Flybe Group Regulatory News (FLYB)

Flybe Full Year Report

Delivering Growth and Profitability

Flybe today announces its results for the year ended 31st March 2016. This year represented the second full financial year of Flybe's three year transformation and progress has been significant.

Flybe resolved its final key legacy issue through re-deployment of the remaining E195 jets, returned to revenue growth and achieved profitability after five years of losses1. Flybe is now in its final year of turnaround and focused on delivering profitable growth.

Financial highlights

· 8.7% increase in group revenue to £623.8m (£574.1m in 2014/15)

· 4.2% reduction in cost per seat to £52.67 (including fuel, at constant currency)

· £5.5m adjusted profit before tax (£25.4m loss in 2014/15)2

· £6.8m reported profit after tax (£35.7m loss in 2014/15)

· Strong balance sheet with net funds of £62.2m and total cash of £171.4m, after the purchase of three Q400 aircraft, previously on operating leases, for a cash consideration of £24.4m

This performance was delivered despite the adverse bookings impact experienced from the tragic events in Paris in November and in Brussels in March, the absorption of c£20m of cost relating to the E195 jets, and pressure on yields from industry-wide capacity growth acceleration and lower fuel costs.

Operational highlights

Airline performance improved

· 8.2% increase in passenger revenue and 5.9% increase in passenger numbers

· Total revenue per seat held in line with prior year at £53.23 (2014/15: £53.51) while

seat capacity grew by 9.7%, driven by improved commercial execution and disciplined pricing

- yields improved by 1.7% while the load factor was reduced by 2.6ppts to 72.6%

· Significant progress made in laying foundations for future profitable growth:

- two new bases established (Cardiff and Doncaster)

- 52 new routes launched

- 47 existing business routes benefitted from additional daily frequencies

- strong performance on like-for-like routes (with revenue per seat up 3%) supported investment in new routes and frequencies

- new codeshares signed with Emirates and Virgin Atlantic

· Cost discipline accompanied by significant operational improvement

- 2.2% reduction in cost per seat excluding fuel (at constant currency).

- improved punctuality with 85.4% of flights having arrived within 15 minutes of scheduled time vs. 84.5% in 2014/15 and recognised by OAG as among the top 20 airlines worldwide for punctuality in 2015

- aircraft utilisation up by 0.9ppts and aircraft reliability up by 0.2ppts

· Named Best Short Haul Airline at the 2016 Business Travel Awards (January 2016)

· Customer satisfaction up 3ppts to 58% (top 2 box score: "completely" and "very" satisfied) driven by improved end-to-end customer experience

White Label progress continued

· New SAS operation with four ATRs successfully launched in Stockholm.

· Brussels Airlines contract extended by two years as of October 2015 with two Q400 aircraft

A strong year in MRO (Flybe Aviation Services 'FAS')

· Revenue up by 5% to £42.8m and profit before tax increased by 9% to £2.5m

· Sustained momentum in A400M maintenance services for the UK's RAF at Brize Norton through Airbus Military

People engagement enhanced

· Employee engagement score up 8ppts to 63%

Legacy issue resolution

In the first year of the transformation, Flybe restructured the business, completed a successful capital raise and relaunched the Flybe brand. The Group resolved a number of outstanding fleet issues, including an exit without penalty from a binding USD892m obligation to buy new aircraft, and also divested the unprofitable joint venture in Finland.

Flybe's final key legacy issue was resolved in this second year of transformation by redeploying the remaining E195 aircraft on regional routes in arrangements with regional airports, which reduced the outstanding liability by 50% to £40m.

With the redeployment of the E195s, all of the Company's key legacy issues have been resolved with c£750m of liabilities eliminated.

