacity, the way I would look at it, we want to grow this business as fast as we can but maintain margins. And essentially, that's what we said. If we see we have a great summer, then we'll grow fast [for] winter. And I think if you go back and reflect [your] fuel price [indiscernible], that was in Q1, but bearing in mind, before that, I think fuel price in liquid terms was up 20% So I think if we go back, let's say, three or four months ago, it was around about 615. So when we came out with guidance, we were at 685 in terms of our numbers, so I think you challenged us on that, but the market price [was] 730 and sort of existed around that. Yes, today it's dipped down again, but the reality is [indiscernible] decision during Q1 to pull back capacity, [indiscernible].And again, I mean, let's put it in context. I mean, 18% growth is still a phenomenal growth rate. We want to grow this business profitably and maintain margin. So, I think trimming the fourth quarter growth to a modest 16% I think is still a pretty good result.
With regard to Brexit ownership and control, I think it is still a process which is unknown to anyone. Certainly, it's unknown how the terms and conditions of Brexit will get defined. And everyone is now forming a view and opinionating the [Board topic], so I don't want to fall into that trap.Nevertheless, the most important action what we have taken so far was to set up this U.K. [indiscernible] and to make sure that actually we have an operating model in both sides of the [occasion] to make sure that we can allocate capacity according to possible regulatory changes with the objective of continuing to operate between the United Kingdom and other countries, being European Union countries or non-European Union countries beyond, obviously, working on contingencies and looking at issues like ownership and control. But I just don't want to go ahead of this decision. Whenever we have a firm action what we are taking, we will make announcement. But I can tell you now that we are looking at it. But as far as we are concerned, we made a big step forward with the establishment of Wizz Air U.K.And with regard to Ryanair Sun, I mean, we have been competing with Ryanair for about 10 years in Poland now, and not only in Poland, but also [indiscernible] in our market. What's really important, as far as I'm concerned, if you look at the cost performance of the two airlines in the reporting period, now we are taking the cost leadership of this in Europe. We have the lowest cost measured on [cost] airline in the whole of Europe, and we believe that our costs are still under control, but the [radars] are [creeping] quite [indiscernible]. So we are very confident in our [indiscernible] if we are to compete with [indiscernible] airline, including Ryanair. As you know, this Ryanair Sun is targeting a bit [indiscernible] segment. What you need to know is that Poland is quite a unique country in Central East Europe. You've got the charter market. This is huge. Certainly, in certain airports, that charter capacity is more than scheduled capacity, so I'm not surprised that [someone gets diverted] to that market from that perspective. We remain very focused on our business model, and we want to be a scheduled brand. We are not offering charter capacity to do [indiscernible], and we are going to stick to that model. And we're [indiscernible] to enhance our competitive positions on cost and brand. And that will be the focus, going forward, as well.And that [indiscernible] we haven't even deployed aircraft of the NEO delivery program, and obviously, once that happens, the [indiscernible] going to be even more competitive in the marketplace. So other thing that triggers any [substantial] change, in our mind, obviously [indiscernible] the market, but obviously [indiscernible] Poland in particular.
Can I just come back on the ownership and control? Because unless I'm going even deafer than I thought, I didn't hear an answer to my question. I mean, are you telling me you've got a plan for ownership and control, and you're not going to tell us? Or is it still being formulated?
No, it is being formulated. And when we have the plan, we'll tell you.
So what I think you already know, Andrew, is that we've actually been slightly ahead of the curve. Our [indiscernible] already [allow] to what other airlines are running around visibly trying to get to the [plate]. So yes, we have the U.K. airline. But in terms of our [indiscernible], we also have all those actually already in place. So I think it's fair to say we've been slightly ahead of the curve. But again, there's a lot of unknowns, and we're kicking off those as we speak.
The next question is from Shika Savjani of Barclays.
Just a couple of questions on the capacity trends. Now that you know you're growing Q4 capacity by about 15%, is there any more downside risk on that if fuel rises any further? I mean, what's the lowest rate of capacity growth that you would be willing to consider in the winter period?Secondly, could you also comment on the competitive capacity environment? Are you seeing any indications of capacity coming into the winter from other carriers in your competing markets, or is that a little bit too early still? That would be very helpful.
