Wizz Air Holdings PLC (WZZAF) CEO József Váradi on Q2 2019 Results - Earnings Call Transcript

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About: Wizz Air Holdings PLC (WZZAF)
by: SA Transcripts

Wizz Air Holdings PLC (OTCPK:WZZAF) Q2 2019 Earnings Conference Call November 7, 2018 5:30 AM ET

Executives

József Váradi - CEO

Iain Wetherall - CFO

Analysts

Damian Brewer - RBC Capital Markets

Alex Paterson - Investec Bank

Rishika Savjani - Barclays Bank

Andrew Lobbenberg - HSBC

Kathryn Leonard - Numis Securities Limited

Mark Simpson - Goodbody Stockbrokers

Ross Harvey - Davy

James Hollins - Exane BNP Paribas

József Váradi

Thanks for coming to this meeting. But believe it or not, we are actually reporting a record half year in H1. And we believe importantly that this remains a structure winner in the industry. We are operating mostly from Central and Eastern Europe. Central and Eastern Europe gives us a disproportional growth opportunity given the GDP growth and the market stimulus. But our business model can apply in that market context. We are becoming the undisputed cost leader in the industry. And we're going to start seeing significant economic benefits flowing through the new aircraft delivery program what we are going to start in a couple of months.

I mean, clearly we have been encountering increasing fuel cost in the business. And as you can see, we actually have reacted to that by trimming capacity. And also we have made certain changes to our revenue production. And all those have implied in an increasing yield for the business going into the second quarter aimed at the second half of the financial year.

We went through, I don't think this is only down to this, this is industrial events, we had very difficult summer from an operational standpoint. But now we are seeing operational is being normalized and we are certainly back on track to an extent that in October and early November our operational KPIs are now exceeding those of 2017.

Our strong balance sheet with investment grade give us success to lower cost capital. And we certainly can ride those benefits when it comes to aircraft financing. And it is especially beneficial going into fiscal '20 when we will start taking a bunch of A321neo aircraft.

Well passenger number is up 20%, revenue is up 20%, load factor up 1%. And actually net profit for the reporting period is up over 1%. I mean obviously we are seeing another phase of consolidation in the marketplace resulting from high fuel prices which I think is a good thing especially from a Wizz Air perspective because all that consolidation in the European airline space is benefiting Wizz Air directly or indirectly, certainly is thanks to the ULCC business model. And it gives further opportunities for expanding our reach in the market.

Nevertheless, taking all factors into account, we are reguiding the market from a previous €310 million to €340 million to €270 million to €300 million. Maybe a little bit of color to the numbers. If we see everything actually manifesting in a way as we are seeing them today. We think we're going to be landing at the upper end of the range. If a perfect storm develops, we may be pushed lower than that. But I think we are coming with a guidance which we have now explained twice to the market.

So looking at the first half. Wizz Air is #1 low-cost carrier in Central and Eastern Europe. We carried close to 19 million passengers. As said, 20% more than a year before. Our fleet was grown to 104 aircraft. And we nearly opened 100 new routes in this period. So we remain very active in the marketplace. We keep innovating the market. And we keep bringing new routes, new opportunities to customers to enjoy low fares of Wizz Air.

Operationally, we delivered a lot of growth in this period. You may recall that we had a scheme of 17 aircraft over 17 weeks. On the one hand, that was stretchy from an implementation standpoint. But at the same time that gave a lot of ground to deliver more capacity to the marketplace.

Well, all in all, if you look at the major KPIs, actually the business was very intact, very high utilization, increasing load factor and we maintain the regulatory of flight. The one KPI where we suffered severely was punctuality, and that was resulting from the difficult operating environment in the summer period.

And taking about that operating environment. You can see that on-time performance dropped significantly in the summer months. Lots of ATC issues, ATC strikes, ATC slot constraints. A lot of congestions in airports. Those were the external factors. But also internally I think we were stretching ourselves with 17 aircraft 17 weeks concept. And also that coincided with the ramp up of Wizz Air U.K. especially from a training perspective. So that created an additional layer of distress on the system.

And you can look at a cancellation side of the equation. I mean clearly the summer was very disruptive. And as a result we suffered long delays and kind of new heights on cancellations.

We have been putting a number of actions in place to make sure that we are not falling into the same trap as far as we are concerned over what we can control going into next summer. So we are looking at the schedule design. We are looking at spare capacity to be more capable of recovering from operational disruptions. And certainly we are aiding this whole development by lowering our growth profile of the business.

Maybe a little color to it. For the second half we were guiding 18% growth. Now we're going to be taking it down to 14%. And for fiscal '20 we are looking at capacity growth of around 15%. Those who have been following us for a long time must remember that we have been always guiding the market as we believe that Wizz Air is a structure of 15% business annually. In better times we may stretch it to a bigger number, maybe 20%, even more. But in worse times we may take it down to 10% or even lower. And we have examples of both in our history.

And an underlying principle to growth is that we never grow this business for growth sake, we grow this business for financial performance and growth is an output of that process. So I think this is what you are seeing. As the environment is getting a little tougher because of higher fuel prices we are just moderating our growth essentially to fall in line with the structural model and the structural assumptions of the model.

So with that note I would hand it over to Iain who's going to take you through the numbers and the financial performance.

Iain Wetherall

Thank you, József. So I'll spend a little bit of time just giving you some of the building blocks of our first half numbers, so for the first 6 months of the year ended 30th September 2018. And also some of the flavor going forward into the second half. So on Slide 6. As József highlighted, we actually had a record first half. There's not that many airlines in Europe that can boast record first half. 20% passenger growth, 20% revenue growth. Profits were actually up 1.2%. Again, I don't think there are many airlines that can boast profits were up in the first half. And in the second quarter profits were actually up 5%. So we delivered a net profit of €292.2 million.

In terms of the building blocks of the margin, I'll come on to that in a few later slides. So revenue growth, again delivering 20% passenger growth or maintaining a flattish RASK I think is a very good performance of the best of times. So you can see that 20% in terms of the revenue. Now that's made up essential of 2 pieces, the ancillary I think we've been signaling for a while last year, we changed our bag policy October last year. And we have been seeing a deterioration of the bags. Actually we've been seeing a deterioration of the bag revenues for a number of years now for the past five years. We've been calling the bottom but unfortunately we didn't call it quite -- quite low enough. So we changed that bag policy last year. But as you've seen from press, that we've reintroduced that.

