Flybe, one of Europe’s largest and most successful regional aviation groups, is filing accounts for the financial year ended 31 March 2009.
Key financial and performance highlights at a glance:
· Profit before tax of £12.8 million* (2007/08: £35.4 million*)
· Growth in turnover of 6.8% to £572.4 million (2007/08 £535.9 million).
· Growing passenger volume, up to 7.3 million passengers (2007/08 7.0 million).
· Growing ancillary revenues per passenger by 30% to £10.37 (2007/08 £7.97).
* Excludes net exceptional, integration and restructuring charges of £12.7 million (2007/08 £5.0 million)
The period covered by these results includes the height of the global downturn in the world’s financial markets, the spike in oil prices and the onset of global economic recession. It was also one of the most turbulent environments ever experienced by the world’s aviation industry.
A profitable performance in a period affected by one of the deepest and most prolonged recessions seen by the aviation industry.
Operating cash inflow before restructuring of £31.4 million generated in the year.
Passenger numbers up by 4.3% helped underpin a profitable performance.
Continued progress on Flybe’s balanced ancillary revenue strategy with a 30% increase in ancillary revenue per passenger driven by new value added streams including income from advanced seat assignment and financial services.
Completion of the fleet rationalisation programme (May 2009) which underpins Flybe’s competitive position in the regional airline market. The programme saw 76 aircraft either introduced or retired over a 26 month period leaving Flybe with an average fleet age of under 3 years (May 2009).
Successful launch of our first franchised operations as Loganair began to operate under the Flybe brand during the year. The move helps to cement Flybe’s position in the Scottish aviation market.
Flybe successfully completed the integration of the BA Connect business, realising substantive synergies in overhead and maintenance rationalisation, while enjoying the full economic benefits of substituting 50 seat jets with Flybe’s preferred 78 seat Q400 product.
Flybe was awarded 2009 Regional Airline of the Year by Air Transport World, the first UK airline to hold this title since 1996.
Maintenance, Repair and Overhaul Business-Aviation Services (MRO).
Continued strong progress in our MRO business which was recognised as European Airline MRO of the Year in 2009 by Aviation Week. The unit enjoyed a profitable year with 70% of its revenue now coming from third party customers.
In 2009 Flybe took its first steps towards developing a strong aviation training business by securing funding for the building of a new Training Academy, to be based at Exeter, and expected to be completed by the end of 2010.
Jim French, Chairman and Chief Executive, commented: “The Flybe business model was put to the ultimate test during the year and I am delighted to report that it came through with flying colours. In my 40 years in the industry, I have never experienced such a difficult environment and, in that context, we can rightly regard the result for the year as a success. I am proud that Flybe was one of few major airlines to announce a profit in the year.
“Whilst steering Flybe through economic turbulence, we also remained focussed on developing our business and brand. The management team continues to demonstrate both clear strategic focus and agility and I believe this will ensure that Flybe will be one of a handful of European airlines to emerge stronger and more competitive as the recession comes to an end.”
Looking ahead, Mr French added: “Flybe has continued to prove the resilience of its business model and strategy by recording good profits for the half year period to 30 September 2009. The airline is winning market share in a number of key markets and we are seeing substantial rationalisation by our competitors in our key domestic market place. In the first half of 2009/10, Flybe became the UK’s number one domestic airline. The airline is having a good recession and is well positioned to harvest the benefits when more benign economic conditions return. The airline has successfully completed the financing of all its current fleet in the year and has no new aircraft to finance until April 2011- putting it in an enviable position among European airlines.
“The MRO business, Aviation Services, has capitalised on the excellent reputation of the Flybe brand and has expanded the geographic range of its services to Greece where it has supported the start up of the new ‘Olympic Air’. This has been very beneficial during the current financial year and has provided the platform for further developments of this kind.
“The aviation training business has made solid progress and work has commenced on building our flagship Training Academy in Exeter.
“In 8 years since 2002, Flybe has reviewed and invested in every single aspect of its business and as a result is well positioned as the UK and European economies emerge from recession.”
