It is a truth universally acknowledged that every country needs air transport. However, where opinions differ strongly is on how it should be provided.
Maybe it is national pride or prejudice against low-cost carriers that has led to so many loss-making inefficient airlines that seem to exist only to serve government interests.
As one would expect, József Váradi, chairman and chief executive of Hungarian carrier Wizz Air, is in favour of a liberalised environment in which airlines can compete freely.
“Every country wants to have an airline, which might have been the right strategy 20 years ago, but I do not believe it is the case any longer,” he says.
Váradi does not agree a national airline is necessary to create infrastructure or boost a country’s economy. He argues that in many cases a country’s commercial aviation needs can be provided by what he calls “de facto, quasi national airlines… like Wizz Air”.
Citing Macedonia as an example, he adds: “They had a national airline [Macedonian Airlines] that went down. I think we created a market by entering with significant capacity and, if you look at the traffic we are generating, it is more than they did before.”
Váradi believes Wizz provides greater benefit to the countries it serves than “inefficient legacy carriers”. In Budapest, he says, Wizz will soon be carrying more than two million passengers “and all of those are point-to-point so they really use the structure of Hungary”. Comparing this with former Hungarian flag carrier Malev, he says: “If you look at them, half of the 3.1 million [passengers] used to be connecting traffic. Their passengers were just touching and going. They spent no money in Budapest, didn’t use the tourism sector or any infrastructure, and didn’t spend money in hotels and restaurants, so you can argue that we are already larger than Malev in terms of serving the Hungarian market.”
When it comes to discussing Malev, Váradi knows what he is talking about, having been its chief executive for two years. Despite bringing a degree of stability to the troubled airline, he was forced out by the Hungarian government during the fallout over an auditing dispute in March 2003. In the months following his departure, Váradi was putting the building blocks in place to get Wizz off the ground.
Malev lost its fight for survival in February, after the European Commission ruled it would have to pay back the near Ft100 billion ($457 million) it received from the Hungarian government between 2007 and 2010.
History repeating itself
Váradi believes its demise is a portent for what will unfold elsewhere. “Malev is a visible example of what is in front of the industry. Certainly, I would not consider it as a unique case and think there is more to come in the future.”
He thinks the end of loss-making state carriers propped up by governments is inevitable. “Obviously, when you are a government and you have certain other interests than just financial performance, your tolerance to inefficiency might be totally different to mine.
“It’s just down to the will of a state or government to what extent those airlines will be supported and in what ways. No matter how much the European Union prohibits financial aid, governments are creative enough to find ways of somehow bailing out their airlines.
“But economic rational gain is going to stop that process at some point; it’s just unpredictable when that will happen.”
While acknowledging that governments are likely to be wary of low-cost carriers, given the reputation of some to cut capacity or abandon airports altogether at short notice, Váradi says his carrier is different.
As an example, he uses Wizz replacing Malev’s traffic into Budapest: “We are committed to Hungary". We have always declared that and consider ourselves the home-town airline; we have made significant investments into the market.”
Economic realities mean “the ultimate measure needs to be profitability when it comes to routes”, he says, and airlines must “match supply with demand”.
Váradi makes no bones about how Wizz, like any other airline in a seasonal industry, rationalises its capacity during weaker periods. “We have always been doing this. The magnitude of the rationalisation depends on a number of factors. Most importantly, it depends on the input costs of the business.
“An airline’s sensitivity to excess capacity is very different when oil is trading at $110 a barrel rather than $30 a barrel,” he says.
Despite being geared towards profit, Váradi says Wizz is better positioned than any national airline to make a long-term success out of a route. “My view is that if I can’t make financial sense out of a route with the cost base I have and the efficiency I can create, no-one else is going to make it.”
Reiterating Wizz’s dedication to its 16 bases in Bulgaria, the Czech Republic, Hungary, Lithuania, Macedonia, Poland, Romania, Serbia and Ukraine, he says: “Wizz tries to be the home-town airline of our markets. In Poland, we employ Polish cabin crew and pilots. In Hungary, we employ Hungarians, in Romania, we employ Romanians.” He says this has advantages, especially in the perception of passengers. “The crew speak their own language and so the passengers can associate themselves with us.”
Váradi feels this approach differentiates Wizz from some of its European competitors but, overall, he says it is similar to what he describes as other “ultra-low-cost carriers”. He explains: “We are seeing two sub-categories of low-cost carriers. We call one of them ULCCs – ultra-low-cost carriers – and we define ourselves in that category. Then there are the LLCCs, the lazy low-cost carriers that are doing everything but remaining focused on cost.”
