Wizz Air Holdings PLC

LSE:WIZZ

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to the Wizz Air Third Quarter Results Conference Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Jozsef Varadi. Please begin your meeting.

[József Váradi, CEO & Executive Director]

Good morning, everyone. Thank you for joining this conference. So let me start sort of giving you a few highlights how the quarter was developing and what's in front of us going forward. So yet again, we are announcing a record quarter, record passenger number, 7.1 million passengers, and record revenue EUR 423 million. We continue to invest in growth. We delivered 24% passenger growth in the quarter. That's pretty high at any standard. Clearly, we are putting capacity back into the market, what we intended to park given the off-season and the low season period resulting from some of the consolidation events happening across Europe, in the United Kingdom, but also in Continental Europe. We remain disciplined on cost management, we delivered ex-fuel CASK flat despite a number of headwinds clearly on infrastructure cost, on labor, on fuel, we've seen quite a bit of headwind, but at the same time. the rollout of A321 aircraft has had us offset at least some of it. And the A321 rollout is very important going forward as well. At the end of the financial year in March, we will have 33% of the capacity flown on A321, a year later March 2019, we will have 44% of the seats flown on A321s.We completed the transaction for our largest ever aircraft order, 146 [ A320, 21neo ] aircraft. We just issued a communication yesterday with regard to obtaining shareholders' approval for the transaction. So now this deal is done and dusted. We made major announcements with regard to expanding our business in London at London Luton Airport and entering the Vienna market, obviously taking advantage of the changing market circumstances we [ require ] for airport nightstand at Luton from Monarch and as a result very quickly, we've been able to scale up our operations from an intended 3 aircraft to 7 aircraft already going into the summer period.And as you know, we are in the process of licensing our UK airline, Wizz Air UK, and we are expecting to receive the necessary operating licenses during the course of March in line with our plan. So essentially what we are doing in London Luton will be a Wizz Air UK operation. We also announced the opening on Vienna, taking advantage of the Air Berlin NIKI situation and quite robustly, we're going to be starting our venture there with [ 3 aircraft opening, 17 ] during the course of 2018.Also importantly, we launched the Wizz Pilot Academy. Just for your perspective, we are expecting to hire over 300 pilots each year in the next 5 years and we are expecting to deliver around 150 cadets, young pilots through the Wizz Pilot Academy Program when it's scaled up. We've already inducted over 100 cadets into this program. Quite a lot of growth in front of us, so we are seeing the remainder of the current financial year, as well as fiscal '19 as a continuation of our growth strategy, a similar level and we, are just about to start our largest ever delivery program. We're going to be taking delivery of 17 aircraft over 17 weeks starting on the 1st of March, but we think we are ready operationally to go through that process and induct all those aircrafts.If you take the next slide, we are the largest low-cost carrier in Central and Eastern Europe and obviously, the growth that we have delivered and we continue to deliver keeps enhancing our leadership position there. As said, we are up 24% on passengers, 7.1 million. We have a fleet of 88 aircraft currently in operation. This is 14 more than the same time last year. We continue to add airports to the network and open up new countries and we opened up bases also. We reshuffled bases, we reshuffled capacity, we've also made announcements on closing some of the smaller bases in order to spring capacity for a bigger strategic play as opportunities arose during the period. And obviously, with that capacity growth, we keep building our organizational capacity and we have 3,500 employees as we speak.And despite delivering that high growth and moving on to next slide, the performance metrics remained intact. We operated 18% more flights; utilization remained unchanged during the period, over 12 hours of utilization; load factor increased [ over 1%, 1.4% ] to 89.4%; and the regularity and the punctuality matrix slightly deteriorated, but largely remained the same as in the period last year and we were big time affected by weather conditions in December just in the United Kingdom. We had to cancel over 100 flights because -- in fact, the country became unoperational almost for 2 days. So while in the period, we canceled 57 flights last year, we were forced to cancel 209 flights this year predominantly driven by weather factors, but I can also confirm it to you that it was not driven by pilot shortage or anything like that. So with that note, I will just hand it over to Iain who is going to take you through the financial performance of the business.

[Iain Wetherall, Chief Financial Officer]

