Hello, welcome to the Wizz Air 2019 third quarter results. Throughout this, all participants will be in listen-only mode, afterwards there will be a question and answer session. Please note that this call is being recorded. Today I am pleased to present József Váradi, CEO, and Iain Wetherall, CFO. Gentlemen, please begin.
Okay. Well, thank you very much. Very good morning, everyone. Thank you for joining this call. We are reporting the October-December 2018 period. Let me just take you through the highlights, then we will start deep diving into some of the matters. In the period, we delivered 15% passenger growth and 6% higher unit revenue, and that helped us offset some of the cost creeps in the business, mostly fuel. The 15% passenger growth came with 21% revenue growth and increased load factors, increased load factor two points in this period. As said, the revenue performance was very strong. Revenue per ASK went up 6%. If you measure it on a revenue per seat basis, it went up 8%. Clearly with that, we outperformed the marketplace. In this period, we successfully introduced the new cabin bag policy.
You recall that we were reporting it to the market that we were unhappy with the performance of the previous cabin bag policy, we changed it works out very well. Even I would say probably beyond expectations. We continue to develop our network and system. We opened up 53 new routes in the period, importantly, we opened up a base in Krakow in Poland, or rather we announced the base in Krakow in Poland. Also very important from a U.K. perspective that we received a U.K. route license from the government to enable Wizz Air U.K. to operate as a British airline under any circumstances of Brexit. With that, I think we clearly secured our access to markets from a U.K. standpoint. This is relevant when it comes to flying from the U.K. to third countries.
We continue to develop the business, we announced further two aircraft to join the Wizz U.K. network. By summer 2019 we will have 11 aircraft in operation here. Also importantly, with that capacity, Wizz Air will become the largest airline in Luton Airport, and you know whose homeland Luton Airport is. We remain disciplined on managing costs and managing profitability during the period. Clearly, we had a number of cost issues to encounter. If you look at the fuel bill, it went up over 40%. If you look at labor costs, it went up over 40%. I think fuel you all understand, we are subject to the market with regard to labor costs. It was twofold. One is that salary inflated in the period. You can imagine that Ryanair increases pay to their pilots and workforce by 20%-25%. We do not remain immune to that.
We had to follow through the market forces. Secondly, we had a number of events requiring us to invest into labor in the form of out of base flying or incremental training capacity, and that was related to the Wizz UK setup and also some reshuffled capacity in the network. These are one-offs. These cost lines will disappear going forward. Also we reacted to the cost creep by taking capacity down. I think we have been very vocal about this, and we've always said that we would be managing this business for profitability. We started constraining supply of capacity in order to make sure that demand reacts to it, and as a result, you see the revenue performance of the business. On the cost side, obviously, utilization came down and unit cost increased.
Again, this was a measure for the period of this winter, and we expect that issue to move away going forward and utilization to go back to normal in the next financial year. With that regard, this is a one-off item as well. With that, we are confident in delivering the previously announced net profit guidance, which is a range of EUR 270 million -EUR 300 million. I'm sure you will ask where in that range exactly we're going to be landing. I don't know. I think there is one significant uncertainty, and this is how Brexit is going to play out and how it will affect consumer confidence and the booking profile of the market. We are certain that we will be landing inside the range. Depending how Brexit plays out, we see which part of the range we will actually be at.
Going to the next slide. This is giving you an overview of the business. We carried 8.1 million passengers in the period. As we speak, we have 106 aircraft flying. Actually, that fleet is going to build up to 112 aircraft by the end of the financial year and 122 aircraft by the end of fiscal 2020. We operate from 144 airports from 25 bases, Krakow being the latest announcement in the system. Obviously with the growth of the business, we continue to grow our organization as well. 4,400 people as we speak. As said, we launched a number of new routes, 53 precisely. We made sure that we continue to develop our business across the board, across our base markets and destination markets. Moving on, we became very focused on improving the operational metrics.
You recall that in the previous quarter, the European operating environment collapsed pretty much affecting airlines' operating performance. We took actions on that, and we made sure that we have a more robust, more resilient operating model to benefit the traveling public with that. You can see that we canceled much less flights than in the previous year, much less than in the previous quarters, and on-time performance also improved. I think all these adjustments to the operating model are now bearing fruits, and we are seeing clear improvement. It is not only because of the lower utilization, but it is because of the structural changes we made to the operating model. Looking at the next slide, it's showing the growth of the network going into summer 2019. It will be a very busy period.
We are launching 104 new routes, 85 of them in markets outside the U.K. We continue to develop the U.K. business despite the Brexit issues, we are launching 19 new routes in the U.K. As you can see that almost 90% of the growth capacity is put in place for increasing frequencies of existing services or joining existing airports. We continue to pioneer new markets, new airports, and 12% of the capacity we allocated for that purposes. Next slide is showing some of the other achievements, what we have delivered in the business. Very importantly, we opened up our new training center for our pilots and cabin crew in Budapest. This is a state-of-the-art facility.
It's an investment of around EUR 30 million, that will enable us to efficient and effectively train our crews, to make sure that we adhere to standards, also to execute at lower cost than previously when we had to buy training capacity in different places. For the first time, Wizz Air got rated with seven stars by AirlineRatings. I think this is a recognition of our safety culture, our safety standards in the company, so we are very pleased with that one. As already said, in the period we received a U.K. route license from the U.K. government, enabling us to continue to have access to markets under any circumstances of Brexit. That's an important development step for the business. Also, I said that we introduced a new bag policy, which seems to be a very effective way of managing ancillary revenues.
As a result, ancillary revenues are nicely back on track already, we are expecting further upsides to manifest going forward. With this, I will just hand over to Iain, who will take us through the numbers.
