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Flybe: not yet "Fit to Compete", but the exercise regime has started

25-Jun-2013

Flybe reported wider losses for FY2013, its third successive year of deteriorating results. Moreover, cash flow weakened, net debt grew and net assets fell. In addition to the challenge of high fuel prices, Flybe has seen a 21% reduction in the UK domestic market since 2007 and its high proportion of domestic traffic has made it particularly exposed to increases in UK air passenger duty. Flybe’s unit costs leave it struggling to compete with LCCs, its load factors are below industry averages in spite of capacity cuts and its labour force is among the least productive in Europe.

In Jan-2013, Flybe announced a turnaround plan, dubbed "Fit to Compete" and updated in May-2013 and Jun-2013. This aims to improve profitability through cutting headcount and other cost efficiencies, to drive revenue enhancements, to generate cash without recourse to shareholders and to restructure the network into a defensible core. The disposal of Gatwick slots to easyJet and deferral of aircraft deliveries will help its cash position, but, while Flybe may no longer be gaining weight, full fitness remains a long way off.

Flybe's losses widen in FY2013

In the year to Mar-2013, Flybe reported a pre-tax loss of GBP41 million, compared with a loss of GBP6 million in FY2012. Adjusting for restructuring costs and costs for surplus capacity, the pre-tax loss was GBP23 million versus a loss of GBP7 million in the previous year.

Flybe PLC financial highlights: FY2013

GBP million except
where stated

2012

2013

Change

Revenue under management

678.8

781.5

15.1%

Group revenue

615.3

614.3

-0.2%

Operating profit

-1.9

-31.5

1557.9%

Operating margin

-0.3

-5.1

-4.8

Adjusted operating profit*

-1.9

-18.7

884.2%

Adjusted operating margin

-0.3

-3.0

-2.7

Adjusted profit before tax*

-7.1

-23.2

226.8%

Profit before tax

-6.2

-40.7

556.5%

Net profit

-6.4

-41.8

553.1%

Net debt

29.7

66.3

123.2%

Net assets

89.4

48.1

-46.2%

Revenues were flat in FY2013

Flybe’s FY2013 group revenues were just below flat compared with the previous year, as a 2% fall in passenger revenues was offset by the launch of contract flying, which generated almost GBP13 million in revenues (FY2012: zero). Contract flying represents the provision of four crewed Q400 turboprops to Brussels Airlines in arrangements lasting up to two years and which expire in Apr-2014 and Oct-2014.

Other revenues mainly consist of aircraft maintenance revenues of GBP40.5 million (-8.6%) and training academy revenues of GBP5 million (+66.7%).

Flybe revenues: FY2013

 

GBP million except
where stated

2012

2013

Change

% of FY2013 total

Passenger revenue

565.6

551.8

-2.4%

90%

Contract flying revenue

 0

12.8

-

2%

Revenue from other activities

49.7

49.7

0.0%

8%

 

615.3

614.3

-0.2%

100%

Costs were up almost 5%, mainly due to fuel; ex-fuel was only steady

In spite of capacity reduction and flat revenues, costs grew by 4.6%, although this would have been 2.6% without restructuring and surplus capacity costs. Fuel costs, which accounted for 19% of group costs in FY2013, grew by 15%. Ex fuel costs before restructuring and surplus capacity costs were flat year-on-year.

Flybe costs: FY2013

 

GBP million except
where stated

2012

2013

Change

% of FY2013 total

Staff

120.7

129.6

7.4%

20%

Fuel

106.4

122.6

15.2%

19%

Net airport and en route charges

118.1

117

-0.9%

18%

Ground operations

86.7

83.7

-3.5%

13%

Maintenance

37.7

33.7

-10.6%

5%

Depreciation & amortisation

13.1

12.0

-8.4%

2%

Aircraft rental

77.6

78.1

0.6%

12%

Marketing & distribution

25.5

25.1

-1.6%

4%

Other (net)

31.4

44.0

40.1%

7%

Total costs

617.2

645.8

4.6%

100%

Labour productivity remains weak against other European airlines

Total labour costs, which accounted for 20% of costs, grew by more than 7%. Excluding restructuring costs, labour costs grew by less than 3%, in spite of a reduction in full time equivalents of 4%. This meant that employee costs per employee increased by 7%. This was partly offset by a modest increase in ATK per employee, but total employee costs per ATK were up by 5.7%. On the other side of the equation, revenues per employee increased by 4.1%, but Flybe’s labour productivity remains at the lower end of European airlines.

