Wizz Air Holdings Plc earnings release (before market open)

Wizz Air Holdings PLC Q2 2024 Earnings Conference Call November 9, 2023 4:00 AM ET

Company Participants

Jozsef Varadi – CEO & Executive Director

Ian Malin – EVP & Group CFO

Michael Delehant – EVP & Group COO

Robert Carey – President

Conference Call Participants

Alexander Irving – Sanford C. Bernstein & Co.

Andrew Lobbenberg – Barclays Bank

Ruairi Cullinane – RBC Capital Markets

Jaime Rowbotham – Deutsche Bank

Jarrod Castle – UBS

James Hollins – BNP Paribas Exane

Harry Gowers – JPMorgan Chase & Co.

Conor Dwyer – Morgan Stanley

Jozsef Varadi

Well we are reporting the first half of the financial year, the financial year. So this is April to September 2023. We delivered record profit, over €400 million. I think you have to put that in context of all sorts of external issues affecting the business, proving the resilience of the model. Cash increased to €1.8 billion. We delivered 25% more passengers than the previous year. And when you relate it to pre-COVID passenger traffic, we are up about 50% in the reporting period.

You recall, we told a lot about operations and investments into operations, especially following the experience in summer ’22. We made significant investments and clearly, we achieved significant results coming from those investments. Recently, last 2 to 3 months, Wizz Air has become one of the best performing airlines in Europe in terms of completion rate and on-time performance, and you can see that in the first half. And it had some issues, especially in the June-July period. All in, we delivered 99.2% completion versus 98.1% completion in the previous year. Of course, capacity was up by 27%, 63% versus the same period in pre-COVID year, and that drove revenues by 39% and 83% versus fiscal ’23 and fiscal ’20, respectively.

RASK improved 10% in the period, mostly on tickets and somewhat on ancillaries. CASK reduced overall by 12%, helped by fuel price movements in the market and our hedges, and ex-fuel CASK was down 1%. We will talk about this because I’m sure that you will have questions why only 1%, but you will have to see how the engine issues were sort of evolving throughout the summer and how they affected our operations and put some adverse impact on our CASK performance.

But of course, the big topic is GTF. We just entered into an operational support and financial settlement agreement with Pratt & Whitney. That is significant because that creates predictability for operations, but also it is creating predictability for the offsetting of the financial impact.

We have also taken a number of mitigating actions to make sure that we are protecting capacity going forward. We have extended a number of current aircraft leases, and we continue to take new aircraft deliveries. If you just look at those 2 lines, we’re going to get more than 30 aircraft delivered in 2024 by Airbus, and we will have roughly around 10 aircraft extended on leases. So that’s kind of our way of mitigating the capacity impact of the groundings. As we said, we are expecting to ground around 45 aircraft as of January. We will certainly learn how exactly the program is going to unfold in terms of induction times of engines and recovery times in the shop, but this is a pretty good estimate, the best estimate of the day based on our current best knowledge.

So moving to the next slide, the usual statistics. We are certainly very pleased with our ability to grow the business 25% year-on-year and 50% versus pre-COVID times. I think really, we can say that Wizz came out of the COVID period with strategic gains. We are one of the structural winners of the COVID times, having been able to invest against new market opportunities and solidify our positions in existing markets that has enlarged the footprint of the business, creating a much larger skeleton to continue to grow the business for the long run.

I would also note that our sustainability performance continued to improve. We cut back on our carbon emission footprint quite significant versus the pre-COVID period as well as last year. And just very recently, we were recognized by CAPA, the aviation research institute, for our sustainability performance, being named for the second time to be the most sustainable airline globally, which, of course, we are very pleased with, especially as that ranking is taken based on data, based on comprehensive analysis.

So just back to the GTF matters. I’m sure that you have more questions than answers I can provide, but let me try to recap what it is. So you recall there was Tranche 1 and there is Tranche 2 coming. Tranche 1 had a limited impact on Wizz Air. Only essentially 6 engines were affected, and we were able to cover most of the exposure with spare engines.

Now Tranche 2 is different. This is what we are heading towards. A service bulletin was issued by Pratt & Whitney, which imposes a certain number of cycles for engine inspections. And once you reach the cycle limit, you have to stop the engine in operation. You have to remove the engine. The engine has to be inducted and inspected in a shop and cleared before you can operate the engine again. We were modeling the impact of those. We are expecting around 45 aircraft to be grounded as a result. So 25% of our fleet will get grounded due to the coming issues.

Obviously, it raises 2 questions. Fundamentally, one is operational, how do we operate the fleet? How do we operate the markets? How do we stay competitive with that kind of a magnitude of capacity exposure? And two, how do we account for the financial impact of those?

With regard to the financial impacts, we have a bespoke commercial and financial settlement agreement with Pratt & Whitney. I’m sure you would ask what it is exactly. numbers, I can’t. This is confidential, but you actually can figure it out quite easily. If you read that assessment, the assessment, how much they think will have to be provided to customers and market, and Wizz Air is 10% of the operation of the GTF engine. You just run the numbers, and you’re going to get to it. But it is significant. And indeed, it is protecting the business from a financial standpoint.

But the real challenge coming with the GTF exposure is not financial because we have the protection there with the settlement agreement. It is operational because, of course, we want to protect our markets and we want to stay competitive as a business, and we want to make sure that we fly the capacity required by demand.

Now we will have to learn how exactly this is going to play out. But our best assumptions at this point in time is that 45 aircraft. We have an agreement on induction program. So not every engine is going to be inducted immediately into shops. So there is a bit of a queuing. And depending on the very scope of the inspection, it will determine the shop visit time.

If we just stay with the very issue, the engines are removed for the inspection. That’s roughly a 60-day issue. But once you remove an engine, you do other inspections on the engines too, and that will determine for how long we’re going to take the engine out of service and keep it in the shop. So that varies engine by engine basically.

But we modeled all of that. And we’re seeing that this is roughly an 18 months program from start to finish. And over the course of the next 18 months, our engines would be hitting shops. This is, of course, subject to availability of shop capacity, subject to material supply to the shops, et cetera. But based on our current best estimate, this is what we are estimating.