Morning, everybody. Yes, let's dive a little bit more into some of the details. Q3, this is a three months for the calendar year ended 31st December. October, November, and December. We delivered record revenues. Revenues were up 21.2%. Unit revenues were up, József highlighted, up 6%. I can't think of any other airline in Europe that delivered such superior growth, also some revenue performance. As we've highlighted, we don't grow this business for the sake of growth. If we want to look at Q3 and maybe the context of the previous year. In Q3 to FY 2018, fuel CASK was up 1%, which enabled us to grow 23% ASKs. Fuel CASK was up 22% in the third quarter, which means that the level of growth which we can put to the market couldn't be 23%.
I think a 15% growth in ASKs and passenger growth was a very healthy performance. One of the compromises of slowing that growth down is an impact on CASK. Whilst we're very pleased with the performance on the unit revenues, we slightly underperformed on the CASK. As József highlighted, that came in the form of two things. One, the lower utilization. Simply by flying less, those fixed costs, it takes a while for you to get out of the system. Going forward, with our adjusted growth rate going into the fourth quarter and also to fiscal 2020, those fixed costs we'll be able to remove, and we'll be able to get our ex-fuel CASK back to normal and our utilization levels back to normal.
Moving on to page eight, again, this highlights I think the strong performance that we've been able to deliver on our revenue. What's particularly pleasing is the strong performance on ancillary. We're very happy for the ancillary to get higher and higher if the base fare can get lower and lower. Ancillary now again represents 43% of the overall revenue environment. As you can see, the ticket prices were strong. That's a function of the discipline capacity that we put forward in the third quarter. Also the recovery, I think on the 7th of November, we reintroduced our paid-for cabin bag policy in a slightly different form, and we saw a strong recovery from that. Again, that's from the 7th of November, so you won't have seen the full impact of the recovery of the ancillaries.
We come onto a slide later that shows that we're looking in Q4 to be tracking around about plus EUR 4 per pax on the ancillary, which is a very strong performance. We should have that tailwind going into November next year. Again, another positive sign for a strong fiscal 2020. Moving on to slide nine in terms of the cost. Again, if we reflect on what actually happened, fuel CASK was up 22%. Drilling into the numbers, total CASK was up EUR 0.003, EUR 0.21 of that, or EUR 0.21, over 75% of it is actually coming from the fuel. The rest of it, EUR 0.06 of it, the majority is coming from the crew cost.
As József highlighted, half of that comes from the fact that we raised the average salaries of our pilots from the 1st of April by around about 14% across the network. The other half of it was a combination of two things. One, the utilization and the investments that József highlighted in places like Luton. The year-on-year effect of the salary pay rise from the 1st of April will disappear as we enter fiscal 2020. The one-off investments, as we're looking today, there aren't any of those such large investments going into fiscal 2020. As we look into fiscal 2020, crew CASK certainly should be starting to see the negative number that we expect from this business. A321s themselves, you only need an extra cabin crew. We should be seeing a 17% lower unit cost from the crew cost.
We should start seeing that benefiting certainly on fiscal 2020. I would expect to see a dramatic recovery of the crew cost performance for next financial year. When we look down all the other line items, utilization tends to be the bigger driver. Aircraft rentals, all of our aircraft are leased. When you drop utilization at 6.5%, your aircraft rentals will be up accordingly. I think one thing to flag before the questions start coming. The ex-fuel CASK in Q1, Q2, Q3, all slightly positive. We are maintaining a minus 1% on our ex-fuel CASK for the full year, which means that we need to deliver a very strong performance in that fourth quarter. We know what we need to do. We have the list of items that we will be delivering.
To give you a flavor, we always tend to do very well in the fourth quarter in terms of airport costs. That's when a lot of our contracts get renegotiated. We're expecting a strong performance on our airport CASK. When you're looking at the staff costs, this summer has been particularly challenging for our crew. A lot of disruptions, a lot of out of base flying. Vacation for the summer has been very challenging. Lowering the utilization in Q3 and Q4 enables us to manage that better. Our cabin crew and a more relaxed roster for them enables them to get off and take their vacation. That will get rid of a couple of million. Maintenance, again, while you lower your utilization, certain maintenance events that we were planning in February, March will be ending up in April.
Some of the maintenance events and the heavy maintenance events will be pushed into fiscal 2020. Again, I think that's generally a flavor of how we're going to be delivering on a performance for the fourth quarter. It's not a scenario of going to the church and praying. We know exactly what we need to do on every item, and we are committed to executing all of those in the fourth quarter. Moving on to page 10. Again, a slide that's very close to my heart. I think it's very important as a ULCC business, we are completely committed to the lowest cost in the industry. If you take your eyes off the cost base, then the business model is compromised. We've done a very good job. Q3, you can see utilization always comes down in the third quarter because of the seasonality.
That's when you tend to do more of the maintenance. You always expect to see a slightly higher CASK performance in the third quarter, but that number needs to be coming down. We'll be delivering on the minus 1% for the full year. What you can see is there has been quite a sharp jump on the fuel, from $0.94 to $1.15. Moving on to the next slide. I think we've been talking up the A321neos for a couple of years now. There are four things to highlight here. It's a bigger aircraft. The price that we've secured on this aircraft is industry leading. We were part of the $50 billion deal 18 months or so ago. The engine is the most fuel-efficient engine on the market and has the potential to deliver even better fuel performance than other engines on the market.
We have an investment-grade financing. All these four things, we're going to start seeing the benefit from this quarter. It's very pleasing that we can finally say that the neos are going to be entering the fleet in the fourth quarter. Going into next year, this calendar year, we'll be taking 10. Those are already very well advanced on the financing side. We can talk about ownership costs and financing maybe in Q&A. This is a very exciting aircraft. Next year we'll be giving back three A320ceos. The difference between an A320ceo and an A321neo is a 20% lower unit cost aircraft. It's unbeatable on the market for narrow bodies and short haul in Europe. Jumping onto page 12, just to give you a trend set on the ancillaries. As highlighted in Q3, we were up EUR 1.70 per pax.
