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Edited Transcript of WIZZ.L earnings conference call or presentation 25-Jul-19 8:00am GMT

Q1 2020 Wizz Air Holdings PLC Earnings Call

GENEVE Jul 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Wizz Air Holdings PLC earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Iain Wetherall

Wizz Air Holdings Plc - CFO

* József Váradi

Wizz Air Holdings Plc - CEO & Executive Director

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Conference Call Participants

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* Andrew Lobbenberg

HSBC, Research Division - Head of the European Transport Team

* Jaime Bann Rowbotham

Deutsche Bank AG, Research Division - Research Analyst

* Jarrod Castle

UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team

* Kathryn Helena Louise Leonard

Numis Securities Limited, Research Division - Analyst

* Mark A. Simpson

Goodbody Stockbrokers, Research Division - Analyst

* Michael Kuhn

Societe Generale Cross Asset Research - Equity analyst

* Ross Harvey

Davy, Research Division - Transport, Distribution and Logistics Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Wizz Air 2020 Q1 Results Result Call. (Operator Instructions) Please note that today's conference call is being recorded.

I would now like to hand over to József Váradi, CEO of Wizz Air. Please begin.

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [2]

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Good morning, everyone. Thank you for attending this conference call. So we are reporting Q1 fiscal '20 for Wizz Air. As you can see the presentation, we are reporting very strong set of financial numbers and KPIs for Q1. We are very encouraged also by the summer trading, what we are seeing in front of us with regard to the expected performance on Q2.

And as a result, we decided to up our capacity plan for the balance of the year -- financial year from previously guided 16% to 20% now. So essentially, what we are doing, we are investing incremental profitability into further growth in the business, which I think is beneficial for the company strategically.

Especially, in light of the overall industrial capacity situation and the aircraft supply situation, we are simply taking a strategic advantage of that situation. And, obviously, whatever investments we are going to make in the second half of the financial year will mature for the next financial year, for next summer. So financially we are going to benefit from that.

So back to the current quarter, we delivered EUR 72.4 million of net profit on the back of 20% passenger growth, which recorded at the level of 10.4 million. This is record-high profitability, record-high passenger numbers.

As we announced earlier, we signed an MoU for 20 additional aircraft, the A321neo XLR aircraft, which will come into play in 2023 throughout a period of 2 to 3 years, which would enable us to collect more airports, longer flights within our geographies.

I mean, we have explained this. At the moment we are able to fly our fleet up to 6 hours. The XLR gives us 2 more hours, so we can fly up to 8 hours. We are not necessarily searching for new markets, but we are looking at doing more in our existing geographical footprint.

We also started reporting our carbon footprint. As you might have noticed, we are the lowest level emitter in the industry with 57.3 grams per passenger kilometer. That's significantly lower than any of the airlines. Certainly, much lower than the -- than what the legacy carriers are emitting.

Very importantly, we are reconfirming our profit guidance for the whole financial year. So, again, what we are doing here is that, on the back of the very strong first quarter results and the continuing strengths in the second quarter, we actually decided to invest into growth without affecting the profit guidance of the financial year.

Moving on to our Page 3, this is our geographical footprint. This is largely unchanged versus what you have seen previously. Obviously, with the growth of the business we have also grown the aircraft count. Now, we are operating a fleet of 114 aircraft of which 4 are A321neo aircraft. And, obviously, we keep growing the number of airports, the number of the employees and we keep expanding the reach of the airline in our geographies.

Moving on to Page 4, this is showing you what announcements we have made already for deploying new aircraft in fiscal '20. And let me just make a few comments here. We are moving quite aggressively in Krakow. This is a new market in Poland, we just opened up. Very quickly, we are ramping it to 2 to 3 aircraft. That's quite a significant size relative to the scale of the market. We are very pleased with the reaction of consumers to our services and our network and we are very encouraged by those results. And as a result, you will see us doing more in Krakow and very likely we're going to be deploying further capacity in the marketplace.

London Luton is an interesting case. Obviously, the whole industry in the U.K. is sort of complaining about Brexit and overcapacity and the weak environment. I think this is relative to the performance of the very airlines.

As far as we are concerned, you may want to take note of the fact that throughout last 2, 3 years our unit cost operated on our Luton network has changed fairly dramatically, dropped significantly as a result of gauging A320s to A321s and also nowadays introducing the A321neo aircraft on the Luton route. As a result, I think we have become much more formidable as a competing force in the U.K.

And on top of that, obviously, we have a more balanced customer mix in the United Kingdom, a better balance between inbound and outbound traffic that makes us more resilient from all sorts of Brexit issues. And as a result, we have grown our London business by 50% since we are -- since the Brexit vote and we remain upbeat about the prospect of the U.K. market.

With regard to Vienna, another significant growth market for Wizz. As you know, there is a bloodbath going on in Vienna. But it is also a matter of perspective who is suffering the pain in the marketplace. We are one of the growing airlines in Vienna and we are the only airline which actually reversed financial sense in Vienna at this point in time.

We have made commentaries on this that in our first year we are breakeven in Vienna, while all other -- others are losing a lot of money. And also recently we started observing significant capacity contractions by airlines, including Eurowings, easyJet and LEVEL.

The Balkan markets remain a very strong source of growth for the company. As you can see, we continue to allocate new aircraft capacity in that region. This time around we are building our network in Skopje, Dubrovnik and Chisinau in Moldova.