Later, I will talk about the fleet composition that you understand, how the fleet is growing versus the lines of operations of the fleet because the 2 things veer — go away from each other for some period. We also addressed the Abu Dhabi issue that arose back in 2022. You recall, we had significant operational issues there. We replaced the bulk of the fleet in Abu Dhabi for V2500-powered aircraft. Still a hot temperature, sandy environment affect the operation, not only the GTF, but it also affects the operation of the V2500, but it is just a more mature technology. So you can spread the pain over a longer period of time, and you can create more predictability over the operation of the engine. So this is largely behind us. So we’re seeing that we have an operating platform that is predictable now, plannable, and we can manage it operationally as well as financially.

So I guess one significant fashion comes out of the GTF testimonial is capacity, overall, what this business is going to deliver next year versus the current year. Maybe the best way to put it, this year, we are carrying roughly around 65 million passengers. Next year, we are planning on carrying around 65 million passengers. So we think that we can uphold capacity with the mitigating actions and the programming of the GTF inspections. There will be a little wobbling here or there. So maybe the front end is going to be somewhat lower than capacity, but we’re going to be regaining that capacity over time. As we are coming to the end of the program, capacity will be eased as we would be regaining engines.

So overall, fiscal ’25 capacity is predicted — estimated to be the same as fiscal ’24 capacity, but there might be variations by market, and there might be variations by moms as we would be building up towards that. And with that, let me turn it over to Ian.

Ian Malin

Thank you, József. All right. So the 4 key themes that we keep on hearing that I want to address today are in terms of our ability to consistently deliver profitability, something that was tested over COVID; our ability to control costs and to keep them in a downward trajectory; the yield outlook; and liquidity.

So in terms of the financial performance, despite adding 27% more capacity through ASKs, we managed to grow revenue 39.1%, €3 billion in revenue for the half. So there’s a number of milestones here for the company. So record revenue, record capacity, record passenger size, and as a result, we delivered €878 million worth of EBITDA. If you look at our fuel costs, they’re actually down year-on-year as a factor of both fuel price and, of course, our hedging policy. But our EBITDA was 4x as big as it was this time last year. So we’re bringing that profitability back, and our EBITDA margin is 29%. So pretty respectable results for the half when it comes to EBITDA. And in terms of net profit, €401 million, again, a record number, something we’re pretty proud of.

In terms of cash, €1.84 billion as of September 30, and that’s a 20% increase year-on-year. So we’ll look at cash later on as part of the liquidity theme, but overall, a respectable performance. So despite some challenges, we’re growing pretty rapidly, and that’s a feature of both better operational performance and the growing fleet size until, of course, the Pratt issues hit us.

In terms of revenue performance, so that’s the feature of our yield and our load factor. So the 27% capacity that I mentioned on the last slide, that would normally put a lot of pressure on yield, but we’re still bringing our revenue per available seat kilometer up 9.6%, so 4.91% versus 4.48% last year. The increase comes in the form of ticket RASK 17.4% up, and ancillary was close to €1 per passenger year-on-year. So we’re still delivering in line with our anticipated trajectory there.

Load factor was up to 93%, so almost 6 percentage points higher than last year and overall holding, as you can see from our traffic statistics notwithstanding the capacity that we’re adding to the system. Our ancillary products continue to evolve and reflect where we see demand and what we do there in terms of pursuing artificial intelligence and machine learning, continues to be something that we find a lot of focus on and we’ll focus on, especially as we enter into a period of potentially slowed growth as we work our way through the engine issues.

Unit costs. As you know, we’ve set a number of KPIs in terms of where we want to be operationally, and utilization is, of course, a very important part. Our utilization for the half is 13 hours in ’22, so significantly better than last year, 11 hours and 49 minutes. However, it is lower utilization than we had expected. That was driven by the issues such as engines. So we had non-powder metal-related issues plaguing us throughout the summer as well as the general disruptive issues that the industry faced all summer, and that drove higher disruption costs. Disruption costs driven by cancellation, by delays, disruption costs then imposed on us by EC 261 costs. And as a result, that then drove crew inefficiency and other areas. So the big areas where we saw cost pressure this year was on staff disruption and a few other areas. Certainly, distribution costs change as the mix of our airline evolves. And when I say mix, our geographic mix, and overall, our crew costs are also impacted by that as we move from different cost bases and certain tax consequences associated with that.

So our ex-fuel CASK for the half was lower or just under 1%. We’re pretty excited about having this landmark deal with Pratt that I think we’re the first one to announce, and that will address the costs associated with the engine issues for the foreseeable future. And then when it comes to the overall cost pressures that the business faces, we have been able to show completion factor, on-time performance, dramatically improved by the investments that we made in our business over the last 12 months. And so the August onward numbers, August, September, October, November, we’re seeing significantly better completion factors, better performance. And as a result, we’ll actually eliminate the opportunity to pay compensation costs by actually delivering the product. And so that will deal with disruption costs. And that’s why we’re confident going forward that our ex-fuel CASK will continue to reduce.

In terms of cash and liquidity, you can see we’re actually generating more cash this year than last year, which makes sense considering we’re a bigger business. I think the important point to note is that we were able to receive confirmation from Fitch that our investment-grade rating holds. So no change there. We have conversations with Moody anticipated later this month to begin that journey towards their credit committee. And in terms of our net debt, it’s flat year-on-year, but our leverage ratio has come down dramatically from 27x last year to 5x. And that is expected to continue to reduce and delever the business as profitability continues and we satisfy our debt obligations. So liquidity was healthy and leverage is reducing. In addition, we’re in a position now of a positive equity on the balance sheet versus where we were before. So that helps overall on the balance sheet.

In terms of free cash flow, you can see over pre-COVID to post-COVID, we’re starting to generate a lot more cash through EBITDA cash conversion. Working capital is an area that we’re spending a lot of focus, especially since we go into the season. And we’re very focused on in terms of being disciplined due to the obligations we have. But that being said, we have tools in place to get through the low point. So obviously, the cost element of the impact of engines from Pratt are now dealt with through our compensation agreement. We have our PDP facility in place to address any shortfalls in terms of our comfortable cash minimum levels, and then we have the ability through the winter now with taking capacity out of the system, so no longer having to deal with 27% growth, but maybe flat growth is to be able to generate cash from terminating or suspending cash negative routes and yielding up on our fares.