The cabin bag policy change took place on the 7th of November. We saw a very strong performance from then. Q4 will be the first quarter where you'll see the full impact of that. We're seeing a very strong performance. József highlighted probably slightly higher than we anticipated. I wouldn't get too carried away. There tends to be cannibalization. Whilst we are seeing a very strong performance in the fourth quarter ancillaries, it just means that we can lower our fares that little bit more and stimulate even more traffic. I think the ancillaries, certainly for the next nine months, is looking very, very promising. What I would also flag when you drill into where that performance is coming from, the product mix is changing slightly. We are seeing more than EUR 1 per pax coming from the WIZZ Go, so the bundle packages.
We are seeing more than EUR 1 coming from the priority boarding. Again, there is a baggage-related element to that. We're also seeing strong performance in the allocated seating, the onboard sales, commissions. As our route mix changes with a little bit more leisure, you're seeing us benefiting from that. Again, I think a very strong performance from ancillary. Hopefully for the next three quarters or so, we'll be reporting very similar story. Page 13. We're nearly coming to the anniversary of when we got our investment grade. It's put us in a very good stead for when we're financing aircraft. We have a very strong balance sheet. We have nearly EUR 1.3 billion of cash. The cash generation is looking very strong and very robust. As I mentioned, the aircraft financing for calendar 2019 is pretty much done and dusted.
Coming April, we'll be starting to look at calendar 2020. Again, we're very excited on the opportunities and what we're seeing in the market. The depth and the breadth of the aircraft financing market today is probably one of the best that we've seen. We're very encouraged going into calendar 2020 for those. Maybe onto the last slide, highlighting some of the sort of small tweaks. Again, as we highlighted in November, fuel CASK, we were pointing to around about +22%. We have seen a nice pullback in fuel prices, which we'll certainly benefit from going into the first half. On the fourth quarter, we are starting to see some of the benefits coming through. That's why we're able to drop that down to 19%.
There's inevitably a fuel passer effect and the nervousness that we have around Brexit on the yields or the caution, I should say. It gives us a little bit of caution in terms of the RASK. That's also dropped accordingly. As we've always said, fuel prices always tend to flow through to the revenue environment. We've talked about the ex-fuel CASK and how we're going to be delivering that. That really summarizes up to the unchanged guidance of between EUR 270 million and EUR 300 million for the full year ended 31st March. With that, maybe we'll open up for Q&A.
Thank you. Ladies and gentlemen, if you haven't already, could you please press zero and then one on your phone keypad now in order to enter the queue. Then after I announce you, just ask that question. If you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. As we have a lot of questions today, can I please ask you to limit yourself to one question, then you can always go back into the queue. Our first question is over to the line of Jarrod Castle at UBS. Please go ahead. Your line is now open.
Thanks. Good morning, gentlemen. If you could, can you just give a bit of color in terms of some of your main markets in terms of performance and any early indications of how the summer bookings are looking? Thanks.
Okay. Maybe I should do that. I think, first of all, we need to differentiate between Central Eastern Europe and Western Europe. Central Eastern Europe is still high GDP growth. I mean, some of the countries reported 4%, 5% GDP growth and expectations of similarly high rates going forward into 2019. Obviously, that GDP performance creates significant underlying consumer demand in the marketplace for discretionary spending, like travel. We are, I think, enjoying the benefits of very robust consumer markets in Central Eastern Europe. Secondly, we are seeing airline capacity growth moderating in Central Eastern Europe compared to previous years. In previous years, we saw airline capacity rising double digits, certainly. Now we are more into mid-single digit territory. What we are seeing at the moment.
Now, I would caution you to jump into conclusions on that because airlines may just be launching a further capacity in the region. Clearly, I think there is a trend of more capacity discipline playing into the markets now across the board. I think that's the same for Central Eastern Europe and Western Europe, too. Clearly, we would be benefiting from a more benign competitive environment in Central Eastern Europe with that regard. Also, let's not forget that Easter, this time around, falls into the new financial year. It will be at the end of April. Easter is always a booster of demand for flying. The one uncertainty we are seeing is around Brexit. I mean, simply, we can't predict at the moment how consumers will behave, how they will book.
I mean, there has been a lot of buzz in the media whether airlines will be able to fly or not, and how Brexit is going to play out, soft or hard, March or not March, or ever or never. All these uncertainties, I think, are affecting the behaviors of customers. Once certainty is created, whatever it is, but it becomes certain, I think people will start measuring themselves against the new terms, and we'll start acting. The good news is that people's memory tends to be pretty short, so issues can be recovered very quickly. That's why we are a little hesitant on the guidance, very effective to guide the market with regard to where we would be landing because of this uncertainty. Other than that, I think the markets are robust. We are upbeat about the opportunities, as you can see.
We continue to grow the business. We are planning on 15% capacity growth in fiscal 2020. We are certainly seeing a number of factors positively affecting the cost performance of the business. We're seeing that the demand side of the business is robust, too. When I look at forward bookings, obviously we have very limited visibility yet, but so far so good.
Okay. Thanks very much.
We are now over to Mark Simpson at Goodbody. Please go ahead. Your line is now open.
Yeah, morning. Just wanted to ask about the utilization rates. Obviously, there was a 6.6% decline seen in the Q3. I'm just wondering how you think that will work through in Q4, and following on from that, if that's not going to improve substantially, how are you going to actually deliver that 11% ex-fuel unit cost decline, which is implied by your FY 2019 guidance?