So going into the second half, there are going to be 2 positive impacts. Number one, first the year-on-year effect will kick in in October because that was when it was changed last year. But secondly, we reintroduced a similar policy. And for the past four weeks have sold revenue. We've been seeing a very, very positive reaction on the ancillary numbers. So looking at the revenue piece. So the first half, we've seen strong passenger growth. We've seen a stable RASK environment. That's in -- that takes into account increasing load factors by 0.8 percentage point, maybe 1 percentage point. So we can see that the stimulating model is continuing to work and we're getting even more people on our -- on our seats.

Passenger numbers are 18.8 million, up 3.2 million from the previous -- previous year. One thing in terms of the negatives, often forgotten is that there's no Easter. So we had a bit of a drag in the first quarter of having no Easter. Going into next year we'll certainly have the tailwind of Easter. Sales currencies, I mean we would never like to look at our numbers on a constant currency basis but we do have around about 1% headwind on terms of the sales currencies. Again we absorb -- we absorb that in the RASK.

Moving on to arguably the most important slide. I mean, the structural winner when -- especially when stimulating a market has to be that that airline that delivers seats at the lowest possible costs. And we can claim that we can deliver seats with the industry lowest cost.

And what you can see on the blue bar. I think the important message here is Wizz Air has consistently been able to absorb the cost pressures that the business throws at us, whether it's a stronger dollar. If we look back at 2013, the dollar was something around about $1.40, 2011 was $1.50, today it's $1.14. Crew salary, inflation, you're seeing shortage of pilots that's creating inflationary pressures. Disruption costs. E261 is now going to be around about €30 million cost for the business.

So I think what's very important when you look at that blue line, Wizz Air consistently delivers the lowest unit cost possible on our capacity. And when you layer on the competition, certainly five years ago we would be saying other European LCCs are delivering costs 35% higher than us. Now they've nearly doubled, and in some cases nearly tripled.

So I think from a structural winner basis, our cost base remains very much intact. In terms of the first half, negative high fuel prices, maybe some numbers. In terms of the liquid what we're seeing on the hedge -- hedge level is up 22%. We're seeing carbon up 3%. However, there is a slightly -- slight improved dollar. So you're seeing a little bit of a tailwind on dollar for about 2%. And we take more and more A321s, Sharklet fitted aircraft. So you're seeing 1% fuel consumption improvement.

So when you look at our cash for the full year, we're seeing around about 22%. In terms of the disruption cost, Joseph highlights the operational challenges faced by all businesses. We incurred €16.8 million. This is double the previous year. So essentially you're seeing around about another €8 million of incremental costs through disruptions. And crew salary. I'll come onto the crew salary. The reality is there was a pilot shortage last year. All airlines had to step up and increase pilot salaries. That was effective from the 1st of January.

But the challenges, and maybe we bit a little bit more than we could chew with the 17 aircraft in 17 weeks and the opportunity for Wizz U.K. accelerated. Monarch went bankrupt last year. We picked up some stance. It was a fantastic opportunity. But of course that requires crewing and training.

So I think when we were here -- when I was here in May we were guiding around about 7% to 9% CASK increase on the crew as a result of increased training requirements, slightly more expensive pilots in places like Vienna and the U.K. You're seeing probably that number is going to be more towards around about 13%, 14% on a full-year number.

The positives, we are seeing a slightly weaker dollar, albeit marginally. And we can come onto the aircraft gauge, type in future.

Slipping on to Page 9. Really I think there's only 1 or 2 messages to come out here. If you look at the bottom, total CASK is up €0.20. And you look at the fuel, it's up €0.18. We always -- there's always going to be cost pressures coming from various line items. One year we'll invest in airports, another year we'll invest in maintenance. So we always manage our -- we manage our cost base. So you can see that we've been doing a pretty good job on depreciation. We knew that number was coming down and therefore we can invest more in airports such as the Viennas of this world.

Aircraft rentals. The dollar has helped that one. So I think the 2 pieces coming out of that, number of fuel costs which we talked about and then the disruption cost, this additional disruption cost coming through on the other expenses. But other than that, our cost base remains very much intact.

Onto Page 10. This is more of what we have coming. A very exciting chart. If you look at -- I'm sure you've got your models, you can plug in. We've actually -- we've toned down our growth rate over the next 1 or 2 years. And you can see that the numbers are actually trading down a little bit. So the end of '20, we're 122 aircraft, previously would've been 130. So you can run those through your models to see how we are being very disciplined, very active. And that has all been negotiated with the manufacturer.

I think it's very important when we look at the future. So when we talk about the costs, we have a phenomenally priced aircraft order. That's going to be flowing through the cost base. We have the largest aircraft, 239 seat neos coming onboard. Essentially that's 239 seats, that's around about 32% more seat capacity than an A320 and you only need 1 extra cabin crew. So again, the gauge of the aircraft is going to be delivering significant cost savings.

The neo engine, well, reported to be burning at least 16% less fuel, hopefully a little bit more once it's fine tuned. With 10 aircraft, 10 neos coming next year you'll be seeing between 1% to 1.5% lower fuel burn coming through our line. So in an environment of very high fuel prices the airlines that are going to succeed, the structural winners, are those that are operating the most efficient technology. And we have one of the most efficient aircraft orders coming through.

And the last piece is the -- on balance sheet financing. When you drill into our cost base, the one area where we've always been lagging the competition basically because we've been a young company, startup cash is our ownership cost. And with our investment grade that we got at the beginning of the year, we are seeing some significant improvements on deals.

If you were to ask me a few months ago, I would have said going to the bond market would have probably been the cheapest form of financing. That's not the case. We've secured or we've got lessors in 10 -- for 10 aircraft coming next year at phenomenal prices.