Yes. I think I'll take the first question. On the winter capacity, essentially, that trimming really reflects the environment we see today, so if you're seeing slightly higher fuel prices and maybe slightly stronger dollar, the financial performance of some of those routes, rather than flying five a week, maybe you'll fly four a week in terms of a frequency, just an example. So I think if there are any fundamental changes, then obviously we need to adjust our business model accordingly and maybe trim. So [the first] [indiscernible] is a lot of that is already on the schedule, so if we start to see things reverse, then actually maybe we're in a position to actually accelerate growth. So I think we remain nimble, and obviously we need to be able to react as the market dictates.
Yes, exactly. I think, yes, the [indiscernible] market, as we understand the market today, and coming to your second question, how we are seeing the capacity environment, I don't think we have full visibility on that yet. I mean, typically what you see is that airlines publish their winter schedule, and then they start adjusting their winter schedule. Then actually, they are approaching the period. So I think we'll have a much stronger visibility on that in around September time. I mean, obviously, we are hearing some news of some underperforming businesses not being able to pay bills to suppliers. So if anything, we may see some upside for our business coming out of this, but we have not been planning for [that time]. We have not included anything of that in our forecast. So if something happens, which would represent an opportunity for us, that will [come as an upside].
The next question is from [Mark Blott]. The next question is from Ross Harvey.
Ross Harvey from Davy. Just two questions from me. One has been slightly answered in the prior question. On the increase in terms of value added services within the ancillary to EUR 3.1, can you just remark on how much of that related to priority boarding, given that you changed the cabin baggage policy? And into winter then, I guess, how much of the RASK improvement is dependent on ancillary maybe hitting an inflection point and maybe turning positive? And how much of it's on basic fare? I understand that hedge one is clearly where the basic fare does a lot of the heavy lifting, where the ancillaries are still on a downward curve.And secondly, just to clarify on a question that was asked before, in terms of the RASK improvement through winter, if we're looking at a figure which is slightly higher than the 3% overall for the year, how much of that depends on competitors pulling out more capacity? I think you implied from the prior answer that, as you look at the market now, you don't really need any competitive reaction into this winter to achieve that 4%, and it's all really upside if you begin to see some people rolling back on their capacity.
Jump in if I've missed some of your questions. So in terms of the priority boarding, I mean, that was introduced back on 20 June, so you won't see any of that, or hardly any of that, in Q1. What you're starting to see, as I highlighted, is that's more [indiscernible] in terms of our priority products. So in terms of the number, you can probably model about 0.7 of an increase coming through [indiscernible].
But this is the [indiscernible], and so this is not the full potential. So we are expecting significantly more than that. But this is where we are at right now.
Your last question in terms of winter RASK. I think we've been highlighting around about 4% is what you should be expecting about H2. Yes, I think what you'll be seeing is you should start to see the ancillary will start contributing to that. I wouldn't specifically say what blend of it, because sometimes you get cannibalization between products. But net-net, I think modeling 4% RASK for H2 I think is a reasonable assumption. As you mentioned, cutting a bit of capacity, maybe there's a little bit of upside, but I think 4% is a very safe place to go today.And your second question, could you repeat it?
Yes. Actually, you've covered [off] the two of them really, which is on priority boarding. But just in terms of that point on cannibalization, do you think that you've recovered some basic fares in the first quarter, given the change in baggage policy, given the next [three notes]? Or do you think there was an increase in basic fare, which might necessarily replicate itself once you annualize that change in baggage policy?
Yes, I think the first [indiscernible], so again, to be able to deliver virtually flattish RASK and still give back over EUR2 per pax on bags, yes, it's fair to say that we've probably been able to capture some of that.
The next question is from [ Charles Cartridge ] of [ Flow & Robinson ].
In your annual report, you talk about your [indiscernible] next 12 months, and you said the higher prices [coming out] -- higher fuel prices is [indiscernible] fare environment. And you have said that, normally, ticket prices might follow fuel prices, so there's a 12- to 18-month lag. Could you tell us, sort of on the ground, whether you're seeing your competitors raise ticket prices in response [to] higher fuel prices and lack of hedging? And perhaps if not, why not, or when do you expect that impact to start kicking in? Thank you.