An abbreviated version of the Chairman’s Statement from the Accounts for the financial year ended 31 March 2009 follows below.
I am pleased to report on another encouraging trading performance from Flybe against the backdrop of extreme challenges in the airline sector.
Having successfully integrated BA Connect in the previous year, the Board looked forward to a period of stability in 2008/09 with the focus on profitable growth, continued cost efficiencies as the fleet modernisation neared completion, and a relatively small and targeted route growth planned for the year.
However, the year proved to be very challenging with various external factors having a major impact on the financial performance of the business (and all other major airlines). These factors included:
* Crude oil doubling in price to $147 per barrel in the six months to July 2008, with a corresponding increase in jet fuel prices. Our fuel costs for the year to 31 March 2009 rose by 35.5% to £115.4m. This unprecedented rise in fuel prices also increased costs across the broader economy, helping trigger a slowdown in consumer spending and air travel. Domestic air travel in the UK (by number of passengers) declined by 7.2% in the 12 months to March 2009.
* Sterling collapsing against the US Dollar by over 30% in the last four months of 2008, and remaining at c$1.40 through the remainder of 2008/09. A significant proportion of our trading costs are denominated in US Dollars on items such as fuel, maintenance and aircraft leases.
* The collapse of Lehman Brothers in October 2008 which signalled the start of the crisis in the global banking sector, and represented the moment when the credit crunch (which began in August 2007) started impacting the wider business community. Domestic traffic on key business routes into and out of Edinburgh from Manchester, Birmingham and Southampton experienced significant declines.
* In January 2009, the recession took an even firmer hold, with business travel virtually being stopped as corporations and business wrestled with the scale of the recession.
The combination of these factors resulted in the Board having to focus on short term cost reduction programmes and, in particular, to reduce the capacity offered to meet the reduced demand. Despite these efforts, the level of losses incurred in the quarter from January to March 2009 were unprecedented in Flybe’s recent history.
This loss in the final quarter of 2008/09 clearly had a serious impact on the financial performance for the year, as did the impact of the increased fuel prices in the first half of the year. Given the scale, severity and short timescales of these external factors and the impact they had on the wider aviation sector, the headline figures highlighted above demonstrate (a) the resilience of the Flybe business model and (b) the determination of the management team and staff within Flybe to deal with critical challenges on a timely basis.
The combination of these two key ingredients will ensure Flybe is one of the survivors of the recession.
Financial performance 2008/09
Profit and loss account
Despite the many and considerable challenges referred to above, Flybe delivered results which we believe belied the underlying trends in the aviation sector:
* Increased passenger volumes from 7.0 million to 7.3 million.
* Turnover increased by 6.8%, from £535.9 million to £572.4 million.
* Cost of sales, excluding net exceptional, integration and restructuring charges of £9.9 million (2007/08 £5.5 million), increased by £59.1 million (14.1%) from £444.5 million to £503.6 million. Fuel costs accounted for £30.2 million of this increase (2007/08 £85.2 million, 2008/09 £115.4 million).
* Gross profit, excluding net exceptional, integration and restructuring charges of £14.1 million (2007/08 £5.5 million), was £73.0 million (2007/08 £91.4 million), giving a gross margin of 12.2% (2007/08 17.1%).
* Operating profit for the year, excluding net exceptional, integration and restructuring charges of £14.3 million (2007/08 £7.4 million), fell from £38.2 million to £20.4 million, giving an operating margin of 3.5% (2007/08 7.1%).
* After net exceptional, integration and restructuring charges, operating profit was £6.1 million (2007/08 £30.8 million).
* Net interest payable and similar charges in the year totalled £7.8 million (2007/08 £2.9 million).
* Adjusted profit before tax for the year was £12.8 million, compared with an adjusted profit of £35.4 million in the previous year.
* After deducting net exceptional, integration and restructuring charges of £12.7 million, profit before tax was £0.1 million (2007/08 exceptional and restructuring charges £5.0 million, leaving a profit before tax of £30.4 million).
