Wizz Air Holdings Plc (OTCPK:WZZAF) Q1 2023 Earnings Conference Call July 27, 2022 4:00 AM ET
Company Participants
József Váradi – Chief Executive Officer
Jourik Hooghe – Chief Financial Officer
Conference Call Participants
Jaime Rowbotham – Deutsche Bank
Harry Gowers – JPMorgan
Carolina Dores – Morgan Stanley
Alex Irving – Bernstein
Mark Simpson – Goodbody
Stephen Furlong – Davy
Jarrod Castle – UBS
Alexia Dogani – Barclays
Conor Dwyer – Berenberg
Operator
Good day, and thank you for standing by. Welcome to the Wizz Air Q1 Results Webcast. [Operator Instructions] Please be advised, that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, József Váradi. Please go ahead.
József Váradi
Good morning, everyone. Thank you for coming to this meeting, and I also welcome everyone online. So, this is to report the first quarter of the current financial year. If you could just move the slide, please.
So we delivered 30% more capacity in the first quarter versus pre-pandemic levels, unit revenue was gradually building up month-on-month. Clearly, it was a difficult quarter overall, taking all events into account, let’s not forget that, that was the time when the company had to reallocate a significant portion of its capacity originally designated for serving the Ukrainian and Russian markets across the rest of the network.
That took some time to implement it. It was a tenured [ph] a big ramp-up period for the business. That’s a period when we were ramping up utilization to deliver 30% more ASKs in this period.
Also, this is a period when we started experiencing significant input cost rises, like the fuel spike and also towards the end of the period; we started seeing some significant disruptions coming through the underperformance of the supply chain. So kind of a difficult period.
The Q1 ticket revenue was minus 12%, while ancillary revenues continue to grow significantly in the magnitude of 14%. A fewer costs basically doubled down in this period relative to fiscal ’20. We put in place some insurance hedges for the current financial year and started systematic fuel hedges for the next financial year. As of fiscal ’24 right now, we are hedged on 20% of our fewer requirements in the next financial year.
Ex-fuel CASK came in at €2.62 per ASK, including €0.22 for flight disruptions, as I said, we started encountering significant events on this field, resulting in a number of flight cancellations and obviously significant compensation cost to passengers.
We ended up the quarter with €285 million of operating loss. Net loss was €453 million. The difference is majorly the unrealized FX exposure that didn’t affect the cash performance of the business but affected the P&L.
The company remained in a very strong liquidity position at €1.6 billion at the end of the period, maintaining investment-grade credit, as a result. We believe that we have a continuous revenue momentum, and we are expecting a significant profit, operating profitability, but in the current quarter of the financial year.
So moving on with the slide. So you can see the key business metrics here. But obviously, passenger numbers have went up very significantly four times the numbers of the same period in the previous financial year. We continue to expand our operating footprint in terms of operating more of – 16 more out of the 26 more airports and two more countries. We consolidated some of our base operations, a number of bases we opened up during the pandemic got consolidated as a result. We have been receiving a number of awards. But clearly, this period was marking a significant expansion and diversification of our network footprint.
Moving on to the next slide. This is an overview of market shares in our core regions in Central and Eastern Europe. Overall, we managed to be at 5% market share gain in this period. So our overall market share in Central and Eastern Europe went up from 18% pre-pandemic levels to 23% in the quarter, and you can see the overview by market-by-market. In most of our countries, we have been gaining market share positions. And in the balance of the countries, we have been holding market share positions.
And with that note, I would like to hand it over to Jourik.
Jourik Hooghe
Thank you, József. So good morning also from my side. I think the financials have been released a few weeks ago. So I guess no surprises here, numbers are consistent. So from a revenue point of view, we see revenue quadrupled indeed versus the base period. Obviously, not a great point of reference, but still a very strong revenue performance with 17% up versus the same quarter pre-COVID.
From a profit point of view, there’s really three factors coming into play. So clearly, we’ve mentioned the RASK, we’ll reference the cost numbers in a minute, which were 40% higher, mainly driven behind the high input cost. And clearly, from a reported point of view, we were affected by the strength of the dollar. The balance sheet rate at the end of June was 1.044. And the only reason why I mentioned that is because today, it’s somewhere below 1.02. So whereas we have seen a significant loss in the first quarter, we may continue to see in the current quarter another €100 million or so of these unrealized FX losses should the euro bet at the same position versus the dollar at the end of September.
Again, these are not cash losses. These are purely translational FX into the P&L. And once the market, hopefully, at some point in time, move to more of a risk on mood these will start reverting as well. Cash position, I think, a very strong performance on cash growing from another €200 million versus the position at the end of the year.
Now moving to CASK, so if you look at CASK, so as mentioned, I mean, the CASK for Q1 increased in total 40%. That’s obviously extremely considerable. The key driver of that was doubling almost of the fuel CASK. The average fuel price for the quarter was $1,240 per barrel. So just to put it in perspective for you, what’s driving these numbers.
If you look at ex-fuel CASK, it was at 262, as József mentioned, €0.22 was driven behind disruption. So if you strip those out, you basically get to Q1, let’s say, pre-abnormal disruption costs of around €2.40. It’s still €0.13 higher than where we used to be pre-COVID, but if you look at the first quarter, we operated around 10% lower utilization over assets of our, let’s say, of our crew, then we did pre-COVID. And that’s really the key difference between where we are or where we were pre-COVID for the disruption and the utilization versus where we are today.
So these things, as you see, as you see further on the presentation, they will be normalizing, they are normally as we speak, and obviously, we should trade out all those sub charges as we move week on week.
Looking at cash, and cash is moving to €1.6 billion. Clearly, we keep operating with the same principles on the network, especially also in the first quarter focusing very much on profitability. We’ll talk a little bit more where we see the RASK increases, et cetera, but it’s coming broad-based across the network.