Hi, Charles, thanks for the question. I mean, the reality is that you do see fuel prices, or [input] prices, that [indiscernible] is also an important input cost. They do flow through to the fare environment. And a good example is Q1. So as I mentioned, there was no Easter effect, yet we were still able to deliver a flattish RASK, which means yes, definitely, year-on-year, you are starting to see fuel prices flow through. I wouldn't say there's the -- sort of the mechanism of adjusting prices. That's market driven. What you are seeing is you're seeing obviously a moderating of capacity, or rather the growth coming through from airlines, I mean, less so from us. But this year, rather than growing 23%, 24% and growing, now we'll be looking to grow 18%.As a result, potentially there's sort of less seat supply in that additional demand. So it's certainly flowing through. The timing of that, it's like a million-dollar question. I think it tends to be slightly harder during the summer, because everybody wants to fly. I would say there's probably less elasticity in the summer. But certainly, as you go into the second half, I think you probably would see that. But it's ultimately capacity and how airlines adjust capacity. And maybe [reflect you] on one of the questions earlier, what are we seeing in terms of the competitive environment, you're not seeing waves of capacity. You're seeing more discipline simply because other airlines can't properly grow, whereas Wizz Air, with our cost base, we can. And I think that's hopefully something you'll continue to see. I don't think you'll be -- [we] start to get a little bit exciting as we go to the end of the summer. Where airlines start to lose a lot of money, or rather the weaker airlines, I should say, start to lose a lot of money, and Joe highlighted that maybe there's some opportunities for us. So yes, you are starting to see fuel prices flow through ticket prices, and that's why we're saying 3% for the full year, and with a bit more of the back end with slightly less growth.
The next question is from Alex Paterson.
It's Investec. Sorry, two questions, please, and the first one you've talked quite a lot around, and I didn't quite catch the bit you said over the prepared remarks. But on the ancillary revenues, were you saying that you expected growth from the second half of this year, or was it another period? And then, the second question is, just on the Slide 10, you were talking about multiple aircraft financing options. I'm just wondering if there was any preference you had for any particular type of financing, or whether you'd expect to use a mixture of different financing, i.e. you might do a corporate bond, and also aircraft leases or sale and lease-backs, or something like that.
I'd like to take the [indiscernible] of the financing question, and Iain takes the ancillary [indiscernible] for finance. I mean, I think that what we have been communicating before we are speaking to, that we are exploring various options, including bond financing, sale and leaseback, even purchasing aircraft or [indiscernible], or whatever. And then we're going to compare notes, and we'll decide what the best way is for taking advantage of the [market suggestion]. Quite likely, given the scale of the delivery program, we will be ending up in a mix of financing vehicles. But I think it will be premature to kind of commit ourselves to a [indiscernible] one. But as said, I mean, we are looking at basically all available options to try to understand how they work and how they [apply] the financials on aircraft ownership and how that affects the business short- and longer term. But we haven't made decisions yet. I mean, let's not forget that we made a principal position, or we made a principal decision, but I think a position that for so long has [indiscernible] deliveries of the current [COF] of technology, we would not be financing those aircraft on balance sheet. But the moment we start taking deliveries of the new aircraft, we would be exploring those options, as well. And we have the first new aircraft scheduled for delivery in January. So as time is approaching, we are going to get into it. And obviously, once we conclude a deal, then we will announce it. But at the moment, we are just exploring options.
And I think, just to add to that, I think we are very well positioned. I think with EUR 1.3 billion of cash on the balance sheet and investment-grade credit rating, we're keeping all these institutions very honest. So I think we're certainly going to be well positioned as we go into next year.Your first question, so yes, on the ancillary, I think maybe a couple of points. We've always been guiding 1 EUR per pax per year increase. Are we going to achieve that this year? I think it's going to be challenging, with the summer certainly starting to disappear. The anniversary of that change of bag policy kicks in in October, so, mathematically, one would expect to see the value add continue to increase. But if you then start to see all the incremental on the priority boarding kick in as well, you should start to see the recovery coming through in Q3. So it's fair to say, in Q2, that there'll be headwinds, so we'll probably be having the same comment at our half year results. But certainly, what we're looking at today is that the second half is when you should start to see the recovery of that, and we would hope earlier in Q3.
The next question is from Michael Kuhn of Societe Generale.
Essentially follow-ups, and one more, sorry, on ancillaries. Would you think that, at this EUR 5 per passenger level, you've reached the bottom on the baggage side, or would you see that further coming down? And on your -- one, your increase per annum target, do you think you will be back on that run rate in the second half of the year? Or could that be still below that level, and you're only back on the run rate, let's say, next year?Then, on capacity, you sometimes comment on your capacity growth versus competition. How does that look in the current summer? And what are the current indications for winter, obviously knowing that there are still some uncertainties for the upcoming winter?And then, last, not least, on the NEO deliveries, you mentioned the first one scheduled for January. Are you confident you will get your [NEOs] on time, or is there a risk of delays?