Fleet Transactions

Flybe's stated strategy, as announced in our capital raise two years ago, is to rebalance its aircraft fleet away from operating leases towards outright ownership, which brings both cost savings and greater flexibility in aircraft deployment. In line with this, Flybe took ownership in February 2016 of three Q400 aircraft, previously on operating leases, from Rand Merchant Bank (RMB) for a cash consideration of £24.4m. Flybe took debt against these aircraft in May 2016.

Flybe has entered into a contract with Nordic Aviation Capital (NAC), to cancel obligations to lease nine used Bombardier Q400 turboprop aircraft, while taking ownership of 10 Q400 aircraft it was under contract to lease, for a cash consideration of c£86m, with delivery and consideration to take place over the next 12 months. The contract has a number of conditions that still remain to be satisfied at this time.

Flybe contracted in 2014 to take 24 used Q400 from Republic Airways in the US in return for Republic taking Flybe's firm order with Embraer of 20 new E175 jets. The new deal proposed with Nordic Aviation Capital (NAC) means that Flybe will now take only 15 used Q400s from Republic, with NAC taking the remaining nine.

Taking ownership of thirteen aircraft Flybe was obligated to lease (the three from RMB and the ten from NAC) will reduce costs by c£4m in 2016/17 and c£8m annually thereafter. It also increases Flybe's flexibility to control the size of its fleet in the future. In addition, the cancellation of nine Q400 deliveries reflects more cautious capacity growth assumptions over the next two years, lowering seat capacity growth from 17% to 15% in 2016/17 and from 10% to 6% in 2017/18. Excluding the five ATRs operated for SAS in Sweden, Flybe will own 34% of its UK fleet following these transactions vs. 20% previously.

To moderate capacity growth further, Flybe has recently negotiated a 12 month postponement of the delivery of 4 Embraer jet aircraft on firm order. These will now be delivered in Jan-April 2019.

Flybe's aircraft fleet profile by the end of 2016/2017 will now comprise 85 aircraft in total:

· Sixty Q400s, of which twenty owned

· Eleven E175s, of which seven owned

· Nine E195s, all leased

· Five ATRs, all leased

H1 2016/17 UK Trading as at 5th June 2016

Flybe is well placed as it enters 2016/17 with the strongest balance sheet in its history and a disciplined organisation with a track record of delivery over the past 3 years. Flybe has a structurally lower cost base, with further improvements to come from its change in aircraft ownership. The current industry environment remains challenging, however, for a number of reasons. These include the threat of terrorist activity, industrial unrest in France which accounts for c12% of Flybe's seat capacity, consumer uncertainty fuelled in part by macro-economic volatility and in part by anxiety ahead of the EU referendum, and the highest level of seat capacity growth in the European short-haul market for six years. In light of this, Flybe will remain disciplined in pricing, continue to focus on unit cost reduction, and maintain its capacity discipline through continuing fleet transactions.

H1 headlines as at 5th June 2016:

· 17% capacity increase vs. prior year

· 43% of capacity sold vs. 46% prior year

· 8% increase in seats sold

· 5% decrease in yields

· 12% decrease in passenger revenue per seat

Saad Hammad, Chief Executive, said:

"This year was the second full year of our three-year transformation plan and our performance has been very encouraging. We achieved profitability for the first time as a public company, following losses1 in every year since Flybe's stock market flotation in 2010.

We delivered top-line growth in a difficult revenue environment, expanding our network and carrying more passengers than last year. We drove our unit costs down further. We also resolved our last key legacy issue, with solutions delivered for our remaining E195 jets.

As a result of all the action we have taken, Flybe is now a much more resilient business and well positioned for profitable growth.

We are pleased with this performance and confident that we are well placed to navigate the current industry challenges with the strongest balance sheet in our history and a disciplined organisation which is already taking cost and capacity actions to support profit growth in the coming year.

Flybe's successful transformation is the product of our talented, dedicated and hard-working people and I am hugely appreciative of every single Flybe member of staff.

As we enter the final year of our turnaround, we have set down strong foundations for the future and made good progress in transforming Flybe into a sustainable, world-class regional European airline."