So we’re able to deploy our network as we have laid it out and we don’t need to make compromises on our strategy because the cash performance cost probably comes broadly across the network. The company is investment grade with Fitch and Moody’s. And obviously, the liquidity growth this quarter got a boost from the growth of the company at 30%, helping both, let’s say, payables and the un-flown revenue, which is actually what you see in the next slide, in page eight. So you can see here the bridge on cash, you see the outflow on the operations, which includes obviously the lease payments, which is kind of a fixed cost which we have, in any case, which included the disruption cost, you can see a very strong inflow from un-flown revenue from payables and a small €20 million outflow linked to some quarterly phasing on pre-delivery payments.
So all in all, strong cash performance with this on un-flown revenue, the booking window is used to be around 20% lower than pre-COVID when we reported last at full year. Today, it’s around 10% lower versus pre-COVID window, so we still have 10 points – 10% to go to fully close the gap with the booking window pre-COVID, so there is more upside potential here.
Actually, it’s quite a good performance if you think about it, given the amount of news there was on disruptions, given that some countries during this periods, right, and June were probably still peaking on COVID, and we’re kind of coming out of that. So the industry is normalizing on disruptions, infection levels of cases there’s less detrimental impact from a hospitalization point of view already, but obviously, people may not travel if they have been infected. So all of that, we’re trading out of it. It’s a very different situation to be in going forward than where we were last quarter and surely where we were last year, where we were going into August and September in the peak of a health crisis with restrictions as a consequence. So a very different set of circumstances looking at summer.
And from a revenue performance, you can see that we had an excellent performance again on ancillary, growing €4 per passenger. We’re over on slide nine here. That is €1 ahead of our – our target when you want to grow ancillary €1 per passenger per annum versus – and that obviously would be €3 per passenger increase versus F ’20 were €4 per passenger increase. We continue to see that strength carry through for summer.
Ticket fares were down around 12%, as we’ve mentioned. Again, this is where we have seen a sequential improvement with very tough numbers in April and May, as we ramped up, as we were seeing the impact of the recasting of the network, as a consequence of the war in Russia and Ukraine between Russia and Ukraine.
But if you look now forward, we continue to see that strength in ancillary for summer, and we see obviously the ticket fares reverting, becoming double-digit growth on ticket fares. And this is giving us the confidence to guide Q1 at a rough increase of more than 10%, just above 10%, with July probably going to be around 11% RASK increase.
And that is on a 30% growth. That’s a very strong number. You see similar numbers reported by some other players in the industry, but of much of lower growth or sometimes even of declines. So that basically means that not only on our core market, also on the expansion market, we’re able to see those very strong fare increases. And that just speaks to the fact that there is strong underlying demand and strong maturity where we have expanded.
And with that, I handing it back to József.
József Váradi
Thank you, Jourik. Let me just elaborate on a few metrics affecting the performance of the business and kind of how we see the way forward. So I’d like to take on operational performance, flight disruptions. Obviously, this is of high interest to everyone, further elaborating on the revenue line of the business, reinforcing our fleet and network growth and also to talk a little bit about sustainability and leading the fact with that regard.
So let me start with the operational performance of the air. And obviously, it’s been an incredibly challenging period, primarily due to supply chain performance deficiencies. I have been asked the question a number of times, but are not you know, Wizz Air has been fully stopped to be able to rivet [ph] the situation.
Yes, Wizz Air has been fully sub throughout the whole period. You may recall that for the last nine months, we have been kind of warning the industry that we are seeing demand recovery as pretty imminent as soon as governments remove COVID restrictions, and is being confirmed in every single market we operate from, why for whatever reasons, I think most of the industry believe that this is going to be a slow gradual recovery to normal demand over years and some predictions were suggesting that maybe 2026, 2027, be able to hear recovery.
Now reality is confirming that demand is back immediately overnight, months, government remove restrictions. And we have been investing into our organization. You can see, for example, that we got 6,350 people as we speak, working for the company. This is against for South [ph] in a year ago. So we have been bearing more than 50 organizational growth during the last year. And also this number exceeds the pre-pandemic levels by around 25%.
Of course, we have been growing the business in terms of flight. We have been recovering utilization, not to a full extent as Jourik said, given the operating environment as we head to adjust capacity to create more slacks in the system to be able to recover against some of these operational disruptions.
We have been adjusting the model quite significantly and quite large scale, taking down the flight volume, redesigning flight duties, creating additional spares in the system, added significant resources through our planning and logistics departments, also improving capacity in call centers, creating daily fire breaks in the schedule, also affecting boarding procedures to make sure that we are, in the end, minimizing customer disruption.
So we are trying to the customer in the forefront of everything that we are doing to make sure that we protect the interest of the traveling public. Obviously, that costed us utilization, that costed us capacity, but we are able to fly. But if I look at the loss adjustment, we have been making adjustments in two waves, taking down the intended growth from 140% in the second quarter to roughly around 130%. And lost 5% capacity adjustment is actually coming in at neutral to financial performance because, obviously, we are able to yield up the squeeze capacity, and we are able to save compensation cost. So net-net, its financially neutral to the business. Having said that, it is still undermining utilization, which remains a further opportunity for the company to play on going forward.
If you look at how flight disruptions have been affecting the business over the course of the last period, you see some significant event. Undermining our ability to operate properly, mainly ATC related issues or airport related matters. I think the latest on that was the Luton the [indiscernible], which I’ve never heard over 20 years of my career at [indiscernible] but Luton managed to prove that.
So we are dealing with all these hiccups in the system and systematically we have been dealing with change in labor shortages at ATC and in the airport environment in handling and airport security.
You can see the trend line now that there is some level of normalization coming in. Obviously, most of it is because of our investment into our own resilience, more sets [ph] more buffers to make sure that we are able to deliver these options. But also, we are expecting efforts to continue to invest ATC to continue to invest and see some benefits coming through this, especially the post summer peak period.
Jourik told about revenue. I think revenue is a strong side of the equation for risk. And really the key highlight here is that we are growing this business 30%. Our competitors are here down versus pre-pandemic level like EasyJet or growing 15%, but we are growing 30%. And we are seeing the same unit revenue trend here, which is just underpinning our diversification strategy that it is not only the incumbent markets that keep the business going and create value for the company.