I'll take the first one. I think you know, I've been calling the bottom of our unit bag rate revenue decline for a couple of years now. I think it's -- I'm fairly confident that removing the large cabin bag, hopefully we'll start seeing the bottom of that. So I think in that respect, yes, we should start to see that coming through. In terms of the run rate, yes, so net-net, we should start to see the positive effect kick in in October. We delivered over EUR 2 on the value add, so one would hope [soon] we'll start to see north of EUR 1 in the second half. But will that compensate for the full year, given the importance of the summer? I think it's unlikely. So flattish for the full year I think is probably the safe assumption. In terms of next year, yes, we'll certainly start to be looking to try and achieve that EUR 1 per pax per year.
And in terms of capacity, competitive capacity, I think it's fairly benign, to be honest, in [indiscernible]. I mean, if I looked at competitive overlaps, compared to any other airlines, not a lot has changed. I mean, you're asking some notable changes. [Lower coach] airlines are growing like crazy. And then, you see kind of a better field developing in Vienna. But other than that, I think this is pretty much as usual. And we are not seeing a significant change going into the -- again, I've said we are seeing some airline weaknesses which will translate into capacity cost, which should benefit our business, but we have not been provisioning for that.With regards to the NEO deliveries, we have a contract in place with Airbus. Our understanding is that, actually, Airbus will do reasonably well in the first half of calendar '19. There may be some delay, but more like weeks than months. But we have not been notified of any of those, so we are still holding the lines as per the contract. But of course, we are also planning on contingents there should be any delays.You may have captured it, that actually they started a few reasons of [indiscernible] just to make sure that we have an insurance policy in place. So, if we don't get the vehicles, that [indiscernible] has the capacity to give it to us to deploy the commercial program. So, yes, we have some concerns, but I think we've also got the plans to cover up those concerns. And again, our own understanding is that the first half of '19, that should be reasonably okay from perspective of Airbus' ability to deliver the aircraft as contracted, or with a slight delay.
The next question is from Peter Testa.
It's Peter Testa from One Investments. Just on the last thing on ancillary, you made a comment of 0.7 benefit on the bag. I wasn't sure whether that was what you're seeing in the current quarter, the current picture, and then you talked about being able to improve that, going forward, with action. And maybe you could talk a bit about that, please.The second question, just on cost overall, I man, you've done quite a good job in other lines, the cost, to offset the disruption costs. And I was wondering whether there were any timing factors in that, or what opportunities you had to do similar as the disruption carries on, going forward, maybe also as the Airbus [stress of] delivery becomes a bit less, [then the bag] stress at the gate becomes a bit less.And then, the last cost question. So I was just looking at the overall associated disruption costs. When trying to understand how -- your comment that you felt it would be a bit less disruptive in the less stressed period of H2, what that really means in terms of cost per kilometer.
In terms of the overall run rate, how it's [flagging], you're talking about EUR 1 million, EUR 1.5 million per month, and that's essentially what we've been for the past few months, including July. So that's the run rate. If you see a less stressful environment [indiscernible], you tend to see strikes and issues happening when it really hurts the passengers the most. So one would think that, actually, it's going to be the summer that they get their biggest bang for the buck. So going into the winter period, there's less congested skies, and one would hope that that starts the moderating back to normalized levels. But in terms of a run rate, I would say you can add EUR 1 million, EUR 1.5 million per month for the remainder of the summer.In terms of the cost, I think what's important is that every year has a slightly different story. We model everything. Last year, we saw an increase in depreciation, and the depreciation also has increased the year before that. As a result, you need some new [indiscernible] in your business, and essentially, I think last year we did a very good job on the airport mix to essentially compensate for that. This year, it's almost gone the other way, so we're actually seeing some relief on the depreciation, if it's because of the timing of some of our [indiscernible] events, and therefore you can invest a little bit more in some of those airports. So that's why the Viennas, the [ Lucernes ], the [ Frankfurts ], the [ Berlins ], those are the types of airports you can actually can [ export ] [indiscernible] [ clearly ]. So we don't look at it sort of quarter-by-quarter. You sort of model what's coming down the line over the next couple of years, where you can invest and where you can. So I wouldn't look at saying which line can you squeeze the most. The reality is I think it's all part of one big initiative to -- we want to constantly drive our ex-fuel CASK lever. Where we can, we will, but obviously, we want to make sure that we're driving the business, as well.
