Smart engagement needed: Why low-cost European airlines are good businesses and WIZZ is undervalued by 178%.

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There has long been a stigma attached to investing in airline stocks. Yet a group of Low- Cost-Carriers (LCCs) have emerged in the European short-haul market over the last decade that have significant cost advantages over legacy High-Cost-Carriers (HCCs). These cost advantages are on fuel, crew, and maintenance, and stem from having more homogenous and modern fleets, weaker worker unions, profit-maximising cultures, and greater utilization. We think these sources of competitive advantage enable them to generate value and are largely durable. The greatest risk LCCs face is from being victims of their own success: overexpansion could push HCCs out of the market and result in much lower prices and profitability. However, we think it is more likely that the largest players will continue to behave smartly and nurture the market. While supernormal returns may shrink over time, LCCs will remain good businesses. We think that Wizz is the LCC with the greatest durable cost advantage and the cheapest stock, and see +178% equity upside when using a conservative valuation model. We think the market misprices Wizz because it is overly focused on short-term pricing pressure, Brexit, still de-stigmatizing LCCs, and is still getting to know it post the IPO in 2015.