Wizz Air's Bumpy Journey Back From Abu Dhabi
Ryanair's Michael O'Leary likes to argue that Wizz might not make it. But Wizz's chief commercial officer says his airline can turn things around.
Dear readers,
If only Wizz Air executives had listened to their nemesis, Ryanair’s Michael O’Leary, who spent years gleefully suggesting that Wizz’s Abu Dhabi joint venture would fail. Perhaps O’Leary’s bombastic rhetoric was inappropriate, but his message to Wizz was accurate: ULCCs typically succeed when they fly packed airplanes on short stage lengths and turn airplanes quickly to leverage their cost advantage.
Unfortunately, Wizz chose a different path with its 2019 joint venture with the Abu Dhabi Developmental Holding Company. The sovereign investor wanted a low-cost option to connect Abu Dhabi with Europe, the Middle East, Asia, and Africa, both to bring in tourists and to make it easier for laborers to travel back and forth. Meanwhile, Wizz wanted entry into a market where it (presumably) would have less risk, since it only owned 49 percent of Wizz Air Abu Dhabi.
I don’t think you need as much experience as O’Leary to ask how this airline, which began flying in January 2021, would be a good idea. Long flights to Europe, Asia, and parts of Africa always were going to challenge the ULCC model, and while it’s true that passengers tend to find cheap fares, the Wizz brand wasn’t (and probably still isn’t) well known in the Middle East.
With little going right, Wizz Air Abu Dhabi closed Sept. 1. When they ended the 12-aircraft operation, executives blamed several challenges they had not expected, including high maintenance costs, engine issues, operational reliability problems, and government restrictions on which routes it could fly.1
With the benefit of hindsight, we know that shutting down the airline was a good idea. Six months later, Israel and the United States attacked Iran, and Iran retaliated in part by targeting the UAE with missile and drone attacks. By then, only about 4.7 percent of Wizz’s capacity flew to the Middle East, mainly on longer hauls from European bases to Saudi Arabia, the UAE, Israel, and Jordan.
“A lot of people say, ‘You look really smart,’” Wizz chief commercial officer Ian Malin told me in an interview last month. “Certainly we didn’t know what was going to happen, but one of the reasons for pulling out of that airline … was because every time there was political instability, geopolitical sorts of stuff, the capacity got all messed around.”
I like Malin, and not just because he’s such a loyal listener to The Air Show that he listened to it last year during the Wizz Air Skopje half marathon. I found him candid in discussing Wizz’s recent stumbles, and I appreciated how he led me through his network changes, like bolstering operations in Italy and Eastern Europe. I thought he chose his words carefully only once — when he responded to O’Leary’s very public vendetta against his employer, which goes beyond Abu Dhabi.
“Michael can say all sorts of stuff, and he will,” Malin said. “We don’t really care. We know that there’s a lot of good things he does. He should focus on what he does well and not trying to identify what we do poorly.”
Here are some highlights of my discussion with Malin.
Wizz Abu Dhabi did not go well. Engines were a big issue.
Wizz Air Abu Dhabi confused more airline insiders than just O’Leary. Even with the boost from the sovereign wealth fund, it was never clear why this airline, based far away and with a brand unfamiliar to most local customers, was the right one to introduce low-cost travel to Abu Dhabi.
Malin told me he didn’t see it that way. Yes, he said, by the time he arrived in 2022 as CFO (he became CCO just a couple month ago), he knew it would fail. But he said the premise of the Abu Dhabi airline made sense and argued that its failure mostly was related to things outside the airline’s control.
Engines (no surprise there) were a major problem. Wizz received its first A321neo in 2019 and like a lot of airlines, it found that these engines weren’t as reliable to operate as their predecessors.
”The GTF engine, in the brochure, was expected to last 9,000 or 10,000 cycles between intervals,” he said. “That was sort of how the things were costed. It turns out that the durability of those engines was an issue.”
That has been a network-wide problem. But the harsh climate of the Middle East came with its own penalty — engine maintenance is much more expensive in certain countries and in certain climates. When airplanes fly a majority of their sectors in hot desert environments, manufacturers charge more to fix engines.
”In power-by-the hour arrangements, once the engines hit a certain threshold of the number of takeoffs in hot and harsh environments versus total takeoffs, then they attract a higher rate," Malin said.2
Next, Wizz, again like many competitors, grounded airplanes and increased the number of spare engines it needed because of the Pratt & Whitney powdered metal issue.
Wizz Air Abu Dhabi also struggled operationally because of its small size. Wizz has more than 200 airplanes, and with most concentrated in Europe, it benefits from economies of scale. Wizz Air Abu Dhabi lacked that advantage, as do Wizz’s remaining long routes from Europe to the Middle East.