Thanks, Jozsef. I think in the context of the growth that Jozsef just described, we were very happy with the financial performance of the third quarter. The first half, if you remember, we delivered [ EUR 282 million ] of profit. We delivered EUR 14 million of profit in the third quarter, taking us to EUR 303 million of profit for the 9 months. This is a fantastic platform to essentially accelerate the growth which Joe has described and we'll give a little bit more color on the fleet later. So seat growth was up 22.4%, a slightly higher stage length to 1,600 kilometers. ASK growth was up 22.6%, load factors were also up and passenger growth up 24%. All of this flows through to higher revenue of 24%, so delivering EUR 422.9 million in the third quarter.Notwithstanding this growth, it is pleasing to report that cost remained very tightly controlled, so delivering on an ex-fuel CASK flat is a good performance. We are guiding broadly flat CASK for the full year, so you will appreciate that we'll be looking for an even better performance going into the fourth quarter. So that number will start turning negative performance in the fourth quarter, which on the back of the growth again I think will be a very good performance.We've also guided slightly positive revenue environment, so the RASK as you can see in the third quarter notwithstanding this growth profile, we're able to deliver a 1.3% increase in the RASK performance. I think it's also very important to -- when you look at RASK and make some conclusions yourself is, bear in mind that the CEE is at a very different stage of evolution to that of Western Europe. So what we're seeing in the CEE, we can come on to later, is still a very strong economic backdrop, a serious amount of opportunities to continue the stimulation. So the revenue environment, we want to grow this business as fast as we possibly can and maintain flat margins. So maintaining a flat CASK, driving those costs even lower with the A321, so revenue is not -- we're not revenue chasers, we are cost chasers.Maybe moving on to the next slide, just to highlight a couple of points. Within 2 years on the fleet side, [ over 54% ] of our fleet will be supplied with A321s and bearing in mind the A321 is delivering 10% lower unit costs. With the neos, our first neo will be coming in January '19. We are very confident of the delivery of that aircraft, the fuel savings on those aircraft, hopefully, they'll be even better than our expectations. So with the neos and the A321s, we'll be driving our costs even lower and driving the revenue line higher.I think it's worth highlighting at this point on the ancillary, so maybe one of the negative notes of the quarter is the ancillary, a slight decline. If you remember, the first half, we delivered a plus EUR 1.8 per pax. In the first half, this was a strong performance. In the third quarter in October, we changed our paid-for-cabin bag policy. We still need to refine that. Essentially we've been having a bit of a challenge over the past few years in improving the cabin bags. Basically, people don't want to pay for bags and the challenge the industry faces across all markets is that essentially these aircraft [ are instructed ] to take one bag per passenger, so an A320 can probably only take about 100 bags versus 180 seats. So I think this is a challenge the industry has, it's something that we will be improving on.I think the positive note is the value-add was up 2.6 -- sorry the value-add was up EUR 2 per pax for the quarter, but the bag declined EUR 2.6, so we delivered a minus EUR 0.6. For the full year, they will still be in positive territory and I think for your models, the target should always be EUR 1 per pax per year and that's what we'll be aiming for going into fiscal '19. I think on the economic backdrop, it's also worth highlighting that in all of our markets, we're seeing strong growth. In some markets, you're seeing GDP growth north of 6%. This is driving passenger traffic north of 10%. So in terms of the fundamentals of the business model, it remained strong and this is one of the cornerstones of why we can grow at the pace that we're growing.Moving on to Slide 4, I've highlighted the opportunities with the A321s. With the neos coming in January '19, we have a stronger balance sheet, we are actually looking at the options for financing those aircraft. So certainly, that will be something that I would be looking at in more detail going forward. I think Joe highlighted the incredibly large order that we did with the aircraft, the price of which we have secured at competitive rates. So in terms of the aircraft, the price paid for those on the asset side of the equation, I think we've ticked that box and created a fantastic platform for the next 10 years.On the challenges, Joe highlighted in terms of labor cost, it's [ suffice ] to say that the labor environment is getting tighter and when you're growing at 25%, that's a significant pressure on the organization. The team is in place, the organization structure is in place, we are confident that we have no issues going -- certainly going into the summer on that respect and all the initiatives in terms of the recruitment, the Pilots Academy, we should be well set going into next year.Looking on to Page 8, I think again, a slide you've all seen before, it's very pleasing to see that there's always going to be headwinds and tailwinds and our job is to make sure that we deliver very tight cost control. So we've delivered a flat CASK for the third quarter and going into the fourth quarter that number will be turning negative and with the A321 rollouts, we had a bit of a blip going through with depreciation, which I've highlighted. We've sort of -- we've gone through that now as we go into fiscal '19, and I think I highlighted at the half-year results, we should start to see that negative trend returning. So certainly, ex-fuel CASK for us remains very tight and we will start on the downward trajectory as we go into fiscal '19.Moving on to Slide 5, cash generation remains very strong. Free cash was around about 30.6% of leverage. This number can change by 0.1 percentage point depending on the rate of the dollar. The balance sheet is very strong. Maybe pushing on to Slide 10, just 2 sort of tweaks on to the guidance, the fuel prices, we pushed that up from plus 3% to plus 5% and the growth in terms of capacity was 23%. We've been able to successfully push that up to 24% capacity growth, 25% passenger growth for the full year. The net profit guidance remains unchanged from the first half. With that, I'll pass to Joe to give some flavor on the network and other developments.