And so overall, the outlook for the winter looks stronger than it has because we’ve managed to address the costs through operations and through compensation. We’ve managed to enter into an environment where we can price up due to scarcity and overall, the demand looks well. So that’s where we are on the financial side of things. I believe that’s my last slide, and I’ll hand the floor back to József, and I’ll look forward to your questions. Thank you.

Jozsef Varadi

Thank you, Ian. We were talking about all these external challenges affecting the business. And I would just want to recap those and kind of the ways how we are mitigating and them. We have told a lot about the GTF issues, and I’m pretty sure that we will have ongoing discussions around that as the program evolves and we’re going to learn how exactly it’s going to unfold. But we have taken a number of initiatives. So we are trying to be as proactive as we can be with regard to the issue.

So I think we are probably the very first operator coming up with a settlement agreement and announcing a settlement agreement with Pratt & Whitney. We definitely wanted to create predictability and visibility around the issues on the one hand, and two, you can imagine being one of the largest operators that you get treated by the OEM accordingly. We have also recasted the network as such that we maximize the benefits of the new operations, whatever is left on that after the groundings, and we put the new effort on longer sectors to optimize the performance of the entire fleet and as said, we have taken a number of initiatives to protect capacity through the extension of existing leases.

As in the second group of external is geopolitics. If you just look back over the last 20, 21 months, so we started with the war in Ukraine last February, then we went through some events between Romania and Azerbaijan, and we operate both countries. And here we go now in Israel, where actually Wizz Air is the largest international carrier. So we have a significant capacity deployed to the market.

I think we have kind of learned by now how to best deal with events like that. I mean simply when the market becomes closed or unsafe, we withdraw capacity and we reallocate that capacity. And we do that with a very high degree of efficiency very quickly. I mean there is a short-term impact, of course, because you need to create some sales lead time. So probably 6 to 8 weeks, you will have capacity on the ground. But once the capacity is reallocated, you will start building up the franchise again and you will start earning revenue on that capacity. I wouldn’t say that this is like totally routine to the business, but fairly routinized. When things like this happen, I think we know how to deal with them.

Fuel costs. Well, this dynamic is better than me out there in the marketplace. We have resumed our hedging program and that hedging program is now totally effective similarly to the times before suspending it. So we are back in the game with that regard. And let’s not forget that as we continue to make new aircraft deliveries, we benefit from the fuel efficiency of that technology of that aircraft. And I will have a slide, I will show you that actually this is a significant benefit derived from the fleet renewal program.

Macro uncertainties, I seem to keep talking about that. Is the world in recession or not and how demand is affected. I’ve done a few interviews this morning. I mean if I just want to summarize it, people say that, okay, fine, we understand summer. How about winter? But the same questions have been posed year after year. So there is, I think, quite a degree of uncertainty in the minds of people looking at demand on a lot shorter term basis than longer term. We have a very diversified network. And believe me that the view of life is very different depending on where you are in the planet. So there is skepticism in Europe, especially in Western Europe. Central and Eastern Europe is doing better than Western Europe with that regard.

But you go to a country like Saudi Arabia or the United Arab Emirates, I mean, those countries are sparkling. I mean they are taking benefit of the times. Trade is up. The incomes are up. People are spending. And as in the more diversified you are, the better hedged you are against these macro uncertainties.

But all in all, we are seeing demand robust. We are not seeing any significant changes. We’re seeing that people are going to fly. They have the money to spend, and demand remains intact overall. And then you have all these industry challenges. I mean, we made one significant investment. We made a lot of investments, but one very significant investment that we decentralized our operating model. So going from like one airline approach towards a multiple airline approach by having 4 AOCs. Those 4 AOCs have been solidified and are very robust. They have matured a lot.

And clearly, if there is an issue in one place, we are able to isolate ourselves from that issue in other places. And we have invested a lot of management capacity and leadership capabilities against that model, and we are clearly benefiting from that.

Also, we added more support to the operations in the form of more spare aircraft and more spare crew to make sure that the recovery process is aided capacity-wise as well, just simply not relying solely on the improvement of the supply chain. But if it doesn’t improve, that we are still not dependent on the matters, but we can affect them directly over our own base. And you will see the operational results have been largely improving as a result.

So moving to the next slide. I just want to address a few points quickly that you have better perspective. So let’s start with operational performance. This is showing the 2 major KPIs, on-time performance and completion rates. Now we don’t have the industry numbers on this chart, but the industry has been coming down on performance structurally. And this is the function of the underperformance of the supply chain. So you take on-time performance, the industry performed a lot better overall in 2019, then how it performs at the moment.

At that time, ATC was intact, airports were intact, handlers were intact, maintenance providers were intact. They all deteriorated to some extent. So I think you have to take that context. But really, what we are trying to demonstrate here is, first of all, there is a significant rate of improvement year-on-year. You can see the kind of the light blue line, this is last year’s performance. The red line is current year, and the dark blue is pre-COVID performance. So you can see that we are in between last year and pre-COVID. So we are trending up a lot better than last year, but not at the level of pre-COVID times. But again, the industry is not at the level of pre-COVID times.

If you look at completion rate, we made a huge investment into completion rate. We prioritize completion. We’re seeing that the customers have to fly. They pay for it because they have to fly and we need to make them fly. So you can see that we are starting to really come back to pre-COVID performance levels, above internal target of 99.5%. And I can tell you that if I take August and September, actually Wizz Air was the best-performing airline in Europe. No other airline achieved higher completion rate than Wizz Air, and we were consistently beating our low-cost peers, the other low-cost carriers.

So really, what I’m saying here is that we made significant investments into operational resilience into operational KPIs, and you can see significant improvements coming through.

So this is about utilization. I mean utilization is cornerstone to the business model. We are still not where we need to be relative to pre-COVID times. Some of it is provisioning for the supply chain inefficiencies. So the business had to carry more slacks, more spares as a result of the problems given our strategy . And also the Pratt & Whitney engine issues started to come in, in our operations already early summer. So we started grounding aircraft. And as a result, those groundings were eating up spare capacity. So we had to create more spares, and it kind of started creating a liquid effect.