Georgia, Kutaisi, has been maturing very nicely. We are very encouraged by the results -- what we've been able to deliver as a result. We are making a significant investment into the marketplace by essentially doubling the size of our business there. It's been a busy period. We've already launched 60 new routes for fiscal '20, but we are just yet at the start of the financial year, so more to come in the coming period.

Moving on to the next slide. You can see that the way we delivering growth is very safe. So we are deploying 87% of our capacity in the form of increasing frequencies on existing goods routes or joining existing airports. But at the same time, it remains important to the business to continue to carry the flag of low cost and pioneer new route opening and new market openings. So we want to make sure that we also deploy capacity for that purposes.

Page 6 is showing our environmental footprint which we started reporting. Well, clearly, Wizz Air is the greenest airline in the whole of Europe. Our ecological footprint is far more favorable than any of the other airlines, especially when you compare the Wizz Air performance to legacy carriers. Legacy carriers emit 50% more than us on a per passenger kilometer basis.

And it's not only that we are a green airline, but actually we are getting greener and greener every month. You can see that our footprint has been much reduced over the periods. And if we continue to reduce going forward, given the introduction of the neo aircraft, which is an environmentally even friendlier aircraft than the existing aircraft fleet out there. We are continuing to report on this and I think you will see that Wizz Air is standing out in the European context. We have a very clear target of actually reducing our footprint by a 1/3 by 2030, which is a far more ambitious target that -- of any of the other airlines that are putting out.

Moving on to Page 7, this is showing you the operational performance of the business. You may recall that this time last year we were hit hard by all sorts of issues in the operating environment be it ATC, airport congestions, weather issues. Clearly, this year, our operating model has become far more resilient, delivering a much improved set of KPIs -- operational KPIs across the board. Especially, our flight regularity improved significantly in the period last year. We canceled 145 flights. This year we already canceled 50 flights and it is a 20% more production.

We also improved aircraft utilization quite a bit. We significantly improved our load factor performance. And you can see that somewhat we've been able to improve our on-time performance as well. So the operating environment in Europe remains very challenging. ATC is not improving. As a matter of fact, I think it has further deteriorated.

But if you look at our operating performance, actually it has much improved because of the measures we put in place to make sure that we become more resilient against all these issues affecting us. So we have a much better quality of operations today than what we had a year ago.

And with that note, I would turn it over to Iain, who is going to take you through the numbers.

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Iain Wetherall, Wizz Air Holdings Plc - CFO [3]

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Good morning, everyone. Moving on to Page 8. In the first quarter Wizz Air had a record Q1, record numbers of passengers, record revenues, record profitability and we continue to lower our ex-fuel CASK even lower. In terms of the capacity and passenger traffic, seat growth was up 18.1%, load factor, József highlighted, was up 1.7%, which leads to passenger growth of about 20.1%. We flew slightly further with stage length up 1.5%. So ASK growth was 19.9%, so 20% ASK growth which is fairly punchy. When you combine this growth with the RASK, which was up 4.6%, we delivered 25.4% higher revenues at EUR 691.2 million.

If you look at the building blocks at the foot of the page, what you can see is that the unit revenue growth outstrips total CASK. So unit revenue growth is up 4.6%, outstrips total CASK growth of 2%, which is driven by the fuel price, which gives us margin expansion. So what you can see is in terms of the net profit margin focusing on the one without the foreign currency is up 1.8 percentage points. What's very favorable is when you look at the free cash flows, it's important that profitability drives cash. So our cash position year-on-year is up to EUR 347 million in total. When you take into account restricted cash, we have EUR 1.64 billion of free cash and we continue to finance our deposits on our aircraft and have over $300 million deposits with Airbus.

IFRS 16, the following slide, if we move on to Page 9. Now IFRS 16 is the new accounting standard for leasing. I think it's been in the pipeline for 15 years. Many people have been trying to get their heads around this. So this is related to leases. And given that the company's fleet is fully leased, in terms of the reporting, it has a significant impact in the way we present our numbers. But as we've highlighted, the net impact -- the direct net impact of IFRS 16, as indicated in the past, doesn't really move the needle. So if you look at the foot of the first table, the net impact on the first quarter was around about EUR 2.8 million negative in terms of the restatement of prior year.

What IFRS 16 does? Maybe I'll draw your attention to essentially 4 numbers in the middle column. The first number is aircraft rentals. There were no longer aircraft rentals, so that disappears. That's been replaced by 2 items, depreciation EUR 56.6 million, and financial expense. So, essentially, the net of those 3 really is essentially where we're getting to. But they are on different line items.

The fourth item I would point you to is on the bottom table in terms of the balance sheet. So with IFRS 16, we're bringing EUR 1.7 billion worth of dollar-denominated liabilities onto the balance sheet. And this is what's driving the restated foreign currency number. So IFRS 16, we have adopted a full retrospective method, which means that we have to apply the transition method as if we've always been applying IFRS 16.

So with that EUR 1.7 billion liability, as at the beginning of the last financial year, where the FX rate was $1.23, you compare that to the FX rate at the end of the quarter of $1.17, that's what's driving this theoretical unrealized loss of EUR 80.7 million. Now, we didn't hedge that, because the liability didn't exist. Hence, that's why you have this volatility. Going forward, we've highlighted we will be -- we have changed our treasury strategy or risk management policy, so that exposure has been eliminated from our risk management strategy. So you won't see volatility coming through in Q2, Q3, Q4 and beyond.

