Wizz Air warns on revenue but sticks to capacity growth plan

By Yamini Kalia and Joanna Plucinska

LONDON, Aug 6 (Reuters) - Budget airline Wizz Air's operating losses deepened in the first quarter, it reported on Thursday and said it expects revenue per seat to keep falling in the current quarter after it cut fares to attract passengers.

The budget carrier, which is set to expand its fleet with new Airbus deliveries, said it would stick to its plans to increase capacity.

It reported an operating loss of €183.3 million ($211.7 million) for April-June, its first quarter, as it was unable to pass on rising fuel costs stemming from the Iran war to its core customers who demand cheap seats.

That was its third consecutive quarterly operating loss and much bigger than a €36 million loss in the previous quarter.

Wizz Air's results expose a widening split in European aviation where full-service flag carriers have been more resilient to the Iran war than budget operators, whose business model relies on offering cheap fares.

Shares in Wizz Air were down 4.3% at 1,098 pence at 1147 GMT.

Goodbody analyst Dudley Shanley said that was due to softer than expected second-quarter revenue comments and to some profit taking after the stock had rallied around 19% since annual results beat expectations in June.

Chief Executive Jozsef Varadi said the airline would grow capacity as previously planned and target passenger growth, despite the reduced revenues.

"We will very carefully manage the capacity growth that we have in front of us. But we know that this is a challenge for the next probably nine months, and after that we will get it down to a lot more palatable levels," Varadi told Reuters.

The airline said second-quarter revenue per available seat kilometre would fall by a low single-digit percentage year-on-year, even as it guided for seat capacity growth of up to high-twenties percentage.

"The need to digest high levels of capacity growth should place pressure on profitability this year, both for Wizz and for other airlines competing on its routes," Bernstein analyst Alex Irving said in a note.

Airlines including Air France-KLM, Lufthansa and IAG have either cut capacity or kept it flat to deal with the costs associated with the U.S.-Israeli war with Iran.

Varadi told analysts on a separate call that Wizz Air was deliberately focusing on more routes within Europe and removing capacity from medium-haul trips to destinations in the Middle East as part of an effort to allocate capacity more effectively.

AMPLE LIQUIDITY

Wizz Air has some protection against any further fuel market volatility.

It said it has hedged 76% of its full-year jet fuel needs using zero-cost collars — instruments that cap its exposure at $826 per metric ton but also prevent it from benefiting should prices fall below a floor of $759.

The airline has said it has ample liquidity to ride out the turbulence, but still shied away from offering an outlook past the second quarter.

($1 = 0.8659 euros)

(Reporting by Yamini Kalia in Bengaluru and Joanna Plucinska in London; Editing by Nivedita Bhattacharjee, Barbara Lewis and Susan Fenton)