Flybe Group Regulatory News (FLYB)

Flybe Group plc

('Flybe' or 'the Group')

Delivery and Future Direction

Flybe, Europe's largest regional airline, today announces the setting of medium term operational profit targets and a turnaround plan to return the Group to profitability in 2013/14.

The Group has also today separately announced its Interim Management Statement for the period to 23 January 2013, incorporating its performance in the third quarter ended 31 December 2012, and confirming guidance for the full year.  

Summary

·; Significant actions being taken across the Group to restore profitability.

·; The setting of medium term operational profit targets, backed by a clear plan and measurable targets.

·; A restructuring of Flybe Group to create a leaner more focussed business, with the number of divisions reduced to two, Flybe UK and Flybe Outsourcing Solutions.

Flybe UK

·; Announcement of phase one (of a two phase) turnaround plan for the Flybe UK business (and those group activities which support the UK business) - a cost reduction and de-risking plan including proposed headcount reductions of:

o c20% in management headcount;

o c10% in overhead and production headcount.

·; It is envisaged this will result in a total of c300 roles being made redundant in the business, a c10% reduction in UK based staff (including Isle of Man and Channel Islands), and potentially transferring certain support activities to outsource partners (call centre already outsourced in December 2012).

·; Management do not currently envisage any significant change to the number of UK bases or its route network at this stage.

·; Reduction in size of Group and Operating Boards.

·; The cost reduction plan should deliver £35 million of savings by 2014/15, and is expected to result in a new slimline business model for the division. Costs of restructuring are estimated at between £10 million and £12 million, the majority of which will be provided in the 2012/13 accounts.

·; Phase two of the Flybe UK plan will focus on revenue enhancements and on-going business efficiencies.

Flybe Outsourcing Solutions

·; Flybe has developed into the largest independent scheduled contract flying provider in the European regional sector, operating twice the number of flights than its nearest competitors.

·; The new Flybe Outsourcing Solutions business will build upon Flybe's success in European contract flying and drive substantive growth by bringing together the previous Flybe Europe and Aviation Support divisions to provide an integrated outsourcing offer to customers.

There will be a conference call for analysts and investors at 8:30am this morning, and a conference call for media at 11:30am. To register your attendance, please contact Helen Tarbet on 020 7457 2025 or helen.tarbet@collegehill.com

An accompanying presentation will be made available on the investor relations section of the Group's website.

Enquiries:

Introduction

At the time of reporting its half yearly results on 8 November 2012, Flybe referred to the company's determination to focus on cost control, revenue growth and improved efficiency in order to counter the challenging economic conditions across the European regional aviation sector.

This business update, issued in tandem with Flybe's 2012/13 Q3 IMS, lays out a clear short-term roadmap to return the business to profitability, backed by measurable targets and benchmarks, and sets medium term profit targets for both divisions. It addresses the Group's immediate challenges and opportunities by means of:

·; firstly, a cost reduction and de-risking plan which should underpin the return to profitability of the UK scheduled flying business; and

·; secondly, a clear plan to respond to the increasing opportunities available in the European outsourced aviation market and build on Flybe's recent very strong growth in contract flying.

A transparent and measurable medium term plan and the structure to deliver it

In order to drive and deliver the business turnaround, the company will create a leaner and more focused organisation, comprising two divisions to replace the current three. All UK based scheduled services will be managed in Flybe UK, while all outsourced services provided to third party customers including contract flying, MRO services and training, will be brought together under one division, Flybe Outsourcing Solutions. Flybe UK will continue to be led by Andrew Strong and the newly formed Flybe Outsourcing Solutions headed by Mike Rutter.

Flybe has set a medium term annual profit target of £3.00 per seat in Flybe UK and €400k per aircraft in Flybe Outsourcing Solutions. The table below shows Flybe's expected progress towards that target in the first two years of the plan's implementation.

Flybe UK 

Flybe UK will focus on its core activities of flight operations, in-flight service delivery, financial control, commercial delivery and asset deployment. Following the recent successful outsourcing of its Call Centre, all remaining support activities, comprising base maintenance, line maintenance, ground handling and on-board catering will be reviewed and potentially transferred, along with associated staff, to outsource partners. This is expected to create a leaner division whose initial focus will be to implement a cost-based return to profitability. This turnaround will be underpinned by significant business efficiencies, including a proposed c20% reduction in management posts and c10% in overhead and production roles. It is envisaged that this will result in around 300 roles being made redundant, equating to approximately 10% of the current UK based workforce (including Isle of Man and Channel Islands). Consultation with affected staff and their trade unions will commence immediately.

