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flybe launches IPO to fund expansion

16-Dec-2010
Flybe CEO, Jim French
Flybe CEO, Jim French

flybe, Europe’s largest regional airline and the UK’s largest domestic carrier, has raised up to GBP66 million from its much-awaited and delayed listing on the London Stock Exchange on 09-Dec-2010. The airline, like many others, has been intending to list for many years but plans had been deferred due to market volatility.

The listing valued the carrier at GBP215 million (excluding the exercise of the over-allotment option) with funds to be used for aircraft purchases and “growth opportunities” including acquisitions. Approximately 20.3 million new shares were sold, representing 28% of the total in issue (excluding the over-allotment option).

flybe Group shares surged 16% on 10-Dec-2010 from the offer price of GBP 295 pence to GBP 341.45 pence, valuing the Exeter-based company at GBP249 million. The airline had initially offered its shares at between GBP 285 and 385 pence but lowered the top end of guidance to GBP 295 pence on 09-Dec-2010, the final day of bookbuilding.

The bookbuilding was led by sole bookrunner Bank of America Merrill Lynch. As stabilising manager, Merrill Lynch International has been granted an over-allotment option over up to 2.0 million shares, exercisable for a period of 30 days. Following conditional dealings flybe was admitted to the LSE’s main market on 15-Dec-2010 and marked the commencement of official trading.

Rosedale Aviation to remain largest shareholder; BA to maintain 15% stake

The carrier's largest shareholder prior to the offering with a 69% stake in the company, Rosedale Aviation Holdings Limited, now holds approximately 49.6% of the carrier's shares.

Mark Chown, Deputy Chairman of flybe and corporate representative of Rosedale Aviation Holdings Limited, flybe's largest shareholder, upon the announcement of the carrier’s listing said: “flybe has a proven and resilient business model with an experienced management team capable of realising significant future growth opportunities. Rosedale believes it is the appropriate time for flybe to maximise its growth potential through access to the capital markets. Rosedale has been a shareholder in the business for over 25 years and intends to remain a significant shareholder following the IPO and looks forward to participating in the future success of flybe as a listed company.”

British Airways, through subsidiary company, The Plimsoll Line Limited, has stated it planned to maintain its 15% ownership position after the sale. BA CEO Willie Walsh stated: “We are delighted to participate in the flybe IPO. Since our divestment of BA Connect to flybe in March 2007, we have been impressed with the achievements of flybe and its management team. We are committed to supporting Flybe in its listing and capital raising, and wish Jim and the team every success as a public company.”

BA was the only leading shareholder not to dilute its stake in the offering. Chairman and CEO Jim French also retained shares in the carrier while around 7% will be held by the company’s employees. Mr French stated he was "very pleased" that the share offer was two-times oversubscribed.

Proceeds to fund fleet expansion and pursue acquisitions

flybe intends to use about 50% of the net proceeds to provide it with capital to assist in funding its aircraft fleet expansion programme. The remainder will be used to further strengthen its cash position, providing strategic flexibility to pursue additional growth opportunities – such as the expansion of codeshare arrangements, strategic arrangements with other European airlines and targetted acquisitions – should such opportunities present themselves.

flybe had stated that the offer is designed to provide capital to “assist in the expansion of its operations within continental Europe, provide the company with a platform for future growth through acquisitions using the company’s listed securities as consideration, assist the Group in recruiting, retaining and incentivising key management and employees and improve the group’s profile, brand recognition and credibility with its customers and employees”.

In Sep-2010, flybe expressed its desire to expand its presence in Europe and acquire struggling European regional operators. The carrier stated it was in talks over two purchases as it seeks to build bases in continental Europe, with the potential deals “digestible” rather than “transformational”. It has subsequently been reported that the carrier is interested in potentially acquiring Flybaboo and an unspecified Finnish carrier.

Mr French added that having gained market share in the UK, the carrier now plans a “string of exciting business developments which will accelerate the roll-out of the flybe proposition into Europe” with Mr French stating: "If you're making a profit during the recession, then that's the time to expand your business."