But also, we are seeing the very same trends through the new markets. Italy, the investments in the U.K. by acquiring slots, the expansion of Abu Dhabi entering the Albanian market, we are seeing very similar trends coming through what we are seeing in the incumbent markets. And you see that generally, we have a revenue momentum months on months, and we believe that we’re going to be able to maintain that momentum.
Obviously, one of the question you could – questions you would have is, how a possession inflation – possible inflationary pressure on consumers could affect bookings, especially going into the winter period. I believe that MPD [ph] co-evidence have suggests that when it comes to high inflationary period even recession times, as the low-cost sector is winning in the industry because people tend to downgrade, they still travel but prepared to pay less for travel, maybe they shorten their ships. And it is more at the decrement of the legacy carriers than low-cost carriers. And in these periods, actually low-cost carriers continue to be at market share, market position. So this is not a betting for Wizz Air, if this is what’s happening.
The fleet continues to be our strategic strengths and a huge source of competitive advantage. We believe that there is no better action that the A321neo. Our fleet at the end of the period consisted of 157 aircraft. We took eight new A321neo deliveries and we retired four old A320CEO aircraft in the fleet. The fleet continues to get younger, 4.9 years average fleet age, I think that makes us the airline operating the younger suit of aircraft upsize in Europe and probably in the world.
Also, we have been up-gauging from A320 to A321. We have received – count is 240 now. Obviously, this is a source of economic advantage on the unit cost coming through the engineering design of the aircraft.
Our fleet program remains intact. We are not deferring aircraft deliveries. Obviously, we are subject to supply chain issues on the OEM side, and we might be subject to some delays. But this is a fairly programmatic aircraft delivery program. We are taking 40 to 50 aircraft deliveries a year. And even if there is a shift of a few months here or there, the plan remains intact going forward.
If you look at the way we have been growing the business in the current period, I think we are now resuming the normal growth better, being focused on increasing frequencies on existing routes. So roughly three quarters of growth capacity manifest in the form of frequency increases, 24% by joining the dots connecting existing airports, but we continue to deliver new airports, new countries to the franchise to make sure that we continuously diversify our fleet network. So we believe this is a very safe way of delivering growth.
So the major investments are behind us. We made those investments during the COVID period. So by having that backbone created now we are putting the meat on the backbone to make sure that we are benefiting from those early investments. And we started seeing results coming through, as Jourik mentioned. We are getting very similar revenue patterns through the new markets, as from the existing markets.
We remain focused on our environmental commitment. This is a leadership area for Wizz Air, given the fleet, but we operate, given the aircraft what we operate. It has been increasingly recognized by the Burt [ph] organizations who are focused on environmental impact, on sustainability.
We also performed a – our first flight with sustainablization fuel that was blended here from Bucharest to Lyon, I think that was taken very well. We were the only airline actually operating full commercial flight of the airlines [indiscernible]. So that I think kind of suggest the commitment of Wizz Air versus the rest of the industry.
We remain ambitious with regard to our sustainability targets in 2030. And you can put that in perspective versus our competitors. We believe that we have performed a lot better than the rest of the industry in terms of unit, carbon impact relative to other airlines.
Also, we have been further diversifying our management in terms of gender diversity, as we speak, 6% of our management consists of female leaders and managers in the company. And actually, that number continues to rise. So Wizz Air is a good place for diversity.
Let me have a few highlights on the current quarter, on Q2. We are looking at delivering capacity growth of 30%. It was intended to be bigger. But because of the capacity adjustments to create resilience against operational disruptions, we took that growth down, but it is still very significant 30%, and we are expecting to deliver over 40% capacity growth in the second half of the financial year.
Again, if you would on the math, in terms of aircraft count and utilization, you come up with a bigger number than 40%, but we are keeping reserves for operational disruptions to make sure that we continue to protect the consumer and the integrity of our operating platform. But we shall see how that plays out, whether or not that would give us more scope for growth, but we are planning on up here on 40%.
We are maintaining a relatively high crew productivity and fleet utilization on travel, so our target is more than that. We will be looking at 2.5 hours about the concession, here is again – put against the operational disruption. So we need to see the environment to improve significantly before we can go above. But I think that’s a huge reserve for efficiency improvement for the airline.
We were talking about the revenue environment. We are seeing RASK improvement of around 10% in Q2 versus fiscal ’20. And we believe that some of that momentum made just fall into the second half of the financial year, but visibility is very limited at this point in time.
We are expecting 90-plus percent performance on load factory in July and similar numbers for the rest of the quarter, underpinning the strong consumer demand for our services and our products.
Ex-fuel is approaching historical levels. I mean, we are still having deficiencies of – on cost resulting from the lower than intended utilization, but once we are fully back up into historical utilization levels, you will see the cost levels improving.
We are expecting to deliver significant profit in the financial quarter. And as said before, we continue to expand our jet fuel hedge and carbon emission coverage for fiscal ’24. Right now, we are hedged on 20% of our jet fuel requirements for the period. But in a way, we are playing catch up and we will continue to place layers of hedges going forward. And given the uncertainties around disruptions and the macro environment at this point in time, we are not providing further financial guidance for the year.
So with that, let me just wrap it up. So Wizz Air, we believe, is in a good place to continue to strengthen its leadership in our core markets and also benefit from the investments into new markets and all those investments and ranks [ph] will continue to keep us on track for delivering the strategic growth pattern of the company.
Operational disruptions are normalizing to some extent largely because of our own investments, by adding the operating model and partly because we are seeing the investments also made by third parties into the supply chain to make sure that the situation is gradually improving.
We clearly see momentum on revenue and yield, and we are building on that – on that momentum going forward. Ex-fuel unit cost is at a target, assuming full utilization. It is, at the moment, compromised because of the supply chain issues, but once we are seeing further normalization of the supply chain, we’re going to be putting utilization back to historical levels. And we believe at that time, we would be back in ex-fuel, of course, that was pre-pandemic.