Now we improved our utilization actually quite a bit versus fiscal ’23, but you see there is still a gap to fiscal ’20, and this remains our benchmark where we want to go back to. So load factors continue to rise. This is all in context of very high growth. So we are up more than 50% versus pre-COVID capacity, 27% versus last year’s capacity. So all these load factor numbers need to be seen in a very high growth setting. And obviously, that puts some pressure on load factor performance on short term. I mean over time, we will recover that, but short term, some pressure. But it is improving and it’s coming back to standards. Ian noted fuel efficiency. And I also took note of the fact that it is not just hedging, but we are operating a better fleet of aircraft for fuel burn. You can see that the technology essentially offsets the impact of ETS and emission costs in the system.

So primarily, we are relying on technology. Hedging is good for eliminating short-term volatility, but the real game is technology. And when you compare our fuel burn performance to our peers, this is where we are winning very clearly. We are outperforming the entire industry on fuel performance and fuel burn.

So talking about the brand, it’s almost like 2 categories of markets, the established incumbent markets, the home run in Central and Eastern Europe and kind of the new markets in Western Europe and the Middle East. You can see that we are very consistently performing in Central and Eastern Europe, very high awareness levels. Obviously, after 15, 20 years of operation, you should be expecting that. But very importantly, we have been gaining a lot of ground in Western Europe and in the Middle East. So our awareness continues to rise very steeply.

Market share is very important that in the reporting period relative to previous year, we continue to build market share. So now we are up to 24% of the total of these markets versus 22% a year ago. And fairly consistently, our market share positions have been enhanced in most of the markets.

So this is important. I’m trying to explain it to you because there are 2 lines now we need to track. We used to be showing this to you and you were able to model it kind of easily that, okay, we will grow in the fleet. We are going to fly more capacity and then you derive your numbers from that. continue to unfold. So nothing is really changing with regard to long-term fleet growth. It’s as intact as it used to be. Actually, short-term fleet growth is enhanced through the extension of existing leases.

But the lines of flying, we are not [indiscernible] because of the groundings. So you’re going to have a bit of a depth here. So starting in the back end of ’24, fiscal ’24 throughout fiscal ’25, you will have a reduced number of lines of flying as a result of the Pratt & Whitney issue. But why this is important is that we might be flying, say, 40, 50 less aircraft in fiscal ’25. But once those aircraft are cured and cleared and the engines are back in line, the following fiscal year, we are going back to 287 aircraft. So this is going to be a significant growth year because virtually, we are gaining engines back and also we benefit from the supply of new aircraft deliveries. So when you look at the GTF engine, this is a short-term issue, not a long-term issue. It doesn’t affect the trajectory of growth for the business.

And last but not least, sustainability. As said, we are happy to be recognized as globally the best-performing airline sustainability-wise. We have, as I said, made significant investments into SAF. We are coming up with commercial contracts with producers, but also we are making equity investments there. We think SAF is probably going to be the bridge between now and 2050, when we would be expecting a brand-new propulsion technology coming to the market in the form of hydrogen-powered aircraft. But this is not a short-term matter. This is more of a long-term matter. And we look at how best we can affect the SAF program.

Changing gears. We appointed a new Director to the Board, Ms. Phit Lian Chong from Singapore. I think she brings in another perspective, a more Asian perspective. And you see that we are expanding in Asia, and we are trying to enhance our corporate standing with that regard.

So moving on, I guess, this is something of interest to you, although not a lot of change. With regard to capacity, we are reconfirming our previous guidance. You recall, we issued an RNS in September. And at that time, we effected the capacity guidance with the unfolding Pratt & Whitney issues, and we are reiterating that guidance. So we are expecting the second half of fiscal ’24 to be up 20% year-on-year in the construct of 25% in Q3 and 15% in Q4.

With regard to load factor performance, we are expecting to fall in line with recent trends above 90%. Actual cost to remain on the same trend what we are reporting for the first half, so lower than a year before. And we narrowed the range on net profit. We had €350 million to €450 million. We are putting it into €350 million to €400 million. I mean, obviously, we had to take all the issues into account, the war in Palestine, process of Pratt & Whitney matters, and we’re seeing that this is a better reflection of our current best knowledge of the situation and the corresponding performance of the business. And that concludes my presentation.

Thank you. So please go ahead with your questions.

Question-and-Answer Session

Q – Alexander Irving

Alex Irving from Bernstein. Starting with the GTF bans. How does the aircraft on ground evolve from March, to go up from there, stop go downstream way? Is there a pause? And when do you expect that to go to 0? Second, also on the GTFs. I mean, we’ve seen one of your U.S. peers who operates GTFs say the planes they haven’t yet docked are also going to have problems in the engines. Is that the same for you? Or when you get your deliveries, the engine is fine? And then third, how do you expect this to impact your unit economics into next year as the RASK impact the past impact about your network, having your planes to operate?

Jozsef Varadi

Alex, good questions. I expected to have more questions and answers on the GTF. So look, I mean, as said, it is about an 18-month program. So maybe the best way to think about this is that around number terms, we have 200 engines perfected, which will have to go through inspections at one stage, not all falling in January, because depending on when the engine reaches a cycle in it, will have to be removed, and will have to be inducted into shops. But total exposure, 200 engines, okay?

I think we’re probably going to be inducting something between 24 to 30 engines a quarter. So if you run the numbers, probably, this is like a 6-quarter program. So that’s why I’m saying that this is an 18-month program. And depending on the very scope of the engine inspection, it can be anything between 2 months to, I don’t know, 6 months.

But against that, you have protective capacity like extension of leases and an increased pool of spare engines. So this is not all net negative because there are some offsetting mechanisms. So we are getting a lot more spare engines from Pratt & Whitney as a result of that.

So the exposure is going to be reduced. And obviously, capacity is protected through the lease extensions as well. So this is a long program. So this is not going to be resolved very quickly. So we have to plan smartly around that, and we are doing it. And that’s why it was very important to enter into this agreement with Pratt & Whitney, not only for the financial settlement, but also it has a lot of operational support elements in terms of induction slots in terms of managing capacity and all those sort of spare engines, et cetera.