One item to highlight in Q1, which is specific, there was a EUR 5 million FX loss. The large proportion of that was a function of us moving our leases from Wizz Air Hungary to Wizz Air U.K. So 10 leases will be -- are being moved over there. That happened during the month of May. And that essentially takes those leases from a euro entity into a British pound entity. That was a point in time when British pound weakened by about 4% and there was an unrealized FX loss on that. As of today, that's fully hedged. So when you're looking at the clean number and are trying to model Q2, Q3, Q4, we're assuming a neutral FX result for the numbers of Q1. There was a loss there which should not be repeated.

Moving on to Page 10. This slide I think is a great slide that demonstrates the ULCC business model working at its best. What you can see is that the ticket revenue is lower 4%. But this is really driving passenger growth. So the passenger growth, the high load factors is driving the volume. And then we're making it up on the ancillary. So ancillary versus Q1 last year, as a percentage of total revenue, was 40% is now 45%. So the higher portion we can get on the ancillary, the better it is for us, because it means we can get lower base fares into the market. We can stimulate more traffic. Our average ticket price now is EUR 36.5, where it was in the first quarter.

One thing to highlight in terms of the 4.6% RASK, roundabout 3% of that related to Easter. So roundabout -- we always say roundabout EUR 20 million related to the Easter effect, that's about 3%. The remainder really is roundabout robust markets. The FX environment was fairly flat and so there's no constant currency noise going through. So the strong demand coming through really is driving the other 1.7%.

Moving on to 11. So here's a -- we're sort of coming to the end of the story. We're changing our cabin bag policy. Ancillary revenue was 17.7%, up year-on-year, a very strong performance. Pleasing is that the bags is starting to improve, so the checked-in bags just starting to add. On the bags, we've been seeing a decline on the bag revenues for a number of years now. What's driving that ancillary? Essentially, now 34% of our customers are taking bag related products, whether it's a priority boarding related products, and 30% of our passengers are taking seat related products or allocated seat relating products. We believe there's further room to push those.

Looking at the chart in terms of development, what should you expect? There are 2, I would say, moments in time that affect was number. In July of last year -- well, maybe in November of the prior year, that's when we changed the policy. That's when you started to see the deterioration from fiscal '18. We introduced the priority products in July of last year. That was roundabout EUR 0.65. So, therefore, you'll start to see this real step-up sort of starting to normalize as of July, and the anniversary of the cabin bag policy was November the 7th. So going beyond that, what I would model is, we're back on track to trying to deliver the plus EUR 1 per pax, per year.

So, essentially, what we can see is that the ancillary is recovering very well. We're very pleased with the products. And I think the -- the new cabin bag policy has also paid a very good big part in improving operational performance as well. Last year we had a lot of challenges with bags, getting them actually on the aircraft, serving during the very busy summer period.

Moving onto Page 12, as you know, my favorite slide, disciplined ultra low cost, but actually I would say very structural cost savings continue to come through. Business as usual, I would say for the first quarter, maybe 3 items to draw to your attention. Fuel prices was up 9% year-on-year. Of that 6.7% was the pure liquid, so the pure fuel price and the dollar strengthened 2.5% year-on-year. So that's sort of driving the large fuel piece.

Staff costs up marginally in the first quarter. This is the tail end, essentially, of 16% pay rise that we gave pilots right at the beginning of the last financial year. So we raised the salaries in April and then all of the pilots that came on the books signed up to that pay rise in May. So, looking forward, we would expect to see with the A321 effect, i.e. 50 extra seats or 59 extra seats with still 2 pilots, you should start to see that that on -- we should start seeing it negative. So for the full year, we're expecting crew CASK to be negative, albeit slightly up in the first quarter.

We have also highlighted maintenance. Utilization was slightly softer or slightly lower in the fourth quarter, because we slowed the growth down to protect yield. As a result, certain maintenance events jumped from Q4 into Q1. So there was a big maintenance program making -- getting those aircraft back into condition just in time for the busy summer period. So that's sort of why we saw Q1 maintenance numbers increase.

I would flag that our aircrafts -- some of our aircraft getting a bit older. We're getting those aircraft back into condition to the lessors. Also the one item for the year that I would highlight, where there be a bit of inflationary effect is coming on the maintenance. Albeit, it will be absorbed by structural cost savings of A321 and cost savings elsewhere in the P&L.

And in terms of the net financing charge, I think what's important is the -- with IFRS 16, we're stripping out essentially a 1/3 -- no, the 1/4 of our -- of the costs, of the leases and that putting into financial expense. So that's why we believe, if you want to look at the cost of actually producing seats, the cost of producing ASK, it's important to take the actual cash cost. Hence, that's why we're now including the financing of those aircraft, the net financing of those aircraft in our CASK calculations.

On Slide 13, we -- as of yesterday, we have 4 A321neos in the fleet. We're very happy with this aircraft. As mentioned, this are driving and delivering 60% less fuel burn, which in turn, delivers 16% less CO2, so certainly, playing into our green footprint. The interesting one as well as is the sound or the noise pollution coming out of these engines is significantly lower. So airports are getting more favorable to taking delivery of these aircraft on to their airport. So we're getting a lot of demand and a lot of requests from airports to take the neos. And flying further, so clearly with less fuel burn you can essentially get that slightly extra stage length.