Note:

1 Losses here means reported loss before tax, adjusted for USD revaluation of aircraft loans

2 Reported PBT for 2014/15 was £(35.6)m. Adjusted PBT for 2014/15 was £(25.4)m excluding £(10.2)m USD revaluation of aircraft loans

Disciplined growth and cost focus made us profitable in 2015/16

Summary

2015/16 has been a year of returning to growth and achieving profitability for Flybe Group. Total revenue increased by 8.7% to £623.8m from £574.1m, as the UK business saw capacity increase by 9.7% to 11.3m seats and passenger numbers increased significantly to 8.2m compared to 7.7m in the previous year through an improved route network and customer offering. Flybe has now created a platform to expand further in Europe.

During 2015/16 Flybe continued to reduce unit cost, both including and excluding fuel. We focused heavily on airport and aircraft ownership cost reduction. The resolution of the last key legacy issue, the nine remaining E195 aircraft, was a major achievement in the year. We absorbed £20m of E195 related costs in 2015/16 related mainly to lease and maintenance costs, insurance, margin dilution and 'back in to service' costs. The future costs related to these aircraft remain as communicated before: £10m in 2016/17, £6m in 2017/18 and £4m in 2018/2019. Overall, we have mitigated half of the outstanding financial burden to the end of the aircraft leases.

Flybe invested in taking ownership of a further three of our leased Q400 aircraft in February 2016 for £24.4m as per the strategy of owning 50% of the fleet over time. During the year, we started to benefit from the lower fuel cost as our hedges started unwinding.

The MRO business, Flybe Aviation Services, generated a profit before tax of £2.5m (2014/15 £2.3m).

Flybe made an adjusted profit before tax of £5.5m (2014/15: loss of £(25.4)m). This is adjusted by non-cash revaluations on our USD loans that are intended to be natural hedges against the value of each aircraft, whose value is denominated in dollars. Including these revaluations, we made a profit before tax of £2.7m (2014/15: loss of £(35.6)m including discontinued operations).

Flybe continues to have a robust balance sheet with free cash of £163.6m at the end of March 2016 (2014/15: £177.9m), net of restricted cash of £7.8m (2014/15: £18.0m) and net funds of £62.2m (2014/15: £76.6m).

EBITDAR improved by 43.8% to £120.1m from 2014/15's £83.5m, as we achieved profitability.

Set out below is a reconciliation from operating profit/(loss) to the EBITDAR figures. EBITDAR metrics are non-GAAP measures1.

EBITDAR is a common airline profit measure which is used for making comparisons between airlines.

The 2015 EBITDAR has been restated to show the gross depreciation on maintenance assets, these were previously reported as net.

The table below sets out a reconciliation from profit/(loss) before tax to adjusted profit/(loss) before tax which adjusts the result for USD loan revaluations:

The adjusted profit/(loss) before tax figures given above are non-GAAP measures1.

1. Non-GAAP measures exclude amounts that are included in the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS. The reconciliations above describe how the non-GAAP measure is determined from the most directly comparable measure calculated and presented in accordance with IFRS. The non-GAAP measures are not regarded as a substitute for, or to be superior to, the equivalent measures calculated and presented in accordance with IFRS or those calculated using financial measures that are calculated in accordance with IFRS. The non-GAAP measures described may not be directly comparable with similarly-titled measures used by other companies.

Fleet

In 2014/15 Flybe entered into agreements with Embraer and Republic Airlines ("Republic") whereby the contractual commitment to acquire 20 (of a backlog of 24) Embraer E175 aircraft was removed and Flybe committed to sub-leasing 24 Republic Q400 aircraft between 2015 and 2019. In 2015/16 Flybe took delivery of five Republic aircraft with five further aircraft scheduled for delivery in 2015/16, being delayed into 2016/17.

