Flybe Group plc - Results in line with expectations - shaping a sustainable future

Flybe today announces its results for the year ended 31st March 2017. In March we guided the market that we expected a small underlying loss before tax for the year, before IT write-downs of around £5-10m. Today we announce an adjusted loss before tax1 of £(6.7)m, after IT write-downs of £4.8m. This write-down is at the low end of our previous range, but we anticipate further IT costs of around £6m in 2017/18 relating to cancellation penalties on existing contracts.

With the fleet size at its peak and planned to reduce during 2017/18, and under the leadership of our new CEO Christine Ourmieres-Widener, we are building the platform to shape a sustainable future.

Financial highlights

• 13.4% increase in group revenue to £707.4m (£623.8m in 2015/16);
  

• Stable passenger yield at £70.20;
  

• 3.0ppts lower load factor to 69.6% reflecting the 12.3% increase in capacity;
  

• 2.0% increase in cost per seat to £53.74, but a 5.2% reduction at constant currency;
  

• £(6.7)m adjusted loss before tax1 (£5.5m profit in 2015/16);
  

• £(26.7)m reported loss after tax (£6.8m profit in 2015/16);
  

• Strong balance sheet with total cash of £124.3m, with net debt of £(64.0)m after the purchase of ten Q400 aircraft, previously on operating leases.
  

1 Adjusted loss before tax is calculated as reported loss before tax of £(19.9)m excluding USD loan revaluation losses of £(13.2)m (2015/16: profit before tax of £2.7m excluding USD loan revaluation losses of £(2.8)m)

Operational highlights

Flybe Limited

• The legacy commitments to acquire additional aircraft caused the business to increase flown capacity by 12.3% to 12.7m seats. Passenger numbers increased by 7.6% to 8.8 million, reflecting the immaturity of new routes and resulting in a lower load factor (down 3.0ppts to 69.6%);
  

• Passenger revenue increased by 8.3% to £619.3m (£571.7m in 2015/16) in line with passenger growth. Total revenue increased by 12.4% to £675.6m (£601.0m in 2015/16) as the White Label and airport partnerships revenues annualised;
  

• Significant progress has been made in laying the foundations for future profitable growth:
  

•  Flybe was again named by OAG as the best UK airline for punctuality (on time performance) and placed sixth worldwide;
  

•  Heads of Terms have been signed for a new franchise and joint venture alliance with Eastern Airways and a new franchise agreement with Blue Islands in the Channel Islands;
  

•  Continued to develop our relationships with our airline partners in Cardiff, Doncaster Sheffield and Exeter/Norwich flying the E195s;
  

•  Routes launched from Scotland to London Heathrow;
  

•  New codeshares signed with Virgin Atlantic, Air Berlin, Air India and Singapore Airlines;
  

•  Agreement to return six end-of-lease Bombardier Q400 aircraft to the lessors in 2017/18 allowing Flybe to become a more demand-driven, customer-focused business.
  

• Given the capacity increase, the depreciation of sterling and increased E195 and White Label flying, cost per seat has increased 2.0% to £53.74, though this reduced by 5.2% at constant currency.
  

White Label

• SAS operation flying five ATRs is now successfully established in Scandinavia.
  

• The SN Brussels Airlines contract expires in October 2017 and will not be extended.
  

Flybe Aviation Services ('FAS')

• FAS continued to perform well. Revenue has increased by 17.1% to £50.1m (2016: £42.8m) driven by a 39.5% increase in third party revenues leading to a 36.0% increase in profit before tax to £3.4m (2016: 2.5m).
  

• Sustained momentum continued in our A400M maintenance services for the RAF at Brize Norton through Airbus Military UK. We anticipate a reduced contribution from the A400M service contract in 2017/18 as we complete the start-up phase and move to business as usual.
  

• We plan to retain and integrate the MRO into the airline, creating synergies and saving cost.
  

Becoming a customer-centric business

Flybe has achieved many significant changes: a capital raise, a relaunched brand, the cessation of the Finland joint venture, the strategic project addressing legacy fleet issues and a strong cost-conscious culture was introduced to drive effective unit cost reductions.

Despite the substantial progress in reducing the size of legacy fleet orders in 2015/16, Flybe has still seen significant capacity growth in a market where we witnessed slower growth in consumer demand. The Company has deployed its additional capacity on new routes and increased frequencies on existing routes, solely where these deployments could deliver at least a contribution to direct costs. New routes and increased frequencies were targeted to cover marginal costs in the early years of operation, but do not contribute significantly to overall profitability. The capacity growth therefore had a negative effect on profitability.

Flybe reached its peak fleet size of 85 in May 2017. Reduction in the fleet size will start by returning six end-of-lease Q400s in 2017/18. This will enable Flybe to become a more customer centric business and for the first time concentrate the business on profitable routes. Becoming a truly demand and customer-focused business is the key plank of our strategy.

Implementing a clear strategy is about returning to the core of what really works for the airline. We will make Flybe a sustainable business that operates the best routes and at the best times to suit the needs of our customers. We will stay true to our mission to connect people and businesses with safe, reliable and affordable travel.

Flybe is a regional airline with 53.7% of the UK domestic flights outside of London, connecting people and regions with one another throughout the UK and to and from Continental Europe, for both business and leisure. In many markets, we provide a true 'lifeline' transport service. We must fly the right routes, at the right times of the day and at the right times of the week according to the demands of the market. Our top eight departure point markets are all in the UK and represent 62.2% of our customers, and our top four represent 42.9% with Birmingham, Manchester, Belfast City and Southampton leading the way.