[József Váradi, CEO & Executive Director]

So obviously, with the influx of new capacity, we continue to build our network and fairly similarly, to the profile of growth what we have delivered, you are seeing the same flowing through the quarter we are reporting here. We put [ over 80% of the growth ] capacity on routes or airports, which are familiar to us. 56% of the capacity went into increasing frequencies on existing services and 27% for joining the dots, joining existing airports, but we remain keen on carrying the flag of the [ USCC ] and bring the low-cost model to new markets, to new territories and with that spirit in mind, we continued to open up new airports as well, 17% of that capacity went into new airport.Looking at the next slide, Slide 12, you can see the expansion in Luton. I must say that this is a step change versus our original plan, pretty much triggered by the Monarch situation. We were able to secure 4 airport nightstands enabling us to essentially move the operations from 3 aircraft to 7 aircraft very quickly, are ready operating through summer of 2018. As said, we are expecting Wizz Air UK to be licensed in March and we're going to be able to obviously, at least, to some extent, address some of the Brexit concerns with regard to the airline operating model by having essentially 2 airlines, 1 in the U.K. and the other in the European Union. I mean, obviously, this is the start of a journey. We have robust plans for the future for London-Luton, but already with this expansion, we are coming up to 37% market share in London-Luton. So we are pretty much tied to #1, #2 there, but depending on [ sort ] and airport infrastructure availabilities, we remain committed to continue to build our network in Luton.Next slide, Slide 13, is our new venture in Vienna. We're highly excited about this opportunity. Actually, we had been looking at Vienna for a long time, but this was the right moment for getting the right commercial and operating platform for actually entering the market. Let's not forget that the geographical proximity of Vienna is very favorable for our core markets. I mean essentially quite a large number of Hungarians, Slovakians and Czechs are using Vienna airport as their preferred airport and we are building on the halo effect obviously, and clearly, the consolidation opportunity arising from the sale of Air Berlin and Niki triggered us to essentially enter the market at this time around, and quite a robust entry with 17 new routes and 3 aircraft and again this is the start of a journey and you can expect us to do more in the near future.Moving on to the next slide, we have now a very robust delivery stream of aircraft coming down the line between now and 2026, a total of 281 aircraft to be delivered in this period. You see the detailing of how that actually will get executed, so we are still having a few aircraft of the [ ceo technology A320s, A321s ] to be delivered between now and 2019, and already in January 2019, we will start taking delivery of the previously confirmed 110 A321 order stream. You'll see that flows into 2024, and in 2020, we will start taking deliveries of the new aircraft, but we just confirm the [ A320, A321neos ]. Now the A321 is obviously a very significant driver of the business. It has a 10% lower unit cost than the A320 and the neo technology is adding an additional 10% cost saving to the business. So operating an A321neo aircraft compared to today's A320ceo aircraft gives us 20% unit cost saving which is very significant and we will make sure that we remain very competitive and very formidable in the marketplace.So just on the 146 aircraft order, this is the largest order the company has ever placed and we are part of an order, the Indigo portfolio order over 450 aircraft which essentially is one of the largest orders in the industry in history. This represents over $17 billion of financial commitment at list price. Obviously, we are buying it at a lower price than list. And strategically, it fits into our strategic objective to become the ultimate lowest cost producer in the industry and in Europe and certainly this aircraft is going to help us achieve that.Moving on to the next slide, you are seeing the revised fleet plan. Essentially, we are [ hoping ] capacity compared to what you were presented about 6 months ago. So if you take fiscal '19, we will have a fleet of 112 aircraft compared to 106 what we previously communicated. That pretty much comes on the back of extending a number of aircraft what we planned on returning, but given the market environment and the market opportunities, we decided to retain that capacity and further operate those aircraft in order to be able to supply the demanded capacity. And with that, the fiscal '20 number is now changing to 127 aircraft at the end of the financial year, and you can see below, 33% of the capacity will be flown on A321 in March, a year later 43%, and 54% in March 2020. So the A321 will become the core of the fleet and I think that's great news because we believe that this aircraft is unbeatable in terms of aircraft economics compared to any other aircraft of any other manufacturer.So with that, I would just recap the presentation. So another strong quarter taking the 9 months of the financial year to a total of EUR 303 million net profit. We are quite encouraged by forward bookings what we are seeing especially for Easter. We are [ opting ] capacity plan and the passenger growth plan, we expect to deliver 25% growth on passengers with 30 million pax in the financial year. Very significant expansions in London and Vienna resulting from consolidation opportunities. We continue to invest into infrastructure and assets. We secured aircraft orders, which will serve us for quite a while with regard to the growth requirements of the business, but also we want to make sure that we control our own destiny when it comes to crewing those aircraft and by institutionalizing the Wizz Pilot Academy, we make sure that we don't remain just totally dependent on the market, but actually we can also produce our own pilot.Our balance sheet has become stronger, quite a lot of liquidity has been created over the past year and as said, this growth will continue to take place and we are just in front of our major delivery program which will start on the 1st of March when we will take delivery of 17 aircraft over 17 weeks which is fairly unprecedented not only for Wizz, but probably for the whole industry, but we remain very excited about the growth opportunities and the robustness of the model to actually deliver financial performance while we are growing the business 20% plus. Thank you.

[Iain Wetherall, Chief Financial Officer]

Operator, maybe you can open up to Q&A, please?