Flybe has today announced that it plans to cancel obligations to lease nine used Bombardier Q400 turboprop aircraft while taking ownership for a cash consideration of c£86m of ten aircraft it was under contract to lease. This will leave 10 Q400 aircraft to be delivered in 2016/17.

In support of White Label operations in Sweden, Flybe leased one additional ATR72 aircraft (increasing the total to five), which was delivered in May 2016.

One Embraer E195 aircraft was redelivered to its lessor in 2015/16. No other redeliveries have taken place in the year. Flybe also took ownership of three of its previously leased Q400 aircraft in 2015/16.

The following table shows the current number of aircraft that are contracted for delivery to the Group.

The profile of Flybe's fleet at 31st March 2015 and 31st March 2016 is summarised below:

As at 31st March 2016 Flybe had 74 aircraft.

The Group will continue to match capacity to demand. With the announcement of the completion of "Project Blackbird" in 2015/16, Flybe has found solutions for its 14 surplus E195s, with:

(i) five returned to lessors (four in 2014/15);

(ii) two based at Cardiff, one based at Exeter and two based at Doncaster, under long-term agreements with the respective airports;

(iii) one based at Newquay flying under a Public Service Obligation agreement with Cornwall Council; and

(iv) two operating on high demand routes at Birmingham and Manchester airports plus one standby.

Business results

Flybe's results before tax, analysed by segment, are summarised below:

1 Flybe UK adjusted profit before tax is the segment profit of £8.8m (2014/15: £(24.1)m loss) after deducting Group costs of £5.8m (2014/15: £3.6m), and revaluation losses on USD aircraft loans of £(2.8)m (2014/15: losses of £(10.2)m).

2 FAS profit before tax is the segment profit of £2.5m (2014/15: profit £2.3m).

3 Adjusted profit/(loss) before tax and USD loan revaluations defined as profit/(loss) before tax and revaluation losses on USD aircraft loans of £(2.8)m (2014/15: loss of £(10.2)m).

Flybe UK

Revenue

Flybe UK discontinued under-performing routes and drove load factors by yield investment and improved marketing. The 9.7% increase in seat capacity was offset by a 2.6 percentage points decrease in load factor. This resulted in annual passenger numbers increasing to 8.2m. The increase in passenger numbers and the increase in passenger yield resulted in an 8.2% increase in passenger revenue to £571.7m.

Due to the fact that the additional capacity was introduced recently, revenue per seat fell by 1.4% (to £50.64).

Other revenue in Flybe UK totalled £15.4m, a 46.7% increase on the £10.5m generated in 2014/15 driven mainly by an additional £5.7m contract receivables in association with our arrangement in Cardiff.

Contract flying was up £2.3m to £13.9m reflecting the start of SAS operations in Sweden.

Operating costs (on a Flybe UK basis)

Operating costs, increased by 5.2% from £565.7m to £594.7m. The increase is significantly less than the increase in capacity growth of 9.7% as we have focused on cost control and cost savings.

Despite an increase in the number of aircraft from 66 to 74, the total aircraft rental charges reduced from £80.6m to £79.3m as we purchased three aircraft from lease and reduced the number of E195 aircraft to nine.

A better mix between digital and traditional advertising and improved marketing execution enabled us to reduce the marketing and distribution cost by £2.2m, while continuing to support our growth.

With growth, variable cost will increase as well. We have seen this especially in staff costs, airport and en-route charges and ground operations.

Focus on technical reliability and applying best Bombardier practices have resulted in a reduction of the maintenance cost by £1m from £22.3m to £21.3m.

As outlined below, Flybe benefited from fuel hedges unwinding through the year. The reduction was partly offset by capacity increases.