So maybe a bit of flavor on the outlook. I think if you -- there are 2 pieces to this. Maybe if you look at the top-right. The starting point is high fuel prices, how airlines should be reacting in a disciplined way. So you can see that we are slowing the growth down in terms of the ASKs. How does that really look. I mean, the months of the Novembers and the Januarys and February you will be seeing sort of high single digits, but December clearly you have the Christmas period, so you'll be looking to grow as fast as you can. So that's sort of how that's flowing through there.

And how does that translate into the yield environment. I've got gross RpS. That doesn't take into account the stage length. So arguably, the fare environment. So we're seeing a very strong performance in the fare environment but with a stage length at about 1.1%. That's how that's flowing through onto the RASK piece.

Fundamentally, our market is incredibly robust. We now operate in 44 countries. We are seeing strong GDP growth across CEE. And that is the fundamental driver of our business. We are seeing a recovery of the bag revenues. We changed our policy. We announced and put on sale our policy in October. And as of the 1st of November those sales. And we've been very pleased with the recovery of those. That sort of gives us the optimism going forward.

József highlighted slow growth. If you slowdown your growth, your route -- your routes mature faster. And that also flows through. Some of the negatives. Again, as I mentioned there's no Easter traffic in the fourth quarter and the sales currency, a little bit of a headwind but nothing to talk about. So ancillaries has been a hot topic for us. It remains an absolutely critical piece of our business model. I mean, the way you get the low fares into the market, the way you stimulate your track is to have the -- traffic is to have the lowest possible base fare. So ancillary for us is absolutely critical. We have been struggling on the bags revenue. I mean, it's a combination of changing consumer behaviors, also changing in the type of customers. We're taking more leisure passengers who tend to take smaller bags. So over the past five years we have been seeing a gradual reduction on our bags. And as a result, we changed our policy last year essentially to try and stem that flow and it was a bad decision.

Ultimately, what you could see certainly on the right-hand side of the chart is that we've been seeing ancillary per passengers certainly in the fourth quarter of last year Q1 and Q2 really deteriorating. And as a result of changing that policy since we announced in October, we're starting to see a dramatic recovery. The good news. I think there's two good news. One is the outlook because we have now changed that policy. The year-on-year effect of the change in policy [indiscernible]. But I would also stress that there is a number of initiatives and a lot of efforts have always been put on the value-add. So in the first half you're seeing value-adds up €2.7 per pax, which clearly was not enough to absorb the minus €4.6.

What does that mean in practice? Essentially what was happening is we were getting around about €2 per pax on cabin bags for the previous policy. When we removed that, everybody turned up to the gate with their bags. So we were suffering significant on the checked-in bags and that was essentially the area that we underestimated. Now that has all changed. And looking-forward, the sole revenue since October and certainly the flown in revenues from last week are very encouraging.

On the balance sheet. In terms of these numbers, we remain -- we have an investment grade balance sheet. And you can see that our cash remains very healthy at €1.336 billion. We will -- in terms of using that cash, we want to maintain investment grade balance sheet. And I think if you start jeopardizing your investment grade balance sheet you will then start jeopardizing your potential cost base. So as a result of the strong balance sheet we have seen significant cost savings already coming through on our aircraft ownership. And that's something we will maintain. So in terms of where we look forward, we definitely want to be maintaining or lowering our -- our leverage.

And with that I'll pass over to Joe for some closing comments.

József Váradi

Thank you, Iain. Look, just a little bit on the markets. We remain the #1 airline, the leading low-cost carrier in Central and Eastern Europe. We have around 39% of the market there. And in most of the countries we operate from, we are #1 or #2. As I mentioned, Central and Eastern Europe is a market that continues to deliver significantly higher GDP growth than West Europe. If you look at it from the standpoint of market penetration, while around half of the population fly in West Europe, it is only 15%, around 15%, 16% in Central and Eastern Europe. So that is a long, long way to go in terms of penetrating the marketplace.

So our business model remains focused on stimulating the marketplace as opposed to trying to get into dog fights with other carriers. And we believe that by being the lowest cost producer in the industry, this is the best way to position yourself for those growth opportunities in the future.

In terms of delivering growth, the profile has not really changed. It's been fairly consistent over the last few years. Most of the incremental capacity is deployed on either increasing frequencies on existing routes or joining existing airports in the network. But at the same time, it remains important to the company to carry the flag of low cost and continue to open up new airports, new countries in the business. We deployed around 7% of our capacity that way.

Maybe just a few words on Wizz Air U.K. I think Wizz Air U.K. is [indiscernible] for Wizz. Wizz Air U.K. is a new British airline. It's just received its operating license from the British government which is essentially recognizing Wizz Air U.K. as a British airline for the purposes of designations.

Wizz Air U.K. is ramping up very quickly. At the moment, it operates a fleet of 7 aircraft, but within a few months the fleet will grow to 10 aircraft. And as you can see obviously with that employment is also ramping up.

A few weeks -- a couple of weeks ago we started operating Wizz Air U.K. under its own commercial code W9. And we continue to believe that the U.K. is a unique Western European opportunity for Wizz. And we will use Wizz U.K. as an operating platform for expanding our reach in the marketplace.

On the one hand, this is a Brexit contingency, but on the other hand we think Wizz U.K. actually can be a consolidating platform in the U.K. And there might be more turbulence coming and we will make sure that we have a position here in the U.K. to further expand our business. That doesn't mean buying airlines or other business. We are not going to buy any airlines. But we might be acquiring assets what we can forward into our operating platform.

We continue to innovate our operating platform. We have been making a lot of investments. I think we have been talking about this. We have been making a lot of investments into training, crew training, pilot training, cabin crew training. We just started our fifth pilot academic program in Hungary following Bulgaria, Poland and Romania. And just a few days ago we opened up our new simulator center in Budapest which gives us training capacity for the next five years by placing up to 5 simulators over time. Essentially enabling us to technically train our entire crew of Wizz Air. This is a state-of-the-art facility, probably the most modern of its kind across the whole of Europe.

Well Iain was talking about ancillary revenues. Ancillary revenues indeed remain crucial to the business. It is well over 40% of our revenue production. And we believe this will keep rising. Bag related revenues have been in focus in the period, but also I think we've done pretty well on some of the other revenue streams. Nonbag related revenues grew around €2 per passenger. So really the new cabin bag policy is giving us the opportunity to close the gap what we had rising from the previous policy. So we remain very upbeat about ancillary revenues. And this is certainly a strategy we will continue to pursue going forward.

