Forecast

The first scenario that will be forecasted is the base case scenario. The various forecasted items, which are assessed to be the most relevant in relation to the future budget, are included below, where a detailed explanation is provided.

Passenger growth

Passenger growth is difficult to predict due to the current circumstances surrounding the Covid-19 pandemic. There are different forecasts for when a recovery will take place from airlines, banks and aircraft manufacturers. It is possible to see that the interval for a recovery in most cases range from 2023 to 2025 (Appendix 15). From the PESTLE analysis, it was highlighted that the number of passengers from 2019 will not be restored until 2024 due to continued border restrictions. In addition, it was also highlighted that a decrease of 60% in passenger number is expected compared to the previous year. This political factor can therefore be of great importance for the future development of passenger numbers, as open borders in one period and closed borders in another period can lead to capacity being upgraded and downgraded, which may result in fluctuating passenger growth over periods. In the base case scenario, it is therefore assumed that air traffic will be restored in 2024 and that the number of passengers will decrease by 60% in forecast year 2021 compared to fiscal year 2020. For comparison, Wizz Air had a 73% decrease in the number of passengers in the period from April 2020 to August 2020 compared to the previous year (Appendix 16). Hence, it is estimated that the number of passengers will decrease by 60% in 2021 compared to 2020 numbers, decrease by 40% in 2022 compared to 2020 numbers, decrease by 20% in 2023 compared to 2020 numbers, while the market is expected to stabilize in 2024 with the same number of passenger as in 2020. In relation to the further growth after the stabilization of the market in 2024, it appears that Wizz Air had an average growth of 19% per year in the number of passengers over the past five years (Appendix 17). In the VRIO analysis, it was furthermore highlighted that Wizz Air has an additional 268 aircraft in the order books and with deliveries of many new aircraft in the next eight years, it is estimated that the passenger growth will be high. Therefore, the passenger growth is estimated at 25% in 2025, 22% in 2026, 19% in 2027, 16% in 2028, 13% in 2029 and 10%

in 2030.

Total revenue

Wizz Air's total revenue consists of revenue from ticket sales and ancillary services. Since 2017, ticket revenue has to some extend remained constant, averaging between 37-39 Euros per passenger (Appendix 17). The only exception is in the year 2016, when ticket revenue was 44.7 Euro per passenger. For the past five years, ticket revenue was 39.7 Euro per passenger (Appendix 17).

Hence, the ticket revenue is set at 35 Euro per passenger in the forecast year 2020-2024, as a declining demand for air travel will most likely lead to lower airfare prices and therefore a lower ticket revenue. After the market has stabilized in 2024, it is assumed that ticket revenue will correspond to the average of the last five years' accounts. Therefore, the ticket revenue is estimated at 40 Euro per passenger in the forecasted years 2025-2030.

In relation to ancillary revenue, this has increased from 2016 to 2020. On average, ancillary revenue was 28.1 Euro per passenger during the last five years (Appendix 17). In the PESTLE analysis, it was highlighted that the ancillary revenue is likely to increase if GDP increases, as per capita consumption corresponds to 60% of GDP. As several countries have reported recession, which was highlighted under the economic factors in the PESTLE analysis, it is estimated that revenue from ancillary services will decrease to 25 Euro per passenger in the forecasted years 2020-2024, while ancillary revenue is estimated to increase to 30 Euro per passenger in the forecasted years 2025-2030. The increase in ancillary revenue is based on the VRIO analysis, which revealed that Wizz Air has motivated and trained employees, which may lead to an increase in sales on board. In addition, the increase in ancillary revenue per passenger is also justified by the fact that ancillary revenue increased from 2016 to 2020 (Appendix 2).

Operational expenses

Wizz Air divides operational expenses into six different categories: Staff cost, fuel costs, distribution and marketing, maintenance materials and repairs, airport, handling and en-route charges and net other expenses. The development in the forecast years for the operating expenses is shown below:

• Staff cost has averaged 7.77% of total revenue over the last five years (Appendix 17). As a result of declining passenger numbers, it is estimated that the staff cost will be a greater

expense in relation to total revenue. Therefore, a staff cost of 10% of total revenue is forecasted in the years 2021-2024. In the years 2025-2030, staff cost is set at 8% of total revenue as a result of a recovery of the air travel demand.

• Fuel cost averaged 27.57% of total revenue over the last five years (Appendix 17). In the PESTEL analysis, it was highlighted that the price of jet fuel fluctuates over time, as it is a variable cost. However, airlines make use of hedging to reduce a fluctuating jet fuel price. In Porter's Five Forces analysis, it was also highlighted that the load factor on the aircraft has decreased during the Covid-19 pandemic. This may therefore lead to an increase in fuel costs per passenger, as fewer passengers will have to share the fuel costs of an entire plane.