He had said he believes partnerships with other airlines as an ideal way to increase flybe’s presence and reputation in Continental Europe and is a far cheaper option than launching new routes itself. The developments are also aimed at consolidating the group’s position as a major European carrier and provide a solid platform for growth within western Europe.

As part of this expansion, flybe entered a codeshare agreement with Air France in Jul-2010 and a regional operations agreement with Olympic Air of Greece last year. The company is also in talks with Finnair about regional services in the Nordic region.

flybe airline partners

Carrier

Details

British Airways

In 2006, flybe agreed to acquire BA Connect from British Airways, with integration completed in Mar-2007. The final 15% is owned by British Airways as a consequence of flybe’s acquisition of BA Connect. The remaining 69% of the company is owned by Rosedale Aviation Holdings Ltd and 16% of shares are owned by staff through an employee share scheme.

Loganair

In Jan-2008, flybe announced a landmark franchise agreement for Loganair to become its first franchise partner, with operations commencing in Oct-2008. The franchise means that, in Scotland, the flybe brand has more than 50 routes and carries more than 2.5 million passengers.

Air France

flybe signed an extensive codeshare agreement with Air France in Jul-2010, giving Air France passengers access to 45 France to UK routes and 17 UK domestic connections. flybe passengers gain access to five additional routes between the UK and France as well as seven new domestic French routes and 11 international routes.

Finnair

The carrier is in ongoing discussions with Finnair for flybe to cooperate in the provision of regional services in Nordic and Baltic Sea areas.

Olympic Air

flybe stated it gained considerable experience of operating in continental western Europe through the conclusion of a deal in August 2009 with Olympic Air in Greece to start regional operations of the new Olympic Airline, removing all of flybe’s surplus aircraft and crew costs for 2009/10.  The agreement involved the provision of four Bombardier Q40s with pilots, cabin crew and engineering support to the start-up Greek airline. Under the original agreement, the wet lease was planned from Aug-2009 to Sep-2010. Based in Athens, the aircraft will become part of the New Olympic business and operate under flybe's Airline Operating Certificate (AOC). At the time of the announcement in Jun-2009, Mr French said: “Over the past 18 months or so, flybe has been offered literally dozens of opportunities to start up or support start-ups globally all of which, until this one, we have declined.”

These moves will enable the carrier to continue its expansion into continental Europe, with the carrier adding that it is looking at potential acquisitions of regional airlines in Europe after weathering the economic storm. CCO Mike Rutter added that the airline would target “distressed” European regional carriers. "The initial outlay to buy such airlines won't be all that high but the costs will come as we restructure them. But we've done that before and we'll be happy to do it again," he said.

flybe has the fleet to support its proposed and continued strategic expansion into Europe with an order for up to 140 88-seat E175 and E-family aircraft made in Jul-2010. The carrier’s firm order comprises 35 E175 aircraft valued at USD1.3 billion, 65 options (USD2.3 billion) and 40 purchase rights (USD1.4 billion) for a total of USD5 billion. flybe will be taking delivery of 35 88-seat E175s between Jun-2011 and Oct-2016 with the carrier stating it has negotiated “attractive debt financing arrangements for all 35 of these orders at a loan to value ratio of 85%”. See related article: “Flybe to the Moon...” Behind the UK airline's massive Embraer order.

flybe in service and on order fleet

Aircraft Type

In Service

On Order

Total

Bombardier Dash 8

55

4

59

E175

0

35

35

E195

14

0

14

Total

69

39

108

Intension to maintain regional carrier model

Despite the spate of agreements and its acquisition plans, flybe plans to adhere to its regional carrier model, with Mr French stating: "What we will do in Europe is regional, we will go into a regional market. We have no desire to be another BA, easyJet or bmi."

The carrier generally operates sectors of less than an hour (average 58 minutes), using regional aircraft with 85 seats. The carrier has commenced a fleet rationalisation strategy, with its fleet age under four years. The carrier has also increased the average seats per aircraft by 15.1% since 2007/08.

One of three major European airlines to report profit during recession

flybe has continually stated it was “one of only three major European airlines to report profits throughout the global recession” with the privately owned carrier gaining market share as other carriers were more seriously affected by the global economic crisis.