* There was a deferred tax credit of £4.0 million for the year (2007/08 credit £4.5 million), leaving a profit after tax for 2008/09 of £4.1 million (2007/08 profit after tax £34.9 million).
Our cash reserves at the end of the year stood at £56.6 million, a decrease of £10.8 million on the 31 March 2008 balance of £67.4 million.
However, it should be noted that the opening cash balance of £67.4 million included cash earmarked for certain planned items incurred in 2008/09, as follows:
* the continued utilisation of funding provided by British Airways on the BA Connect acquisition to cover the cost inefficiencies of operating the 50-seat Embraer E145 jets acquired as part of the transaction until they could be replaced as part of the new fleet strategy (represented by negative goodwill amortisation of £17.2 million in 2008/09);
* payment of £9.2 million of restructuring and integration liabilities relating to the BA Connect acquisition; and
* redemption of the outstanding preference shares of £14.1 million.
Having deducted the above items from the opening cash balance of £67.4 million, our ‘remaining’ opening cash was £26.9 million. During the year, we generated operating cash inflow before restructuring and integration of £31.4 million, and year end cash was £56.6 million.
i BA Connect fleet
I am delighted to report that in May 2009 we completed our two year fleet substitution programme (following the acquisition of BA Connect in March 2007) resulting in a two-type fleet of Bombardier Q400 78-seat turboprops (‘Q400’) and Embraer E195 118-seat regional jets (‘E195’). During the 26 month period to May 2009, this substitution programme entailed:
* the retirement from operation of 39 BA Connect aircraft (28 Embraer E145s, 7 Bombardier Q300s, 4 BAe 146s); and
* the introduction of 26 Q400s and 11 E195s.
This fleet substitution programme, which totalled 76 aircraft being either retired from or introduced to the fleet in this 26 month period, was a tremendous achievement by all areas of the business – finance, operations and commercial.
ii Overall fleet
The overall fleet transition project over the last seven years since the launch of Flybe has involved the introduction of 66 new aircraft and the disposal or handback of 66 aircraft (including those acquired on the BA Connect acquisition). This represents a major financial cash investment made by the business during the last few years. It has also been a major challenge for the team to finance more than 30 aircraft since the start of the credit crunch in summer 2008 and I must congratulate them on their success.
Our current fleet as at January 2010 totals 68 aircraft, comprising 54 Q400s and 14 E195s, with an average age of three years. Of the 68 aircraft, 57 are held on operating lease and 11 are owned and debt financed.
I am pleased to advise that Flybe has no aircraft deliveries to be financed until 2011. The fuel efficient fleet, with an average age of 3 years and no financing requirements until 2011, places Flybe in an excellent position compared to many other airlines who still have to modernise their fleets.
Clearly the high price of jet fuel experienced in 2008, and the continuing price volatility, has placed enormous pressure across the industry, including Flybe. I am pleased to report that the significant investment in new aircraft combined with a clear hedging strategy for fuel and US Dollars has reduced the impact on Flybe of this industry-wide challenge.
The decision to invest in the new fleet of 78-seat Bombardier Q400 and 118-seat Embraer 195 aircraft has provided significant benefits in terms of reduction in fuel burn. This improved efficiency will continue through the fleet substitution programme, which was completed in early 2009/10. If, in 2008/09, we had operated the same fleet as we had in 2002, our fuel burn would have been 28% higher, with an increased fuel cost of circa £32 million.
With regard to our hedging policy, our objective is to smooth the cost of fuel and to de-risk cost escalation and volatility as far as possible, thereby enabling the Commercial team to price our product before the selling season commences. The Fuel Committee will continue to monitor the effectiveness of its policies and to benchmark these against our competitors.
In January 2008, we announced an agreement for Loganair to become our first franchise partner.
Loganair was founded in 1962 and has become the quintessential Scottish airline brand. With 340 employees, headquartered in Glasgow and serving Scotland’s Highlands and Islands as well as Northern Ireland and Dublin, Loganair previously operated under a BA franchise since 1994 with c0.5 million passengers carried on 26 routes from 16 airports with 15 aircraft.
