The FTSE 250‘s been on a rallying march this year, but not all of its constituent stocks have been so lucky. In particular, Wizz Air Holdings (LSE:WIZZ) has seen its share price slashed in half since the summer.
Considering the travel industry’s now recovered from the pandemic, this isn’t the sort of trend many investors were expecting. What happened? And is this now a buying opportunity for me?
Emergency grounding
The travel sector as a whole is under a bit of pressure right now. While demand seems to be holding steady, the increased number of airlines bouncing back from the pandemic has caused competition to once again rise, resulting in a softer pricing environment. That’s good news for travellers but not for airliners.
In the case of Wizz Air, the situation’s only been made worse following widespread engine trouble. In its latest results, the firm reported a modest increase in revenue, climbing from €1.24bn to €1.26bn. However, profits seemingly collapsed by 98%!
Some 46 aircraft of its fleet were grounded due to engine issues. As a result, management was forced to enter a so-called wet lease. Essentially, Wizz rented other aircraft with crew, maintenance, and insurance included to avoid cancelling flights, paying €39m to do so. Pairing this with unfavourable currency exchange rates resulted in the bottom line taking a massive hit and the shares tumbling off a cliff.
However, given these are all short-term challenges, does Wizz Air present itself as a buying opportunity at its new discounted price?
Should I buy?
On paper, the airline industry sounds like a lucrative source of investment returns. Demand for travel can be cyclical, but going on holiday or travelling for work’s unlikely to fall out of fashion, in my opinion. And since running such a business largely consists of fixed costs, there’s significant potential for vast margin expansion when demand’s high.
Unfortunately, fixed costs are a double-edged sword. When demand’s low, profitability evaporates. And even after excluding these one-time expenses, this FTSE 250 company’s profitability is under pressure.
As previously mentioned, competition’s recovering to meet the rising travel demand. And in a world of comparison websites and money-saving as a top priority, airline loyalty’s a scarce commodity that Wizz doesn’t seem to have. In other words, the group lacks any significant form of pricing power.
To make matters worse, the firm’s balance sheet is hardly the strongest in the industry, further indicating it doesn’t have the financial resources to win a pricing war. Therefore, the best course of action for this business is likely to try and find ways to cut costs without impacting customer experience. But whether Wizz can pull that off is quite uncertain, in my mind.
So I’m not planning on adding any shares to my portfolio right now.
This post was originally published on Motley Fool