Morning, Mark. I would think it's fair to say that the utilization is going to be at a similar level going into fourth quarter. Again, if you think about it, airlines tend to lose money in November, first two weeks of December. January and February tend to be loss-making. Again, in a higher fuel price environment, it makes no sense to just grow faster. What we tend to see is that if you make a lot of money in the third quarter, you can invest that in the fourth quarter. The traditional pattern tends to be profit Q3, loss Q4. What you're seeing now is break-even-ish in Q3, and again, that's the sort of level we're going to be looking for into Q4. The utilization to your question will be of a similar sort of magnitude. Getting it back up, I think is fairly straightforward.
We have adjusted the capacity schedule. Easter, clearly we're going to be looking to be flying as much as we possibly can in April. Because that schedule is more normalized, and again, if you think back to this time last year, we were saying we're going to take 17 aircraft in 17 weeks. That's a lot of pressure on the business, and also that can impact on utilization. Having a more normalized schedule of a couple a month means that you're not putting that pressure. We're absolutely convinced that we'll be able to get our utilization back up to the normal levels, certainly from April onwards. For Q4, it'll be the same thing. Onto your question, I can just repeat what we were talking about earlier. Yes, there is a lot of things we need to do.
We have a strong track record of delivering a strong ex-fuel CASK performance. A number of initiatives that were being planned for the third quarter will now materialize in the fourth quarter. There does tend to be always a fairly heavy backloaded effort. These are initiatives that we've been doing throughout the entire year. They do tend to happen in the fourth quarter. As I've highlighted, the business as usual. These are all pretty much business as usual, whether it's improvement on the crew side of the equation, the airports. These are contractually linked and recently we announced a deal to Skopje, so there was some support for that. You can see that there's a lot in the pipeline, and we're convinced that we're certainly going to be able to deliver definitely a negative performance.
The challenge is minus one, and that's what we're setting ourselves out to do.
Just following on from that, can you give us the phasing of the A321neo deliveries in FY 2020?
We're taking two in March, and then there's 10 for the full year. Exactly, yeah. There's 10 for the full year. In terms of the phasing, you're seeing, I think it's three at the beginning of summer and then a couple at the back end.
Well, that's the other thing which is changing significantly versus fiscal 2019, that fiscal 2019, we were loading all the new capacity and aircraft delivery program prior to summer. We had this scheme of 17 aircraft over 17 weeks. We won't have that going into fiscal 2020. It's going to be a more spread over aircraft induction, which obviously will ease the labor side of the equation, and we're going to be able to trim costs in the system substantially compared to what we had to go through in fiscal 2019. The program is now settled with Airbus. You recall that this is a renegotiated delivery platform, recognizing the industry issues of OEMs, including Airbus. We believe that we got Airbus' skin in the game sufficiently that they will better deliver, or if they fail to deliver, it will come with a significant financial penalty on them.
I think from our perspective, we're going to be covered, but obviously we have an interest to get the aircraft and deploy the capacity as opposed to just get the money. Financially speaking, I think we are pretty well covered with this in fiscal 2020.
In terms of specific numbers, Q4, we're taking six units. We've got 106, and we're going to be ending up 112, another six units in Q4, of which two are neos. In Q1, we're taking five additional units. To József's point, I think we've allowed ourselves a lot more capacity to be able to take those aircraft. Certainly, and I think the key thing there in terms of the crew and the recruitment process as well. We used to be training and recruiting with about a three to four-month lead time. But when you're taking so many aircraft, that's been pushed up to eight months. One of the reasons why we've seen inflation on the crew, which will not happen going into fiscal 2020, is that we have a much more normalized delivery schedule.
That's great. Very helpful. Thanks.
Okay, now over to Société Générale and Michael Kuhn. Please go ahead. Your line is now open. we're
Good morning. One question, also keeping in mind that the neos are now more and more coming. You mentioned you're encouraged by the current state of the aircraft financing market. What is your latest view on buying versus leasing, and what do you have in mind for fiscal 2020 in that context? Thank you.
Morning, Michael. I think it's important to reflect that IFRS 16 treats them both the same. Whether you lease or whether you buy, essentially you're treating them the same on your balance sheet. It's sort of a little bit of an academic question. The question then is who's charging you more? A bank or the capital markets or the lessor. When we look at financing, it's essentially now we can look at apples and apples and say, right, which financier is charging us the lowest possible rate? As we look today, and also the benefit when you look at leasing is that you're essentially locking your leases in for between nine and 11 years.
With a risk management hat on, the ability to lock in 11-year money at rates that are historic lows and pretty close to what you could issue for five-year bond money, the leasing market is incredibly compelling. If you were to ask me a year ago, when we got investment grade, and we say, right, where's the last piece of the jigsaw where we really need to lower our unit cost? It's ownership. If you were to ask me a year ago, I would've said the bond market would've been a fairly compelling proposition. When you compare that to a lot of money that's still available in the leasing market, it's incredibly compelling.
I think what's also very important is when you look out for our delivery schedule, there'll be a couple of years where once you take into account the lease returns, we're going to be taking 25, 30 units per year. I think it's very important to maintain for us, we want to maintain and we will maintain an investment-grade balance sheet. If we're seeing today really compelling pricing from the leasing market, that's what we're going to be continuing to do. That said, we'll have to decide when we come to the decision. We're now pretty much financed for this calendar year. Going into next calendar year, we'll look at all the options and we'll make the decision pretty much on the day to finance.
Okay, great. Just one quick follow-up. Just as a reminder, what did you guide last year on the profit contribution of Easter?
It depends where. There's always a couple of days. We have a couple of Easters, the Orthodox and the sort of the normal Easter. There could be a couple of days on that. EUR 15 million tends to be around about full Easter.