So as we've said before, the difference between an A321neo versus an A320ceo is a 20% lower unit cost producing assets. So when flying to an airport like Vienna, where airlines are losing 10%-20% margins, when you're flying in at A321neo that's how Wizz Air is able to breakeven in year 1.

Maybe on Slide 14, I would draw your attention to '20 to '21. There has been a lot of publicity about the Airbus and their ability to deliver A321neos, in particular. We mentioned in October last year that we confirmed of our fiscal '20 schedule. We're not seeing any material delays on our fiscal '20 schedule. So fiscal '20 is looking good. Fiscal '21, a little bit of shuffling around has taken place. The A321neo, there are some slight delays coming off. But we've secured that by essentially swapping some of our positions -- delivery positions. And we've swapped 4 A321neos with 6 A320neos. So in terms of securing and maintaining the capacity growth in terms of seats, we have that secured. So looking ahead for the next fiscal '20 and '21, also, we're looking pretty good.

So with that moving on to Page 15. Not a huge amount has changed. So certainly in terms of the macro environment it's fairly similar to when we came to the market back in -- back at the end of May. The only 2 items to change is the capacity growth. So as József highlighted, we're stepping up the capacity growth, predominantly in the second half to 20%. So when you look at the capacity for the full year Q1, we're delivering 20% ASK growth, Q2 it's 18% and then H2 we'll be looking more like 20%-23%. So on a full year, we're going to be delivering 20% growth.

Now that's coming out of cost of yield. So when we move down to RASK line item, we were guiding up low-single digits. You could say 2% to 3%. But now we're doing slightly positive. So that's more like in the 1%. This is purely a decision that we have taken. Wizz Air is adding 40% of the incremental seats into the CEE in the winter period. So this is purely driven by Wizz Air. So other than that no real change to any of the other line items, so the net profit guidance range as József highlighted remains unchanged at EUR 320 million to EUR 350 million for the full year ended 31st March, 2020.

So with that, we will open up for Q&A, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Our first question comes from the line of Jarrod Castle from UBS.

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Jarrod Castle, UBS Investment Bank, Research Division - MD, Head of the Travel & Leisure Sector and Co-Head of the Global Transport Sector Team [2]

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Three, if I may. Firstly, just in terms of ex-fuel cost guidance, broadly flat, you've increased the capacity guidance. A lot of the ex-fuel cost performance is related to, I guess, financial income expense. But -- I mean, it doesn't seem like there's any kind of operating leverage by increasing CASK from 16% to 20%. So if you can just get some color on why there isn't?

Secondly, just to make clear, I mean, it sounds like kind of guidance for lower pricing is all linked to increased capacity. But is there any pricing weakness you're seeing in any of your markets? And in terms of expectations going forward? How some of the pricing is looking?

And then, rightly so kind of point out, carbon, and how efficient you are on that front? But can you give us an idea of your net carbon cost and how that has evolved in the last year or 2 and how we should think about it going forward? Because obviously the strong growth will partly offset the free allowances that you currently get?

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [3]

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Okay. Thank you. With regard to ex-fuel CASK, yes, I mean, we might be getting some benefit from the increased scale, obviously. And we shall see -- but at the same time, there might also be negative issues in the marketplace. So that's why we are somewhat reserved. But, obviously, scaling of the business should be giving us a leverage for lower operating costs.

With regards to the pricing question. We don't really see pricing weakness in any of our markets. I mean, that's why we took the decision to up capacity. And that's pretty much across the board. I mean, this is not like, we are focused on 1 or 2 markets. Well, we are focused on a few markets with regard to competing properly on a formidable basis. But in terms of revenues strengths and demand out there, we see very positive trends overall.

I mean, let's not forget that, the focus of our business is Central East Europe. And Central East Europe is seemed to have better quality market with regard to growth than Western Europe. I mean, you see, GDPs of the larger countries -- Hungary, Poland, Romania, they are all -- India, in the neighborhood of 3.5% to 4.5%, with pretty significant GDP growth guidance going into 2020. I mean, that's uncomparably higher than what Western Europe is producing. And obviously, all that GDP growth is translating into disposable income and discretionary spending of consumer. So we have a lot of underlying demand and that is coincided by our improving relative cost position to the industry.

I mean, we have been upgrading from A320 to A321. We are now rolling out the A321, A320neo program, taking our unit costs down relative to the industry. So, simply, we are just more competitive than what we used to be. And as a result, I think our revenue continue to stimulate the market, it's just increasing and this is what we are reacting to.

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Iain Wetherall, Wizz Air Holdings Plc - CFO [4]

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And maybe on the third question on the carbon. Yes, so we were guiding -- I guided about EUR 50 million of carbon cost for the full year. The price today is something like EUR 29. So that's increased to about EUR 65 million. So that's sort of offset by probably slightly softer fuel prices. So we'll probably make -- we'll probably making or saving about EUR 15 million on the fuel price, but we're giving it back on the carbon. So net-net when you look at overall fuel CASK, it's unchanged.

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Operator [5]

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And the next question comes from the line of Jaime Rowbotham from Deutsche bank. Please go ahead.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [6]

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3 from me, 2 on capacity, 1 on cost. On capacity, to what extent is your higher capacity growth trying to capitalize on the 737 MAX issues, and what happens when the MAX comes back in at the later date?