With regard to the new aircraft deliveries, well, the engine deliveries will not be totally clean in the short term, but they will become clean at one point. And this is something what we are trying to clarify as we speak, but sometime during 2024, Pratt will or Airbus will deliver clean engines to the market. But in between now and that point, there will be still engines that will remain subject to inspection once they reach the cycle limits.

Unit costs, of course, that’s not happening, because we are going to operate less efficient aircraft, impact, and we will be grounding our most efficient aircraft due to the entry and expansion. So I think this is going to put some short-term pressure on cost performance. But again, you have to look at it from at least a medium-term perspective, because like through the 18-month cycle, we’re going to be out of this and economic efficiency will be reinstated actually even at a better level, because by that time you will have a lot more old aircrafts out of the system, a lot more new aircrafts delivered to the system.

RASK, this is supply and demand. If you contain supply, obviously, that helps your pricing performance. Assuming standard demand or unchanging demand, intake demand, we are not seeing anything that would suggest that demand is changing or portfolioing. So yes, as we are containing ourselves, we should be benefiting from that through pricing through RASK.

Andrew Lobbenberg

Andrew Lobb from Barclays. I’m really respectful of your need to be careful on what you communicate on the settlement, but I know everyone and we’re all very curious. So when you were giving your prepared remarks, can you just repeat what you said is the best place we might go to try and do our homework to model it. Did you say to look at the RTX and your share of the fleet, or was it to look at something from the credit upgrade? Can you give us that. On timing, what can you say on timing? When will this compensation be booked to your P&L? When will it be booked to your cash flow? And how would it be accounted? I know you’re going to be constrained on what you can say, but I’ve got to ask.

Jozsef Varadi

Yes. So please appreciate that we are bound to a confidentiality agreement. So I cannot tell you what the deal is, okay? But just trying to be helpful, I think RTX has made a number of communications to the market protecting the financial support they need to put in and invest into their customers. We are 10% of those engines in operation. So I think you can figure out a number and I think it will be probably fairly close to the realities. I cannot say anything more than that.

With regard to the operation of the compensation of the settlement, I mean, this is as is where is. So basically, as the cost incurred and the compensation kicks in, it’s going to be immediately settled month by month. So this is imminent. So this is not like put into long-term credits or anything like that. This is imminent cash, immediately paid, immediately booked.

Ruairi Cullinane

Ruairi Cullinane, RBC. Perhaps on a slightly different track. Ancillary RASK up quite modestly. Please could you talk around that, What’s performing well, what isn’t. Would you be able to give us any unit revenue guidance in terms of Q3?

Ian Malin

So in terms of ancillary RASK, I touched upon that when I was doing the slide. So we’re seeing, obviously, strength in the ticket RASK, but on an ancillary RASK, you wouldn’t expect to see much similar growth rate, but we are still on track with our €1 per year progression on that side of things. And so there’s no issues there. I think we see different opportunities at the start of the year to price more versus less. And so no concerns there, and we still continue to be very excited about our ancillary business.

In terms of unit revenue for Q3, we are waiting and evaluating the impact of all of these things that we’ve been digesting over the last basically 6 to 8 weeks. So making sure that we understood the impact of the service bulletin that came out on Friday, getting the deal across the line and making sure that we are able to book it where we want to book it and treat it the way we want to treat it.

We also have other things that we have to factor in like the Tel Aviv situation and the Palestine situation and making sure that as a result of our new business, which is a world that we haven’t seen in a while, right, we’ve been growing very fast for quite a period of time. And now we’re having to look at things from a perspective that I don’t think many of us have ever seen, having to take that kind of capacity out, other than maybe COVID, but of course we didn’t have the demand environment in that perspective.

So we want to make sure that we look at our overall revenue guidance and revenue picture in the context of all these moving pieces rather than simply coming out with a number that we then have to correct. So we’re taking a cautionary approach on revenue at this point. But as Joe said, earlier, the demand environment is still robust. We’re not seeing a decline in demand, we’re just not yet prepared to quantify that.

Jaime Rowbotham

Jamie Rowbotham from Deutsche Bank. Three from me, please. Just if you talked about protecting the capacity in the face of these unprecedented GTF challenges, you’ve clarified that overall capacity is potentially going to be flat year-on-year next year. I’m just trying to get my head around to what extent what you fly in fiscal ’25 might look different to ’24, as you said, aircraft being out of sync with the flying lines. Any more color you can give us, I know it’s difficult, on that would be helpful.

Secondly was just to come back to Alex’s point about contaminated engines potentially being delivered to you in the early part of 2024. Given the time it takes to get engines inducted, given that they have to complete certain numbers of cycles before they have to come off wing, isn’t there a risk of a significant number of engines being grounded in calendar ’25 affecting fiscal ’26.

And the last one, coming back to the near term, did you receive some compensation from Pratt in Q2? I noticed the net other income was higher than normal and the notes mentioned supplier credits? And if so, is that where we should expect to see it reported going forward?

Jozsef Varadi

Okay. Maybe starting with the last point, yes, we have received compensation, and we will continue to receive compensation as we move forward. As said, I mean, the compensation scheme post agreement is basically even as is where is. So if an issue happens, we’re going to get compensated for that.

So back to protecting capacity. Indeed, the ’25 or fiscal ’25 network is not going to be exactly the same as the fiscal ’24 network despite the flat capacity what we are expecting, because we have been investing in certain markets and we are protecting those investments. And we will have to kind of discuss certain other markets in order to be able to achieve that with flat capacity.

But the way we try to do that is not to go overboard either side. So we have taken a few principal decisions that we want to maintain the footprint and the skeleton of the business. So we don’t want to start closing bases, countries, whatever they are. But that is going to be capacity alterations. And when we are talking about flat capacity, please don’t take it like it’s going to be flat every month throughout the whole year. So you will be seeing some variations of capacity, especially early part of next year is going to be somewhat down on capacity, but kind of the later part will be up because we’re going to be regaining some of the engines. But it will be different, not dramatically different, because the footprint is going to be maintained, but somewhat different, but we try to contain the exposure either side.