Okay, great. Thank you.
We are now over to Damian Brewer at RBC Capital Markets. Please go ahead. Your line is now open.
Yeah, good morning. Thank you for taking the question. Could I follow or return back to a previous theme? I'm still just a little bit mystified by your ex-fuel CASK guidance. In particular, if one kept the staff marketing lease D&A costs flat quarter on quarter, the maintenance cost fell to a level about two years ago. That implies the airport and route charge costs have to fall something like 26% year-on-year in Q4. Clearly there's something in there I'm still missing, but could you maybe elaborate a little bit more on what some of the moving parts are more, please?
Yeah. We have a number of transactions falling into Q4 with regard to aircraft and engine transactions, the business will benefit from those transactions. They happen to happen in Q4. It is just by accident. I mean, it simply is because of the delivery program that we have. This is normal course of business, so we've had that before, and we'll have it in the future as well. This time around, it seems that it's just concentrating in one quarter.
Okay, how sizable are those? I mean, we're a third of the way through Q4, I assume you've got relatively good visibility on this.
We're not guiding to those. The focus should be on the business. The focus is all about the airport CASK is going to be a very strong performance. On route charges, we can certainly say that the Eurocontrol charges are down significantly from January. I would see a significant reduction on the enroute charge and navigation charges. That's on top of, as I highlighted, the airport charge. Just to give you a flavor, with the CEO technology, we've sold one or two engines in previous years. You'll have seen that last year. You'll have seen it the year before. They tend to happen around about July, and this time they're going to be happening around about in Q4.
Okay, if you want to go back and have a look at sort of maybe on the cash flow statement for the second quarter, that's something you might want to look at. I think on the whole, this is just business as usual.
Okay, thank you. Maybe I'll have to revert to it offline. Thank you.
Okay, we're now over to Numis Securities and Kathryn Leonard . Please go ahead.
Morning, guys. Following up on the financing point on the aircraft. Wondered if you were able to put a bit more guidance on what you expect the CASK on aircraft rentals to do, given that favorable leasing terms that you're getting. Following on from that same question, what are you going to do with the cash that you've accrued, given that previously you were looking at ownership? That's now not the case. What might you do with that?
Well, I think let's start with the last question. It's not a good use of shareholders' funds to use all of that cash to buy aircraft. If you buy aircraft, yes, you would put probably 20%-25% of the company's cash and the shareholders' cash into it, and the rest of it would be off on balance sheet debt, whether it's the bilateral debt or whether it's capital market debt. I think the important thing is that we need to maintain a very strong balance sheet in order to maintain that investment grade. The investment grade itself essentially derives significant cost savings, not only through the aircraft financing but through other line items. When you go and speak to a supplier with an investment-grade rating, you can considerably improve your terms. Financial terms, also maybe some restricted terms. Holdback terms, you don't have those.
Collateral terms, you don't have those. I think maintaining an investment-grade balance sheet is absolutely critical. Again, I think let's reflect on it. In two years from now, you can see the fleet delivery schedule in 2022, that we're going to be delivering quite a number of aircraft back to lessors. We're going to be taking an incremental unit of 33 units. We need to make sure that we maintain a very strong balance sheet to be able to finance those. Therefore, when you go to a financier with an investment-grade balance sheet, that you can essentially get the best possible pricing. Today, the leasing market certainly helps from that perspective. In terms of, we're not guiding on the CASK performance for fiscal 2020 on the aircrafting. That's something we'll keep until May.
Okay, thank you.
We're now over to HSBC, Andrew Lobbenberg, please go ahead.
Hi there, József. Hi, Iain. Can I ask, in the past you've said that you don't want to go buy any airlines, but you'd be interested perhaps in buying assets, I think, that might come available as the industry restructures. How do you see opportunities lying there at the moment? Slightly related to that, Indigo are in talks to invest into WOW. Do you see opportunities to collaborate with those guys? Is there any relevance as Indigo considers having a second broadly defined European low-cost business?
Let me start with WOW. Well, Indigo is a private equity investment firm with their own objectives and own strategies. They happen to be an investor in Wizz Air. We are not related through discussions between Indigo and WOW, and I don't think actually that transaction has been confirmed yet. This is a business of Indigo. This is not a business of Wizz. We are not involved. We are not looking at it. With regard to consolidation, I continue to believe that the European market will have to consolidate and will continue to consolidate. We're going to be open-minded to look at the opportunities arising from that consolidation process. Nevertheless, our core strategy is to continue to grow the business organically. We have become the lowest cost producer in the industry.
We operate from markets in Central, Eastern Europe, and Central, Eastern Europe gives us the growth opportunities we need organically. Clearly, we are seeing that we can deploy 15%, even 20% certain times capacity, to continue to stimulate the markets in Central, Eastern Europe. We remain on that strategy. As we have said previously, we are not necessarily interested in buying businesses. We are not necessarily interested in getting involved into M&A activities, but we are certainly interested in capturing market opportunities arising from consolidation airline failures like we did in the U.K. when Monarch went down. We acquired some assets from Monarch, and we translated those assets on our operating platform, and we operated it under the Wizz operations and Wizz brand. These matters tend to be opportunistic. We are not planning on it.
If they happen, we would look at them, and we will form a view whether or not we want to do anything there. Please don't expect us to start chasing M&A opportunities going forward. We remain a very focused business, focused on organic growth, focused on further expanding our operating platform and the Wizz franchise.
All right, thanks.
Now we go to Davy, and Ross Harvey, please go ahead. Your line is now open.