Fuel CASK will become level playing field as of fiscal ’20 due to our resumed systematic hedges going forward. We are having a strong liquidity at €1.6 billion. And we feel good about the other prospect of liquidity going forward. And we believe that our fleet remains our strategic source of competitive advantage going forward and that unlocks the lowest cost and lowest carbon intensity commitment of the company.
With that, I would hand it over to Q&A.
Question-and-Answer Session
Q – Jaime Rowbotham
Good morning, József, Jourik. Its Jaime Rowbotham from Deutsche Bank. And two questions. For low-cost carrier to grow and take market share during a recession is obviously very plausible, helped by people trading down, as you alluded to. But doing so can be quite expensive because it can be hard to get the kind of pricing you need to offset cost headwinds and prevent losses. So are you happy to – you sufficient balance sheet strength to withstand such a period in case that’s what happens next?
And second question linked to that, Lufthansa revealed yesterday that they’ve offered their ground staff wage increases of between 6% and 10%. And today, they’re all on strike. What’s the current situation it with in terms of staffing and wage cost inflation? Thanks.
József, Jourik
Maybe I would just take the second question first and Jourik can elaborate on the first one. So we have been heavily investing into our staff in various ways. First, we have been growing headcount significantly. As said, a year ago, we were roughly around 4,000 people in the company. Now we are at 6,350, highest headcount pre-pandemic was roughly around 5,000. So we are significantly off on the organizational capacity.
At the same time, I think we were the first airline reinstating pre-pandemic fare levers. First, for the cabin crew, secondly, for the pilot community. I mean many of our competitors are still on cost salaries and they are still on the aftermath of COVID measures, those companies have taken. This is the recognition of the inflation environment. And also, we said that that’s an investment which is worthwhile to improve the morale of the group, given the incredibly distressing operating environment.
I mean, let’s not forget that these people show up at work and they make a drag into doing nothing for two, three hours because of ATC delays. And it is just a very distressing lifestyle going through this deferred [ph], we needed to make investments against that, that also, we have been systemically reviewing especially low cost salaries CASK for cabin crew to make sure that we are going with the market when it comes to the inflationary pressure of the local market and we have been adjusting salaries across the board.
So we have been on an investment cycle when it comes to softened, on that basis we believe that we are truly in a lot better position than most of the other airlines who might have been playing it a lot stricter than us. So I feel pretty good about the morale of the company, the commitment of our organization, our people and the resilience of the system, especially now as we have made some adjustments to capacity.
Jourik Hooghe
Jamie, on the first point, if you look at liquidity of the company, it’s at €1.6 billion. We have summer ahead of us. So operationally, that should further build, maybe there will be some outflow that will offset some of that because of un-flown revenue as we look forward for the second half.
But essentially, the key uncertainty ahead of us is, its kind of the second half, which is six months to bridge. That’s not a long period, as of F ’24.This is a level playing field. There’s a lot of strength. The platform always we believe come to full fruition as we have level playing field on fuel costs, as we will have the same operating platform on revenue.
And you know, whatever strength we may have lost, and obviously, we have lost versus pre-COVID in terms of balance sheet, we’ll very quickly rebuild that as we get into F ’24. So yes, we are confident and if there would be a politic scenarios over the winter, there’s things that we can do with the operation to make sure that we minimize any outflow from the operation.
Unidentified Analyst
Sathish from Citigroup. I’ve got three questions here. Firstly, on your – given your high exposure to the VFR market, can you give some color on what the recovery looks like within that particular segment for you? And where is that compared to pre-pandemic levels?
And the second one is on the balance sheet. So first of all, what is the leverage targets that you need to do to maintain the investment grade credit rating? And also any color on working capital recovery as we go into the full year – into the next three quarters? That will be helpful.
And then the third one is on the capacity. Obviously, you said that you built the resilience, so how confident you are operating at 40%, given you actually cut back in Q1 to 30%? And do you see any down-size risks there? And also how flexible you are with that capacity if any potential downturn into the winter? Thank you.
József Váradi
Maybe I’ll take one and three. So with regard to the VFR traffic recovery. VFR has been pretty strong across the cycle. So if you look at the breakout of COVID and how the various flows was impacted by the COVID restrictions, actually VFR has been, by far, the most resilient segment.
Now obviously, we are seeing some restructuring of VFR traffic. I mean, U.K. is interesting. I mean, obviously, you have certain immigration measures put in place by the other country, especially those Brexit that has some impact on VFR flows. But they are kind of moving capacity around to make sure that we serve the people wherever they go and we have flights for that.
So I mean, actually, this is not a very difficult segment to manage. To be honest, I mean, you just need to understand the dynamics where people go and you serve their needs on that basis. And we have been doing it forever, to be honest, I mean, we’ve just been following people and their path.
With regard to overall capacity, 40%, whether or not this is sustainable. And actually, if you run the numbers, you could end up with a conclusion that actually we should be growing around 49%, given the act of account and given the utilization targets what we have in place. So we are already creating contingency for the operational disruptions with the 40% level.
But we are not going to fly for the sake of flying. And we are going to fly for financial performance. So cash management, liquidity management remains the – remains a very important guiding principle for the business. And our ability to adjust flying capacity has been demonstrated throughout the pandemic.
I mean, if you just look back what happened in March 2020, we were operating 100% of capacity. In April, we went down to 3%. In August, we were 80%. November, we were 10%. December, we were 100%. So we, again, manage capacity probably a lot better than any other airlines in terms of going up and down according to market demand, according to operating conditions.
So we’re going to be adjusting capacity according to the market conditions. We are not going to grow for the sake of growth. But we – at this point in time, given what we are seeing, given the market strengths on revenue, given the currently assumed cost environment, we feel quite comfortable that this capacity planning is intact from a market standpoint, as well as an operational standpoint, and we have sufficient reserves to be able to operate the airline despite assumed disruption here or there.