[Operator]

Thank you. [Operator Instructions] And our first question comes from the line of Christopher Combe from JPMorgan.

[Christopher George Combe, Head of Transportation and Logistics]

Just 2 questions from me. I saw a press interview quote this morning stating that you expect no material changes in fares in FY '19. Just wanted to ask if that's -- if we should read that as your sort of first-take on RASK guidance for next year, and in light of that, could you give us some sense of how you expect unit costs to develop in light of D&A normalization and the rising share of A321s? Thanks.

[József Váradi, CEO & Executive Director]

Okay. Yes, indeed. We don't necessarily see a dramatic change in the fare environment. I mean you are seeing different factors affecting the fare environment. One is certainly a very robust macroeconomic context of our markets as Iain already commented on. We are seeing some of our markets with GDP growth over 6%, but even the slowest growing market is more than 3%. So it's very strong economic sentiment overall. We are seeing a rising fuel price which based on empirical evidence, rising input cost tends to feed through into the fare environment over time, but that's a longer-term process, so it can take 12 months to 18 months, so it's sort of pushing fares up. We are also seeing some capacity consolidation resulting from failures of airlines and obviously, that also has improved the fare environment, but at the same time, you are also seeing actually the backfilling of that capacity fairly quickly by airlines including ourselves. So based on these factors, I don't think there is going to be a material change, maybe there is some upside to unit revenue, but it's not going to be mind-blowing. And if you look at the cost performance of the business, we expect to benefit from the A321 rollout definitely. I mean now this is going to affect over 10% of our capacity. So if you take 10% gain on 10% of your capacity, this is already giving you a company-wide 1% cost saving. There is headwind and actually a number of headwinds on labor cost, I mean you are seeing very clear labor cost inflation, [indiscernible] and some particular workforces are even more affected like pilots, but clearly unemployment rates are down everywhere and as a result, minimum salaries are increased by governments especially in Central Eastern Europe and we are seeing somewhere in the range of 5% to 10% wage inflation in Central Eastern Europe and we are not immune. So we need to react to those market forces and we need to make adjustments. And also, you have the fuel cost question, how fuel goes and we are expecting fuel to rise to some extent, but we're seeing that we are overall in a good position with A321 rollout, so certainly we would expect ex-fuel cost performance to be flat, slightly negative, but overall the cost probably is going to grow slightly because of the fuel component of that, but we're seeing that the revenue upside will be sufficient to offset that. So overall, we expect a fairly similar trading environment in terms of margin performance.

[Christopher George Combe, Head of Transportation and Logistics]

That's clear, thanks. And just one last question. When we look to the order book, can you talk about the incremental benefits of ownership, how that may impact D&A and the finance costs on the margin going forward?

[Iain Wetherall, Chief Financial Officer]

Yes, I can take that one. I think if you look at the -- as you know, all of our aircraft are currently leased on operating leases and the embedded financing charge on those can range from anywhere from today 3%, 4% to 7%, 8% on the older leases. So essentially if you compare that to issuing a bond, I won't give indicative prices, you can see in the market what they're trading at, but you can certainly see there's a couple of percentage points certainly on existing leasing deals. So by removing the lessor, we will certainly be benefiting. I think it's probably worth highlighting on that point, IFRS 16, I think it's a hot topic. It's not something we're going to be adopting as of the 1st of April 2018. We've done the analysis, it doesn't really move the needle for Wizz Air in terms of the numbers, so you can't -- I wouldn't expect any big issues coming out of that, but I think what's important is that the IFRS 16 will split out the ownership cost in terms of asset prices and depreciation, so the great deal that we've just done with Airbus, you'll see nice trends of depreciation certainly for the long-term and then on the interest line, that will also be [ below EBIT in the interest ] and the funding costs. So you'll see the existing funding costs and so whether it's on balance sheet financing or even better lease prices, you'll start to see an improving trend. So IFRS 16 as a topic, it's actually quite helpful in giving a bit more transparency in terms of ownership costs and funding costs. So I think I would model that. The timing though Chris, I think you need to look a bit beyond, I mean the [ first A321s -- the neos is January '19 ] that we still need to be convinced of buying. There's the question on residual value, we are confident the aircraft are going to perform there in the air now and the performance we see is excellent. So we're happy they are coming, but in terms of the next 12 months, it's not something I would put in your models, it's something more for fiscal '20.

[Operator]

And our next question comes from the line of Damian Brewer from RBC.

[Damian Brewer, Analyst]

2 questions from me too. First one, in terms of Q3 trading, obviously slightly breathtaking to grow 24% and see unit revenues flat to [ almost ] slightly up, but within that, is there anything in the mix that you could call out as being particularly exceptional\weaker, and any feelings for what the reasons for that is and how that changes the way you evolve your growth strategy in terms of where you put the growth for this summer? And then the second question, and I'll give them to you all at once is just looking at [ your ] growth rate, when you've looked at other businesses that have grown at this fast a rate, what have you learned from them in order to sort of avoid the pitfalls of any sort of overgrowth or over trading that we've seen in companies in the past? So if you could just tell us what you think the risks are there and how you've addressed them? Thank you.