At the same time, we remain very consumer-focused. We are highly technologically driven. I think we have been presenting these numbers broadly speaking. But we continue to innovate our app, we continue to innovate our website, we continue to innovate our interactions with the consumers.

Again I would just like to remind you that the average age of a Wizz Air customer is 27. So we are seeing what's coming much more in advance than possibly the other airlines. And thus you can see the new generations of customers are very technology savvy and we need to deal with this population accordingly. And I think that gives us an angle to innovate more and more efficiently than probably most of our rivals who are dealing with [indiscernible] different profile of customers.

So with regard to the guidance. So overall capacity growth is 17%. This is somewhat down. And that comes on the back of moderating capacity growth in the second half of the financial year, taking it down from previously guided 18% to 14%. Load factor continues to enhance. We are expecting around a 1 point rise on load factor.

We are obviously seeing fuel cost rising. We are expecting a rise of around 22% as fuel cost coming down 1%. Again we will start taking deliveries of the neo A321 aircraft in the last quarter of the financial year. But we will see more of that benefit flowing through the numbers in fiscal '20. But again, it would be great to have the net benefit of such an initiative. But also we have inflationary pressure on some of the cost items. So we are certainly good at offsetting those. And at the same time we think that any action is such a step change in terms of economics, aircraft economics that we will see net benefits across the cost side of the company.

Well, positively and I think somewhat uniquely, we are seeing RASK going up significantly in the second half, reacting to on the one hand the ancillary revenue [indiscernible] but also the capacity discipline. We are expecting second half growth going up 7%. So it could give us 3.5% increase over the financial year.

So with all that, we have come around on net profit guidance in the range of €270 million to €300 million. As said, €300 million is more what we are seeing at this point in time. €270 million is a disastrous scenario which we hope won't happen. But I would just reinforce our view that, yes, you are seeing headwinds flowing through the numbers here. But I see most of it -- most of those headwinds are behind us. And we are seeing a set of developing tailwinds going forward on the back of the improved yield prospect of the business on the back of cost advantages again from the A321 delivery program. And as far as fiscal '20 is concerned, obviously we will benefit from the fall of Easter in that period.

I think with that I would turn it over to questions.

Question-and-Answer Session

Q - Damian Brewer

Damian Brewer from RBC. Can I ask 3 questions. First of all, in terms of sort of fuel cost input, what that does to margins and capacity. In Western Europe most airlines do seem to be rational, forced to be rational. Do you think that actually holds for Eastern Europe? There's still lot of state or quasi-state owned or somewhat opaque financed players. Do you think fuel actually makes much difference to their aspirations? Or do you think they keep going regardless? And if that is the case, how does that translate into capacity changes and sort of rational pricing to recover fuel? Secondly, could you talk a little bit more about what you mentioned in the prepared remarks about summer 2019, in particular spare capacity being more prepared for ATC and other disruption. Can you just talk a little bit more about exactly what you're planning there? And then very finally because it's a question that keeps popping up with investors. Iain, can you talk little bit more about the accounting on gains you make on sale and leaseback, in particular the capitalization of the gains into deferred income and then the release over the lease term of the aircraft and what impact that made on the H1 numbers, please.

József Váradi

Maybe I would just start with the first question, the whole increasing fuel cost effect, the Central and East European airline space taking into account that many of the airlines are state-owned and somewhat irrational. I mean, as far as we are concerned, I mean we don't really care what they are doing. First of all, Central and Eastern Europe is a hugely fragmented airline space, especially from the perspective of national carriers. So a bunch of small countries, small national carriers. And as said, our focus is not really the market share gain, stealing some of the passengers from them. But it is to stimulate new market and get people into the franchise of flying. So I think we are fairly unaffected, I would say, by these airlines. Probably they are less rational than the private airlines in Western Europe simply just different pressure applied on them. But I don't think it largely affects our business. Our principle competitor is Central and Eastern Europe is Ryanair. I mean we have the most capacity overlap with Ryanair. Ryanair tends to be a fairly rational airline when it comes to managing their profitability and applying capacity discipline. Likewise, I think we are a rational airline. And as said, we are reacting to the high fuel cost environment by lowering our growth and trimming capacity. So I don't think we are greatly reflected by the irrational nature of the incumbents in Central and Eastern Europe.

Iain Wetherall

In terms of summer '19, I think there are couple of key things. Firstly, we have 17 aircraft in 17 wings. You're putting a lot of pressure on the organizational operation. We added Wizz U.K. and the ramping up of that and training everybody to U.K. CAO requirements. There was a lot of pressure for the team on that. You then add those 2 pressures on top of some constrained airports, highly congested airports and ATC strike, you sort of had 3 big headwinds. As we look into next year I think the first thing you can do is that the Wizz U.K. thing is now up and running, going very well. We're not going to take 17 aircraft in 17 weeks.

We learned that lesson. I think it was great for summer sales. Our commercial team -- our operations team weren't that keen on it. So we'll be looking say more like 1, 2 aircraft per month. So that certainly adds a lot less pressure on the organization. ATC, you don't quite know. Now what we have done is we've added [indiscernible]. So the cost to that utilization will come down a touch. But obviously we are a high-utilization organization and we need to make sure that we maintain as high as possible. So there are [indiscernible] breaks, so certain maybe you will have an hour extra break in the day on certain days to make sure that you catch up if there is any strike that's happened. I think this is an assumption we have to go into next year that there will be the same problem. I mean where people decide they want to strike is where it hurts consumers the most and that's when is the summer holiday. So the working assumption is that that will continue next year. But those things that we can do internally that we have done operationally we're setup for that. In terms of the spare aircraft capability, there will probably be another spare aircraft around as well to be able to absorb any sort of AOGs or strikes or sort of thing. In terms of the accounting, the gains, I think there is two answers.