Jourik Hooghe
Yeah. And your balance sheet-related question. So clearly, I mean, I just gave some on the current quarter, right? So we should be able to build some more liquidity coming out of the summer. Then you go into the second half, in a normal year second half is, let’s say, profit neutral, maybe slightly loss making for an airline. So we will probably burn a little bit of cash during the second half, given where we’re at under earlier, let’s say the macroeconomic condition. Obviously those changes could be less or more.
But the really, it’s really all down to F ’24. And if you look at the F ’24 numbers, if you look at the pricing platform that is out there, the hedging that we have in place, you can see that we immediately get maybe next years at the high end of the leverage ratios, but then the year after fully impact at the low end of the leverage ratios, which are required for our own targets, including for rating agencies.
So we feel quite comfortable on that. I think nobody is looking at point in time, people are looking forward. And I think we’ve said previously that there was comfort being sought on what we would be able to do on the pricing platform over summer, I think we’re proving that we can be out there with the other airlines despite a higher growth, and we’ll continue to prove that as we go month-on-month. So I think that gives you the right level of comfort on the balance sheet as well.
Harry Gowers
Yeah, morning. Its Harry Gowers from JPMorgan. I go two. On the system, first one of those market share slides. The places where it increased the most, Albania, Bulgaria, I think, what is you know, in those markets is it a case of local operators because Eastern Europe are struggling? And then just on cost, with utilization slightly low in Q2 and winter now. I mean how should we think about the non-fuel CASK in terms of that journey of getting back towards pre-COVID levels? Thanks.
József Váradi
Maybe to take the market share question. I don’t think we are a market share driven company by definition. And COVID to some extent, as we suffered some of the competitive capacity in certain markets. So Albania is clearly one of those markets, local airlines basically superior than to be – got that to fill the vacuum. Bulgaria is also similar to some extent. So of course, we are taking advantage of the market situation, but we are not necessarily market share driven.
But the consequences of our growth is translated into market share gains. And as I said, we have been gaining significant market shares in Central and Eastern Europe, as we speak, we add up 5% versus pre-pandemic levels. But we are not driven by market share. So we don’t have a market share target for any of the countries. It is more of a consequence of what we are doing organically and annually.
Jourik Hooghe
Yeah. Maybe just building on that, and you can see that from what happens in the industry, right, if you look at summer capacity its down 15 points for the market, we see then open capacity, obviously you grow. In certain of the markets, if you look at some of our competitors in Bulgaria, Bulgaria area is down 45% in capacity, [indiscernible] is down 25% in capacity. So even just us holding or slightly expanding in some of these markets leads to almost by accident, let’s say, to those market share gains.
On your question on utilization impacts on Q2 costs. So if you look at it, I mean, as outlined during the main presentation, the two key drivers on the cost of charge versus fiscal ’20 pre-COVID were really disruption costs and utilization, disruption costs will be – still there to some extent during the month of July, we communicated sequentially improving. We should be trading out of this during August and September.
Utilization impact, we also have maybe not 10 points impact over the second quarter, but maybe still 5% deferential versus where we used to be in F ’20. So those two factors will be at play during the second quarter, but to a much smaller expense. So that’s what you should kind of use for the second quarter ex-fuel CASK cost.
József Váradi
Maybe just to come back to overall capacity in light of market shares in Europe. So if you look at the projection for the industry, it is expected that the European industry will deliver roughly 95%, probably closer to 90% capacity versus pre-pandemic levels in the second half of the calendar year. And our numbers would be around 140 mark to be that regard.
And that doesn’t mean that we are blowing our minds in our existing markets. I mean, this is really the investment coming through in terms of entering new markets and expanding our operations in new markets. But we are resuming capacity in incumbent markets basically to pre-pandemic level.
So the objective of the financial year is to get back to where we were prior to COVID-19 in each of the incumbent markets. Obviously, where we are seeing some strengths or competitive advantages or the kind of market vacuums, we are filling those and we are acting on those. But most of this 40% growth is from the new markets, the new investments like Savitali [ph] Abu Dhabi, Albania buying slots in London. These are the sources of that growth.
Unidentified Analyst
Hi. It’s Andrew from HSBC. Can I come back on the CASK, which you know, you were just discussing. I know you’re talking about productivity being 5% below in Q2. But you said in the second half, it’s going to be 10% below no, because you’re holding back.
So I mean, you’ve got that pressure on unit cost and then you’ve got inflation because you told us how much you’re paying your people who you care for so much. So how does that balance when we’ve got inflation building, we’ve got productivity being held back deliberately for disruption. How confident are you? Or is it just that the growth in aircraft gauge can magically deliver the pre-pandemic CASK?
Second question would just around PDPs CapEx and whether you’re going to finance them. So what impact that has on the cash flow as we funded the balance sheet? And then the final question would be around governance, I guess. So on Friday, I think your Chairman bought a big slug of shares, three working days before this announcement of results. So just curious to understand what rules govern the buying and selling of stock by board members or other insiders?
József Váradi
Sure. Let me start with governance. I don’t think there is any insider information issue, which is involved here. There was no any news that would have been affecting the financial prospects of the business anyways. Yes, we have been trimming some further capacity. But on a financial neutral way, I said, on the one hand, we save on disruption cost. And on the other hand, we are yielding on the business where we squeeze the capacity and that was done in a financially neutral way. We have a very robust governance code dealing with inside of trading matters dealing with share trading matters and this process has been totally compliant with that.
The restriction, the formal restriction that we have is on periods when we are reporting the full year and the half year results, the quarterly results. But we are paying extra attention to every single share rate request by any of the senior leaders of the company, as well as the Board of Directors.
We have a very robust approval process. Actually, when it comes to the shares trading, it is approved by the Chair of the Audit Committee. So I think I can assure you that this has been greatly scrutinized and applied and implemented with full responsibility and taking all sensitivities into our account.