Secondly, if we put 737 MAX operators to one side, your competitors in some of your key markets and routes are also being ambitious on capacity growth. How much of today's decision is driven by reacting to that versus actual demand improvements, if there are any of those? I hear your point about strong demand. But that -- was that -- that's really from Central and Eastern Europe so far? Are you actually seeing any demand improvements?

And finally, you mentioned the fewer flight cancellations in the quarter. Is it possible to quantify the benefit you got from that? I just wondered to what extent the ex-fuel CASK progression -- what it would have looked like without that benefit.

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [7]

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Okay. Maybe I would just start with reversely. With regard to the ops KPIs and the value they represent to the business. I think the best way to really manifest this issue is to look at the Regulation 261 exposure, because, obviously, you as an airline are obliged to compensate passengers for long delays and cancellations. So when we improve this -- the set of KPIs in operations, regulatory especially, and improving long delays, then we reduce the exposure on Regulation 261, so there is a clear financial benefit. So we are seeing some benefits. I mean, obviously, the business is growing. So absolute terms, you probably look at the magnitude of around couple of millions per quarter. So maybe on an annualized basis you are talking about EUR 5 million to EUR 7 million of improvement. I think that is significant. It's not changing the profitability of the business, but I think it's an important pillar.

But back to your capacity questions with regard to the MAX issue. I don't think that we are particularly reacting to the MAX issue. I think we are reacting to the performance of the industry. I mean, partly it is affected by the MAX issue and the supply chain matter. But you are seeing European airlines somewhat wobbling with regard to financial results. I think within that context, we outperformed the industry and we think that creates an opportunity for us to move strategically on that opportunity.

I mean, we shall see when the MAX comes back and how actually this is going to be taken back. I mean, it's a bit like a Brexit issue. It's looming over there. We don't know exactly what's going to happen, when it's going to happen and how it's going to happen. Once we see it, I think, we can have a better answer to your question, how we would be reacting to it. But I don't think we are overly focused on this. I think we are just focused on our own business and to see the opportunities for our self to step change our competitive position.

Whether we're reacting to competition or demand? I think demand is a matter of perspective. To be honest, I still think that we are -- still we are the best basket case for that. A lot of airlines competing in Vienna are complaining about overcapacity and weak yield environment. But it is from their perspective, because -- of course, what they are bringing to the market they cannot make financial sense out of what they are doing. But that's not the case for us. We scaled our business from nothing to 5 aircraft over a year and we are breaking even financially. And it is because we are a very focused business, very low cost and as a result, our ability to stimulate demand is much greater than theirs. And actually we are so low cost that whatever really we are getting from the market actually makes financial sense to us. That's not the case for them. So it is a demand issue, it is a low yielding environment for our competitors, because they don't have the cost base to compete in a commodity business, but that's not the case for us.

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Operator [8]

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And the next question comes from the line of Mark Simpson from Goodbody.

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Mark A. Simpson, Goodbody Stockbrokers, Research Division - Analyst [9]

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3 questions, first one just on where capacity is growing. Obviously you've identified 13% coming from new airports. Given that those are assumed to be RASK dilutive in that startup phase, can you indicate what the RASK performance is Ex those new airports?

Second question, Vienna, breakeven now. I'm just wondering what the perceived path is to attending company average margins. How you see that developing over the next sort of 12 to 24 months?

And then finally, you've talked about filling the vacuum as weaker airlines withdraw capacity. Ex-Vienna, what airlines or markets would you identify within that trend?

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Iain Wetherall, Wizz Air Holdings Plc - CFO [10]

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Yes. So in terms of RASK -- I can take the RASK one. I think we've said in previous times that, actually if you look at that slide, the increasing frequencies tend to be where you are yield dilutive. So these are markets where we're actually making more money than we should be. And as a result, we self-dilute by adding frequencies. So in terms of the RASK, new airports themselves doesn't necessarily bring down the RASK in terms of the contribution margins. We haven't previously split out. The margins we make on all of these, so I can't give you the number to that.

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [11]

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Okay. With regard to the situation in Vienna, I think you have to recognize that there is a process here. Every one jumped on Vienna, but nothing was happening in Vienna for decades and all of a sudden everyone joined the party. But now we are seeing kind of 6, 12 months down the line that actually a number of airlines are contracting capacity, so Eurowings is contacting, easyJet is contracting, LEVEL is contracting. So the dust will settle down sooner or later. And, obviously, this is a process that takes time.

As far as we are concerned, we are looking at Vienna over the horizon of around 3 years to continue to invest. So our objective is not to maximize profitability in Vienna, but to build our presence to a scale that makes strategic sense over longer term. I think this is going to take around 3 years to get that. And, once we are there we will start focusing on maturing our margin performance. And so I would guess that, you know in -- you will start seeing significant margin improvement in year 3, but really you're going to see probably a year 4, year 5, the margins -- what could match up with corporate performance.

With regard to weaker airlines, that's a difficult question, because we all know that there is a significant degree of rationality going into the airline industry, even from private investors, but certainly from state actors. So we are seeing essentially already incumbent national carriers in Central and Eastern Europe struggling big way. But they are still hanging in.