Our strength is not only in the point-to-point network but also in the connection opportunities for regions via Manchester, Birmingham and now London Heathrow with our increasing number of partners.

Our maintenance, repair and overhaul (MRO) business, Flybe Aviation Services, and our Training Academy are core to our success. These two distinct but key support areas, with their own expertise, need to be managed effectively to support the future profitability of the Group.

Looking beyond the UK at this stage it is neither the right moment, nor do the markets currently support, an expansion of intra-European activity (leaving aside Brexit uncertainty).

Our fleet size will start to decrease during 2017/18 which allows us to enter a phase of stabilisation and consolidation. We need to ensure we are executing what we are best at and making sure everyone knows who Flybe is. We will deliver a controlled expansion mainly via the optimisation of our partnerships.

We have developed a Sustainable Business Improvement Plan consisting of 6 focus areas:

1. The customer
   The customer will be put at the heart of everything we do. Sales and marketing will deliver sustainable revenue growth to maximise profitability, while optimising the customer experience and improving the customer interface at every touch point. Flybe's digital proposition will be enhanced through a strong digital e-commerce platform and the Flybe product will be developed in line with insights gathered from a better understanding of Flybe customers. This requires significant investment and will take several years to deliver in full.

2. Network and fleet optimisation
   We will deliver an optimised network focusing on positive route contribution based on customer and financial analytics starting from Winter 2017. The delivery of the tighter network will follow a structured process with minimal changes once the schedule is published. We intend to make a decision during this financial year on the long-term fleet configuration.

3. Operational excellence with reliability and on time performance
   With a better understanding and knowledge of our customers and a demand-driven network, we need to improve reliability and on-time performance and always seek continuous improvement. We also plan to re-design and implement a new structure for our engineering organisation which remains core to our business. The expert support offered by our Training Academy will be important to plans to drive customer service and profitability.

4. Organisational excellence
   We shall design and implement a cost-effective organisation structure with clear and aligned KPIs cascaded and embedded in every role profile and annual performance measurement. The basics need to be in place combined with a strong backbone of policies, processes and a transparent remuneration policy.

5. Technology
   We will build further resilience into our IT platform during 2017 and invest in the core operational platforms as we move towards improving the digital experience for passengers and implementing industry leading support systems for our engineering platforms.

In 2018, we will move towards offering our customers a truly digital online experience as we invest in a new platform. The new platform will not just benefit our customers. The first phase will commence this summer when we will launch the Electronic Flight Bag which will bring paperless working to our flight deck, enabling operational data to flow more efficiently into our operations team.

A principal reason for customer dissatisfaction is the quality of our website and their interaction with it. Over 80% of our customers are booking online via our website, with the majority being repeat customers. Our new digital platform, backed by our sales and marketing action plan, will enable us to attract new customers and enhance our customer relationship management.

6. Costs
   We will continue to look for ways to reduce costs at all levels of our business without hindering our performance and the quality service we deliver to our customers. Cost per seat remains a key metric, especially where capacity is likely to reduce in the second-half of 2017/18.

The Sustainable Business Improvement Plan is underpinned by a strong organisation and safety culture, aiming to ensure that every employee believes they can and will contribute to Flybe's success.

Improved employee engagement will be key to delivering the strategy. We will regularly survey our employees to measure progress and adapt our approach as appropriate. To support the delivery of our 2017/18 objectives, we will drive the right behaviours through the following balanced values:

• Care and respect;

• Customer-focused;

• Teamwork;

• Continuous improvement; and

• Accountability.

Outlook

Flybe is well placed as it enters 2017/18 as it will be in control of its capacity going forward. Flybe has a clear business plan which will form the foundation of a longer term plan to become the best regional airline in Europe. As part of this plan, we will optimise our fleet and network, expand our partnerships, improve our distribution approach and optimise our customer proposition in the coming years.

The three year project to digitalise Flybe commences this year. Our digital transformation will empower us with industry standard solutions to attract more passengers, improve the customer journey and optimise our revenue per seat. The proximity to our customers and our ability to serve them will be improved through the implementation of a long awaited customer relationship management suite.

The year to date performance has benefited from the timing of Easter which fell in April this year and March last year. In H1 capacity growth will slow and in H2 capacity is expected to reduce with the likely outcome being broadly flat capacity for the full year. This slowdown has already shown a benefit in Q1 2017/18 with load factor increasing over the prior year. Revenue per seat is also rising.

H1 performance update as at 5th June 2017:

• 2.7% capacity increase vs. prior year
  

• 45% of capacity sold vs. 44% prior year
  

• 2.6% increase in yields
  

• 4.6% increase in passenger revenue per seat
  

As of 5th June 2017, we had purchased 90.0% of our anticipated fuel requirements at USD490 and 88.7% of our anticipated US dollar requirements at USD1.41 for 2017/18.

Christine Ourmieres-Widener, Chief Executive, said:

"I am truly passionate about the airline industry and I see tremendous opportunities for Flybe to connect and engage with communities and to establish a reputation for excellence in serving our customers. We will be successful in delivering by continually focusing on our costs, increasing our knowledge about who our customers are and what makes them tick, achieving industry-leading operational excellence and implementing a great digital platform.

Flybe has a great future as Europe's largest regional airline. My team is focused on delivering an exceptional customer experience and building value for shareholders."

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation EU no. 596/2014 ("MAR"). Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.