But, I mean, clearly, just to [wing it] from a structural standpoint, I mean, if we have a few headwinds, and I think those headwinds will continue to affect the business. I mean, labor, our labor inflation pressure is that disruption cost are there, and [ they make ], at least to some extent. But I think they are just looming over the whole industry, actually, and obviously, they are not immune to that. But I think where we [barely come in] in terms of mitigating those headwinds, I mean, clearly, we have the A321 program, I mean, fairly quickly towards the end of this year, towards the end of calendar year '19. Maybe [ we'll ] have the second seat flown on an A321. I mean, that's huge. I mean, if you think about it, I mean, we are converting the business from a 180-seater business to a 230-seater business. That leaves us very significant efficiency and cost advantage.And then, because of stopping the aircraft financing [motions], I mean, we are clearly going to benefit from our credit standing and the broadly available, or a broad available set of options for aircraft finance to materially affect ownership cost in the business. And simply, when you look at our cost base compared to our competitors, this is the one line where we are beaten by our competitors. On every other line, essentially we are outperforming the industry. And we're going to be able to close the gap on that. Obviously, that's a slow motion, because it has to feed through the process delivery by delivery. But after it kind of bids up to a reasonable size, I think this is going to become meaningful. But, the A321 program is already very meaningful, as said. [Half of the three, half of the six] [indiscernible] at the end of the year.
I mean, just elaborating on that, I mean, I'm not sure of any other airline that essentially can almost [rig fleet] from an A320 CA technology to an A321 [mirror] technology. So, structurally, you've got the larger aircraft coming. You've got even another nine seats on the NEO, which is a 239-seater. You've got the financing, which is, again, is a significant job. And then, you've got NEO engine, which is I think at least 16% less fuel. So if you think about structurally the runway ahead, it's a very exciting proposition.
Okay. And then, the last question was around just the 0.7 on bag, and then how that works with [other] quarters, the rest -- the balance of the year, and opportunities to improve that with better management of the opportunity.
So that policy was changed on 20 June, I think from memory, so you won't see any of that, or very little of that, in June. And essentially, that will start kicking in from then on. So you'll start seeing that coming through. We'll need to do there a couple of [indiscernible] that [resisted it], so [it's that] in terms of actually improving the operational side of it and making sure that we get full penetration, but also improving that. And I think the awareness is getting more, as well. So as I mentioned, I think it was 26% is the conversion rate, but we should be certainly be seeing more than that coming through.So I think you should start to expect to see some of that in Q2, maybe the full impact of that coming through in Q3, and hopefully maybe a little bit more upside.
But the 0.7 number was for what?
Incremental. That's the incremental what we're seeing today versus somebody -- so before the policy, what we were seeing people pay for, and after the policy, what we're now seeing people pay for. So, that's an [indiscernible].
And maybe overall on ancillary, do you think in the balance of the last nine months for the year, that can get back to flat per pax?
Yes, I think the team are going to be challenged with that. I think the challenge you have is the summer, which is an important part of the business. But I think achieving the EUR 1 per pax per year year-on-year I think will be unlikely, but flattish. Essentially, that's what we'll be targeting.
The next question is from Jarrod Castle.
UBS. Just a couple of questions. One, can you just kind of come back to ATC? I mean, what is your understanding of what they actually want? And what will that mean in terms of navigation charges if they get what they want? And secondly, just kind of coming back to Q4 capacity, what is your thinking in 2019 at the moment regarding the U.K., given the Brexit? Is some of the capacity reduction related to the U.K.? And then, just lastly, I know it doesn't sound like you're that serious about it, but just any thoughts on current consolidation and M&A? It seems like it's more "have a look" rather than anything that you take seriously in terms of actually doing something.