Tickets under the new franchise agreement went on sale from July 2008 and Loganair began flying in Flybe colours from the start of the 2008 Winter Season on 26 October 2008. The franchise means that, in Scotland, the Flybe brand has over 50 routes and carries more than 2.5 million passengers.
Staff training and development
Flybe’s plans to build a Training Academy at Exeter continue with all funding now in place. The project should be completed by the end of 2010.
Phase 1 of this facility will incorporate 26 classrooms, workshop training facilities, cabin crew emergency training facilities and a flight simulator hall which can accommodate up to four flight simulators.
With 3,000 staff, many of whom fulfil highly technical and safety related roles, it is essential that Flybe operates a very high standard of skills training. The training function has been developed over many years by individual departments and we now plan to bring this together into the new Training Academy. This will ensure substantial benefits in terms of quality of training and overall costs of delivery.
It is planned that this facility will operate alongside our aircraft maintenance, repair and overhaul (‘MRO’) business, Flybe Aviation Services, where circa 70% of the man hours produced are sold to third party customers.
As a result of the extended awareness and excellent reputation of the Flybe brand, Flybe has been approached by various overseas companies to use its recognised expertise in the regional aviation sector to (a) support existing operations, (b) to manage the introduction of regional aircraft operations for others or (c) to participate in new joint ventures. Such approaches vary from project to project but incorporate the various key skills which we have developed – flight operations, engineering, training and commercial.
Such activities can prove critical during an economic recession by enabling the airline to utilise its surplus resources in other markets in order to offset fixed costs and avoid staff redundancies.
The Board has taken a very cautious view of such approaches being very conscious of the risks involved both from an operational and a financial perspective.
We have worked on two major projects since January 2009, one in Greece and another outside Europe. The Board supported the Greek project which has proved to be very beneficial during the financial year 2009/10, something which is expected to continue in 2010/11. It was decided to abort the project outside Europe since the financial risk profile was not acceptable.
Given the considerable restructuring and consolidation currently being undertaken within the aviation industry in Europe, it is the Board’s belief that there will be further opportunities for Flybe as this process of consolidation matures and stabilises. The Board has therefore been very active in ensuring that Flybe is well positioned across Europe to capitalise in any future opportunities which may arise.
There has been some internal re-organisation made in order to ensure that the day to day operation of Flybe is not undermined whilst such opportunities are being investigated.
The latter part of the financial year 2008/09 witnessed the beginnings of one of the deepest and most prolonged recessions in aviation in history. Many have stated that the impact of the economic crisis around the world was much greater and more prolonged than anything the industry has previously experienced.
The challenges have extended through to the current 2009/10 financial year. However, much of the early corrective action, which began in earnest in the January to March 2009 period, established the basis on which the business has managed its way through the recession.
The management team and staff have worked very hard for a very long period to overcome these considerable challenges without the motivational adrenalin which would have been released if that same devotion, commitment and energy had been working on a significant new development. I want to take this opportunity of thanking everyone for their very significant efforts during this time.
Since its launch in 2002, Flybe has grown to become one of the largest regional Aviation groups in Europe, comprising:
* one of Europe’s largest regional airlines (recognised as 2009 Regional Airline of the Year by Air Transport World)
* Europe’s largest specialist regional aircraft MRO (recognised as 2009 European Airline MRO of the Year by Aviation Week); and
* the development of a Training Academy dedicated to regional aviation.
Since 2002, Flybe has reviewed and modernised every aspect of its business. This has required a major investment across many areas, including:
* New business model;
* New brand;
* New fleet;
* New hangars and workshop facilities;
* Expanded network;
* Acquisition and successful integration of BA Connect;
* Strengthened management resources; and
* Plans for the new Training Academy.
Although these investments have required a very significant cash output in the past few years, they have resulted in the Flybe Aviation Group being in excellent shape to take advantage of the economic upturn when it comes and without the burden of any planned major capital investment.
The Group is therefore well positioned as the UK and European economies emerge from recession.