He says that while all new-generation airlines have “started off from the same platform”, many have lost their original focus and “started diverting from the basic fundamentals of being really low cost”.
Váradi views any meddling with the principles of low-cost as a mistake. “I think history is telling us the more focused you are on cost, the better your financial performance will become.” He warns it may be tempting for an airline to try to “appeal to customers that today choose legacy full-service carriers… but over time the competitive landscape may change and your competitor might become a more efficient, more effective airline when it comes to cost management and you may have a hard time.”
Similarly, the expansion of some of the main European legacy carriers’ low-cost divisions does not concern Váradi, who feels airlines such as Germanwings or Transavia, for example, present no strategic risk to Wizz.
“I understand why they are doing it, they predominantly want to address their own problems… such as union issues and those sort of matters,” he says. While efficiencies may be achieved in comparison with legacy airline operations, Váradi says they are “not creating efficiencies versus the real players on the market”.
He also observes: “Every single one of those initiatives started so far has failed. Whether they were in Europe or North America, but I wish them good luck this time.”
Playing by the rules
Having seen off a number of legacy and low-cost rivals, Váradi believes that to survive competition from those that may follow it is best not to tamper with a winning formula.
Amid the costs associated with GDSs, he sees no need to start selling tickets this way.
“In every single market... we are told ‘this country is different – there is no access to internet, no credit cards, your distribution strategy is going to fail’. We have been winning over every market with the same approach of only selling through the internet.”
Váradi is also against using allocated seating on his airline on the grounds of maintaining operational efficiency. “It’s something that sounds good from a customer perspective… but you are creating pressure pre-boarding. Customers might not be coming to the gate on time and you might need to keep waiting for them.”
While stating that Wizz Air is a private airline that does not disclose measures such as revenues per available-seat-kilometre, Váradi explains just how “low cost” Wizz Air actually is: “What I can tell you is we tend to be around 25-40% lower cost on a per-seat basis than the LLCC carriers, as we define them, and we are certainly in the ball park of Ryanair.”
The fruits of his strategy are clear, as in less than nine years its fleet has grown to 39 Airbus A320s, including the two aircraft operated by Wizz Air’s Ukrainian operation. Váradi says that even in the current economic climate, Wizz’s growth rate is “still double digit, which is fairly unique in Europe”.
He also dismisses media suggestions that the airline is unprofitable: “That is untrue... last year [ending 31 March 2012] was our most profitable year: we made more than €40 million ($52 million) of net profit,” he says.
Váradi says Wizz will keep looking for new expansion opportunities and, like other European low-cost airlines, it is looking east.
Wizz has recently begun stretching its boundaries from its initial route network within the EU. Váradi says this was not necessarily an “issue of desire”, simply what the carrier could do “in certain cases”. Citing the manner in which Wizz has had to approach different markets, he says: “When you take the market outside the EU, like to Ukraine, there’s a reason why we had to come up with an airline. You are subject to the bilateral regime the country has in place with other countries.”
Yet, he says that after establishing itself, new doors are opening: “Given that we have become an increasingly mature business – and we have proven ourselves in various markets – we have started accessing other markets and routes that were unavailable to us before.
“On that basis, we have opened up flights from Ukraine to Georgia; that’s how far east we are flying at the moment. Recently, we received designations from the Hungarian government to fly to Tel Aviv. Also, we received bilateral designations from Hungary to Russia, Turkey and Ukraine. That process is ongoing but it is very slow. It is not like acting within the EU... there is a process you need to go through.”
He says many countries on Europe’s eastern periphery still apply a “fairly closed” regulatory regime. Yet, he adds, regimes are changing and the EU has been initiating certain concepts such as Open Skies.
Even if Wizz is granted access to certain markets, Váradi says it will not rush in. “If you can access a market but have constraints that could jeopardise your efficiencies, which could fundamentally undermine your business model, this is not something we want. We need to wait for changes to be able to implement what we have,” he says.
As well as Russia, he says central Asia is becoming “increasingly exotic, especially looking at it from here [eastern Europe]”. Váradi views Georgia as a potential stepping stone to the region, but describes expansion there as a medium-term priority.
For all its devotion to low-cost strategy, Váradi is the first to acknowledge the role played by chance in the success of Wizz. “We started flying in May 2004... the same month as the EU was enlarged by 10 more countries.
“That created a genuine market opportunity and I don’t think Wizz could have been done before that and I don’t think Wizz could have been done after that, just for the sheer fact that after then the whole market would have been occupied. So I think it was the right time at the right place.”