Wizz Air to keep growing as east Europeans fly more

* Wizz Air has grown to be biggest low-cost carrier in eastern Europe

* Financing from U.S.-based Indigo Partners was vital

* Rapid expansion to continue as Wizz explores new markets

By Marton Dunai

BUDAPEST, July 17 (Reuters) - When a group of Hungarian businessmen told the manager of a shabby air strip in southern Poland that they wanted it as a base for a new airline, none of them had any idea that it would quickly become the biggest low-cost carrier in eastern Europe.

Wizz Air's maiden flight to London took off from Katowice in May 2004. It now has over 300 routes, annual revenues of 1 billion euros, counts Ryanair, another no-frills airline as its main competitor, and dominates air travel in a region with faster economic growth than the rest of Europe.

Organic expansion in the region and as far afield as Moscow, Tel-Aviv or Dubai is set to continue while a new phase of growth is likely to come from Wizz Air exploiting the difficulties of state-backed regional airlines that are struggling to survive.

"These airlines either disappear, or merge, or shrink a lot from their current size," said Jozsef Varadi, Wizz Air chief executive and a former Procter & Gamble executive.

"Either way that means opportunity for Wizz Air."

Varadi set up the airline after trying, without success, to reform Hungary's Malev. When Malev eventually collapsed in 2012 Wizz Air stepped in to pick up many of its routes and passengers.

It plans a listing on the London Stock Exchange (Other OTC: LDNXF - news) to raise money for expansion, though an offering scheduled for June this year was pulled, with the company citing unfavourable market conditions. It has said it would try again, but it is unlikely to do that this year.

Wizz Air is nevertheless, well placed to pounce on other regional airlines - Poland's LOT, Czech Airlines, Latvia's Air Baltic, and Slovenia's Adria Airways are all propped up by state aid.

LOT is especially vulnerable, with local press reports saying it is in financial difficulties and Wizz Air has many Polish-speaking flight crew and five operating bases in Poland.

INDIGO INVESTMENT

Varadi was in Poland with other founders of the airline looking for a base. They decided on Katowice for the first flight, which took off two weeks after seven ex-Communist states joined the European Union, giving their combined 70 million people opportunities to travel that they had never known before.

At the time, less than 5 percent of people in the region flew, aviation professionals estimate, compared to nearly half of Americans.

"We were near Katowice, on a cold winter morning in late 2003...We could not find the airport to save our lives. There were no signs," Varadi said.

"The airport served 200,000 people in a year. Today it serves 2.5 million, more than half of which is us. We put that airport on the map."

The executives knew the low-cost model they had chosen could only work if they achieved an economy of scale. That meant lots of passengers, many flights and large planes to keep the costs down. They quickly started to run out of money.

Then Indigo Investments, a Phoenix (LSE: PHNX.L - news) , Arizona-based investment group specialising in aviation, gave Wizz Air a small capital injection in the early autumn of 2004, followed by a bigger investment in February the next year.

The group is headed by Bill Franke who was at one time chairman of America West Airlines and has invested in airlines including Mexico's Volaris, Florida-based Spirit, and Singapore's Tiger Air.

Along with his cash, Franke shared with Wizz Air his industry expertise, procurement connections and staffing, said people familiar with the companies' cooperation.

Franke declined to be interviewed for this article, and Indigo declined to comment. Niether Indigo or Wizz will say how much of the company Indigo now owns.

COMPETITION

The Eastern European low-cost market offers huge opportunities. It is expected to grow to $4.12 bln by 2018 from around $3 billion this year, according to Euromonitor International, or a growth rate of 40 percent compared to 20 percent expected in Western Europe during the same period.

Wizz Air stole a march on its low-cost rivals by entering the untapped eastern European market first, but Ryanair has since caught up.

When Hungary's Malev folded, Wizz Air and other airlines also increased capacity or opened new routes. Ryanair within days had opened new routes from Budapest airport, although it downscaled later over a row about airport fees.

There has been speculation that mainstream European airlines would like to takeover Wizz Air, giving them access to the low-cost market in the region. Air France KLM and Lufthansa denied having any interest in Wizz, which also said it was not in takeover talks.

Ryanair remains Wizz Air's fiercest competitor, with the two companies expected to entrench for an intensifying competition for share of a quickly expanding market.

"Demand for aviation in Wizz Air's core region of Central/Eastern Europe is projected to grow faster than the rest of Europe, due to higher GDP growth and lower current levels of penetration of air travel," industry analyst CAPA said in a report in May.

"Nevertheless, Wizz Air's planned increase in traffic is much faster than market growth and will require further market share gains."

Wizz Air is now in a straight fight with Ryanair to keep costs down and squeeze revenue from passengers.

Their average ticket prices are nearly identical. The two airlines are fairly close to one another on the main benchmark, cost per available seat kilometre, which for each carrier is around 0.35 euro cents.

Ryanair, Europe's leanest airline, does better on fuel, airport services, and the cost of the aircraft it operates, according to the Centre for Aviation, an Australian-based aviation industry consultancy.

Yet Wizz Air is leaner than Ryanair in others ways, in part because its workforce is based in lower-cost eastern Europe.

Varadi is confident Wizz Air's growth rates will continue.

"We have produced an annual growth rate of about 15 percent in recent years and our portfolio is so diverse, we are present in so many markets, that I think we can keep that up regardless of any turbulence," said Varadi.

($1 = 3.0386 Polish Zlotys) (Additional reporting by Gergely Szakacs in Budapest, Christian Lowe in Warsaw and Victoria Bryan in Frankfurt; editing by Anna Willard)