So there is, one is going with IFRS 16, everything comes on balance sheet, against traditionally is amortize over that aircraft. I can't tell you the number because it is confidential. So if I tell you what gains have been made and divide that by 12, then you can do your math. So we can't tell you that. But the -- but what happens is that you -- if you do a very large aircraft order you get very, very well-priced aircraft, you can sell that for a different price. And traditionally that gets amortized over the life of the lease. And that's exactly the same under IFRS 16 when it comes on. I think there may have been opportunities to take gains in previous years, but with IFRS 16 that's not the case. I think that's all I can answer on that question.

Alex Paterson

Alex Paterson from Investec. My three, please. On Wizz Tours, could you just say what went wrong or didn't go right? What has caused you to decide to shut that down? Secondly, can you just talk a little bit more about the sort of flexing of the fleet delivery and the spare capacity? Can you give any numbers around that? What was going to from your decision on that? And then finally, just on ATC, could we be optimistic that we could have overfly over France next summer or is there…

József Váradi

Yes, the French are the French. But it's not only the French, I mean we have equal issues with the Germans. So I think as a system ATC is not as in tact as it used to be. I mean, certainly I think European traffic has just grown to an extent that ATC was unprepared to deal with that -- with the traffic. And I also think that they need to implement systemic changes in terms of separation as routing and orders [indiscernible] to make sure that they actually can accommodate the growth of the industry. I know that they are working and actually they are in touch ATC and they are organizing high-level meetings with ATC to try to put pressure on them on the one hand but also to try to have them in a way how to move the direction of their business development. But I don't think there is a guarantee that next year is going to be any better than the previous one. But I think at least now they are recognizing that systemic changes are required to cope with the challenges. Back to Wizz Tours.

Well, I would say that in a way I am actually quite happy to fair on Wizz Tours because I think it kind of signals that we have entrepreneur spirit in the company and we are prepared to keep stretching our own boundaries and we are prepared to take risks on certain business prepositions. I think what it comes with is that some ideas will work out and some ideas don't work out. And we setup these tools as a very low risk proposition essentially just building up airline fares with hotel rooms. Simply we just couldn't push it to the margin. But we are able to achieve on the airline. And certainly structurally we don't want to destroy shareholder value. And we realize that in order to try to achieve the margin level what the airline can deliver we would need to change the risk profile of the business fundamentally, i.e. we would need to acquire inventory ourselves and manage that inventory ourselves. And simply we are just not in that business. And we lost a few million, I mean we didn't lose a lot of money.

And we probably lost around €4 million on this time, I mean in the magnitude of the big things, I mean this is pretty much nothing. And simply we are just refocusing ourselves on the core business and look at the best idea. So I think that's with Tours. With regard to the flexibilities around the feet. We have signed five purchase agreements with Airbus so far and we have reminded those agreements I think 50x at least. I think it just shows the sort of -- the relationship between the manufacturer and the operator that there is inherent flexibility in the relationship to adjust free deliveries according to demand, according to industrial issues. I mean, clearly what you are seeing is that both Boeing and Airbus have sold more aircraft than what actually they can deliver in 2019-2020. So they need to go back to the operating industry and renegotiate the deliveries. I think we did that. And the new delivery stream what we have is pretty firm, certainly it gets more skin of airbus in the game, so they better deliver. And we feel that that's better for us, having somewhat less capacity on the one hand but it's more certain capacity than running the risk of whether or not we're going to get delivered. Also when we were ordering the aircraft, actually that was not a well-ironed -- well-ironed delivery stream versus our demand. So it peaked up and dropped down. So basically what we are doing is that we are ironing out the delivery stream so we are getting around 15% growth this year from that delivery stream. Actually we feel see quite good about the outcome of that process.

Iain Wetherall

One final comment on Wizz Tours. Essentially we were looking for Wizz Tours to make about €1 million this year. And I think the additional 4 is going to come essentially from closing our business down, writing off some IT systems. Now we could have left it on life support until April, but not -- but that's not the right thing for the business. So when you look at the numbers forecast, our forecast is assuming there will be plus 1 but actually we're delivering a minus 5. So that's just another factor when you look at the numbers and the building blocks for this year. And going to next year we won't have that drag on our profitability.

Rishika Savjani

It's Rishika from Barclays. Just a couple more questions around the capacity growth and the decisions you made with Airbus around the delivery schedule. If you're taking 8 less aircraft next year, can you maybe just help us think about what that means to the unit cost [indiscernible] next year because obviously lot of the aircraft or maybe all of those aircraft were neos and therefore more efficient on [indiscernible] and on gauge. Is there a scenario also whereby you've cut the total order book? Is there any scenario in which that happens? Or is it simply just a case of leaving things around if the environment changes over next few year? And then just a final question on growth. It looks like from your presentation you keep mix a little bit more towards kind of existing airport, existing routes in the first half as you think about the 15% growth next year. Can we assume this will stay around that 90% mark on the [indiscernible] of the network and where the new growth comes from if there is new growth.

Iain Wetherall

I'll take the first question. I mean I think if you -- so this year we're going to be taking two neos, so this fiscal '19. That represents 0.1% of our capacity. So there is no real -- it doesn't move the needle for this year. I mean, going into next year, I think the important thing with the neos is there -- it's a 20% lower unit cost versus the ceos. And when you take into account the ownership cost on top of that, it's fairly significant. Certainly next year you should -- we will be looking to be having a negative, so where there is minus 1 or minus 2 in terms of our ex-fuel CASK. The fuel CASK itself will be lower fuel burn. You will be lowing -- burning about 1.5% less. We are not giving guidance yet. But I think the reality is that we put in a phenomenally priced aircraft order. We're going to refinance them already or the rest [indiscernible] have been signed for phenomenally financed aircraft. You have the seat count. So you can certainly be expecting to see a negative number. The magnitude of that obviously will be firming up on communicating. But 8 extra aircraft, yes, it would have been a slightly better number. But also I think some of those 8 aircraft was skewed towards the back end of the year. So the summer performance isn't really going to be affected that much.

József Váradi

I think I would just want to put that in perspective. I mean, I don't know how much you -- you are into this. But when you look at the new engines, both the Pratt & Whitney engine and LEAP engine, they are not matured technology yet. They bring a lot of childhood diseases to the market, and giving a lot of headache and disruptions to the operating airlines. So I think that is a bit of a criteria for us. So on the one hand, the underlined aircraft economics are usually attractive, especially from our standpoint that we actually have very attractive acquisition cost and financing cost on the aircraft and the underlying whatever 10%, 15% improved unit cost. But that comes with a lot of operational disruptions and lot of incremental cost to deal with those childhood diseases.