Hi there. Thanks for taking my question. I'm just wondering about ex-fuel CASK for FY 2020. Clearly, you won't go into guidance, but when we look at a couple of the drivers, there's a lot of encouragement from higher utilization, strong capacity growth, the A320 mix of the fleet, even the comps are benefited from the Wizz UK start-up costs, salaries, disruptions, et cetera. Is there anything for us to consider from the perspective of major maintenance events or anything else to flag that we should consider when we're beginning to look at that FY 2020 figure? Thanks.
No, I think you've pretty much nailed it on the head. Looking at ex-fuel CASK going into next year, I think we should be able to deliver a pretty good performance. There's three aircraft going back to lessors. When you get an aircraft back into condition, you can be talking to the tune of EUR 750,000, EUR 1 million to get the aircraft back into condition. That's something that you'll start to see creeping through. In the grand scheme of things, the A321neo has an extra nine seats, so you should be seeing an improvement coming through on that. No, we're not giving guidance, but there's nothing out there that I think we should be signaling now that I can think of.
One thing is worth flagging, this is, I think, to the whole community is, IFRS 16 will have a significant change to our balance sheet in P&L. What we'll need to do is once we've pretty much buttoned up fiscal 2019, we'll come out to the investment community and sort of go walk you through the impact of that. In terms of the CASK performance per se, there's nothing that I can think of. Maybe just where in the P&L those line items fall. Leases disappear, as an example, 100% of our aircraft are leased. By definition, you'll see a different depreciation number, and interest will come on the face of the P&L. That's something that I'll need to come out. We'll have some teach-ins with you guys further down the line. Yeah.
If you look at page 10 of the presentation, I think it sort of gives you a pretty strong suggestion, what you should expect from this business to deliver with regard to cost per fuel. If you look at the fiscal 2013, fiscal 2018 period, essentially CASK ex-fuel, was contained within the range of EUR 225-EUR 230, let's say. I think this is the range you should expect to happen going forward. A321 rollout and the neo induction will certainly help us create tailwind with that regard. We need a tailwind to offset some of the headwinds like inflationary pressure here or there, like labor, maybe infrastructure cost. You should expect this business to remain on track with this regard. It's been consistent over the last six, seven years.
Yeah.
Okay. That's great. Thank you very much.
Okay, we now go to the line of Jakub Caithaml at Wood & Company. Please go ahead. Your line is now open.
Hi, thanks. Could you please help me understand what options are on the table for the U.K. shareholders if the U.K. eventually exits the EU in face of the EEA ownership rules? Also, could you update us on how many shares are held currently by non-EEA shareholders and how many shares are held by U.K. shareholders, please?
In terms of the shareholders, 53% of our ordinary shares are owned by Europeans. Of that 53, 28%, 28% of our issued share capital are U.K. I think what we've been saying all along is that we have a contingency plan. It's in place, it's been robust, and actually it's a plan that we've had in place since IPO. Our articles allow us to disenfranchise U.K. shareholders. I think we'll just have to see what happens.
Yeah, I think we have to be careful here because I'm not sure who in this country is in a position to say how Brexit is going to play out exactly. It looks like it's changing with the wind every day. We are not trying to predict the outcome of Brexit. What's important from our perspective is that to have the contingencies in place, to be activated if needed, to make sure that we continue to fly the passengers between the EU and the U.K. and also third countries and the U.K., and make sure that we remain compliant with whatever requirements and ownership and control may come into play. I think we've got those plans on hand. We don't know what to activate at this point in time because we just don't know how Brexit is going to play out.
Once we learn how Brexit is going to play out, we can provide certainty of our actions, how we are going to address that. I think there is a sequence of actions here. First the U.K. has to make up its mind what to do, align it with the EU or not, then we act on that.
I think one thing you can be rest assured is that we are fully engaged with all the relevant authorities, whether it's the U.K. CAA, whether it's the Hungarian CAA, the CAAs of the countries that we fly and also the European Commission. I think to József's point, we have a contingency plan, but that is in very almost daily dialogue with the relevant authorities. We'll be able to confirm when Brexit is confirmed.
Okay. Before taking a follow-up question from Damian Brewer at RBC Capital Markets, if anyone else has any further questions, please press zero and then one on your phone keypad now. Damian, your line is now open.
Yeah, good morning. I just want to follow up on actually the theme of the last question about Brexit. Given you don't have any visibility and it appears no one in the U.K. does, could you talk a little bit more about, in particular U.K. operations, how quickly you can cancel, combine, or rejig the U.K. services of Wizz outside the Wizz Air U.K. operation, in the event of maybe a hard Brexit and a consumer slowdown? Indeed if there was some kind of bounce in demand, how quickly you can go back in and layer back in capacity?
Well, first of all, I think we are legally settled for being able to operate between the U.K. and other markets post-Brexit under any Brexit scenario by having Wizz UK licensed as a U.K. airline, and also Wizz UK having obtained the route license from the U.K. government. Operationally speaking, I think we are prepared to deal with Brexit in any event. If we have to correct capacity for whatever reasons, it only takes probably five seconds to deregister an aircraft in the U.K. and probably takes two days to reregister the same aircraft for Wizz Air Hungary. Ultimately, the beauty of the airline industry is that you fly aircraft, and actually aircraft can depart from one place and land another place. Actually you can move capacity very quickly. It is always the capacity discipline what we tend to play here.
We look at demand, we look at expected profitability of the marketplace, and we adjust capacity accordingly. Do we expect a major shock at this point in time? No, we don't. We actually think that the operation of the airline will remain smooth post-Brexit. And personally, I wouldn't expect a huge market correction on the demand side of the equation following Brexit. U.K. has been a very resilient market for Wizz Air through 15 years. Even if you just look at our recent history in the U.K., post the Brexit vote, we are the only airline that has been growing the business 25%-30% just over the last two years. Obviously we do it because the market opportunities give us the profitability what the business requires. We remain very positive, and we remain very upbeat.