[József Váradi, CEO & Executive Director]

Okay, with regard to Q3 trading, I don't think there are big miracles. They are simply -- simply we try to muster operational excellence and [indiscernible] on a bigger scale. Many of the things has become sort of a factory in our case. I mean if you look at it, I mean we are operating across 28 bases in 16 countries. I mean we know how to enter a new jurisdiction, we know how to set up a new base, we know how to scale those operations. So I think the operating model is very intact and very well tested already. I mean one of the challenges obviously is that we are seeing plenty of growth opportunities, but we don't want over-grow the business, so I mean -- I could even argue that we deliver 25% [ before ] we could have delivered 35% growth as well if you kind of derive growth from market opportunities, but at the same time, you want to make sure that you actually can execute and you don't dilute the operating model of the airline. So we had been filtering these opportunities and as a matter of fact, that forced us to review the business maybe more rigorously than before and we have been eliminating underperforming capacity, we have been eliminating underperforming bases, we have announced the closure of a number of small bases that we set up a number of years back, just couldn't drive it to an extent that they would classify as a scalable good businesses with good prospect for the future. So we took sort of the hard decisions on those in order to make sure that we spring capacity where we really have compelling opportunities. So I think we have been moving that kind of a portfolio to some extent, but other than that I think we've just been very focused on the [ USAC ] principles and we continue to seek those principles. In terms of learnings, I think it remains very important to us that we build a diversified portfolio of markets and we are further diversifying our business like 13 years, 14 years ago we were totally reliant on 2 markets, Poland and Hungary and we were quite vulnerable to external shocks, competitive incursions and all those sort of matters. Then we started diversifying across Central and Eastern Europe and I think we got to another level of diversification now that given the rising opportunities from consolidation in Western Europe on a very select basis, and somewhat opportunistically, I would say we are entering the Western European market. Does it represent any shift from strategy? Not at all. We remain focused and totally committed to Central and Eastern Europe and I would be expecting going forward that the overwhelming majority of the growth will be deployed in actually Central and Eastern Europe, but as we are a sizable airline and we have very significant presence in Western Europe as well, I mean we are one of the largest airlines in London-Luton, we are the largest airline in a number of Western European airports, so obviously we ought to look at those opportunities as they arise from consolidation, but also we are very keen on doing more further East. 5 years ago, Israel was an untouchable market because of regulatory constraints. Now, we are the largest international airline in the country operating 2 to 3 airports. So as those windows open up, we want to be there and we want to carry the flag there as well. So I think you may expect us to do more in the East, you may expect us to do more in the West in the future, but the core, we remain unchanged and we will be focused on Central and Eastern Europe. So I think the diversification method is certainly a lesson and the other lesson is that we can push growth from a commercial perspective, but we need to take into account our capacity to execute that growth from an operational perspective and we think that we probably got to the point now with this level of growth on a continuous basis. I mean, we have been delivering 20% plus growth for 3 years now, that probably this is how far we can go and rather than further stretching ourselves operationally, we might have to be a bit more selective on the growth opportunities and also more rigorous on reviewing the underperforming part of the business.

[Damian Brewer, Analyst]

Okay, thank you. And just the Q3 tradings, any particular as to a [ better or weak on an average ]?

[Iain Wetherall, Chief Financial Officer]

No, I think to Joe's point, I mean it's -- it is fairly consistent across the board. I think December in particular, I would say there were some operational challenges, so Joe highlighted conditions -- I mean Luton was shut for an entire day, we canceled 77 flights. So essentially in Q3, we had nearly 4 times the amount of cancellations that we had in the Q3 fiscal '17. But in terms of a trading environment, [ no ], I think on the back of a strong summer that sort of continue going through, it was pretty much in line with what we expected.

[Operator]

And our next question comes from the line of James Hollins from Exane.

[James Edward Brazier Hollins, Senior Transport Analyst]

2 quick ones for me. Just -- I saw a couple of quotes this morning, which to be clear I haven't read, but can you just give us some clarification on how active you are on the Alitalia option, whether you've put in an offer or in [ turn over ] to someone else and also how that would work for you. I think the one headline I did read is you are not interested in long-haul, which is obviously a good idea. The second one is your best unit cost performance was also your [ largest ex-fuel cost line at airport handling, on route charges ]. So I was wondering if you could just let us know if there are any particular detail on why that was much better, is it just scale, better airport deals, am I missing something maybe on forex? Thank you.