And I don’t know what threshold you apply. I mean, I don’t think there’s a three day threshold or five day threshold, or one day threshold. But we are very confident that it was a new process followed with no any suspicion of insider trading in both years.
Jourik Hooghe
So, if I may. On the threshold, it’s two day’s after notification, which has been fully respected when the company was notified it was not two day that the Chairman traded. And we did announce within today of notification. So building on Józ point, we definitely follow your process.
József Váradi
Maybe if I just come back to the first question on the cost fee impact. I think the current deteriorating factors are clearly utilization on the one hand, utilization productivity on one hand and disruption costs on the other hand. The inflationary pressure, I would say, is pretty much offset by the productivity gain of the aircraft.
I mean, let’s not forget that we are trading A320CEO aircraft for A321neo aircraft. And if you look at it from an inflationary or stock inflationary perspective, the A321neo riding 239 seats to be required the same number of pilots and only one more cabin crew, which is already a productivity gain versus A320 flying 180 seats.
So there is a significant labor productivity gain just coming from the technology of aircraft that we phase the inflationary pressure there. So I think we are less worried about the inflationary pressure. The real question is disruption cost on the one hand. And as we say, we are trading that for utilization, aircraft utilization, but we need to see some structural improvement in the system to be more confident to move the line up back to historical levels.
Jourik Hooghe
And just on the balance sheet, as we mentioned in the last call, in the next 18 to 24 months, you shouldn’t expect any major PDP movements, payment movement for the company. There may be some minor core devaluations depending on the delivery stream. And if anything, PDP could be even an upside. I mean, we have €800 million worth of PDP deposited. So that’s really a large asset on the balance sheet.
Carolina Dores
Hi. Carolina Dores from Morgan Stanley. Three questions from me. First, do you appreciate all the work up you’re doing and hopefully things will improve. But assuming we get a recession and if the euro weakens, you have dollar exposure in your debt, I’m assuming all the cash is in euros, but please correct me if I’m wrong. How committed are you to keeping – I guess how important it is the investment-grade rating for you and what is, I guess, can be?
My second question is on hedging of CO2, are you doing any, given that you have a larger exposure, I understand that peers. And third, if you could give us an idea of what material operating profit means? I guess, typically, over the past quarters, consensus was, I guess, overestimating results and around €200 million of operating profit, do you think we are getting it right for the next quarter?
József Váradi
If I may just give my perspective on your first question. What’s the investment grade was for the company. I guess your implied question is whether or not we would be backing investment rate with equity, I don’t think there is appetite for that and I don’t think there is need for that from the company’s perspective, from the board’s perspective or the investors, existing investors perspective.
We have been kind of calculating the net worth of the investment grade, that’s roughly around 40 basis points. If you want to put it that way, on access to capital, investment-grade is something which, obviously, we are very proud and we do a lot for protecting our positions and to maintain investment grade. But I guess it’s not going to happen at any price.
Jourik Hooghe
On CO2 hedging, we are at forward book for the full year, and we continue to buy almost the year around. So that’s the policy for the company. And on operating profit, we’re not guiding, but I think it show in the model, the RASK guidance we’ve given, the commentary on CASK, you can probably calculate where we’ll net out. So I don’t think you’re estimated with all.
Operator
Thank you. We will now take telephone questions. [Operator Instructions]
József Váradi
Sorry, operator, we just have one more for the floor.
Operator
Sure. [Technical Difficulty]
Maybe starting with the pricing strategy. Obviously, we need to take two things into account when it comes to pricing, one is the competitive environment who we compete with, what kind of pricing levels are out there from a market standpoint. And two is input cost environment we are into to make sure that we protect profitability of the business. And these are the two forces we try to combine in our pricing strategy.
I don’t think we are on competitive at all. I mean, first of all, I mean, half of the capacity is – more than half of the capacity actually is flying against high-cost carriers or no airline competitors. So our pricing power is probably a lot stronger. But where we compete, we stay competitive and relevant to the marketplace.
I mean we are – despite the fact that we have the hedge exposure in the current financial year, I mean, we are very competitive versus any competing airlines and we make sure that we stay competitive. But we take into account the rising input cost factors and make sure that we are priced according to our input cost as well.
Jourik Hooghe
On net debt, I mean, we are not disclosing the balance sheet numbers for the quarter. But if you look at it, we have improved cash position and the fleet has expanded from 153 aircraft to 157 aircraft versus last quarter. So essentially, we slightly improved the net debt position versus the previous quarter.
On staff costs here, again, we have not really disclosed any inflation numbers on staff specifically. But in previous calls, we have mentioned that growth inflation before optimization, of course, taking [indiscernible] into account we’re seeing double-digit inflation, so around 12%, 13% when we ran the numbers.
So first half, maybe somewhat in the ballpark or no, but clearly there is inflation on some of the cost element. And if you’re not investing in new technology, if you’re not investing in your network, that growth inflation will become also net inflation, but we’re able to offset that, as Józ alluded to earlier with the question there, that came from Andrew.
József Váradi
Any questions from the line?
Operator
We will now take telephone questions. [Operator Instructions] Our first question comes from the line of Alex Irving at Bernstein. Your line is open. Please go ahead.
Alex Irving
Hi. Good morning, gentlemen. Three from me, please. First of all, rationalizing basis, but as you continue to grow the fleet, do you expect to add more of those claims into existing bases or to grow outwards. And if outwards would that be more in Central and Eastern Europe, would that be more in Western Europe or what you looking elsewhere?
Second question is on ancillaries, clearly, very strong in the course for passenger and tracking ahead of your €1 per passenger per year target. Do you think that’s sustainable or that’s nuances that would maybe take us down to the original line impact.
And then third, on Italy, specifically pleased. So Ryanair told your operation earlier in the week is having quite low load factors. Could you please provide a bit of color into how you see performance on your Italian network and how that’s evolving both through the summer and as roots [ph] mature? Thank you.