I mean, I look at the Alitalia case. I mean, I think, 2 years ago everyone saw that finally Alitalia is going well. I mean these guys are still hanging in. And the creativity is unlimited how to keep funding that business. And clearly the EU is assisting to do that. So it is very hard to predict what exactly is going to happen. But what we are clearly seeing is that LOT Polish Airlines is now becoming rational. They are reducing capacity. TAROM, Romanian airlines is reducing capacity. Ukraine International is reducing capacity. So I think as the macro environment is hardening up on the airline industry, you see some degree of rational behavior coming in as some market forces -- to the effect they have on industry. But it's very hard to predict what exactly is going to happen.

But, again, I think as far as we are concerned, we stand ready to fill the vacuum and I think we've demonstrated a few times that whenever something happens in the marketplace, we act very quickly, that's how we did in the U.K. We acted on the collapse of Monarch, that's how we did in Vienna. We acted on Air Berlin and flyNiki and we would be acting on situations similar to this whenever they happen. But we are focused on building our own business.

Our business is not chasing market share, our business is not necessarily trying to eat into the cakes of others. Our business is to continue to stimulate the marketplace. I mean, we have a lot of markets to stimulate. Penetration in airlines -- penetration is still very low in Central Eastern Europe and that's why we are so keen, as Iain explained, to keep taking the fare levels down to be able to reduce the anti-barrier for consumers to come into the franchise and just stimulate the marketplace on that basis. I think airline freighters are almost like a sort of side benefits to the business we could react on. But this is not core to our business. This is not core to our ability to deliver growth in the future.

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Mark A. Simpson, Goodbody Stockbrokers, Research Division - Analyst [12]

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Just circling back on one. You talked about the 3-year build out program of Vienna. Could you just give us an idea of what the kind of target fleet you have? You have 5 now. Where do you think that will go?

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [13]

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Yes, we should be -- we should be landing on around 15 to 20 aircraft in the next 3 to 5 years.

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Operator [14]

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The next question comes from the line of Andrew Lobbenberg from HSBC.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [15]

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Can I skip out the change in fleet composition in '21? Just wondering whether there was any compensation from Airbus? Because, obviously, when we looked at the Q4 at the end of last financial year, there were -- there were few funnies knocking around the other cost lines. So anything to come from Airbus or indeed anything else that would be peculiar to distort the CASK line as we go forward?

Then can I ask on ancillaries, as the turbocharging drops out into the winter, what measures do you expect to deliver that run rate of up EUR 1 per passenger per year or what levers that you've got to pull to keep that pushing along.

And then a final question on the order of the 321 XLRs, what you're going do with them?

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [16]

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Okay. Maybe I would tackle the fleet matters and Iain will answer your ancillary question. I think what we try to accomplish for next year 2020 was, first of all, to recognize the industry supply issues. Obviously, we don't like it. We are very disappointed with what's going on in industry. And -- so clearly, there is an issue with the OEMs, with their ability to supply, aircraft tests are contracted. And this is across the board, and that affects aircraft manufacturers, engine manufacturers, parts suppliers, basically the entire supply chain of the industry.

But I think we have a situation here and we try to react to that situation. And when you look at it from an Airbus perspective, there is a distinct difference between the Airbus A321neo assembly line and the A320 assembly line. The A320 assembly line is much safer for the purposes of delivering aircraft as contracted than the A321 delivery line. The A321 deliver line has become volatile. There are dragging delays affecting the entire industries. I think many airlines have commented on that, that they are now seeing 6 months delays, et cetera. And simply we just decided that we don't want to take the risk with capacity. And it is strategically important for the business to secure capacity, to secure aircraft units to be able to grow the business. That's why we decided to convert for A321 for 6 A320neo aircraft, because we have the confidence and we've got assured by Airbus that those A320 aircraft will be delivered on time as contracted. And I think they sufficiently demonstrated their ability and capacity to do so. So we got really motivated by our objective of bringing the supply of aircraft units into the system, we need to deliver the growth out of business.

Next to it, we have also made decisions on extending existing leases again to secure a supply of capacity. And also, we are looking at further leases, which we might be extending, and those would be confirmed in the near future. So we are very keen on making sure that we have the supply of capacity what we need to meet demand and to meet the needs of the business. So I think with all these measures we put in place we feel comfortable with our ability to deliver growth. So it was more of a securing the growth trajectory, securing the supply of capacity to growth as opposed to chasing compensation.

With regard to XLR, I think, maybe the best way to put the XLR is that. If you look at sort of the 2 extremes of our geographical footprint, so we are flying the UAE and we are flying the Canary Islands of Spain. We are reaching the Canary Islands from Budapest, for example. But we are not reaching to Canary Islands from Bucharest, because that's further east. We are reaching Dubai from Budapest, but we are not reaching it from Vienna, because that's further west.

The XLR will give us the opportunity to add an additional 2 hours of range to the fleet. And I know it's kind of exciting to think that, well, is it lower cost or is Transatlantic, that's not the purpose of the XLR. The purpose of the XLR is to connect the dots within our existing geographies primarily. Of course, we would be looking at new market opportunities as we continue to look at new market opportunities in any event. But the prime objective of the XLR is to do more of what we are doing within our existing geographies.

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Iain Wetherall, Wizz Air Holdings Plc - CFO [17]

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And onto the ancillary, maybe the best way to demonstrate this, if you look on Page 11. If you look at the fourth quarter fiscal '18 where we were EUR 2.9 short, that was a full quarter where we didn't have the policy. And you compare that to the fourth quarter of fiscal '19 which was plus EUR 4.2. You're seeing a delta of over EUR 1.3. What that says is that we were able to compensate for the change in the policy. But we also delivered more than EUR 1 on everything else, so whether it's conversion, whether it's new products.