So I think there is a bit of a trade. And we said that on one hand we are lowering our overall capacity for the reasons we were just explaining that we are applying capacity discipline on rising fuel price. But at the same time also I think we are to some extent hedging all these operational disruptions. And again, we learned quite a few lessons going through this summer that we better be aware of these disruptions and we better be prepared to deal with them. So I don't think this is necessarily a best thing, what's happening to the business. And as I said, I think we are actually quite pleased with the outcome. But no way we are cutting orders, we are not cutting orders here. We're seeing that the -- this order book or these order books are very precious assets of the business and we shall continue to ride on this -- on these arrangements. With regard to the airport mix, I think it's just a wait, it comes around. Should we be seeing new airport opportunities at attractive commercial terms? I think we would be certainly considering those. So I don't think that we have an objective of, I don't know, deploying 90% of our capacity across existing airports and only 10% on new airports. I think that's just the way it works out, but certainly I think the way it works out is very safe from the perspective of delivering growth. But at the same time we remain totally open-minded to keep carrying the flag of low cost and bring capacity to new airports should those airport opportunities arise. But recently we don't see a lot of development. We have a lot of discussions but we don't see a lot of them actually happening.

Iain Wetherall

I think it's fair to say that the vast majority of our [indiscernible] continue to be in our existing network. So if you look at this chart that we presented, for many years it's around about 90% on existing network. The new destination country, that's pretty much Austria, Austria and Estonia. So new destination countries given that we -- there are very few white spots on the map that tends to come and go, but the reality is that lost -- vast majority of that will be in box number 1 and number two.

Andrew Lobbenberg

It's Andrew Lobbenberg from HSBC. Can I just stay on the aircraft story and changing the order book. To what extent is this you trying to display capacity discipline and going to Airbus asking for fewer planes? And to what extent is it them not being able to build them and coming to you? And to that end, the planes that you have got scheduled to come this and more particularly next financial year, are you -- how firm are you that they will actually come? And then can I ask about the Western Europe to Western Europe flying, out of Vienna but also out of Luton. How profitable is that proving? If your network average is a 100, how successful is this Western Europe-Western Europe flying? And where are you going with that strategically? And then my final question would return to my evergreen hobby of Brexit. Where are you on your ownership structure of EU excluding the U.K. And what are your contingency plans if it proves necessary to maintain that above 50%?

József Váradi

Okay, with regard to aircraft, yes, I mean essentially Airbus has to deal with their own problems of over-selling their order book and not being able to deliver that order book. But at the same time we also have an interest in making sure that we only take adequate capacity what the business can profitability deploy. So I think that's in a way a joint interest. And you might have missed that part of the presentation but actually what we made sure is that Airbus is keen, is in the game heavily to deliver the -- the new delivery agreement for calendar year '19 and early 2020. So I think they have a vested interest in delivering what they are committed to, if not this is going to cost them a lot of money. So I think this is fairly fixed. I mean how fixed -- I mean, we are not the deliverer of the aircraft, I mean they deliver the aircraft. But I think they will get that delivered. Western Europe to Western Europe, I think it's pretty much the same as flying Central and Eastern Europe, otherwise we wouldn't be doing it. I mean why would we be lowering our profitability in Western Europe just for the sake of flying Western Europe. So you can assume that we are applying the same discipline and the same return expectations on Western European flying. The strategy remains on Central and Eastern Europe.

I think we have said that fairly clearly that Western Europe is more of an opportunistic way of building the business for Wizz as suppose to having a strategic plan how to conquer Western Europe. So we don't have that strategic plan. But at the same time, if you look at it, let's say, Luton, I mean we're in the U.K., we felt that the Monarch failure actually put an opportunity on the table which we should be considering. And we consider that opportunity. We acquired certain assets from Monarch and we forwarded those assets on our operating platform. And as a result we were expanding our reach in Luton. And that manifested in the end in -- in the establishment and the growth of Wizz Air U.K. Is this the right thing for the company? What we can do? It is absolutely. Is this delivering the [indiscernible] -- is this delivering the profitability? But the corporate average is [indiscernible] yes, it does.

So I think so far so good, but we are not going to blow our mind on Western Europe. So we will remain very measured on Western Europe, and the core focus will remain on Central and Eastern Europe. With regard to Brexit, I mean we are not different from EasyJet, Ryanair and IAG. I mean, we are looking at the same things what those guys are looking at. They are -- we are looking at the same issues with regard to market access. We are looking at the same ownership and control matters what they are looking at. So I don't think there is anything unique to this with this regard. I mean, I don't think Brexit is yet something you can really act on. You can certainly plan on contingencies and we have been planning on contingencies and we have been looking at ownership and control. I think this is going to be the key point. I mean we are more comfortable with market access. I think we are seeing the measures falling in place and the rights we are obtaining that will secure our ability to operate within the U.K. and Europe and even between the U.K. and certain countries under any scenarios or Brexit. So the real question remains on ownership and control. And I can tell you that we are looking at the very same things what the other guys are looking at.

Andrew Lobbenberg

Can I just quickly follow up on tax because obviously for this financial year the effective tax rate of 3% is a helpful development. As we look into next year I know we're going to have, I don't know, 10% of the operation with U.K. or bit less than that. And you just told us that it's going to operate at network profitability. So what does that mean for the corporate tax rate which in the U.K. is well above 3% or 6%?

József Váradi

Yes. So the U.K. business is taxed in the U.K., the rest of the business is taxed in Switzerland. So the U.K. would be taxed on the U.K. corporate tax rate.

Iain Wetherall

I think on the Q1 call I think I highlighted, Andrew, that the tax rate will be trending towards 10% as a result of that. And if it's higher, then it makes -- means we're making more money in the U.K. which is a good thing.