With regard to ATC, I mean, I don't know what it really means. I mean, I'm not in charge of [indiscernible] their charges. But ATC is protected by law that, on a [cost-plus-cost] basis, what they have, they can push it across and charge it on the industry. But this is against a growing industry, so I don't know what it would really mean. But I'm almost certain that they believe there is a bit of an ATC charge increase rising from [full] stopping and fixing all the disruption and operational issues. We would be a net beneficiary of that, because we would be saving a lot on disruption costs and compensation costs. So I think ATC needs to be fixed. We don't fully understand what cost it brings to the system, but I think the overall cost in the system would come down as a result of fixing ATC.With regard to the U.K., I think we remain very happy on the U.K. We think the market is very robust. We have been growing. I mean, we have been growing more than double-digit in London. We have been growing across the whole of the U.K. this year compared to last year. And this is, against the backdrop of a very big pound. I mean, the pound still [indiscernible] very [close] prior to the Brexit vote. So we have a lot of trust in the market, and, as a result, we continue to develop our business there.We understand that the market itself is not really growing. It's fairly flattish in terms of capacity. But we are truly one of the few players, if not the only one, who continues to push for more capacity. And obviously, this is a sign of success and a sign of solid financial performance.With regard to consolidation, I think it's interesting. It's topical. But as far as we are concerned, we are not involved in anything concrete, but obviously we keep an eye on what's going on. But as we have said before, we don't really have an interest in buying or acquiring failed businesses, or failed airlines. We would have more interest in acquiring markets, or getting into market [indiscernible] failed businesses or failed airlines.
We have one last question from Kathryn Leonard of Numis.
Just two very brief follow-ups. I was just wondering, just on the financing options of the new aircraft and that you've mentioned through the call, I just wondered whether you could give us any flavor on, directionally, what pricing is doing in those markets for financing, and what effect -- you've clearly got a lot of options there, and you've spoken historically about maybe sort of a 200 bp, 300 bp improvement. And I just wondered if you're still seeing that, or you're seeing the directional improvement.And then, just on disruption and the commentary in the statement and the commentary on the call about looking like it will continue into the autumn. Just wondering whether you could update us at all on what you're seeing in the second quarter thus far. You talk about that run rate statistic. So is it [indiscernible] in the run rate and the increase in the three hour-plus disruptions continuing for July and August?
On the financing, obviously, the direction is going in the right direction. I think that getting our investment grade has certainly made them sharpen their pencils, whichever institutions we're talking to. So I would say the -- I mean, in the past what we've said, [there has been a] financing charge on the leases. You compare that to a bond. You're seeing a good 2%, 2.5% [indiscernible] premium pickup on the bond. I think the direction is probably getting even better. So on that, I'm very excited about some of the [upside] of the equation, but I think it's a bit too early yet.We are testing the market. What's important, I think, on Joe's comment, is that we're taking quite a few aircraft. So as long as we make sure we have every avenue of financing open to us, then we get the best possible pricing. Then we'll be taking the opportunities at the right time.In terms of disruption, yes, I would say Q1 was actually particularly fierce in terms of -- or severe, I should say. We are still seeing the issue, so we're not seeing on-time [indiscernible] improve as of yet. Certainly, cancellations I think is probably a little bit less so far in July, so that's certainly happening. But I think the run rate certainly going into Q2, [indiscernible] Q1, is probably a good assumption.
Just one follow up to the financing question. I know it's a little bit early, but you've taken a lot in the call about the structural drivers, in addition to ownership, in terms of the cost base in CASK in the next sort of three to five years. How should we be thinking about that sort of for the next year? I mean, obviously, you're welcome to say it's too early for that, but what sort of areas, including or excluding ownership costs, what [indiscernible] should we perhaps be thinking about?
Well, I think if you -- the size of the aircraft is mathematic, so, essentially, you need 2 pilots to fly A321 versus an A320, so that's an extra 28% seat capacity. You need one extra cabin crew. So by definition, on the crew side, you're seeing a 17.8% unit cost improvement on the crew alone. So that's enough to [draw]. So I think on the structural, these are things that we're seeing. So that's why it's exciting, because these are coming through just because of the [map]. So what you can do is you can go down all those [lives]. I mean, [indiscernible] you were saying A320 versus an A321 is a [indiscernible] unit cost improving aircraft, both on fuel and also on the all-in cost. There are some costs, like on-route costs, where you wouldn't see the full impact because it's slightly heavier aircraft. But there are areas, like the crew, where you'll see a slightly higher structural cost. So what you can do is you can go down every line item, and you'll see some general benefits. But on the whole, the A321 is a 10% lower unit cost-enhancing aircraft. You then add the NEO, and those are nine extra seats, so 3% extra capacity versus the A320. And then, you add the fuel element, which is a higher, much more efficient engine, you're then seeing another 10%. So an A321 NEO versus an A320 [indiscernible], you're looking at 20% lower unit cost. That's before you've even started talking about ownership costs. So again, I think, structurally, it's very exciting, looking forward.Great. Well, thanks, everybody, and we'll be back online with our half-year results in November.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.