Cost per seat including fuel reduced by 4.2% from £54.97 to £52.67

Cost per seat excluding fuel reduced by 2.2% from £44.72 to £43.67

Fuel

The spot price of fuel has seen a decline in 2015/16 from $822/MT to $481/MT (42% reduction). Flybe has a hedging policy to protect itself from short-term fluctuations in spot prices, and so, in line with most other airlines, our net fuel price decreased by only 13.7%. Our net fuel costs decreased by 3.7% (net of FX adjustments) to £101.6m (£105.5m in 2014/15) with a 9.2% increase in volume of flights offsetting some of the fuel price saving. Aviation fuel prices remain liable to large and unpredictable movements due to a variety of external factors, including changes in supply and demand for oil and oil-related products.

During the year to 31st March 2016, Flybe UK used some 173,254 tonnes of jet fuel, an increase on 2014/15 of 8% from 160,702 tonnes. The average market price during the year was USD470per tonne (2014/15: USD807), with the Group paying a blended rate (net of hedges) of USD826 per tonne (2014/15: USD949). Including 'into plane' costs, Flybe's fuel costs in 2015/16 of £101.6m (2014/15: £105.5m) represent an all-in cost of USD911 per tonne for 2015/16 (2014/15: USD1,041). Using constant currency, our fuel costs per seat decreased by 12.2% from £10.24 to £9.00.

Flybe UK operates a policy of managing fuel price volatility by entering into derivative contracts representing a portion (between 60% and 90%) of its aviation fuel requirements a minimum of 12 months forward from the current date. The intention of this programme is to provide a significant element of certainty over its fuel costs for any forthcoming IATA season. As at March 2016, 90% of the year's fuel requirement to March 2017 was hedged at an average price of USD569 per tonne. Taking into account our hedged position, each USD50 increase/decrease in the price of jet fuel reduces/improves Group profits in 2016/17 by £0.6m.

Net finance costs

Net finance costs improved by £4.9m mainly due to a £7.4m non-cash, non-underlying movement on the retranslation of US dollar denominated debt used to fund the acquisition of aircraft, from a loss of £10.2m in 2014/15 to a loss of £2.8m in 2015/16. The movement in this US dollar liability cannot be naturally offset against the value of the aircraft as the latter is recorded in pounds Sterling in order to comply with the requirements of International Financial Reporting Standards. This income statement charge of £2.8m has therefore been removed in arriving at adjusted profit before tax. Other finance costs increased by £2.5m including the £1.5m recycling of foreign exchange losses on Flybe Finland.

Foreign exchange

The Group foreign currency hedging policy has an objective to reduce the volatility of costs. Flybe manages its foreign exchange positions based on its net foreign currency exposure, being foreign currency expenditure, less associated revenue. Flybe UK currently has a relatively small net exposure to the euro, but has significant US dollar costs in relation to fuel, maintenance, aircraft operating leases and loan repayments. The Group generates no significant US dollar revenue and actively manages its US dollar position through a foreign exchange forward purchase programme similar to that outlined for fuel. As at 31st March 2016, 90% of our anticipated US dollar requirements for the year to 31st March 2017 were hedged at an average exchange rate of USD1.5079. All existing derivative financial instruments are forward swap arrangements.

Taking into account our hedged position, each USD0.05 reduction/improvement in the US dollar exchange rate has the effect of reducing/increasing Flybe UK's profits in 2016/17 by approximately £0.7m.

Carbon emissions

The Group is required to purchase carbon allowances for all flights departing from and arriving into the EU in order to offset its carbon footprint in each calendar year. Flybe manages its exposure by purchasing carbon emissions allowances through a forward purchase programme to top up the free allowances awarded to it under the scheme. The table below sets out Flybe UK's emissions and carbon allowances for each of the periods under review:

FAS

In November 2014 we created FAS, a stand-alone maintenance, repair and overhaul (MRO) business which includes the MRO business that was part of Flybe Limited. The results for FAS in 2015/16 (combined MRO and FAS for 2014/15) were as follows:

Revenue increased by 4.9% in 2015/16 to £42.8m (2014/15: £40.8m), of which £22.8m was for third party customers (2014/15: £23.2m). This increase was driven by the 2.6% increase in manhours from 534,000 in 2014/15 to 548,000 in 2015/16. The increase in revenue generating capacity led to a 4.7% increase in operating costs from £38.5m to £40.3m. FAS, despite being loss making in H1 as a result of delays of third party work from H1 to H2 and a focus on E195 solution preparation, increased its profitability by 8.7% to £2.5m for the full year.