With regard to contaminated engines, still to be delivered new. Yes. I mean, I think we will have to learn. This is something which we don’t fully understand at this point in time. I think what we know right now is that the engines delivered new are not yet clean. But we don’t know when the cutover is going to be. So we have to learn that. So we don’t know how many engines we are talking about. But that is another program in the backdrop, which I think is significant that Pratt stepped up to enhance their spare engine deliveries to the operators. So we might be able to offset all of that or most of that, I don’t know. So I think we just have to learn what the issue is and how to best mitigate that issue.

But Mike, I mean, correct me if I’m wrong, but we are expecting 2024 to be the turning point at one time to see the engines coming clean.

Michael Delehant

Yes. I think roughly midyear. They’re still working through on when that will happen. I think kind of related to Europe, when we see a subsequent hit. I mean, remember, right now the grounding is driven by everything kind of quickly now based on cycle counts, but you have to look at when the engines start coming back, they won’t come back in one giant chunk. They’ll be coming back incrementally. So any subsequent inspections will be more naturally graded as you move through the cycle, so we shouldn’t see a big hit again in the following period.

Jarrod Castle

Jarrod Castle from UBS. Two or 3. Just thinking about MENA, largest exposure of low-cost airlines. You spoke about parts of the region which are doing very well financially. But clearly, as a region, the risk profile has gone up. So do you think differently about the opportunity and also differently about kind of the Eastern expansion opportunity just given what seems to be higher risk? .

I mean, I know you’re kind of cautious in the questions been asked before, but can you give a bit of an indication what has actually been booked for 3Q? Lufthansa said 80%, IAG 75%, very high levels for Ryanair. And at the very least is RASK looking positive at the moment.

And then just lastly, are these going to eat your lunch, frankly. I mean, no growth in ’24, ’25, you’re coming back in ’26 with massive growth. By then, others could be on their route. You might be entering new routes. What is that going to do to your pricing outlook, even though capacity looks restrained?

Jozsef Varadi

Yes, just to clarify the last point, I don’t think we are saying that no growth in ’24 and ’25 and huge growth in ’26. First of all, I was talking about fiscal ’25, fiscal ’26, so fiscal ’25 ends March ’25, and fiscal ’26, March ’26. And already, I think maybe the best way to think about this, if you want to kind of really pin this down that I think in the first half of fiscal ’25, so this is next summer, we’re going to be somewhat below previous year’s capacity. But in the second half, we will be already up against previous U.S. capacity. And gradually, we’re going to be regaining that kind of a trajectory, what we originally put forward.

And in fiscal ’26, so summer ’25, winter ’26, I don’t think we’re going to be seeing a lot of the GTF issue still. This should be beyond that. Because again, it is not just the recovery of the engines, but it is also the spare engine line, which is hugely enhanced. I mean, we will have dozens and dozens of spare engines coming to create another protective layer for capacity.

So with regard to the Middle East, I mean, I really don’t want to get into politics. But yes, I mean, you may argue that, that part of the world may be less settled from a geopolitical perspective. But having said that, I think the situation is actually fairly well contained yet. And if I look at demand, I mean, we are not seeing change in demand in Saudi or the UAE. I mean, the demand, of course, affects Israel in a big way, and to some extent, the neighboring countries like Jordan and Egypt, but not really further. So we are not seeing a profound impact on demand in Abu Dhabi, for example.

I think the risk profiles of the markets are different. I mean, the Middle East certainly is a vast creation, high-growth market, which will stimulate travel for the future. And with that regard, I think it’s a good spot to be at from our standpoint. Maybe the geopolitical profile is more intense in that part of the world.

And then you look at Europe, I mean, I think the European problem is that Europe is growing increasingly bureaucratic, increasingly burdensome, low growth overall. So that will I think curtail demand a lot more. So it’s a predictable jurisdiction, maybe less prone to geopolitics order, we don’t know. So I think it’s just a different profile of markets. But one of the things that we have been learning over the years is that diversification is a good strategy. And we are clearly seeing that, for example, demand remains very strong in Central and Eastern Europe, and there’s a home run for this even under challenging macroeconomic circumstances. And I think it’s good to have your eggs in different baskets.

With regard to bookings, I mean, Robert, you may comment on that, but we are not really seeing any profound changes in the booking profile.

Robert Carey

No, I think no changes in the booking profile. We’re seeing healthy demand coming through, as Ian mentioned earlier for Q3. So nothing abnormal there.

Ian Malin

Yes, I think I would add just on that. So if that’s what we’re seeing for 27% — 25% capacity guidance guiding for Q3. If you look at the rest of the competition, they’re seeing healthy yields for Q3 with maybe single-digit capacity growth. So that then further emphasizes or underpins our expectation as to what will happen in Q4 and onwards when we take capacity out of the system. We’ll be able to increase our revenue that way.

James Hollins

James Hollins from BNP Paribas. A few clarifications really. Obviously, you’re limiting capacity full year fiscal ’25. Am I right in thinking you’re implying that’s mainly reduced frequencies rather than anything regionally or closing basis? And where regionally might those frequencies be coming down or relative to the growth you might have put in, I suppose, is the question.

Secondly, József, I think you talked about inspections taking 2 to 6 months. My belief was some of the wing to wing inspections went out 300 days, being talked about by Pratt & Whitney. I was wondering if you could sort of clarify your thoughts on me just being stupid. And then the final one, maybe talk about what you’re seeing on wet lease and engine lease rates, what trends you’re seeing there, and whether it matters if that’s just part of the compensation if they’ve gone through the roof?

Jozsef Varadi

So maybe just to clarify the inspection. So the current profile of engine shop is that you remove the engine, it takes 3 months to induct and it takes 6 months to go through the shop. So it’s a 9-month process. That’s the current profile. What I was saying is that I excluded the induction from this equation because induction is now agreed with the press. So we have a process how to induct, but if you look at the very scope of the issue what they are inspecting with the recourse is 2 months, is 60 days. But I’m saying that when you remove an engine, you are not going to do a 60-day inspection of one issue, you’re going to be incorporating a number of other issues. So that’s why it can be extended to 6 months, what we are observing at this point in time. And we shall see what issues to deliver. So that’s how to read the 2 to 6 months.