Kathryn Leonard

It's Kathryn Leonard from Numis Securities. Just a couple, if that's okay. Are you just able to say how much, where were you percentage [indiscernible] for Q3 and Q4? Just thinking about those trends on RASK that you reported this morning. And are you able to quantify what the impact of Easter is, that you're obviously exceeding? And then just on the leasing cost and ownership. Obviously you've alluded to, what you said in the statement this morning that the -- that the 10 A321 is coming through a 30% discount on leasing rates, and you're talking about the great days you guys have with Airbus. Can you just give us some kind of feeling where that leasing cost would trend over time for aircraft rentals over the next five years as the A321s ramp up and the neos? And then lastly, can you give -- just confirm the portion of your leases that are currently on floating rate and where that might trend to as well?

Iain Wetherall

So I'll start with the last one. So we have around about 10% of our operating leases are floating, I think is that -- that was the question you were asking. I think when we look at the lease -- basically what I -- the way I would look at it is in terms of embedded financing charge, IFRS16. So that distorts all of this lease rates, all the lease line disappears from the face of the P&L. So if you're looking to try and model going forward, I would look at the embedded financing charge because that's the best way to look at it. As we've said, the older leases that we've got on our books around about 6%, the more recent ones 2.5% to 3%. If we issue the bond today we would be getting for 5-year money around about 1.5% yields, maybe 7-year money around about 1.9%, maybe a touch better. The yellow lines that we secured for the next 10 aircraft are not with bonds. And that's tells you that we've been given pricing which is even better than that. If someone wants to pay us, offer us financing that we don't quite understand then I am quite happy to take that. So in terms of -- I would look at it in that perspective. So when you're trying to model it just compare that 2.5% to the existing, well, the older CO let's see -- CO leases versus something considerably better than that. That sort of give us the magnitude of the number I think you were referring to. So what were the other questions?

József Váradi

The Q3, Q4 sales.

Iain Wetherall

Essentially I would say we're just slightly ahead in terms of load factors. So the loads are -- and this is what we're guiding, the loads are actually probably 1% ahead. But we've generally traditionally done about 6 weeks of forward bookings, so essentially.

József Váradi

What percentage of the revenue is [indiscernible].

Iain Wetherall

November you're looking at 75%, December you're looking around about 35%. And then you're probably tripling in sort of at the 15%. And then what I would flag is the growth rates that we're seeing in the January and the February. You can pretty much derive how that trend is going to continue. Are there any questions on the telephone?

Operator

[Operator Instructions]. And our first question comes from the line of Mark Simpson.

Mark Simpson

I just want to touch on the network effect because if you look at the winter season, and I'm talking November to March, 60% of your ASK growth is accounted for by that Western Europe to Western Europe and Western Europe to Middle East. So what I'm wondering on the RASK front, how much of your proposed RASK increase is mix and how much is like-for-like price increase? And then the same thing with that exposure or increased exposure to Western Europe. You've guided minus 1% for ex-fuel CASK for the year. That implies you're going to have to hit 3.3% CASK, actual CASK declined in the second half. I'm just wondering how you're achieving that, what are the key lines we should be looking at for what's a significant improvement in what is obviously a quasi-period in a -- at a time when you're kind of more exposed, you would resort to high-cost market. So wonder if you could square that -- those 2 circles. And then finally, lease rates, as you've highlighted, are extremely attractive. Does that change your thinking in terms of -- of say timing of acquisition of the neos which was very much I think part of the perceived plan that you will move from a lease to a purchase policy as the neos became available.

József Váradi

Let me start with the network effect. I don't think Western Europe moves the dial with that regard. So when you are looking at the unit revenue increase, it comes from two angles. One is essentially the bag revenue, what we are earning and the enhancement of that revenue stream. And the other is the overall fare increase on tickets. And I think that correlates, corresponds with the capacity trim what we have -- what we have put in place. I mean, as we say, the share of Western Europe is fairly marginal in the total. And to be honest, I wouldn't say that Western Europe is particularly higher yielding business than our Central and Eastern European business, no. So it is not down to the network mix. It is sheerly down to the capacity discipline on one hand and the ancillary enhancement on the other.

Iain Wetherall

I think you're right. I mean, traditionally if you look back Q4 always tends to be the quarter where we turn the screws. In terms of specifics, the delivery schedule that Joseph referred to, there will be 2 aircraft. When we're dialing down the capacity in the fourth quarter, it doesn't mean the aircraft is sitting on the tarmac. Essentially there are a couple of aircraft that will enter the fleet towards the back end of Q4. So in terms of a lease line you're seeing a little bit of upside on that. Dollar is still a little bit favorable, so that's going to be coming, coming through. If you look and sort of dial down again on the -- on the fleet, maybe the redeliveries, then the maintenance line is also benefiting. So you're seeing a little bit coming through on the maintenance line. And I would say fingers crossed on disruptions. I mean, we have seen a significant improvement as a result of these actions.

You have more spare capacity coming through. So the other cost items, one would hope to that number is going to be also significant, significantly better. So I think if you sort of add all of those together, keep your fingers crosses a little bit for deicing that will happen there. But generally speaking, Q4 traditionally we -- we've got a pretty good track record of the turning the screws and making sure we deliver those numbers. On to the lease rate, combination of two things. One, I mean, yes, we have a phenomenally priced aircraft. So that will flow through to lease rate factors. But the investment grade balance sheet I think is actually also the biggest driver. And it's great to go to their source and their credit. And let's just say, well, we don't really need to do too much work because that work has already been done by the rating agencies. So the investment grade is a combination of the investment grade balance sheet. Again which is why it's very important to keep that fortress balance sheet. But also the very well-priced aircraft and if you think about the industry there's a lot of less ores out there, there are a lot of finance out there chasing pretty good aircraft. And we just talked about the availability of aircraft for the manufacturers, and so therefore those that have the aircraft are in demand. So a combination of all those, Mark, is why we are seeing very good rates.

Mark Simpson

And in terms of say your previous assumption about ownership, that gets pushed out by kind of 12 to 24 months given the rates that you enjoy.

Iain Wetherall

Under IFRS 16 in theory everything comes on balance sheet. So you're sort of -- it's sort of apples and apples. In terms of which form of financing, we keep all our avenues open, whether it's German financing, French financing, [indiscernible] financing, sale and leaseback financing. Today the sales and leaseback market is incredibly hot in which case it would be foolish not to take advantage of that. You don't know what's going to happen next year. So it's keeping our gun powder dry in terms of actual bilateral debt or bond financing. It's nice to have that in the back pocket.