See related report:  European airline labour productivity: CAPA rankings

Flybe labour productivity measures: FY2012 and FY2013

 

2012

2013

Change

Total full time equivalent headcount

2781

2667

-4.1%

Total labour cost GBP million*

120.7

124.0

2.7%

Employee cost per employee (GBP)

43,402

46,494

7.1%

ATK** per employee

221

224

1.4%

Employee costs per ATK** (GBPp)

19.7

20.8

5.7%

Revenue per employee

221,251

230,334

4.1%

The turnaround plan aims for a 21% cut in Flybe UK headcount

Flybe’s turnaround plan sees a 21% reduction in UK staff numbers, based on its Feb-2013 headcount of 2,730. Of the total of 580 staff leaving the company, 330 are to be through redundancy (voluntary and compulsory) and 250 through outsourcing deals.

Activities to be outsourced include call centres, on-board sales, a large portion of line maintenance and ground handling. In addition, automated check-in is being introduced. Flybe has also reached agreement in principle with the pilot union BALPA for a salary cut of up to 5% in return for extra time off. These actions should lead to improvements in Flybe’s labour productivity measures, but the company also needs to increase its load factors.

The turnaround plan originally aimed for GBP25 million of cost savings in FY2014 and a cumulative GBP35 million by the end of FY2015. The company says it has now secured GBP30 million for FY2014, rising to GBP50 million for FY2015. The turnaround plan involved around GBP13 million of restructuring costs in FY2012 and is expected to require around GBP5 million in FY2013.

The plan also involves liquidity improvements through the sale of slots at Gatwick to easyJet for GBP20 million, the deferral of 16 Embraer E175 deliveries (saving GBP20 million of pre-delivery payments in winter 2013/2014) and the sale of other minor assets (Flybe hopes to raise around GBP5 million).

See related report: EasyJet works the Gatwick slot machine as Flybe cashes out

Flybe UK was responsible for the bulk of the losses

Flybe has two divisions: Flybe UK, which is the core UK passenger airline and Flybe Outsourcing Solutions, which contains maintenance and training business in addition to Flybe’s contract flying businesses and Flybe Finland, its 60% owned joint venture with Finnair.

Flybe Finland is equity accounted, which means that its revenues and costs are not consolidated into the group operating result, but Flybe takes its 60% share of the joint venture’s profit or loss into the group’s pre-tax result.

Both divisions made a pre-tax loss before restructuring and surplus capacity costs, with Flybe UK responsible for the larger part (GBP17 million) of this loss. Flybe Outsourcing Solutions' adjusted pre-tax loss of GBP2.3 million was due to the group’s GBP2.8 million share of the Flybe Finland loss. The other businesses in this division made a small profit.

Flybe divisional results before tax: FY2013

Flybe UK's revenues fell 2%

Flybe UK saw passenger numbers fall by 1.1% after seat capacity was cut by 2.7%. Load factor gained 1.0 ppt to reach 64.1%. This remains a weak level compared with the 81.3% average load factor recorded by all UK airlines in the calendar year 2012, although regional airlines tend to have lower than average load factors. According to Flybe Chairman and CEO Jim French, easyJet’s load factor in its UK regional operations (i.e. excluding its London routes) is in the mid 70s (compared with 87% for easyJet overall) and he believes this should also be achievable by Flybe.

Flybe UK’s passenger revenue per passenger fell by 1.4% in FY2012, a little more than the 0.9% reduction in average sector length, and passenger revenues fell by 2.4%. Other revenues grew by 4% in total and overall revenue fell by 2.2% for the division.