[József Váradi, CEO & Executive Director]

Well, I mean Alitalia is more smoke than fire. I mean, simply Italy is a significant market for us. Actually, it is the second largest Western European market for Wizz Air, so we ought to understand what's going on in Italy. We are very interested in Italian market, but not necessarily in Italian airlines, but given that there is this process with Alitalia, we simply just want to understand the process and to see whether there are any opportunities resulting from that, but we have concluded nothing. So don't worry or don't get overexcited on that, but I mean certainly, we have 0 interest in anything which is a non-core operation. We are a short-haul airline flying point to point, it's a low-cost model and we are sticking to the [ USAC ] principle as I said. So we only have interest in that model and the Wizz Air operating platform, but I mean, you've seen a number of examples recently like our ability to take over slots and airport stands from Monarch. You saw other airlines taking certain assets over from failed businesses. So simply we just want to understand what's happening or what could happen and we want to position ourselves for that, but that's it.

[Iain Wetherall, Chief Financial Officer]

And on the cost side of the equation, I think what's important to factor in is that we have levers in our business essentially to manage costs. So where we see pressure on a particular line item, whether it's labor costs or depreciation, we have the levers and the tools in the organization to move. So in the case of airports, we always have a very strict policy in terms of making sure that if you go to an expensive airport that's more than offset by a cheaper airport and these -- managing the mix and optimizing that mix can help you essentially deliver your cost performance. And it requires discipline, it's very easy to chase for expensive airports and chase yields, but that's not our business model. So if you look through our cost performance on our line items, there are levers in that. Next year, moving into places like -- into Vienna, Frankfurt, this may be an area where we've been investing a little bit, but there will need to be other line items that can essentially relieve that pressure. So I think when you look at our overall cost performance, I wouldn't point to a particular deal or a particular volume and I'd also add scale as well. I mean, I think as the bigger you get, the more volumes you get, the more passengers through an airport you get, that certainly comes through. So the economies of scale come through. The A321 itself doesn't actually benefit because that's on a per pax rather than the aircraft itself, but there are things like turnaround. So you certainly do see a little bit of benefit coming from the A321 from that, but again, I think the way you should look at our cost base is not sort of single out a particular line item. We monitor and we look -- track trends and if there is pressure on a particular area, the rest of the organization will need to absorb it in some form or another.

[Operator]

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

[Mark A. Simpson, Analyst]

A couple of questions. Just wanted to kind of understand the guidance for the year in terms of the implied Q4 loss of EUR 23 million. You've got an Easter effect which is a positive this year. I don't know if you could kind of give us kind of quantification of how that sort of falls into the periods, so plus EUR 10 million, plus EUR 15 million maybe. And then that obviously suggests you've got greater cost coming in elsewhere. So I'm wondering if you can actually break that down particularly on the gearing up cost for the delivery of 17 aircraft over the Q1, so just understanding that Q4 loss that's implied in your guidance. And then just a question kind of Brexit related, obviously getting closer to the booking windows opening for post-Brexit sales, what terms and conditions will there be in the small print in your ticket sales post that March 2019 period?

[Iain Wetherall, Chief Financial Officer]

Okay, maybe I can take the guidance question. At a high level, there's no dark clouds on the horizon, I think that's what I would flag. I think what I would also say is that again, if you've had a very strong platform in the first half you're going to grow faster. I mean the first week of January as an example, we grew 31% in terms of capacity. These are months traditionally that you actually lose money and I think we have -- I mean this is fundamental to our business model, if you track back 12 months ago where we were in a slightly different situation, [ we've been in ] market conditions, you can sit there and feel sorry for yourself or you can grow through that and then have future benefit coming through into the summer. So you can scale back a little bit in Q4 and you can add a couple of million to your profitability, that's very easy, it's manageable, but you are then sacrificing the profitability going through to the summer. I think if you travel back to January last year, harsh operational conditions [ can ] deliver EUR 5 million negative fairly easily and we saw that in December. We still have 2 months ahead of us. So I think fuel prices are slightly higher, I think the dollar is sort of washing that, but as I said, there's a little bit of headwind coming through from the dollar. Taking 17 aircraft in 17 weeks, the lead time in terms of pilot recruitment, I mean that's essentially started back in October and before that. So there's a lot of -- the training centers are working 24/7 and opening up new bases as well where these aircraft are going to be going are adding some cost. Wizz Air UK as an example will require some additional investments. The class 1 transactions that we've just concluded, that will [ add ] a little bit of extra cost. So I think the general message is, we've got a -- we've had a very strong platform, there's no dark clouds on the horizon and I think going forward, the pace of growth that we are pushing, I think it's sensible to leave the numbers as they are. In terms of --

[Mark A. Simpson, Analyst]

Sorry, just to interrupt there, Jozsef, but just in terms of the assessed Easter positive effect, what do you -- what number do you put on that?

[Iain Wetherall, Chief Financial Officer]

I wouldn't say that. Essentially it's half an Easter, so maybe if you go back to -- there's always a bit of a sort of left pocket, right pocket in terms of the Easter. It means you may have a slightly weaker February, so I wouldn't put a number on it, but if you go back to last year, it's around about half an Easter that you have this year.