The carrier delivered revenue of GBP570.5 million and EBITDAR of GBP90.9 in the 2009/10 handling 7.2 million passengers in the period, of which 43% were business passengers. More recently, the carrier reported revenue of GBP321 million and EBITDAR of GBP60.7 million for the six months ended 30-Sep-2010. The carrier has had particular success with ancillary revenue generation and unbundling its product with ancillary revenue growth from GBP0.85 per person in 2002/03 to GBP11.98 in 2009/10 and GBP13.12 in the six months ended 30-Sep-2010.

flybe financial highlights for 12 months ended Mar-2010

Currency: GBP

FY2009/2010

% Change

Revenue (mill)

570.5

-0.3%

Cost of sales (mill)~

507.2

+0.7%

     Labour (mill)

107.7

-1.3%

Operating profit (mill)~

9.3

-54.4%

Adjusted operating profit

8.2

+34.4%

Profit before tax^(mill)

6.8

-46.9%

Net profit

6.7

+63.4%

EBITDAR* (mill)

93.8

+4.7%

Ancillary revenue per passenger

11.98

+15.9%

Passengers (mill)

7.2

-1.4%

Operating cash inflow (before restructuring) (mill)

50.9

+62.1%

Operating cash flow (mill)

42.7

+92.3%

Net debt (mill)

21.0

-57.8%

CEO paid GBP715,000 in 2009

It also emerged that Mr French received a GBP1 million house loan from the Walker Trust five years ago. It will be paid back when Mr French sells his shares in the company, flybe stated. The share prospectus also revealed that Mr French, who now owns about 6% of the business after his stake was diluted in the float, was paid nearly GBP715,000 in 2009. This compared with GBP674,000 for British Airways' Mr Walsh. However, Mr Walsh's earnings were affected after he waived one month's salary and a GBP344,000 bonus.

Facing industrial action by pilots

Meanwhile, flybe is facing a threat of industrial action from more than 700 pilots after the British Airline Pilots’ Association accused the carrier of ignoring pay concerns and putting all its resources into the float.  The union has threatened strikes saying a pay claim submitted to flybe in Feb-2010 had been ignored. BALPA also stated it had concerns about the "inefficiency of work patterns" and the way in which flybe organises schedules. The union warned industrial action could be taken if its challenge to pay and work patterns is ignored.

About flybe

flybe is the largest carrier in the European regional aviation market, offering four times more domestic routes than any other carrier with a 28% share of the UK domestic market in 2009/10. Based on OAG data, the carrier has is the largest domestic UK operator with a 30.1% capacity share, ahead of easyJet (22.5%), British Airways (21.1%), bmi (8.8%), bmibaby (4.3%) and Eastern Airways (2.3%). There are more than 20 operators in the market.

The carrier also has a significant presence in the UK to European business cities market with more routes from the UK to France than any other airline. The carrier operates a network of 215 routes in 13 countries from 73 airports across Europe.

flybe commenced operations in 1979 as Jersey European Airways. It was acquired in 1983 by C Walker & Sons Limited, the parent company of a Blackpool-based charter airline named Spacegrand Aviation. The two airlines were run separately, with partially shared management, until their amalgamation in 1985 under the “Jersey European” name. The airline was renamed British European Airways in 2000. The group was re-launched as flybe in 2002 as a new generation of regional airline rose in Europe. flybe’s business model, which combines certain elements of the legacy airline model and certain other elements of the LCC model, was designed to create a distinct market niche.

flybe acquired British Airways’ BA Connect unit for GBP521 million in 2006, adding more than 50 routes and doubling the number of customers enabling the carrier to become Europe’s largest regional carrier.

flybe sets sights on further European growth

Europe and the UK's regional market is set see much more activity in coming months with flybe likely to lead consolidation and restructuring activity in the regional market. There are a number of potential acquisition targets as there are 12 regional operators with less than 1% capacity share in the domestic market. Following its IPO, the carrier will have the cash, fleet and market presence to proceed with its European growth and acquisition strategy.


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