Now with regard to the lease market, of course, it’s through the roof. I mean that’s an opportunistic market anyway by its nature. So when there is demand, of course, there is a lot of demand for used aircraft, for V2500-powered aircraft. But we are not really subjecting ourselves to that. But first of all, we are getting supply of engines ourselves directly. And we definitely — I think Pratt is making the right call to support operators as opposed to supporting a speculative market. And when it comes to that lease, actually, we have not even been contemplating that lease.

We are pursuing lease extension on our own aircraft. And most of actually those lease extensions are precontracted. So there is a formula that if you extend, what the terms of the extension are, in terms of economic terms and operational terms, et cetera. So we are not really subject to this kind of revenue changing market environment on the leasing side. But we are, of course, keeping light on what’s happening there. I mean, it’s through the roof.

James Hollins

Just comment more on that point.

Jozsef Varadi

So yes, I think relative to where lease rates were on older aircraft now versus then, they’ve increased. But relative to what we’ve been paying, because we took the aircraft in as new aircraft, it’s cheaper. So you see cost savings for us by doing so. And on top of that, we otherwise would have had to redeliver those aircraft, which means putting them through a whole bunch of maintenance activities where we see supply chain challenges and high rates currently, obviously inflationary pressures. By deferring that, pushing down the road, we benefit from not having to incur those costs right now, especially because some of the maintenance requirements are only required because of contractual reasons and not because of technical reasons.

So that’s a benefit that you’ll see by exercising these extension options.

Michael Delehant

So with regard to managing capacity for fiscal ’25, yes, it’s going to be largely on frequencies as opposed to a basis for markets.

Harry Gowers

Harry Gowers from JPMorgan. I’ve got two questions. First one, sorry to ask another one on RASK. Can you just clarify, you’re just going to be compensated for fixed cost of any aircraft which is grounded for a period of time? Or is there anything else we need to think about included in the compensation package? And maybe just going back to James’ point, obviously, there’s a direct cost there, but will you get compensated for some of maybe the indirect costs that come with it. So for example, if there’s a cost which comes with extending leases on your existing aircraft as well? And the second one, are you able to quantify maybe any of the cost benefit that you could get from Pratt over the second half of this year, which is going to help towards the €350 million to €400 million of net income guidance?

Jozsef Varadi

You are playing salami on us. And you tried to pin us down from another direction. I’m sorry to disappoint you, but I’m not going to be able to reveal anything that is commercially sensitive. We have a robust financial settlement program, but I cannot go into details to what extent this is direct or indirect. And with regard to the second half, I mean, it is significant. And as said, the problem with this is that we are not going to be able to guide you exactly on the number, because the number will depend on the number of events, number of days. Actually, we are affected by the inoperation of the engine. So we’re going to keep reconciling these matters as they occur on a month-by-month basis, issue an invoice to Pratt and they will pay us for that.

Conor Dwyer

Conor Dwyer from Morgan Stanley. I think this question probably will feed a bit into the Pratt issue as well. But just in terms of the guidance, you’re obviously guiding over €350 million to €400 million for the full year. H1 has been €400 million. So close to breakeven in H2. Consensus before this morning, I think, had you materially worse than the breakeven level. I think it was closer to about €200 million. And this quarter, we’ve missed the consensus run rate. So I’m just wondering how you square that in terms of the building box there.

I mean, is pricing holding up much better than everyone is anticipating, because unit costs, frankly, seem to be tracking a little bit worse than expectations. Is there a big fuel tailwind that you’re expecting? Obviously, that’s been weakening a bit, or indeed revaluations from dollar? That would be helpful. And then in terms of the FY ’25 going into next year, and I accept obviously you’d be getting quite a bit of compensation, but surely going from the current run rate of growth, you’ve done quite a bit of staffing. My expectation would be there’s going to be quite a bit of upward pressure there on unit costs. How do you expect that to kind of track into next year?

And the year after, we’ve got this huge jump again in capacity as all those planes come, and I suppose the worry there is, you’re kind of increasing the breadth of the network all of a sudden, again. Does that not put significant downward pressure on unit revenue then? So my thinking on that is when do we get to a level in your view that we’re at a kind of normal level of profitability for this business? Is FY ’27 probably a fair anticipation of that? And actually, how do you think the margin of this business looks like versus pre-COVID? I mean, it was high 20s EBITDA margin pre-COVID. Do you think that’s still achievable by then?

Jozsef Varadi

So let me deal with the second question. Ian is going to address the first one. So I think you’re right that fiscal ’25 is going to be a cost challenge, a unit cost challenge, and fiscal ’26 is going to be a RASK challenge. The cost challenge will come on the suboptimal fleet composition, the suboptimal lines flying, deciding from the Pratt & Whitney issues. And fiscal ’26 is going to be posing a challenge on very high growth, but it will be on a totally different setting on unit cost. So I think unit cost in ’26 should be certainly helping us offset the pressure on cost to a large extent, if not a full extent.

I mean just imagine that fiscal ’26 fleet, which is basically largely fully converted into A321s and into A321neos. So you’re going to be flying the best technology available in the market with the highest gauge of aircraft relative to the industry. I mean, this is immense, by design, unit cost advantage versus anyone else. And that’s going to be the context against maybe the RASK pressure.

But with regard to the RASK pressure, I would just note that please look at it like — so if you take the market footprint of this today, it is constituted of 2 distinctly different elements. The incumbent markets, Central and East Europe, basically, and kind of new markets, some of it is in Western Europe, some of it is in the Middle East. I mean, we maintain that footprint as we speak. So it’s not like that we are trying to channel that growth through one market or a few markets, but we’re going to be spreading that growth.

And in a way what we are seeing already is that actually markets are lined up for growth. I mean, we could deliver more growth today. And in terms of how that translates into margin performance, I mean, to be honest, I’m not expecting a huge deterioration of market performance, if any — margin performance, if any, versus the current financial year.

I mean, the current financial year is not going to be back at optimum margins due to all the issues what we are facing. But I think in fiscal ’26, you should start seeing consolidated margin performance coming out of the business. And even if I take the next financial year, due to the settlement agreement with Pratt & Whitney, I don’t think you should be expecting margins to be under huge pressure.