In addition to proposed headcount reduction and outsourcing of support activities, the company is implementing cost reduction plans with suppliers such as airports and maintenance providers, rolling out fuel efficiency programmes and introducing further automation at the check in process. The Group does not envisage that any of its 13 UK operational bases will close at this time and that the UK route network will remain broadly intact. However, the Group intends to conduct a thorough review of its network in phase two of Flybe UK's turnaround plan. It will share the outcome of this review and the detail of further business efficiency projects plus revenue and product enhancement plans at the announcement of the Group's 2012/13 full year results in June 2013.

This phase one cost reduction plan is expected to reduce costs by £35m by 2014/15. The table below shows the detail of these planned changes:

Restructuring costs relating to phase one of the turnaround plan are estimated at between £10 million and £12 million, the majority of which will be provided in the 2012/13 accounts.

A number of de-risking actions will also be implemented by Flybe UK, including the sale of four owned aircraft (with two sales already contracted at prices above book value) and the planned removal of 2013/14 growth aircraft. Cumulative actions taken by management since Summer 2012 to de-risk revenue growth (c£10m of annual revenue per aircraft required to cover ownership and running costs) should therefore result in an operating fleet reduction in 2013/14 of seven aircraft versus Flybe's previous fleet plan, thereby removing c£70 million of commercial revenue risk per annum.

In addition to all the above measures, there will be a reduction in headcount on the Group and Operating Boards.

Flybe Outsourcing Solutions

The second structural change to the business involves building upon Flybe's leadership position in short haul aviation outsourcing in order to profit from the anticipated significant growth in European scheduled contract flying over the next few years. Over the last 18 months, driven by the success of the Group's European division, Flybe has developed into the largest independent scheduled contract flying provider in the European regional sector, operating c5,000 flights per month, more than twice that of our nearest competitors.

Flybe strongly believes that pressure on network carriers and small scale state owned airlines to outsource will increase and presents a major contract flying opportunity, along the lines of the US model. The contract flying model delivers predictable income streams per aircraft, with little commercial risk, producing annuity-style earnings. Some 82% of European scheduled contract flying is currently delivered by loss making in-house subsidiaries. Given its success with Finnair, Brussels Airlines and Olympic Air, Flybe believes it is best placed to exploit this rapidly growing sector.

In order to maximise Flybe's opportunity in this market, all of the outsourcing services it offers to customers will be brought together into one division, Flybe Outsourcing Solutions, combining contract flying, MRO and training services. Flybe's scheduled services in the Nordic and Baltic States will also be managed by this division and remain unaffected by today's announcement.

In summary, today's announcement:

·; provides clear short and medium term operational profit targets;

·; sets out a clear plan to return Flybe UK to profitability, based on cost reduction and a new slimline business model;

·; commits to phase two of the plan, including network review, delivery of revenue enhancements and identifying further business efficiencies; and

·; lays out a clear plan to build upon the leadership position Flybe Outsourcing Solutions has created in the European contract flying market to significantly grow the business and increase profitability.

Flybe commits to updating shareholders and stakeholders on the progress of the plan with full reporting on each project, cost and profit target on a six monthly basis at the time of its full year and interim results.

Commenting on the plan, Jim French, Flybe's Chairman and Chief Executive Officer, said:

"Today's announcement commits Flybe to very clear short and medium term profit targets. To achieve those targets we need firstly to return Flybe UK to profitability. That turnaround will be based upon the detailed cost reduction plan we have announced today and the new slimline business model that will underpin those cost reductions.

"Secondly we need to take advantage of the rapidly growing contract flying market in Europe and fully exploit the leadership position we have created in that market in the last 18 months. The creation of Flybe Outsourcing Solutions will allow us to maximise our position in a market which offers predictable profit and cash flows combined with low risk growth opportunities.

"I am extremely disappointed that many valued and hard-working colleagues may have to leave the organisation. It's a decision the Board and I have not taken lightly; it's one we have tried to avoid and it is the first time in almost 30 years of business that we have had to take such action. Whilst recognising the impact this will have on many of our staff, we will make every effort to minimise the impact and to offer support wherever possible in the transition.

Concluding, Mr French said:

"However, recognising that any significant change to the UK economy or a rebalancing of APD paid by regional and domestic passengers are likely to be some way off, today's announcement represents a clear and realistic plan to return Flybe to profitability, with a measurable timescale and benchmarks based upon significant restructuring and cost reduction. We are committed and focussed on delivery of the plan, continuing to provide strong customer service to more than eight million passengers each year, providing secure and long term employment for those staff remaining in the business and to improve shareholder value.''