December 18, 2012 6:43 pm

A bumpy ride piloting a start-up airline

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Jozsef Varadil©Daniel Lynch

Testing times: József Váradi says his experience at Malev, Hungary’s state-owned airline, taught him how ‘not to do business’ when launching Wizz

Things were not supposed to go wrong quite so quickly. In 2004, three months after laun­ching an airline catering to eastern Europeans and employing the low-cost model made famous by Southwest Airlines and Ryanair, József Váradi had to ask his management team to work for free. It was that or go under.

Mr Váradi, a Hungarian economist who had climbed the corporate ladder at Procter & Gamble and then spent 18 months as chief executive of Malev, Hungary’s now defunct state-owned airline, had taken delivery of six leased aircraft for his company, Wizz Air. He was confident he could fill them: the potential customers were there and the proposition was right.

But he had been more relaxed about the progress of signing up passengers when he thought finalisation of funding arrangements with institutional in­vestors was imminent. In fact, securing the hundreds of millions of euros needed was taking longer than expected, and in the meantime cash was leaching out of the young business in the form of fuel payments, airport charges and salaries. As suppliers started talking about bills not being paid, the press pounced. “It was very distressing,” he says. “There were articles suggesting people shouldn’t book because we were on the brink of going bust, and I had to tell [staff] it was very uncert­ain their salaries would ever be paid.”

Most of the management team agreed to delay taking their pay, and the institutional money eventually landed. Mr Váradi says he learnt a lesson: “You understand it’s not enough to manage a business just for profit – you also have to manage it for cash.”

That was just one of the first bumps in the road. Wizz’s passenger numbers have grown strongly since launch – although the rise of about 10 per cent in 2012 to 12m was a little less than in previous years. In 2010 the company broke even, thanks to a change in the way it accounted for maintenance costs. It swung to a loss again last year, but produced pre-tax profits of about €43m in the year to March 31, on sales of €766m.

Wizz has expanded its fleet to nearly 40, and aims to reach 50 by 2014. In common with many other airline start-ups, the company’s aircraft are all run on operating leases rather than owned outright. But the plan is to find a better balance bet­ween leased and owned jets, Mr Váradi says, in line with Europe’s two leading low-cost short-haul carriers, easyJet and Ryanair.

He has learnt from his bigger rivals in other ways, too. However, he says his hands-on lessons came from Malev – which shut in February, long after Mr Váradi had left the company and was “a good school in how not to do business” – and JetBlue in the US, which he visited ahead of launching Wizz.

Perhaps unsurprisingly, some of his former colleagues resent his disparagement of Malev, saying he himself could have done more to fix the airline. One, who asked not to be named, even says he believes Mr Váradi struck aircraft deals in his waning days at Malev that made little sense for the flag-carrier, but would later help Wizz through the relationships they burnished. Mr Váradi rej­ects the notion completely, pointing out that the deals in question were with a different leasing company than that used by Wizz.

Getting off the ground

József Váradi’s tips for launching a business and expanding it

Hire managers who are smart, even though they are not from the industry you are operating in. “At Wizz, I wanted people who could really analyse business models and markets. Later, we brought in operations experts.”

The second round of fundraising can be the hardest, especially if you come up against new barriers. “It was easy to find angel investors who together put in about €3m, but European foreign ownership rules limited the scope of our search in the next round, when we were seeking tens to hundreds of millions of euros.”

Be logical about pursuing your idea. “You can’t take it forward emotionally.”

Sipping coffee in a hotel bar in London’s Mayfair, he seems unassuming and diffident compared with other captains of industry. However, he has had to develop a thick skin in a sector with more than its share of outspoken executives, such as Ryanair’s Michael O’Leary. He found himself at the rec­eiving end of Mr O’Leary’s invective this year, when Wizz and Ryanair both ratcheted up their operations in and out of Budapest in the wake of Malev’s collapse.

“I’ve spent my entire career in the corporate world and I think I’m used to it,” says Mr Váradi of this sort of attack. “I can differentiate between how people are and how they behave when they act on behalf of their company and therefore play a role.”

It was a desire to be tested that first prompted his move into aviation and then to launch a business of his own. He says a change of political regime in Hungary also meant his position at Malev was no longer tenable.

Until recently, there was little reason for Ryanair to want to disparage Wizz. As recently as 2009, the two airlines’ routes overlapped so little that some analysts have regularly asked wheth­er Wizz was positioning itself as a takeover target.

Mr Váradi rejects the idea but ad­mits the two operations would mesh in areas other than network. Like Ryanair, Wizz flies mostly from secondary airports, has a non-unionised workforce and eschews the not­ion of chasing business travellers. On luggage policies, Mr Váradi ap­pears even to have outdone Mr O’Leary: Wizz Air passengers pay €10 for carry-on bags that Ryanair would fly for free; the only free luggage Wizz Air allows must fit under the seat.

“We try to deliver this business at the lowest possible cost,” says Mr Váradi.

Industry insiders who have sat op­posite Mr Váradi in negotiations, but who decline to be named, say he is just as willing as Mr O’Leary to walk away from, say, an airport if it does not offer him the deal he wants. Yet his style is considerably less brash, even solicitous – a quality he wants reflected in frontline employees. “A customer is not a pain to us. We think the customer is someone that we profit from, so that person deserves some care,” he says.

He hopes that approach will help Wizz continue to grow in its existing markets, where he still sees opportunities – particularly if and when governments stop propping up ailing state carriers – as well as to expand geographically. Wizz recently launch­ed a route to Kutaisi, Georgia’s second-biggest city and now the easternmost point in the airline’s network.

While he says there are no specific long-term passenger targets, Mr Vár­adi sees Wizz carrying 25m or more people a year by 2020 – and admits that by then, it is much more likely than not to be a publicly listed airline. For now, though, he says his investors – including Frankfurt-based DVB Bank, Indigo Partners in the US, and wealthy individuals – are being patient as they wait for better market conditions.

If the challenges of rivals’ invective, government-backing for state-owned airlines or disappointments in new markets ever seem too much he re­members that, as an employee, he had craved the heat and light that entre­preurship might bring. “At Procter & Gamble, you’re always just a part of a mach­ine,” he says. He remembers realising that “if you have a bit of an ambition to test yourself, you need to get into a different environment”.

Additional reporting by Kester Eddy

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