Group costs

Group costs of £5.8m (2014/15: £3.6m) include Group Board salary costs and Group related legal and professional fees. The increase year-on-year is primarily due to an accrual for a staff bonus of £2.4m (2014/15: £nil). The reduction in Group Board costs in the year has been offset by higher advisor, legal and professional fees.

Profit/(loss) before and after tax

The Group's reported profit before tax was £2.7m (2014/15: £(35.6)m loss including discontinued operations).

The Group's adjusted profit before tax and USD aircraft loans revaluation was £5.5m (2014/15: £(25.4)m loss).

Profit after tax was £6.8m (2014/15 £(35.7)m loss. The current year tax credit was £(4.1)m (2014/15: charge £0.1m).

EPS and dividends

Basic earnings per share for the year were 3.1p, compared to loss per share of (16.5)p in 2014/15.

No dividends were paid or proposed in either 2015/16 or 2014/15.

Cash flow

The Group generated £64.1m from operating activities (2014/15 £30.1m). Largely due to the strengthened balance sheet, restricted cash was reduced by £10.2m. £10.0m of this was due to the reduction in the restricted cash for our card acquiring merchants and £0.2m due to changes in exchange rates on our outstanding restricted cash balances.

Financing activities of £14.9m included £12.8m of repayment of borrowings and £2.1m of interest paid and £0.8m of interest received, (2014/15 £6.5m including net borrowings of £7.0m and £0.5m of net interest payments). As a result, total cash (excluding debt) available was £171.4m at the year end (2014/15: £195.9m).

Balance sheet

The £192.3m of net book value of aircraft represents owned aircraft, engines and aircraft modifications. The increase of £25.9m is mainly due to the purchase of three aircraft at £24.4m.

Net funds, representing cash offset by debt, at 31st March 2016 of £62.2m (2015: £76.7m) as outflows related to the purchase of three aircraft for £24.4m in February 2016. Net funds at 31st March 2016 includes restricted cash of £7.8m (£18.0m at 31st March 2015) which represents, predominantly, cash deposits held in favour of aircraft owners to secure operating lease arrangements.

The mark-to-market valuation of derivative financial instruments increased from a liability of £7.2m at 31st March 2015 to a liability of £9.9m at 31st March 2016, as foreign exchange rates and fuel prices moved against Flybe's portfolio of contracts. Net negative other working capital increased from £(115.6)m to £(123.5)m, largely due to the increase in trade and other payables.

The balance sheet also includes the impact of the defined benefit pension scheme deficit of £15.3m which is included in other non-current assets and liabilities above. This scheme, which is closed to future benefit accrual, had been in deficit by £21.0m at March 2015. The year-on-year decrease of £5.7m in the deficit is primarily due to the change in the discount rates. A recovery plan of £0.5m contribution per annum from Flybe was agreed as part of the last actuarial review in 2013. A new valuation commenced in March 2016.

Consolidated Income statement

Prior year restatement

During the year the Group restated its 2015 income statement to reclassify costs between staff costs and other operating expenses, and depreciation on maintenance assets between maintenance and depreciation. This had no impact on the Loss for the year.

Consolidated statement of comprehensive income

Consolidated statement of changes in equity

Year ended 31st March 2016

Consolidated balance sheet

Year ended 31st March 2016

The financial statements of Flybe Group plc, registered number 01373432, were approved by the Board of Directors and authorised for issue on 8th June 2016.

Consolidated cash flow statement

General information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31st March 2016 or 2015, but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under S498(2) or (3) Companies Act 2006.