[József Váradi, CEO & Executive Director]

Okay, with regard to Brexit, I mean we -- actually we are pretty active in the U.K. and to a large extent this is all related to Brexit, but also some of the things have their own merit. But we are setting up Wizz Air UK. I mean that's an important contingency. I mean, simply we don't know how Brexit is going to play out, but we want to make sure that we are planning for various scenarios and we're seeing that we've positioned ourselves properly with having a U.K. airline as well as a European airline to deal with the situation. We remain very upbeat on London especially. I mean in 2017 we were growing [ 11% ] on passengers and in 2018 we are growing 23% on capacity. So actually we are [ opting ] our capacity planning in London where we believe that essentially in difficult circumstances and Brexit would result in difficult circumstances for the industry, lowest cost will prevail and win and we think that this is the position we should be taking in the U.K. and be ready for the situation and depending on how events unfold, we could respond and we could react to those events. In March 2019, at the start of the summer schedule, we'll have around 20% of our capacity designated to the U.K.

[Mark A. Simpson, Analyst]

But in terms and conditions, small print in the sales, any comment you can give us on that?

[József Váradi, CEO & Executive Director]

No, I mean, we are fairly transparent. I mean if we run a good business, then we grow that business. If you don't run a good business, we shrink that business and we grow the business in London. That suggests that we are in good business.

[Operator]

[Operator Instructions] And our next question comes from the line of Rishika Savjani from Barclays.

[Rishika Dipak Savjani, Assistant Vice President]

I just wanted to come back to the 17 aircraft in 17 weeks. I [indiscernible] that's an unprecedented rate of delivery for both yourselves and the industry. Can you maybe just talk around how you're managing the execution risk associated with that program and what contingencies do you have in place the unexpected effectively. Thank you.

[József Váradi, CEO & Executive Director]

Right. I mean, I think the largest execution risk is the availability of crew for the upcoming -- these 17 aircraft that's spread across our network. I mean again, we have a system of 28 operating bases across 16 countries and this is really a [ spread ] deployment that helps us recruit cabin crew and pilots and train them up to standard as opposed to doing it in bulk in one place. So I think just the [ fuel ] diversification delivery program helps us mitigate the execution risk. We've already secured those workforces. I mean the typical pilot training program is 6 months prior to operations, typical cabin crew training program is around 3 months. So all the crew need is to actually operate the aircraft, are in place already and they are under training and we continuously monitor headcount and so far so good. So we are very confident that this is going to get delivered. And let's not forget that some of the other aspects of an airline operation like aircraft maintenance, which is another very significant operating factor, it's an outsourced activity to Lufthansa and Lufthansa is a large-scale organization with good degree of diversification and essentially we kind of outsource the execution risk, but we just want to make sure that it is also a blue chip company who actually can be a bit -- such kind of an execution and Lufthansa has been proving itself a very reliable and very scalable partner when it comes to supporting the expansion.

[Iain Wetherall, Chief Financial Officer]

Maybe to add there, I think touching on Mark's question earlier in terms of the ramp up, I mean we need to have all of these crew essentially before the aircraft arrives. So there'll be a couple of months where there will be, I would say, a little bit of extra capacity, but what you have to pay for pilots, so in terms of the sort of slight cost [indiscernible] this is -- I would say there's a longer training period. So that's where there's a few hundred thousand per month, which you will be incurring of additional costs, but also the pilots are on your books before those aircraft are being delivered. So that sort of gives you a little bit of flavor of why you're seeing a little bit of increase going into March, April time.

[Operator]

And our next question comes from the line of Monique Pollard from Citi.

[Monique Pollard, Vice President]

Just a couple of questions from me on the revenue environment, if I may. The first question on ticket revenue. So obviously we saw ticket revenues up 1.4% in the quarter. I was just wondering if you could give a comment on the yield environment currently in the context of rising fuel prices and some of the weaker likely unhedged competitors you have in the region. And then the second question was just on the ancillary, Iain you were saying that value-added ancillary revenue [ per ] passenger up EUR 2, but bags a drag at negative [ 2.6 ]. Maybe if you could give a flavor of some of those value-add ancillary revenues and what more you think you can do you to offset some of that weakness from baggage?

[Iain Wetherall, Chief Financial Officer]

