The Wizz Air (LSE: WIZZ) share price rose by more than 10% on Friday afternoon as investors rushed back to travel and leisure stocks amid a period of considerable market turbulence triggered by Russia’s invasion of Ukraine in late February.
Investors, including myself, have been on the hunt for bargains amid this current period of market volatility, and on face value, Wizz Air — which is down 50% over the year — offers huge upside potential.
However, I’m not too optimistic about this stock’s short-term outlook. Despite holding Wizz Air in my Fund & Share Account, I’m not expecting the share price to hit 2021 heights any time soon.
Wizz Air is also not a good option for me as a passive income stock, as it is not offering any dividends to its shareholders at the moment.
Cause for concern
The Budapest-headquartered budget airline has been considerably more afflicted by the ongoing conflict in Ukraine than its peers, including easyJet and International Airlines Group, and there’s a number of reasons for this.
The low-cost carrier has slashed its business growth target after stopping the sale of flights to and from Russia and Ukraine. Wizz Air was the only EU carrier to have a base in Ukraine and operated 45 routes out of the country. The company has also shifted flights into and out of Moldova to neighbouring Romania.
Beyond the operational disruption, Wizz Air was poorly positioned to absorb soaring fuel prices. Global jet fuel prices surged to near 14-year highs this week as Western nations introduced sanctions on Russian oil and gas.
But while most major airlines had hedging strategies to protect them against severe fluctuations, Wizz Air had stopped hedging, leaving it phenomenally exposed to the current price spike. The airline has even had to cut 7% of its flights in March due to its lack of forward planning.
The current headwinds follow two tough years for the company, although it’s true to say that other airlines fared worse during the pandemic.
Despite returning a profit during the summer, in November the Hungarian group warned that the winter period would likely be difficult, predicting a sizeable operating loss of €200m in the run up to Christmas amid the emergence of the Omicron variant.
However, 2022 started positively for Wizz Air, with a 318% year-on-year increase in passenger numbers for January as air travel surged following the emergence of new and relatively positive data about Omicron.
During the pandemic, the airline invested heavily in new aircraft and added new routes in an effort to emerge from the Covid-induced disruption as a market leader, and take advantage of pent-up demand.
However, it is now looking likely that Wizz’s exposure to soaring fuel prices will impact operating profits. This could be particularly damaging if the prices endure into the highly anticipated summer months.
Will I buy more Wizz Air stock?
The short answer is “no”. Despite the very obvious upside potential, I’m concerned that the airline’s recovery will be hampered by the impact of fuel prices on the bottom line and a loss of business in Ukraine and Russia. In the long term, the airline may fare better, but I’d prefer to be cautious on this one.
James Fox owns shares in Wizz Air. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.