József Váradi
Thank you. Maybe to start with your first question, we are going to deliver growth going forward. I think we are totally consistent to what we have been talking about in terms of the geographical footprint and how we would be diversifying our growth.
We remain focused on Central and Eastern Europe. Central Eastern Europe is our incumbent area. We are the market leader there, and we have been tapping in a lot of strength in those markets. And we believe that due to the low propensity of travel Central Eastern Europe, we continue to be the source of growth for the airline for a considerable period.
I mean, let’s not forget, the propensity to add travel in Central and Eastern Europe it’s roughly a third or roughly the third of the Western European. So there’s a long way to go and obviously, this is a function of GDP development, and we will see how that’s going to go. But we think Central and Eastern Europe will be a high focus area for the airline. And I would expect that most of the major to the growth we have delivered through Central and Eastern Europe.
Western Europe is fairly contained from a visa standpoint. I think we have been targeting certain markets, namely the United Kingdom, Italy and Asia. I don’t think we are trying to make this a broad-based Western European airline, we are pursuing very select market opportunities in Western Europe, and we will remain focused on these three markets going forward to follow through market opportunities with capacity increase there.
We are very excited about going east, as said, obviously, that’s also a set of select market opportunities, pretty much known to the regulatory environment and our ability to access capacity and markets through those investments. Abu Dhabi will continue to expand. And as I said earlier, we might be looking at how the market opportunities going further is, but this opportunity remains subject to the regulatory frameworks available for market access to us.
And maybe coming back to the Italian question. Italy has been a strong performer for Wizz Air. We have built a fairly own core network now as an old borne [ph] carrier, performing a domestic network in Italy, as well as old borne leisure traffic for the Italian market. But also we had a strong inbound carrier having a historical inbound network, especially from Central and Eastern Europe flown to Italy. We are seeing very similar performance of the Italian market relative to the rest of the business. So we feel very confident about the performance of Italy.
Jourik Hooghe
Yes. And there was another comment from someone that 321neo’s would not have same load as our airplanes. So maybe some people don’t have those airplanes. So they don’t have the data. We can also confirm that, that is not the case and the loads and fares are very consistent for the larger – share cost and the other one. So it’s important to be database on the discussion.
On ancillary, yes, we believe that, that growth that we’re seeing is sustainable. We’re seeing it not only in the quarter we just closed, but in the quarter we’re in, and we continue to see that strength for the rest of the year as well.
Alex Irving
Okay. Thank you.
Operator
Thank you. We will now take our next question. [Operator Instructions] Your next question comes from Mark Simpson at Goodbody. Your line is open. Please go ahead.
Mark Simpson
Yeah, thank you. Good morning. Three questions. First off, is there any covenant issue with regards to negative equity in terms of credit rating or your covenants with lenders? FX, you indicated there’s another €100 million potential loss on FX mark-to-market in Q2. Are you looking to hedge FX going forward, as you’re going to do around your fuel exposure?
And then the Middle East, you’re starting with Saudi flights this September. I know it’s a small operation to begin with. But could you give us an idea of whether you’re being incentivized or how that’s – how you’re being incentivized to start that operation? And how quickly do you think you can expand to more major markets operating out of Saudi into the region and maybe into Europe?
Jourik Hooghe
On the first question, the answer is no. There’s no covenant. On the second question, the translation impact, we’re highly unlikely to hedge, I mean, its not our policy. We’re not going to change it for the time being, imagine if you would have hedged that could have been a real problem. The transactional impacts we’re looking to step back into dollar hedging for transactional fuel exposure, but we’ll do that at the right point in time. And we feel given where the market is now, that today is not the right point in time to do that. And then Józ on the third question.
József Váradi
Yeah, with regard to the Middle East, I think we are gaining a lot of success to new markets. I mean, from Abu Dhabi, we have made some significant announcements to the Maldives to Kuwait. For example, very recently, we are also starting operating between Abu Dhabi and looking to more Saudi Arabia. Saudi itself is announced us the new routes to Daman [ph] and we are looking at further expanding that network.
I think we are looking Saudi as a market from the perspective of flying in borne from our existing base set up [ph] airline set up, but we are also looking at ways of establishing a bigger local presence in Saudi on the right conditions. So this is continuous discussions with eleven parties.
I would not like to elaborate on any incentives there because things are not getting in place. With regard to the routes, we announced, you might be aware that actually, Saudi has been overhauling airport cost on a structural basis, not for Wizz Air, but for every airline. And I think that its – has created the incentives to come to market.
Mark Simpson
That’s helpful. Thank you.
Operator
Thank you. We will now take our next. Your next question comes from Stephen Furlong at Davy. Your line is open. Please go ahead.
Stephen Furlong
Hello. Just a couple from me. I just want to – the ex, the CASK, the ex-fuel cost performance once on to the full utilization is in place. Do you think – I mean, EasyAir [ph] has a kind of comment on this, but the BYNEX [ph] over industry will be back to normality, whatever that normality is in terms of disruptions allowing you to operate for utilization. And then going forward, more medium term, I assume you kind of feeling is that on the ex-fuel CASK is kind of flattish in the context of any inflation is offset by gauge and company initiatives?
And then I was wondering kind of more longer term, just looking at – I know you have plans for you know, in the decade to be kind of with 500. And I know you’ve added a lot at Luton and Gatwick. But I’m also kind of aware that London remains a huge LTC market. And do you think that, I guess, 16 base aircraft in the London market is too light in that regard. It seems to be a challenge to get slots, nothing to do with you guys? Thank you.
József Váradi
Well, and maybe I would start with the London issue. I mean, the United Kingdom is one of the best lead open investment market for Wizz Air, and we will continue to invest and we will continue to look for opportunities to grow capacity. Here, yes, we understand that London especially is capacity constrained market and asset acquisition is truly cornerstone to the strategy. So we are looking at base of acquiring further assets in London.
I agree with you that we would need more capacity. But I think it’s a longer-term process, depending on how airports expand at our own capacity and to what extent we can get access to that infrastructure growth. But also there might be market consolidations through asset acquisitions, which would be interested and this is what we have been doing so far, and we’re going to be continuing both revenues in terms of pursuing further opportunities in London.