And I think -- so in terms of how we'll be delivering that additional EUR 1, the team is just working on. There is other 35 teams that are making it better, implementing new beta testing to make them more effective and improve conversion. So within the turbocharging, as you described it, there's already EUR 1 that's being brought through on other revenue streams.

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Andrew Lobbenberg, HSBC, Research Division - Head of the European Transport Team [18]

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But can I just come back, because, I mean, Joe made it clear that you weren't making the fleet change to chase compensation to secure capacity. That's completely crystal clear. But as we assess your unit cost and stuff, with the history of that last Q4 having a very big unusual item in it, are we expecting -- will there be compensation impacts in your accounts this year?

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Iain Wetherall, Wizz Air Holdings Plc - CFO [19]

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Compensation tends to happen if an aircraft is not delivered on time. When you're looking 18 months out or even 12 months out compensation doesn't figure. So, for example, there was a 20 day delay on one aircraft and I think someone mentioned on one of my calls earlier, in Kiev. So 20 days, there would be some small amount of compensation, but not the multimillions that you're thinking about. So an answer to your question, will there be compensation? We don't know. Because so far so good, our aircraft are being delivered on time and we want those aircraft. So in terms of the forecast the answer is, no. There is no meaningful compensation expected in our P&L this year.

But if the aircrafts aren't delivered, which we do not expect, than maybe there is EUR 1 million or EUR 2 million that would pop up, but so far so good.

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Operator [20]

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

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Ross Harvey, Davy, Research Division - Transport, Distribution and Logistics Analyst [21]

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2 questions from me. Firstly in relation to ancillaries, I just wondered to what degree have you gone to price manage some of your products, the likes of the priority boarding.

And secondly, in relation to capacity growth, your winter capacity growth, is it fair -- correct is low around 22%-23%. Do you think it will continue at that level into summer '20 or will it be closer towards at that 15% longer-term guide that you've given.

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [22]

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Maybe I will just take the capacity guidance. I am afraid -- maybe we would love to do 20% given the strengths of the business and the market conditions going into summer 2020. We won't be able to do that, because we won't have the capacity to support it. So I think you will be seeing thus more like the 15% to be delivered in that period.

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Iain Wetherall, Wizz Air Holdings Plc - CFO [23]

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And on the ancillary, we do -- I think we did pretty good job on the ticket in terms of dynamically managing the fares. A little bit more work to do on the ancillary. I think -- there are a number of streams that we are dynamically pricing and that's working quite well. But there's certainly little bit more room. So in terms of how we going to continue to improve our ancillary performance, definitely a little bit more dynamic pricing will come into the fore over the next year or 2.

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Operator [24]

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And the next question comes from the line of from Michael Kuhn from Societe Generale.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [25]

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Also 2 or maybe 3 for me. Firstly, on load factor was healed. You were more, let's say, yield driven in the winter. Now it looks like we are more load factor driven. Is that kind of a more short term driven approach or have you changed your thinking there?

Then listening to your comments on growth and on yields, it sounds a bit like you will generate most or even all of your projected net income growth in the first half of the year. Is that correct?

And then lastly, another follow up on ancillaries, maybe. With the tough comps in the second half to come now, but you still think you are able to grow at your at EUR 1 run rate or might it be a bit slower in the second half then?

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [26]

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Maybe I would take the ancillary and load factor, Iain [the third]. With regards to the ancillaries, yes, indeed, the comps we had changed going into the second half. I think what we have always said consistently is that we are targeting EUR 1, but we may end up with something between EUR 0.5 to EUR 1. So we tried hard.

I mean, if you see the numbers now we are above EUR 30 per passenger. We are 45% on ancillaries of the total revenues. So I think we've done fairly well to push ancillaries. And obviously it's getting harder and harder. I don't think there is a ceiling, but certainly you may expect something EUR 0.5 to EUR 1. Although I would caution you, and please don't take ancillaries like this is revenue coming into the bottom-line, because a significant portion of ancillaries' revenues cannibalize ticket revenues.

But as Iain said, strategically, our interest is actually to try to forward everything into ancillaries at the expense of fares. Seeing lowering fares is a good thing for the business, because that improves our ability to stimulate the marketplace. Obviously, you need to compensate that with the increase of ancillary revenues. But this is the model we are in. So our strategic interest is to see lower ticket fares, with more ancillary revenue production. I think that's the model we're going to continue to drive in the future.

But with regard to load factor, I think we've always been more load factor active and yield passive. I don't think we are as bad as some of our competitors like Ryanair. I think, we've been overall focused on optimizing total revenues. But we are certainly skewed towards getting the aircraft filled. We are seeing that the most expensive seat is the empty seat. So we are very actively driving load factors.

I mean, if you look at it, our load factor performance in the winter period is not significantly inferior to the load factor performance of summer. I mean, obviously, given the seasonality of the European airline business you see, significantly greater demand in summertime than in the winter time. But we continue to focus on filling the planes and achieving high load factors in wintertime as well. And the yield is the outcome of the process. I do think that the approach has changed fundamentally.

And we will continue to push load factor. But at the same time, we -- I think we are pretty sophisticated on yield managing capacity, probably one of the better airlines globally. With that regards we have a proprietary system to do that, and a lot of human and artificial intelligence going into it. So we are not taking it lightly, but primarily we are driving load factors.