Therefore, fuel cost is estimated to increase to 30% of total revenue in the forecasted years 2021-2023. As previously mentioned, Wizz Air has also ordered 268 fuel-efficient aircraft, which may reduce fuel costs over time. Therefore, fuel cost is reduced to 28% between 2024 and 2025, 26% between 2026 and 2027, 24% between 2028 and 2029, 22% in 2030 and 20%

in the terminal period.

• Distribution and marketing have on average accounted for 1.66% of total revenue in the last five years (Appendix 17). It is assumed that there will be no changes in this expense and therefore it is set at 1.5% of total revenue in the forecasted years.

• Maintenance materials and repairs have averaged 5.06% of total revenue in the last five year (Appendix 17). There are also no estimates of changes in this expenditure and therefore it is set at 5% of total revenue in in the forecasted years.

• Airport, handling and en-route charges have averaged 24.17% of total revenue over the past five years (Appendix 17). There are also no changes in this expense and therefore it is set at 25% of total revenue in the forecasted years.

• Net other expenses have averaged 2.57% of total revenue over the past five years (Appendix 17). However, no major changes are expected in the future. Hence, net other expenses are set at 2.5% of total revenue in the forecasted years.

EBITDA-margin

The development in the six different operational expenses affects the EBITDA-margin. In the last five years, the EBITDA-margin has averaged 31.42% (Appendix 17). As a result of the development in operating expenses, the EBITDA-margin is expected to amount to 26% in the period 2021-2023.

In 2024, the EBITDA-margin will increase to 28%, while the EBITDA margin will increase further to 30% in 2025, to 32% between 2026 and 2027, to 34% between 2028 and 2029 and finally to 36% in 2030. The reason for the increasing EBITDA-margin is due to the fact that Wizz Air, as mentioned, has an order for 268 new aircraft, which consume less fuel, which is considered to reduce fuel costs over time. Hence, the total operating costs will decrease, leading to a higher EBITDA-margin.

Lease depreciation

Lease depreciation has increased by an average of 24.02% each year for the past five years (Appendix 17). As Wizz continues to receive new aircrafts, a 20% increase per year in lease depreciation is considered a reasonable estimate in the forecast.

Depreciation and amortisation

Depreciation and amortization have averaged 10.7% of tangible and intangible assets in the last five years (Appendix 17). It is not assumed that there will be any major changes in the future. Hence, depreciation and amortization are set at 10% of tangible and intangible assets in the forecast.

Effective tax rate

The effective tax rate has averaged 3.64% over the last five years (Appendix 17). In relation to the future budget, a tax rate of 9% is applied, as Wizz Air's headquarters are in Budapest and in Hungary the corporate tax rate is 9%. The tax rate is not expected to change over time. Hence, a tax rate of 9% is applied in all forecasted years.

Operating assets

In the last five years, operating assets have accounted for an average of 155.06% of total revenue (Appendix 17). The ratio between operating assets and total revenue is assessed to be stable in the future. Hence, operating assets are set to constitute 150% of total revenue in the forecast.

Asset turnover rate

In the last five years, the asset turnover rate has averaged 0.99, but with a declining trend (Appendix 17). An asset turnover rate of 0.99 indicates that Wizz Air has earned 0.99 Euro for every euro tied to the assets. As the asset turnover rate has declined over the last five years, the asset turnover rate is adjusted to 0.9 for all forecasted years.

Net interest-bearing debt

In the last five years, Net interest-bearing debt accounted for 48.15% of invested capital (Appendix 17). This indicates, that net interest-bearing debt has almost been identical to the value of equity.

This is not considered likely in the future, as net interest bearing has increased in 2020, where it accounted for 59.57% of invested capital (Appendix 17). Based on this increase, the net interest-bearing debt is set to amount to 60% of invested capital in the upcoming years.

Net financial income after tax

Net financial income after tax has over the past five years averaged 18.54% of net interest-bearing debt (Appendix 17). In 2020, there is a decline in the ratio, where net financial income after tax amounted to 10.61% of net interest-bearing debt. Based on this, the ratio is adjusted to 15% in all future years.

7.2.1 Passenger growth in terminal period

In section 5.2.2 it was highlighted that GDP per capita and flights per capita are to a large extend positive correlated. The ratio between flights and GDP therefore forms the future growth in passenger numbers. As Wizz Air is headquartered in Hungary, nominal GDP growth in Hungary over the past ten years is included to estimate future passenger growth. In the past ten years, nominal GDP growth has averaged 5.91% (OECD, 2020B). However, it is assumed that a passenger growth of 5.91% is too high, and therefore the future passenger growth is adjusted to 5% in the terminal period.