”When things go really wrong, you’re miles away from established maintenance providers,” Malin said. “There are maintenance vendors, but we don’t really have a lot of volume with them. So we get rack rates versus volume rates. And then we have crews out of base, and they time out. We don’t have a lot of crews standing by, so you’ve got to ferry them in. You’ve also got to ferry in replacement aircraft. And we’re flying to and from Europe, so we get hit really hard with these EC 261 compensation claims.”
Was the revenue from Abu Dhabi not big enough to outweigh the costs?
No, it was not, and Wizz CEO József Váradi has blamed politics.
When Wizz started 22 years ago, it mostly moved cheaper labor from Eastern Europe to wealthier markets in Western Europe. Váradi, one of the airline’s founders, bet that Wizz could replicate its early model in Abu Dhabi, connecting laborers between the UAE and their homes.
That might have worked in many markets, but the big ones were to be India and Pakistan. Váradi told the Telegraph in July that access to these markets was included in Wizz’s initial memorandum outlining its UAE expansion, but never came to fruition.
”We got designated by Abu Dhabi, and we started working with India and Pakistan, and both of them approved our designation," Váradi told the Telegraph. “But at that point Abu Dhabi changed its mind, and they decided to remove our designation and hand that over to Etihad."
Malin said no other markets offered the same revenue opportunity, particularly once the airline realized it had to earn a price premium because of its increased operational costs. The India and Pakistan flights would have been high-volume and high-frequency routes that could have made a lot of money given the traffic flows.
”We were then having to pick markets that didn’t have the kind of volumes we [needed] to replicate what was happening in Europe,” Malin said. “Everything then swirled together into a bad combination.”
Now it’s back to basics
Wizz is now doing what most airlines (ahem, JetBlue) do after an expensive failure — return to basics. For Wizz, that means focusing on Italy and Eastern Europe.
After Malin became chief commercial officer, his first big moment came in Palermo, where he announced a new short-haul base, including domestic routes in Italy. “We were doing domestic already, but we are just going to do a lot more on short sectors,” he said.
Since then, Wizz has further expanded in Italy. Earlier this month it opened its seventh base in the country, with two aircraft in Turin set to fly 16 new routes to eight countries. Wizz said it will have 40 aircraft based in Italy and will remain the nation’s second-largest airline, with about 11 percent market share.
The key to Italy, along with revenue opportunities, is the length of the sectors. Wizz will fly Turin to Rome up to 11 times weekly, a distance of about 286 miles. It’s a classic ULCC route — a quick flight with tight ground time and lots of ancillary opportunities (people still need to check bags on short flights.)
The Middle East operation lacked those advantages. For a long time, Wizz was flying Abu Dhabi to Vienna, a 2,300-mile sector that ate up a lot of fuel and crew time. Not every new route from Italy is as short as Turin to Rome, but on the whole, Wizz should fly a lot more customers than it ever did in Abu Dhabi.3
”For every sector that we had to reallocate, we've created 1.4 sectors,” Malin said. “You're going to see our seat capacity go up and our sector productivity go up as a result of the shorter stage length."
Wizz likely will resume some longer flights from Europe to the Middle East that were not part of the UAE operation but were suspended due to the war. But Malin said the Middle East network likely will have some tweaks, calling out Israel, where Wizz historically has had a large operation.
”We had, I think, like triple daily from Budapest to Tel Aviv, for example,” he said. “Do I really need three times a day, if it’s going to be disrupted? Probably not.”
What about Eastern Europe?
In its home base, Malin said he’d like Wizz to grow up as an airline. While the carrier once just moved workers around, its customer base has become more diversified, while the passenger experience hasn’t changed much.
Wizz doesn't want to follow Frontier (another Indigo Partners airline) in adding a first class (it prefers its small blocked-middle product called Wizz Class), but it wants to treat customers better.
”What we need to do now is understand the nuance behind our customer segmentation,” he said. “We’re seeing a much larger segment of leisure travelers, especially now that Eastern Europe is getting more wealthy. The third-largest buyer of holiday homes in Spain were the Poles, after the Brits and the French last year. And so you see a different demographic coming through our network.”
Business travelers are also increasingly common, and Malin said he wants to prioritize schedule frequency and depth. He doesn’t want popular business routes to be only flown twice or three times a week.
”I want to be the airline that people think about as their daily driver,” he said. “[I want them to say,] ‘The Wizz flight to Warsaw leaves at this time or these times every day, and they never change that time.’ The problem is, I think, ULCCs tend to fiddle around too much with their network design and their schedule design. No one ever [knows] what days these planes are leaving. I want to fix that."
Consistency is expensive because even robust business markets have weaker days and times of year. But in flattening the schedule, Wizz might gain more pricing power.
”We have this scale and the market share to be price makers instead of price takers,” he said. “That’s really the opportunity that I see in front of me.”
What will Wizz do with its A321XLRs?