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Michael Kuhn, Societe Generale Cross Asset Research - Equity analyst [27]

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And on the net income, is it right to assume it's going to go mostly in the first half and second half be pretty much neutral year-on-year?

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Iain Wetherall, Wizz Air Holdings Plc - CFO [28]

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Yes, I mean it's fairly consistent with prior years. We make all our money in the summer and we invest it in the winter, and so try not to lose in the winter, so, yes, no change to that profile.

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Operator [29]

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And the next question comes from the line of Kathryn Leonard from Numis.

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [30]

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I have 3 very brief ones, I think, if that's okay, please. And Firstly, could you just talk a little bit more just about the FY '21 expectations. I know you just mentioned that, obviously, you would like to grow fast in the 15%. But you see summer 2020 as being sort of 15% growth. Just trying to tally that with the fleet guidance you've given this morning which shows the aircraft growth of sort of more like 18%. And obviously within that mix, you're you are skewing towards the larger aircraft, even though, you've changed the mix from the A321 into the A220 slightly. But just whether you could talk about that a little bit more. And clearly, with what's going on with the MAX, as previously mentioned, I can see there's a rationale for going faster than that 15% next year.

And secondly, could you just comment on forward bookings and the progression you're seeing for Q2 and maybe Q3? I know it's early days. But just what the forward booking profile is doing year-on-year. Obviously, some of your capacities, particularly in the Western European focused ones are suffering, that's about on that.

And then just thirdly, briefly on unionization. I know it's something that gets asked every call. But just whether you've seen any changes to that clearly doesn't quite see headlines some of your capacities at the end of the summer months and across Western Europe.

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [31]

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Okay, well. Thank you. With regard to the growth profile going into fiscal '21, well we certainly update the fleet program. As said, we are now looking at extending existing leases to make sure that we protect our capacity plan for that period, taking the industry issues into account. So I think within months or so, we should be able to give you a proper update. But for the purposes of modeling, we are looking at 15% to 17% capacity growth in fiscal '21.

With regard to forward bookings, but so far, so good. I mean, this is why we are making the decision of upping capacity for the balance of the financial year, because we are confident of what we have delivered in the current financial years -- year and what we are seeing in front of us as far as visibility, permits us to conclude anything. So far so good. We are ahead of last year and this is why we reacted with the capacity adjustment.

And with regard to your union matter, no change. I mean, I would just want to emphasize a point that. I think we had a significantly different company culture than any of the other airlines. I think we have been always walking the talk internally. We have not tried to alienate certain workforces inside the company. We have been building the spirit of being a team and we are all together into this. So we laugh together and we will cry together, kind of spirit. We are very active to engage with the crew, with pilots and cabin crew. We visit them on a very frequent basis. We have a People's Council. That's a fairly newly institutionalized formal -- having the dialogue to understand issues and opportunities and to make sure that there is sufficient focus on all sides to get things done and act on matters.

So it is a very different culture versus what the others have. And as a result, this is not a question in the company. I think the question in the company is, how to create a proposition of winning for all parties. So how to create more shareholder value, how to become more competitive, which I think is very strategically important for the long run. We are a rapidly growing business. We create a lot of opportunities. I think that's important for people's carrier that they see the prospect of growth and they see the prospect of their individual rise in the company. And I think we've been doing a fairly good job with regards to delivery in the sense.

We remain very focused on the organization, on the culture and the dialogue with the people. So we invest a lot into our people, and we do it proactively. So we are not forced to do that. But we do it proactively. And let's not be naïve. I mean, we are not immune from the market. So if the market moves, for example, on pay, we move on pay. I mean, Iain said that, a good year where we decided to go with the market and significantly increase the pay of pilots and should we say the market moving, of course, we would be a pretty much in the forefront of implementing certain actions. So it's just a very different, a very proactive culture of what we have and we will stay like that, and we will continue to build a company on that basis.

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Kathryn Helena Louise Leonard, Numis Securities Limited, Research Division - Analyst [32]

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And just a quick follow-up. I think you mentioned just as last time, People Council. And I just wondered, who is that bought about and what is this, that's the comment or the issues coming out are they quite addressable?

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [33]

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Yes, I mean, this is an institution that is trying to bring various parties to the same table. The People Council functions as such that people from different countries are represented there, people from different functions, office, group, idols coming through et cetera are represented there. Our management is deeply involved in that. And that's an open forum. So this is not framed for certain issues. So, people can bring in whatever they want to bring in and we discuss and we try to narrow down matters that actually make a real difference to people and we try to act on those. It's a frequently run process, so we meet very frequently on this method. So I think it is a well working function. Obviously, we want to make sure that everyone is satisfied with the outcomes of that process. So, yes, I think we are on good track and we continue to enhance the process and also the productivity of the outcomes.

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Iain Wetherall, Wizz Air Holdings Plc - CFO [34]

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I think we have -- thanks Kathryn. We are running out of time. So maybe one more question, if there are any.

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Operator [35]

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There are no further questions.

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Iain Wetherall, Wizz Air Holdings Plc - CFO [36]

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That's perfect. Great. That draws us to close. Thanks everyone for your interest and thanks for calling in your questions and then have a good summer.

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József Váradi, Wizz Air Holdings Plc - CEO & Executive Director [37]

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Thank you. Bye-bye.

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Operator [38]

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This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.