Flybe raises £150m in share offer

Flybe Group has announced that it is raising up to £155.65 million (approximately £150.0 million net of expenses) from the issue of new shares through both a Firm Placing and a Placing and Open Offer, fully underwritten by Liberum Capital.

The move is designed to enable the Group to pursue its strategy of building resilience and targeting profitable growth. Shareholders will be asked to approve the resolutions at a General Meeting on 11 March 2014.

Flybe CEO Saad Hammad (pictured) declared the positive response from the financial markets showed “an appreciation of the real delivery of Flybe’s turnaround plan. We’re attracting a very blue-chip list of investors. We’re delighted. It’s a ringing endorsement showing great belief in the management team we’ve assembled which has brought the turnaround and business-process transformation”. The airline, he added, was showing such good prospects that “if it didn’t exist you’d have to invent it”.

Since joining Flybe in August 2013, Hammad has carried out a full strategic review of the Group’s operations. As a result of that review, the Board believes that Flybe will achieve a sustainable competitive position in the European regional airline sector, based on: developing an efficient operation, using regional aircraft that can operate profitably on ‘thinner’ regional routes (those with less than 400,000 passengers a year); offering a high frequency operation at smaller, more convenient regional airports serving local business and leisure passengers and accessing international hubs; and providing a professional and personal service to all customers, with reliable on time performance.

Hammad’s review identified a number of actions necessary to improve the efficiency and profitability of the Group. This resulted in a three stage strategic programme: first, taking immediate action aimed at returning the Group to profitable operations, including the removal or rationalisation of unprofitable routes and bases, adjusting the fleet mix, further cost reductions and improved commercialisation; building resilience to strengthen the balance sheet to put the Group on a firm foundation for the future and deploy capital more effectively; and targeting profitable growth by implementing the Group’s plans for a profitable growth strategy in both Flybe-branded scheduled flying and white label operations (such as those in Finland and Belgium), whilst enhancing service to customers in branded flying.

One of the areas of change will be in reducing fleet ownership costs. Currently, 87.1% of the fleet is financed through operating leases, which the Board says is sub-optimal versus Flybe’s peers. The directors believe a reduction of that percentage will deliver an estimated return on equity investment of 15%-18%.

Still with the fleet, the need for an additional 10 aircraft has been identified in order to serve a number of new routes. Hammad reported that “around 100 routes are currently being assessed and we plan to begin 38 over the next three years”. The directors plan to fund this at a 75% loan-to-value ratio, thereby requiring approximately £35 million of equity financing and £103 million of debt financing.

The directors believe that there are other opportunities to roll out Flybe’s white label offering (contract flying) and have identified a number of national airlines in Europe for whom white label flying could be attractive, and are in ongoing commercial discussions with several of these airlines. The Board believes there is an initial requirement for six additional aircraft in order to service white label opportunities, which they plan to fund at a 75% loan-to-value ratio, thereby requiring approximately £23 million of equity financing and £69 million of debt financing. Any capital commitments would only be made after contracts have been signed.

Hammad gave some clues regarding the new aircraft mentioned. “Turboprops will continue to be the backbone of the fleet,” he confirmed. “They have low trip costs and the right seat density. We have been speaking with both Bombardier and ATR.”

Meanwhile, 10 Embraer 195s will be grounded at end of March with the other four being withdrawn at the end of the summer season. “Some redeployment of these into white label flying may be possible,” Hammad acknowledged. The remaining UK fleet currently comprises 45 Bombardier Q400s and 11 Embraer 175s.

Bernie Baldwin, editor, Low-Fare & Regional Airlines/

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