Flybe UK revenue drivers: FY2013

The majority of Flybe Finland’s business is contract flying for Finnair, an activity which saw revenue growth of more than 200% in FY2013, with passenger numbers of 1.6 million (0.5 million in FY2012). In its own risk commercial flying activity, it saw 41% growth in passenger numbers in FY2013, with a load factor of 41.8% (up from 40.4% in the previous year). Growth rates are distorted by the fact that Flybe Finland did not operate for a full year in FY2012. Flybe says that “contract flying is expected to dominate this business in 2013/14 onwards and will provide a stable platform for future profit and cash generation”.

In spite of the poor load factors in commercial flying, Mr French says that there are “no immediate plans” to close the business, although it is being “continuously watched”.

Flybe Finland's revenues were up sharply

Flybe Finland revenue drivers: FY2013

A track record of losses and low load factors

Flybe’s track record of profitability has been weak in recent years, with only one year (FY2010) of positive results at the pre-tax level in the past five. Losses have widened each year since 2010.

Passenger numbers in Flybe UK have been more or less flat since FY2009 at a little more than seven million. Scheduled load factor for all passengers under management has fallen by almost 3ppt since FY2009, although it has gained almost 1ppt over the past two years.

Flybe revenues and profit before tax: FY2009 to FY2012 (GBP million)

Flybe passenger numbers (million, left hand axis) and load factor (%, right hand axis): FY2009 to FY2012 (GBP million)

Flybe is the biggest airline at a number of UK regional airports

Flybe’s biggest base is Southampton, where is has a 96% share of seats (source: Innovata, week of 24-Jun-2013). It is the number one carrier at seven of its top 10 airports (Southampton, Birmingham, Belfast City, Glasgow, Jersey, Exeter and Isle of Man). Of the remaining three, it is to withdraw from London Gatwick in Mar-2014 after agreeing to sell its slots to easyJet. It is the number four carrier at Manchester and Edinburgh.

Mr French identifies Southampton, Birmingham, Manchester and Belfast City as his core UK markets, with Glasgow, Edinburgh, East Midlands and the Channel Islands a secondary focus.

Flybe top 10 hubs by seats: 24-Jun-2013 to 30-Jun-2013

Flybe market position at its top 10 airports

Airport

Flybe share of seats*

Flybe rank*

Other main competitors

Southampton

95.9%

1

 

Birmingham

34.8%

1

Ryanair (13.9%), Aer Lingus (13.2%), Monarch (10.6%)

BelfastCity

64.3%

1

Aer Lingus (21.8%), BA (13.9%)

Manchester

10.3%

4

Ryanair (13.6%), Monarch (11.5%), easyJet (10.7%), Jet2.com (10.0%)

Edinburgh

13.5%

4

easyJet (26.0%), Ryanair (17.2%), BA (14.6%)

Glasgow

43.1%

1

BA (15.1%), easyJet (12.9%), Aer Lingus (8.6%)

London Gatwick

3.8%

5

easyJet (44.3%), BA (17.0%), Monarch (6.9%), Norwegian (6.8%)

Jersey States

4.24%

1

BA (19.4%), BlueIslands (14.4%), easyJet (11.1%)

Exeter

93.3%

1

 

Isle of Man

66.4%

1

easyJet (21.9%), BA (7.4%)

Strong market positions on many of its biggest routes

The majority of Flybe’s capacity is domestic, with only 42% of seats on international routes (source: Innovata, week of 24-Jun-2013). Virtually of the international capacity is to Western Europe. Flybe has a strong market position on its top 10 domestic routes, being the number one carrier by seat share on all of them and the sole carrier on eight of them.

Flybe top 10 domestic routes by seats: 24-Jun-2013 to 30-Jun-2013

Flybe position by seats on its top 10 domestic routes: 24-Jun-2013 to 30-Jun-2013

Route

Flybe rank

Other competitors

Belfast City-Birmingham

1

Monopoly

Edinburgh-Birmingham

1

Monopoly

Glasgow-Birmingham

1

Monopoly

Belfast City-Manchester

1

Monopoly

Southampton-Edinburgh

1

Monopoly

Glasgow-Southampton

1

Monopoly

BelfastCity-London Gatwick

1

Aer Lingus

BelfastCity-Glasgow

1

Monopoly

Aberdeen-Manchester

1

bmi regional

Belfast City-East Midlands

1

Monopoly

Even the top 10 routes classified as ‘international’ are dominated by routes within the British Isles and UK territories. Manchester and Birmingham to Paris CDG, Birmingham to Düsseldorf and Southampton to Dublin are the only top 10 international routes not involving UK territories (Channel Islands or Isle of Man).