Jourik Hooghe
On the, Stephen on the ex-fuel CASK, so yes, surely the for next summer, you should assume normalization of the operating environment. I think we are already seeing industry investing in, let’s say, in the system this summer. So this should normalize sequentially month-on-month. A lot for the next quarters, I think you should still assume, let’s say low single-digit inefficiency on the ex-fuel CASK because of the lower utilization, so.
Stephen Furlong
Thank you. Very good.
Operator
Thank you. We will now take our next question. The next question comes from Jarrod Castle at UBS. Your line is open. Please go ahead.
Jarrod Castle
Good morning, everyone. And also three from me. And firstly, any update on retrieving your planes from the Ukraine or progress on insurance claims? Secondly, József, you’ve obviously got your incentive program with regards to share – the shares and the value being double from when it was granted. Any thoughts on changes to the terms?
And then kind of related, any thoughts on share buybacks, just given the, you know, the fall in the share price, if you think it has value at these levels to undertake those?
And then just lastly, just a nuance, but just interested in terms of 2Q RASK, obviously, you’ve given that clear number plus 10%. But how should we think about the profile? Does it – is RASK getting better as we move through the quarter or kind of evenly through the quarter always? Thanks.
József Váradi
Thank you. Maybe regard to the planes in Ukraine, no change. We continue to have three aircraft in KF [ph] one in WIP [ph] We have more access to the aircraft in WIP, so that airplane has been maintained throughout the period despite being grounded. That’s not the case for the KF aircraft given the different degree of sensitivities there. But our understanding is that these planes remains intact. Obviously, whenever we can fly the aircraft it would require a comprehensive maintenance program and approval program to get the airplane out of Ukraine. But no change versus the loss report.
With regard to referencing your question to the value creation plan. Whether or not we have any other source or change to the plan or considering share buyback, no, nothing. The plan remains in place as it was approved and there are no considerations as to speak, for share buyback.
Jourik Hooghe
On the Q2 month-on-month sequential RASK, Jarrod, what we’re seeing is we’re comfortable on 10% for the quarter. I think I have said earlier, 11% for July, it looks like a similar percentage for August, but then the booking visibility starts to the client. So this is why we have kind of given the guidance we’ve given. So we’ll see what happens as we complete the booking cycle for summer, but for now, the increase is very strong and is consistent for the three months.
Jarrod Castle
Thanks very much.
Operator
We will now take our next question. The next question comes from Alexia Dogani of Barclays. Please go ahead. Your line is open.
Alexia Dogani
Yeah, good morning. I just had two questions on kind of network development capacity and its been welcome to see your action on kind of capacity adjustment given kind of the current environment? When you look ahead for the second half and the winter season, how much more willing would you be to – to do more adjustments to trade-off RASK with recovering CASK? So that’s my first question.
And then secondly, you’ve talked about industry competitive capacity gap margins that you’re filling in. I mean, do you see those increasing near term and therefore, your willingness to backfill is higher in certain markets? Thanks.
József Váradi
Thank you. But I mean with regard to capacity management, I think this is really a matter of balancing supply versus demand from the perspective of profitability. I mean, we are in this business to create shareholder value. And our focus remains on profitability and liquidity, and that’s going to be the guiding principle for capacity management.
So I think we’re going to be assessing the market situation, whatever it is, and we will be taking capacity decisions on that basis. As said, during the pandemic, I think we very robustly demonstrated our ability to move capacity up and down, depending on the changing market environment when it comes to managing financial performance. But shareholder value creation, financial performance, we remain the guiding principle for capacity management.
In terms of possible industry consolidation and the opportunities created, I’m pretty sure that this is a significant impact on the industry, especially coming out of summer, going into winter. It’s going to be a pressing environment on a number of airlines having limited liquidity, not having the cost in place to compete and we might be seeing some emerging opportunities as a result. As before, I mean, we are very entrepreneur with that – in that regard, we are market-driven. Should those market opportunities arise, we would be acting on those market opportunities.
Alexia Dogani
Thank you.
Operator
We will now take our final question. The next question comes from Conor Dwyer of Berenberg. Your line is open. Please go ahead.
Conor Dwyer
Thanks very much, guys. Two quick questions for me. The first one, coming back to the ETS credit. Can you at all give us the price at which you’re buying these credits, excluding the free allowances? And are there any credit both for FY ’24, years?
And then secondly, Slide 13, it looks like the weekly book revenue over the last few weeks has kind of leveled off and if not sequentially declined a bit. Just given the pricing momentum, I would imagine towards the near end of the quarter – back into the quarter accelerated. Has there been a bit of a volume drop off? And if not, is it just a product of you trimming capacity in certain markets? Thanks.
Jourik Hooghe
On the carbon credit, we haven’t disclosed the price we purchased that. I mean, we’re having a relatively systemic buying program. There is volatility around the spot price, and we try to purchase at a frequent basis and time it in the right way. So I think if you look at that what we’re purchasing at, I think other people are misleadingly disclosing prices including pre-credit which is not very helpful.
And then on the weekly revenue progression. For F ’24, we are about to start on F ’24. So we have materially bought for F ’24. On the weekly revenue progression, I think it’s part of the cycle. So we had a big increase in capacity, let’s say, during the month of May, June, which then led to the increase in weekly, let’s say, sold revenue.
And then obviously, now the capacity level, the ASK level is more stable if you look at it to across summer and into the second half. So it’s normal that there’s kind of a flat line. I think you shouldn’t really try to read pricing into those weekly numbers in itself would be probably a little bit too high level. But yes, the ASK level is stable, I think with normal at weekly sales are stabilizing.
Operator
There are no further questions. Please continue.
József Váradi
Ladies and gentlemen, thank you for coming. Thank you for joining online. Thank you for your interest. See you next time.
A – Jourik Hooghe
Thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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