Of course, we are a rational player, and we're going to be making assessments on the market. It doesn't take long, to be honest, to adjust capacity. We went through this exercise in Ukraine when geopolitics affected the business there. Within days, we removed four aircraft from the market and reallocated that capacity across the balance of the market. I think that's something that we have done, we can do. Personally, I don't expect that to happen here.
Okay. Thank you. Can I just check, what's your legal advice that you're receiving in terms of if there is a demand shock and you had to cancel flights, would you still be on the hook for EU 261 if it was done with less than two weeks notice? Is your legal advice that EU 261 wouldn't apply if the U.K. is not in the EU? Do you have any comments you can add on that?
I don't think we can. To be honest, at the moment, it's EU 261 that applies. I have no idea whether EU 261 would remain in force post Brexit. We will deal with the situation as the legislation requires us to deal with it, but I can't make any further comment on this at this stage.
Okay. Thanks very much.
We're now over to Charles Cartledge at Sloane Robinson. Please go ahead. Your line's now open.
Good morning. Thanks for the call. Perhaps everyone knows this already. I'll ask it. Could you give some guidance on your tax rate Iain going forward? Thank you.
Certainly, yeah. I think the tax rates we're guiding is 3% for this year. The normal run rate is around about 6%. One thing I would flag is that as our U.K. business gets bigger, the tax rate in the U.K. is more around the 18%. In terms of guiding, what I would be looking to do is probably add 1% per year as the Wizz UK grows.
Where would that sort of level off, do you think? Because, again, as you suggest, it depends on your capacity in the U.K. The U.K. is not going to be growing to 100% of capacity, it will level off before it gets to 18%.
Well, if you think about it, by the end of the year, we'll have 11 aircraft based in Wizz UK on a fleet of 122. That's essentially 10%. If the business grows at the same pace. If we grow the Wizz UK business faster, it suggests that we're making more money in the U.K., I would grow the U.K. I think we've now got the right level. There is no more capacity in Luton, which is one of the reasons why we've been so aggressive in the growth there. In terms of the U.K., I would assume that the U.K. grows at the same pace as Wizz Air Hungary.
Just very roughly, it sounds like you might level off at 6%. If about 8, 9% of your capacity is at 18%, and that's all sort of incremental, if you like, then that might add two points, three points to your current tax rate.
6% is the run rate, and I think I highlighted at the last results.
Last one
I would add 1% as you go up, and you can model the growth rate on what your assumption is on the U.K. By definition, it won't get up to 18%.
Exactly. It might be, I'm just guessing eight or nine, because the U.K. might add two points, three points.
Yeah, I think that's a fair assumption. We'll have to see how the U.K. performs.
Thanks very much.
Okay, now we go back to Jarrod Castle at UBS. Please go ahead again. Your line is open.
Thank you. I'm just looking a little bit at the fuel hedge going into 2020. It's obviously gone up from 35%- 53%. Just want to get any views in terms of any changes to the hedging policy and how you're thinking about fuel costs for 2020. Thanks.
No, no change to policy. I think it's proven to be a fairly robust policy. It works, and it's an insurance policy. There's no change to that. I think we are, I would say, looking today at fuel prices of $600 per metric ton, fairly well positioned compared to competitors that may have hedged at slightly higher rates. Fuel prices can move quite quickly, so we don't want to throw stones. I think we're fairly well positioned as we're looking into the first half of next year. I think one thing I would flag is carbon is a very unpredictable commodity. When the EU ETS scheme was introduced in 2013, we were paying around about EUR 1.5 million on that scheme. Today, it's closer to EUR 25 million. That's pure inflation coming through from the carbon scheme.
The carbon scheme is a bit up in the air. A little bit of the Brexit question as well. The U.K. came out with a white paper saying that the U.K. airlines, post-Brexit, the price will be fixed at GBP 16. The European Union came out and said that they won't be issuing any credits to U.K. airlines from January as a temporary measure. Risk managing carbon, which is unpredictable at the best of times, is a bit challenging. In terms of fuel, I think that's something that we'll need to keep a close eye on. If we have any change to policy, we'll certainly communicate it to you all. Thank you.
Okay, we now go back to Mark Simpson at Goodbody. Please go ahead. Your line is now open.
Yeah, thanks. A couple of things. Just want to have your thoughts on obviously two big expansion bases, Vienna and Luton, in terms of how the market's responding to your increased footprint and how you feel the summer marketing campaign is going. Just on routes, I think you mentioned sort of 55, 60 routes were closed in the Q3. It looks on the data as though you're closer to about 90 routes plus in the Q4. Again, I'm just wondering if you could comment around that fact.
Okay, with regard to the performance of Vienna and Luton, let me start with Luton. I think Luton is a slightly different story from Vienna. In Luton, we have been building Wizz UK on the basis of the strength of Wizz Air Hungary that has been built up over a decade or more than a decade. If you look at our Luton operation, Wizz UK provides probably around 25%, 30% of the total capacity, and the balance is flown by Wizz Air Hungary. Wizz UK comes as sort of a logical addition to the Wizz Air Hungary capacity in Luton. It seems to me that Luton is getting maxed out in terms of infrastructure. It's been very important for us to try to grab all opportunities we can have from an infrastructure perspective and ramp up the business very quickly.
Obviously, that required us to make investments, I think those investments worked out very well. We are very pleased with what we have experienced in Luton. We are spot on, totally in line with expectations and should we have further opportunities to continue the growth of the business in Luton, I think we would contemplate them for sure, it looks like the airport is becoming congested. I think Vienna is a slightly different story. Vienna became very popular, basically for every single airline in Europe. Vienna used to be a closed market. The airport was protecting the Lufthansa Austrian Airlines monopoly, but they were unable to grow the business in line with European peers. As a result, they changed their commercial strategy and started accommodating new generation airlines like ourselves and other local carriers. As a result, the market became overheated.