Operator

And the next question comes from the line of Ross Harvey.

Ross Harvey

Two questions for me. The first is I'm just wondering how you think about your mid- to long-term utilization rates [indiscernible] utilization rates just given the operational considerations of a higher gauge aircraft, maybe different airport mix and potentially some infrastructure issues in Europe which have been mentioned recently by other airlines. And secondly, I'm just wondering how we should think about the underlying labor cost [indiscernible] in the coming years assuming some [indiscernible] disruption.

József Váradi

Okay, with regard to utilization. I think we are still looking at the kind of mid-12 region. So around 12.5 hours. I mean it can be a little more, little less. But it shouldn't be much less and it shouldn't be much more. I think if it's much more, and we have been learning it -- if you are pushing it beyond 13, 13.5 hours even on a seasonal basis you create [indiscernible] for disruptions. And if you take it too much lower then you will have an issue with unit cost and you will not be able to put your fixed cost over a proper capacity measure. So I think you should be expecting a fairly stable, around 5.5 hours a day average utilization coming through the system.

And I think that observes the Western Europe in airport mix and also the gauging -- the gauging method. The good news from our perspective is that actually our schedule can be incredibly flexible so we are not chasing a particular customer type that cannot wake up before 6:00 o'clock and the first flight cannot go out before 7:30. We tend to start the schedule at 6:00 or even before 6:00 like 5:30. And we [indiscernible] on the fleet any time we want. I mean, our customer base is much more price sensitive as opposed to being schedule-sensitive. So with regard to the labor cost environment. I think labor cost is a cyclical matter. And depending on where you are in the cycle I think that determines the pressure on labor cost in the business. As you are seeing, at the moment we are still in the up-cycle with high growth. Obviously that sucks up employment and that creates a tie to market in certain disciplines like pilots. So it is a tight pilot situation. So obviously that puts pressure on airlines with regard to pay but also with regard to the airline's ability to pass some of the infrastructure cost onto the employees, like training.

I mean you can see that when it's high supply of pilots in the market, airlines tend to put the training cost on the pilots. When it's a low supply of pilots, airlines tend to absorb that cost. So this is exactly what you are seeing. So I think for so long as there is a high demand for pilots and less supply of pilots, you will see continuous pressure on cost. But once the tide turns and we are going into another phase of the cycle that can change very quickly, very dramatically. So I think from a European perspective probably it would only take a significant airline to go down to significantly affect the pilots' situation. At the moment it is really the pilot tightness that is influencing the industry. But again, this is cyclical and we are in just -- in a situation when supply and demand are not in balance, but that can change.

Operator

And the final question comes from the line of James Hollins.

James Hollins

Just a few quick ones. Firstly, can you just let us know what the carbon offset costs were as a proportion of your $350 million euro in H1? Secondly, I don't think you answered Lobbenberg's question about Vienna performance. I was wondering if Vienna is much [indiscernible] we think is. Maybe if you change your capacity plan there. And then finally, are you seeing any sort of hint of staff or unionization issues in any of your territories? I think LOT had a strike in Poland. I was wondering if you're seeing any signs of a bit of unrest.

Iain Wetherall

Maybe on the carbon, airlines tend to get their free carbon units in the second halfway. The way we book it is essentially on the average. Carbon back in 2015 was a cost of €1.5 million for us. This year it will be around about €27 million. So yes, it's an annoying cost that comes through. I mean, when the business grows, it doubles in size. Yes, carbon costs are up 20x. It's a pressure that you have to take.

József Váradi

Okay. With regard to Vienna, I mean certainly there is a big party going on there and everyone joined. I don't think everyone is going to stay. But we are one of the airlines which will stay. And let me just reinforce the basic premises of why we are in Vienna and what we are doing in Vienna. Actually from our perspective Vienna is more of an extension of Central and Eastern Europe. A third of Hungary is better off going to Vienna to take that output. Half of Slovakia is better off taking Vienna. A third of the Czech Republic is better off taking the Vienna. So from our perspective Vienna is kind of part of Central and Eastern Europe. The reason why we only showed up in Vienna recently is that because the airport was simply not commercial before and just didn't offer the commercial terms which would have been acceptable to us. And what we are doing in Vienna, we are delivering the lowest cost of any airlines in Vienna and we have a fleet of C-21s to make sure that we stay the lowest cost in Vienna. So we think that we bring in an angle to the market which makes us very competitive, very formidable. And given that this is an extension of our Central and Eastern European strategy you can expect us to stay in Vienna and grow in Vienna. Obviously we're going to be rational. But at the moment I think the market is overdone. And I don't think that you're going to be seeing the same players with the same capacity in a year from now. So the dust will settle down and you're going to see us staying and you might see some of the others certainly using if not going completely. And then we had the last question on --

Iain Wetherall

Unionization.

József Váradi

Oh, unionization. No, we don't have unions in the company. And we don't think that unionization is the way to run the company. I think, we are making a lot of efforts in the company to recognize employee issues and enhance the dialogue with our basis, with our remote employees in the company. And I think we have a culture which is much more collaborative and team-based as opposed to kind of aggression or conflict-based. And I -- we are not seeing any signs of unionization and we want to make sure that the culture what we have remains intact. And we have that open dialogue inside the company as opposed to trying to create kind of border lines inside the business. So I don't think we are seeing anything developing at this moment.

Iain Wetherall

Just one final comment on -- sorry, just one final comment, James, on Vienna, I mean if you -- again it's back to one of my comments on the presentation is if you look at our cost base with a A320, A321neo is 20% lower unit cost compared to our current fleet. And if you look at the CASK of, I would say the largest, in terms of seat supply to that market, their CASK base is 3x higher than ours. So when the music stops as Joe has described, guarantee that we'll be sitting on a chair and other airlines will be departing.

Operator

I'm now heading back to József for concluding remarks.

József Váradi

Well, ladies and gentlemen, thank you for your interest. And have a good day. Thank you.