Good question. You’ll remember that Indigo Partners made a splash at the 2019 Paris Air Show by committing to 50 Airbus A321XLRs for four portfolio airlines. Initially Wizz was to receive 20, but in 2021 as part of a larger order, it increased its count to 47.
Now it has very little need for them.
”By the time we realized that we were no longer doing Abu Dhabi, and we were no longer going to be pursuing that particular product, the aircraft were being built, and so we were able to convert as many as we could to Neos, but we’re stuck with 11 at this point,” Malin said.
Wizz took its first XLR last year and has tried to allocate them to long sectors between Europe and the Middle East. But it doesn’t have that many of those. Malin said he’s open to new long routes that test the airplanes’ range, but only if their economics suggest they’ll be winners. Barring that, he’s taking a conservative approach with the XLRs.
“Otherwise, they’re just going to be Neos,” he said. “They’re going to be Neos with bigger fuel tanks, because there are situations, sometimes, depending on the season and the winds, where we are forced to tech stop, even in the Neo.”
On shorter routes, the XLR is less efficient than a Neo. However, Malin spun it a different way, reminding me the XLRs are more fuel efficient than the airline's A321ceos, which are gradually being retired. “As fuel goes up, that will broaden the gap,” he said. “But let’s hope that fuel doesn’t stay up.”
The XLRs also should open opportunities for charters, including to the United States.
”We have permission to do charters to the U.S., which is actually a pretty neat piece of paper,” he said. “We’re going do some of those for the World Cup that’s coming this summer, but only if someone charters the plane, and pays for the dead leg, and pays us up front, so we know what our profits are going to be.”
I asked Malin, who is from New England and often returns to Maine, whether he wants to launch scheduled flights to his home country.
“There are better ways to commit commercial suicide,” he said.
The fuel crisis could have been worse
Wizz is 57 percent hedged on fuel for its 2027 fiscal year, which began April 1 — a decision that makes Malin, who negotiated these hedges as CFO, look like a genius.
But since I usually follow U.S. airlines, which do not hedge (Southwest was the last holdout), I asked why Wizz uses them. Airlines pay a premium for hedges, and in many years, they lose money. Some carriers lose big money.
Malin said he understands the rationale, and told me it’s a hot topic at Wizz headquarters, since Indigo Partners (which is still a major shareholder) is a U.S.-based company.
”Before my time, there was a decision not to hedge, and that called us out dramatically during the Russia-Ukraine invasion, and so we started hedging again after I took over as CFO, and we’ve been following that methodology religiously,” he said. “We continue to hedge day in, day out, and so we just smooth out the impact.”
Wizz’s problem during the Russia invasion was not necessarily the absolute cost of fuel, though it was expensive. The issue was the relative cost compared to Ryanair and other ULCCs. If Ryanair and Wizz sold fares at the same price, Wizz might lose money, while Ryanair would profit.
“You have to understand your competition in order to help you make the hedging decision,” Malin said. “If we didn't have to, I don’t think we would, because ultimately, you’re paying a price to somebody for that protection. And the banks that we deal with are all big boys, and they don’t do this for free.”
I asked Malin if he is reconsidering his hedging policy. Now all hedging airlines look brilliant. But the math doesn’t lie: Over the long term, hedging rarely provides a net benefit. If he didn’t hedge, might Wizz have an advantage over Ryanair in each year fuel prices dropped?
Maybe. But he told me it’s not worth it.
“If I wanted to gamble, I could go find a different profession,” Malin said. “I’m in the risk management business."
That’s all for today. I’ll be back later this week with a story about U.S. airline earnings. I have heard some interesting things are going on among U.S. carriers.
Not everyone agrees that these challenges should have been unforeseen. During Ryanair’s July earnings call, O’Leary noted that Wizz executives should have known how harsh conditions affect engine maintenance costs and performance. “Wizz have always been, let me see — what’s the word? — inventive when it comes to explaining commercial failures and flip flops on strategy,” he told analysts. I think O’Leary made a good point.
You may wonder, as I did, how engine manufactures determine which countries are bad for engines, and which are not. “It feels like there’s a bit of a political meaning on the map that’s drawn,” Malin said. “Like, Kazakhstan is not but the next ‘Stan — one of the ‘Stans that borders it is, even though they’re right across the border from each other. The United States is not, but certainly Phoenix is no different climate-wise than some of the places in the Middle East. Greece isn’t, but Cyprus is, so I don’t know. It’s just a map that the engine manufacturers give you that determines it. Literally, it’s just a color-coded map. One color is bad, and one color is good when it comes to cost.”
There’s a reason European ULCCs like to talk about how many customers they fly, rather than ASKs. Customers buy ancillaries, whether their flights are 1,000 miles or 300, so ULCCs like to transport as many people as possible.