Already we are seeing some of the dust to settle down. I mean, we are seeing some routes pulled, capacity cut by other carriers, I'm pretty sure that further consolidation of capacity will take place throughout the year in 2019, and probably towards the end of the year, you're going to see a more rational capacity game being played in Vienna than what it is today. With regard to our position in Vienna, I would make two points. One is, Vienna comes as a natural extension of our market reach in Central and Eastern Europe. The halo effect is certainly benefiting our business in Vienna. I mean, for many of the Czech, Slovakian, and Hungarian people, actually, Vienna is a more logical market than their capital cities.
I think we have a starting brand strength going into Vienna, which we try to build on and further explore. Secondly, with the A321 operation in Vienna, we are the lowest cost producer in the marketplace. Clearly, the market opening in Vienna is commoditizing the industry in the market similarly to what has been happening in other places in the whole of Europe. In commodities, lowest cost will prevail and lowest cost will always win. We are the lowest cost producer, we think that we are well versed strategically to win the marketplace. Yeah, at the moment, I think it's an overheated market. It's a bit of a blood bath.
Given that we are the lowest cost producer and we benefit from the neighboring markets, I think we are very well positioned to emerge as a structural winner in Vienna, and that's what we are sticking to.
Any comment in terms of what looks to be an acceleration program of route cuts in the Q4 versus Q3?
I think this is totally business as usual. We look at profitability on the base of actual profitability. Unlike other airlines who tend to strip out everything and they look at things on the base of constant life, we think life is dynamic, and you need to measure yourself against the life what it is at that point in time. Clearly, the change in cost environment has affected our views on the route profitability. Obviously, when you have higher fuel cost to deal with, you have higher labor cost to deal with. The threshold is moving up, and as a result we have become maybe a bit more critical on some of the other routes, how they perform and what expectations we could have. I don't think there is a trend change or anything like that. I think this is business as usual.
We just manage the business against different standards in a higher cost environment.
Hey, Mark, I mean, one thing I would always flag, maybe on the page five, it gives you a flavor of the summer. Increasing frequencies really fuels that, the demand that we see. Traditionally, that number is around about 60%, but now it's around about 36%. And joining existing airports is 52%. That sort of gives you a flavor of dynamically how we're changing the network with the changing fuel environment. I would imagine as time goes by, that'll probably normalize back to the normal sort of levels.
Great. Okay. Appreciate that.
Okay. We've got a follow-up question from Kathryn Leonard at Numis Securi. Please go ahead. Your line's open again.
Hi. I'm sorry, just on the Airbus deliveries and the fleet plan you guys have disclosed, that's in line with the fleet plan you disclosed at half one, it's unchanged. I just wondered whether you could update whether you are seeing any incremental delays from Airbus. It's something that's been flagged to us, obviously, recently by one of your peers, and obviously it's encouraging to see that it's unchanged, but can you just comment on that, please?
Okay. Again, we have a renegotiated delivery platform for aircraft deliveries in 2019. By and large, Airbus is sticking to the new platform. They better do that because of the financial penalties involved. I would say so far, so good. I don't know who you are referring to exactly, we took a deliberate decision to be proactive on the issues and get a new delivery program in place as opposed to just being a victim of industrial issues by the OEMs. I think so far, so good and no major delays we are suffering as a result.
Great. Thank you.
Okay. We have a final question, which is a follow-up from Andrew Lobbenberg at HSBC. Andrew, please go ahead with the final question.
Hi. Just super simple. Are the legal challenges to the bag policy change all set? How confident are you on the reliability improvement that you saw in the last quarter being sustained into the summer as you build the utilization back up? How scared are you about the operational performance in the summer ahead? Obviously it was a big problem last summer.
Yes. I'm not trying to be naive to believe that the European systems, ATC, will dramatically improve going into fiscal 2019. My incoming assumption is that I think it's going to be as bad as last year. The difference I think we're going to have is that we will be prepared for that, and we will have contingencies in place in the operating model to deal with the problems and to recover from the dysfunctioning of European ATC quicker and stronger than last year. We made systemic changes to the operating model, so we are putting up standby crews for recovery. We are putting up fire breaks in the schedule. Obviously, that's stretching us a bit, because we don't want to compromise our utilization. We want to make sure that we fly the same hours.
We are in a way expanding the flying program, but with more recovery slacks in the model. We will have an additional spare aircraft. We'll go from two to three spare aircraft in summer. We think internally we are better prepared to deal with the situation. To be honest, I don't expect the external circumstances to improve dramatically going into summer 2019.
Andrew, maybe just to flag. In terms of utilization, these fire breaks, these additional spare aircraft, you're talking around about 1%-2% in terms of utilization. The cost savings associated with less EU 261s. If you look at all the EU 261, the compensation cost, it more than benefits by losing around about 0.1%-0.2% hours on utilization in the summer. The other thing I would say that's likely, we haven't talked about, is that, again, we ramped up Wizz Air UK, and there are a lot of challenges on the whole ramping up of that, the aircraft registration, the training of those pilots, the outer base flying. We said that the summer disruptions, probably half of it was the environment and half of it was the challenge we put on ourselves, 17 aircraft in 17 weeks, and Wizz Air UK. The self-induced issues will not be there.
To Joe's point, we certainly expect the summer to be probably the same for fiscal or summer 2019. With that, thanks everybody for spending the time with us, and we'll be back on the line in May with our full year numbers.
Thank you.
This now concludes today's call. Thank you all very much for attending, you can now disconnect.