Flybe turnaround continues, but airline exits Finnair JV

Flybe has announced its half-year financial results for the six months ending 30 September 2014 (1H15) including improved performance in its core UK business, though this was offset by a full impairment of assets related to its joint venture with Finnair – from which it now plans to exit – and a provision for EU 261 flight delay claims.

Flybe UK proved to be a strong core business in 1H15, with passenger revenue per seat increasing by 8.7% to £54.75 plus an 8.6 percentage point increase in load factor to a record 77.2%. The UK business is on track to deliver £24m of incremental full-year cost savings, in line with previously announced plans. Its adjusted profit before tax was up by £2.0 million to £13.7 million, despite a £6.0 million provision for the aforementioned EU 261 flight delay compensation

Flybe is to sell its 60% share in lossmaking Flybe Finland for €1 to Finnair, its joint venture partner. The share purchase agreement is conditional only upon competition authority approval in Finland and the two companies are aiming to complete the transaction by 1 January 2015. The full impairment of investment has resulted in a net £9.9 million, non-cash charge in 1H15.

While Flybe Group had a positive operating cash flow in 1H15, it did report a loss after tax of £15.4 million compared with a profit after tax of £13.6 million for the same period last year. This results was impacted by £34.3 million of one-offs and revaluations: Finland net impairment (£9.9m), EU261 flight delay catch-up provision (£6.0m), a net movement on surplus capacity and restructuring cost (£10.4m) and movement on revaluations of USD loans (£8.0m).

The Group had a £6.5 million net cash inflow from operating activities after restructuring, compared with an outflow in 1H14 of £9.9 million.

Saad Hammad, Flybe Group’s chief executive officer, commented, "Our UK business performed well in the first half of the year showing the strength of the new Flybe. We delivered an increased adjusted profit before tax in the Flybe UK business and importantly became cash generative. Though our business transformation is far from complete, we are seeing the benefits of improved commercial execution with the right cost base and we now have improved operational and financial disciplines throughout our organisation.

“We are making significant progress in addressing the legacy issues within the business, which will ensure we operate with a simpler business model. We have taken decisive action in removing the overhang of the outstanding $750 million order for 20 unwanted Embraer 175 aircraft, withdrawing from the Finland joint venture as well as providing for the potential costs for the arbitrary EU 261 regulation for flight delay claims in Flybe UK. We are working hard to resolve our surplus fleet issue.

“We are undertaking a measured approach to growth in the second half with our launch of new routes to and from London City Airport. In addition, we have announced that we will be opening new bases in Bournemouth and Aberdeen. Whilst there are still a number of challenges ahead, Flybe enters the Winter season with solid momentum in its core UK business."

Contract flying by Flybe UK generated revenue of £7.3 million in 1H15 – down from 1H14’s figure of £8.2 million – in relation to two aircraft operating on a Brussels Airlines agreement throughout 1H15 and a third aircraft operating on three-month agreement with Aurigny (which ceased at the end of June 2014) before it moved on to a two-month contract with Helvetic. In 1H14, four Q400s operated on contract for Brussels Airlines. Aurigny and Helvetic activities involved one Embraer 195 and were put in place to reduce overall surplus capacity costs.

Other revenue streams reduced to £6.3 million, compared with £16.4 million in 1H14, since available surplus aircraft and crew in 1H14 had resulted in exceptionally high levels of charter revenue in the comparative period. Revenue from other activities in 1H15 was therefore lower since these surplus resources have been removed from the business.

Flybe Group’s maintenance, repair and overhaul (MRO) business, Flybe Aviation Services, has been the subject of a detailed review and efficiency programme. From its results, the Group has confirmed that it will retain the MRO business as a separate strategic business unit.

The MRO’s revenue in 1H15 decreased to £19.3 million compared with £20.5 million in 1H14. The benefit of an improvement in labour revenue this year was not sufficient to offset the impact of a significant one-off sale of parts last year. Overall, profitability in 1H15 reduced to £1.5 million from £2.2 million in 1H14 as the company booked a £0.5 million provision for MRO staff related bonuses in the period.

Flybe has strengthened the leadership of its white label activity with the recruitment of an experienced specialist, former Aer Lingus, Qatar Airways and Monarch Airlines executive, Jochen Schnadt. A number of discussions have already been held with airlines across the EMEA region.

The Group says its medium-to-long-term opportunity remains clear – that development in this division will be through profitable contracts, as a preference over joint ventures, because the fee-based nature of such contracts is more transparent and avoids conflicts of interest.

As such, the Group has signed a Letter of Intent with a ‘leading European airline’ to provide a regional service starting in autumn 2015 subject to contract completion.

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