Flybe is the number one carrier on six and number two on four of its top 10 ‘international’ routes, but is the monopoly carrier on only two of these (Isle of Man to Manchester and Southampton to Dublin).

Flybe top 10 international routes by seats: 24-Jun-2013 to 30-Jun-2013

Flybe position by seats on its top 10 international routes: 24-Jun-2013 to 30-Jun-2013

Route

Flybe rank

Other competitors

London Gatwick-Guernsey

2

Aurigny Air Services

Jersey-London Gatwick

2

British Airways

Manchester-Paris CDG*

2

Air France,   Jet2.com

Jersey-Southampton

1

BlueIslands

Isle of Man-Manchester

1

Monopoly

Birmingham-Paris CDG

2

Air France

Isle of Man-London Gatwick

1

easyJet

Southampton-Guernsey

1

BlueIslands

Birmingham-Düsseldorf 

1

Lufthansa

Southampton-Dublin

1

Monopoly

Flybe UK's fleet is set to contract

At 31-Mar-2013, the group fleet under management consisted of 98 aircraft, of which 70 were Flybe UK and 28 Flybe Finland. Flybe UK’s fleet grew by five E175 aircraft in FY2013. Four more are due for delivery between Sep-2013 and Dec-2013 and a further 22 will then remain on firm order. These were originally due for delivery to 2016, but Flybe has agreed with Embraer to defer 16 deliveries that were due in 2014 and 2015 to 2017-2019.

The Embraer order is part of a policy to rebalance the UK fleet with a more even distribution of regional jets and turboprops. Four Bombardier Q400 aircraft are being operated for Brussels Airlines on a contact flying basis, of which two will return to Flybe in Apr-2014 and the other two in Oct-2014. Two Q400s were sold to Aero Nigeria in May-2013 and Flybe is looking to sell a further two Q400s. The group fleet had 96 aircraft at 14-Jun-2013.

Flybe fleet under management at: 31-Mar-2013

Compared with the growth in the Flybe UK fleet planned in Jul-2010, management has made significant cuts in order to better match supply to demand. Rather than the originally planned fleet of more than 80 aircraft at the end of FY2014, Flybe UK now expects to have fewer than 70.

Flybe UK fleet plan: Mar-2010 to Mar-2016

Flybe's unit cost disadvantage versus LCCs is a handicap at many of its airports

Flybe has a unit cost disadvantage relative to the LCCs that are increasingly important at many of the airports from which it operates. Its cost per ASK (CASK) is more than double that of Norwegian, the highest-CASK LCC, and more than four times that of Ryanair. Flybe has a shorter average sector length, but, even allowing for this, its CASK looks high compared with Europe’s LCCs (see chart below).

Flybe does have strong market positions on many of its most important routes, many of which are defensible given the limitations on operating the larger aircraft favoured by major LCCs at some of Flybe’s most important airports.

Flybe aims to rebalance its network to generate a higher proportion of leisure travel, because it currently receives more than 50% of revenues within 10 days of departure, making it vulnerable to short term market shocks. Sensibly its criteria for operating leisure routes are, first, that the market is not served and, second, that Flybe can operate its aircraft economically.

Nevertheless, to the extent that Flybe competes with LCCs for discretionary leisure spend, its relatively high cost base limits its ability to offer the attractive fares that often drive consumer decisions more than the destination offered.

Flybe sees its USPs as convenience and frequency, but a restructured cost base will probably be the key to its future competitiveness. In this respect, all eyes will be on the development of its earnings in FY2014.

Unit costs (cost per available seat kilometre, EUR cent) and average sector length for selected European low-cost carriers: 2012*


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