Sure. Maybe I'll start on the ancillary number. We introduced another suite of products essentially obviously geared to how to compensate, so whether it's the priority boarding or tweaking those products. So I would say, certainly the seating continues to improve, but we believe there's a lot further to go on the seating. I think in terms of the baggage products, I think we were very nice when we introduced the policy and I think it takes a little bit of education certainly for our ground handlers and our passengers to understand what they should be checking in, what they should be paying for, what they can be bringing to the gate. Essentially, the last thing we want is to put 100 bags at the gate into the hold. So I think in terms of the bag fees, we need to do more work, we are doing more work and that will be refined certainly in terms of the implementation of that policy, but also refinements to make sure that we can start to see a reversal of that trend, which unfortunately has been going on now for a couple of years, but not for us, but for the entire industry. I think in terms of the revenue environment, I would categorize it as constructive. Fuel prices that are rising are not a bad thing. I think someone highlighted that we are exposed as an airline a bit more than others, given our very low-cost base, we have a high proportion to fuel. Ultra low-cost airlines don't mind high fuel prices. In fact, you have a lot of airlines that are actually starting to wobble now and if there's sustained high fuel prices, it gives us opportunities to increase market share just simply by people disappearing off the face of the planet, which is nice from time to time. So I think I would categorize the revenue environment as constructive. If you look at a chart we presented I think last May, back then, we were contributing 16% of the seat capacity to our markets. This year we're going to be doing 27% of the seat capacity. So certainly, we're a much larger feature in that. That does bring a certain element of pricing power and also seeing our competition, whether its challenges on crewing aircraft or whether it's simply higher fuel prices, the environment is constructive. There's still a lot of capacity coming to the market and I think what's also very helpful is that in some of our markets, the demand is growing by north of 10%. So the markets themselves are absorbing the capacity. So that certainly gives a lifeline to some of the weaker competitors. The higher fuel prices will certainly start to have an impact. I mean we've seen it trickle down the past couple of days, so who knows where the fuel price will go. Generally speaking, I would say that the revenue environment is constructive and that's why we're growing at the pace that we're growing.

[Operator]

And our next question comes from the line of Andrew Lobbenberg from HSBC.

[Andrew Lobbenberg, Head of the European Transport Team]

Hi, Jozsef. Hi, Iain. Can I just ask about crewing, you've been very clear that you're in good shape for this summer and into the future that the Wizz Pilot Academy will be a good source of first officers and that's clear, but how confident are you about the ability to source captains because obviously when we look across at Ryanair, it's the experienced captains which are particularly sought after and if you grow very quickly, you need as many captains as first officers? Second question would relate to the tax rate now and as you grow in the U.K. and as you set up Wizz Air UK, should we be imagining that your corporate tax rate remains at the current Swiss-oriented level or will that face upward pressure? And just a third question, fairly straightforwardly, are you able to tell us what your U.K. ownership is on the share register? Thanks.

[József Váradi, CEO & Executive Director]

Okay, let's start with crewing. Yes I mean -- so if you look at the kind of dynamics, the organizational dynamics for the pilot force, so we are basing our strategy on 3 pillars, so to develop our own cadets through their flight academic program, then to make sure that first officers are trained through properly to become ready to captain and promotable to captain and then to retain the captain force, which is the most experienced part of the organization. So we are very confident that the cadet program with Pilot Academy and our genuine recruitment efforts will source the necessary number and necessary quality of pilots for this and we have a good system in place that trains up first officers through to captain level fairly quickly. I mean let's not forget that we are an airline with full productivity. So we are getting very close to 900 hours, so approaching any standard for captains takes up much shorter period of time than in case of most of our competitors. And then we are very focused on retaining the captains. So I would be expecting that probably we can source 2/3 of our captain requirements in-house internally based on promotion from within and we would be reliant on the market probably in the magnitude of 30%. Maybe we can do a little better than that, but I don't think we will do worse than that. We have not had issues with finding the necessary and the right number of pilots what we need. I mean we haven't been canceling for unavailability of crew unlike some of our competitors and we are fairly confident that this program is going to take us where we need to do. Now if we come with some salary inflation, some pay inflation and we are addressing that, so clearly, we need to move with the market that is managing attrition on the one hand, but also makes us attractive when we recruit for the pilots. So that's the strategy and looking at it for 2018 and early 2019 where we have visibility, we've seen that strategy works, it's going to cost us some money in terms of pay inflation, but all in all, we remain very competitive in the marketplace and we can secure the necessary resources needed to operate the airline given the high growth rate of the business.

[Iain Wetherall, Chief Financial Officer]

I mean, I will take up from there. I mean, I think the other thing just to bear in mind is that, Wizz Air is a place that people want to work for. Clearly, we need to make sure we're competitive in terms of pricing, but it's a very attractive proposition as an organization to work for. We have a great culture and people like working for Wizz Air. On to the tax rate, I think Andrew, it's a safe assumption with Wizz UK, as that business grows, yes, the U.K. tax is going to be slightly higher than the Swiss tax rate. So in terms of your model, you can assume that that number will be growing. In the early years, I mean putting in magnitude you're looking at nearly 350 people based in Luton in a fairly short period of time. So the startup cost, the initial cost, a lot of the routes will be new, so they'll be in their early years. So certainly for the short-term, 1 or 2 years that number won't start to creep up, but certainly that's something I would put in your models for the later years. The U.K. ownership at 29%.

[Operator]

[Operator Instructions] And as there seem to be no more questions, I now hand back to you, speakers.

[Iain Wetherall, Chief Financial Officer]

Great, thanks everybody for your time. Q3 tends to be slightly quieter. I think they were all pretty solid numbers I'm pleased to report today and we'll be back on the telephone lines with our full-year results coming out in May. So thanks everybody for your time and any questions [indiscernible] from the IR team.

[Operator]

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