Ian Malin

Okay. So in terms of the building blocks for the guidance. So first of all, we’re not in the business of speculating on fuel price or FX price. So if there’s a benefit there, that’s great, but that’s not something that’s we’re building our guidance off of. So resisting the temptation to get into the details of the Pratt deal, we have to assume that the compensation is there to cover the cost of grounding. That’s why we have a deal. That’s what everybody has been consistent in terms of talking.

So if you are able to neutralize the grounding cost. Then what you have basically is an airline that is more or less, between now and next year, the same size airline, albeit without the pressure of growth. So we now have the ability to take capacity out — or not have the ability, we’re forced to take capacity out. There’s no cost to doing that because of the compensation from Pratt, which means that we are able to focus on those routes that are both cash and profit negative initially.

So you take those out of the system. You start with €401 million for H1. You have, say, to get to €350 million or €351 million to play with at that point. You have no cost of the grounding of the aircraft. And you have the ability to take out unprofitable routes, especially at a period of time where you would normally experience that because of the seasonality. And on top of that, you have the revenue upside that you’re able to deploy to those lines of flight that are flying. And so that’s how we get to ultimately the confidence to maintain that guidance.

Jozsef Varadi

And just one other point on the hedging, right? So the hedging is based upon — our hedging program was built based upon our anticipated volumes pre-Pratt. As a result of now taking capacity out of the system, our hedge protection increases. So should fuel price increase during this period, we’re actually better protected, we have more of — and you can see in the numbers now 70% for the next 6 months on fuel. So we actually have more protection than we otherwise would have had to offset that fuel pricing.

Operator

We’ve got a question from James Goodall from Redburn Atlantic. In fact, two questions, which you may have covered to an extent. Do you expect to grow earnings in full year ’25 on flat capacity and with the compensation? And his second question, when all the capacity comes back online once the GTF issues unwind, the full year ’26 year-on-year growth rate will be enormous. How will you deploy this capacity growth profitably?

Jozsef Varadi

We are not guiding on earnings. So I would not like to get into this at this point in time given the variability of issues on hand. I think we need to work ourselves through it. But to be honest, as far as I’m concerned, I mean, I don’t think you should be expecting dramatic changes on earnings. With regard to ’26, as we covered this, yes, it’s going to be significant growth. But at the same time, it’s going to be against a significantly reduced cost base, because by that time we would be fully benefiting from the renewal of the fleet and the gauge of the fleet towards A321s, which will be a huge offsetting mechanism against the kind of the year pressure arising from growth.

Operator

And we’ve got three questions from Sathish Sivakumar from Citi, who asks, can you clarify, apart from the airport charges, where do you see volume-based incentives? What’s the conversation with airports regarding no capacity growth into full year ’25. Is there any compensation you have to pay?

Second question, if you have to cut capacity into full year ’25, how does it impact your network U.K. versus Middle East? And finally, can you clarify if you’re seeing issues with engines that are being delivered?

Jozsef Varadi

Look, I mean, thanks for the questions, but I’m not sure I can go that granular on answering those. So with regard to airports, please assume that we have some degree of flexibility. It’s not like months on months or year on year. I mean, we have a long-term commitment to airports and our long-term commitment is not affected with this issue. We have to operationally work ourselves through this. But if you put that in a long-term perspective, this is not going to affect our positions with the airport. So no significant [Technical Difficulty] from the current issues.

I mean, I don’t want to go into details on market by market. So we have never guided on that regard. We are going to be adjusting capacity against a flat overall capacity guidance for the next financial year. Albeit some variations market by market, but we are trying to minimize those variations to create kind of a band, which is fairly narrow. So in a way, we are trying to protect every one of the markets we are operating from. So you should not be expecting, again, dramatic changes with that to go.

Ian Malin

And then on the last question with regards to whether we’re seeing issues on new engines. The short answer is no. So we expect, until we hear otherwise, that these engines will have to go through an inspection cycle when they hit their thresholds. But in the meantime, we’ve learned a lot about how to operate these engines and how to protect them from the challenges that have grounded other airlines fleets prior to the powder metal issue. So we’ve been moving aircraft around our system to avoid the environment that causes more stress on them, and we’re operating them in a way that tries to reduce the number of cycle counts.

So we find them on longer stage lengths and operating them under different dress levels to make sure that we maximize what we can have out of these engines, to allow for shop capacity to come online for turnaround time, visibility to become more clear, and for as many engines that are affected of ours to get through the system first, so it doesn’t create a backlog later on for one of the questions that mentioned 2026 impact. So that’s the answer, Sathish.

Operator

And final question from Stephen Furlong from Davy. I get GTF is a short-term issue and will unwind. Do you expect it to still be an issue into summer 2025, i.e., full year 2026.

Jozsef Varadi

I kind of hope that we understand the GTF exposure as we speak. I mean, we just look at the history of the supply chain, kind of recently started with the grounding of the MAX aircraft, and now we are grounding GTF. I mean, we don’t know what we don’t know. But at least the good news of all of this is that I think this is kind of pinning down the OEM, this is pinning down RTX and Pratt to really get focused on everything when it comes to engineering, design, manufacturing, parts, materials, et cetera.

So every crisis is an opportunity for getting refocused and make significant improvements. I think Pratt and Raytheon are taking this very seriously. They are designating significant efforts and significant human capacity to address the issue. So I would hope that this is the end of it, and from here on, we’re going to be hearing good news from them. They are clearly making the efforts and they are clearly making the investments.

Operator

That’s the end for questions.

Jozsef Varadi

Ladies and gentlemen, thank you very much. Thank you for coming. Thank you for your attention and your questions. We are in interesting times, but take some assurance from the fact that over the last really almost 2 years now, we have been disproportionately affected relative to our peers by many external factors. We are standing, we are delivering record numbers in terms of passengers, traffic, capacity, profitability, et cetera. Yes, we have to process all those issues, but you can see that the organization is a lot more resilient than ever before. So again, back to the previous point, we try to take every crisis as an opportunity to get better and come out stronger. Thank you.