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Flying the right planes for your particular route network is one of the basic rules of running an airline.
It’s not always easy. Buying, selling and leasing aircraft is an expensive business. A change in circumstance can therefore prove costly.
UK regional airline Flybe has been trying to get rid of its Embraer E195 aircraft for almost five years. The jets are too big and costly. Flybe prefers the smaller Bombardier Q400 turboprop, which will “remain as the backbone” of its fleet “for the foreseeable future”.
The problem for Flybe is the larger aircraft are still hurting the company’s finances. It has restated its 2017 results, adding a write-down of some $37.7 million (£28.6 million) to reflect lease and impairment provisions.
The situation has gotten better this year with the E195s only adding an extra cost of $1.7 million (£1.3 million) to the bottom line and the airline is clearly trying to draw a line under the situation.
“Under the previous management there was a much more ambitious approach to growth. When they put those orders in some years back for a large number of Q400s and a large number of Embraers… the current management inherited that. And I guess with lock ins and conditions of some of the leases they probably had to wait until they’ve expired,” aviation consultant John Strickland said.
A Tough Position
Flybe can trace its history back to 1979. It mainly connects regional cities in the UK with each other and with cities elsewhere in Europe.
“It is Europe’s biggest independent regional airline, the UK’s biggest airline in the domestic regional market (i.e. excluding London) and has no airline competition in most of its network,” said Jonathan Wober, chief financial analyst at CAPA – Centre for Aviation.
“However, it struggles to make a sustainable level of profit. Is this a fundamental, structural problem, or a matter of management and execution? It may be a bit of both.”
Flybe has scaled back its more ambitious expansion plans and the airline expects to have 70 aircraft in in its fleet by 2020, down from 85 at its peak in May 2017. Over the last couple of years it has had to find temporary solutions for its excess E195 jets.
“Regional airlines inherently have a high unit cost level and typically work best when focused on a narrow niche. Flybe overexpanded in the past and over committed to aircraft that were not best suited to its network. The latest management team should benefit from the fleet reduction that it now possible, but will likely need to tighten its focus and improve its cost efficiency,” Wober said.
While Flybe’s annual load factor—which measures aircraft utilization—jumped 6 percentage points to 75.6 percent, it is still well down on low-cost carriers such as Ryanair and EasyJet.
Rising fuel costs also present a challenge. The airline is well hedged for 2018/19 but like others, its faces paying more than it is used to in the medium term.
Flybe listed on the London stock exchange in December, 2010, at an initial price of $3.89 (£2.95), valuing the company at $284 million (£215 million). Since then its value has plummeted. Its market capitalization is now $107.9 million (£81.9 million).
Flybe’s recently released annual results are indicative of a company still very much in the turnaround phase.
Although its pre-tax losses fell 81 percent to $12.4 million (£9.4 million), thanks to the aforementioned restatement of the 2016-17 figures, a loss is still a loss.
“Flybe has made significant progress during my first full year as CEO,” Christine Ourmières-Widener, who took the top job in December 2016, said. “With our fleet size under control, we are already delivering improvements to passenger yield, load factors and revenue.”
Ourmières-Widener’s words are certainly encouraging but Flybe’s outlook for its current financial year strikes a cautious note, warning about a challenging European aviation market “with many airlines impacted by excess seat capacity in the short-haul market, a weaker pound, higher fuel prices and both business and consumer uncertainty”.
Given those issues, might Flybe be better served as part of a bigger group? British infrastructure conglomerate Stobart Group said it was contemplating a bid in February this year but has since shelved the plans.
“There could be consolidation but at the moment it’s not completely clear whether that will happen or not especially as [Flybe’s] fleet tends to be quite different to many other regional airlines who perhaps maybe have smaller aircraft,” Strickland said.
Despite being a regional carrier, Flybe is actually carries more passengers than full-service carriers, such as Virgin Atlantic and Lot Polish Airlines.
Unlike, say, Norwegian, which is attracting attention from IAG and Lufthansa, Flybe doesn’t have the scale, aircraft orders or slot allocations at key airports.
Ourmières-Widener is open to consolidation.
“I think that as an airline and also as a board, we have to look at all opportunities to study what could bring value to our shareholders, but also what is consistent with our strategy and with our company strategy, but for employees’ future,” she said on a conference call with analysts after the release of the company’s full year results earlier this week.
“So we are looking at all opportunities, being a consolidation in regional in the UK or in Europe. So I think that is part of what we have what to do. But I think our first priority and our first priority is to make sure we focus on our business plan and deliver against market expectation.”
If a buyer doesn’t come forward, Flybe will have to forge ahead on its own. The management team is confident the new strategy is the right one but that doesn’t mean it will be easy.
“Time is against Flybe, if they were perhaps further forward in their turnaround then the encouraging cost savings and yield improvements would be positive but faced with a challenging market and increasing fuel cost there is still a long way to go and 2018/19 will be very tough,” said John Grant, an aviation consultant.
“Regional aviation is expensive, in it just doesn’t have scale and that’s where the challenge is however smart the management.”