Flybe Group Regulatory News (FLYB)

Flybe Group plc

Final Results for the Year Ended 31 March 2014

Return to profitability and strong operational performance

Flybe announces a return to profitability, following a successful turnaround programme, and its confidence for the future with a focused strategy and a considerably strengthened balance sheet.

FINANCIAL HIGHLIGHTS

· 11.1% growth in Revenue under management to £868.4m (2012/13: £781.5m) driven by significant growth in white label revenue in Finland

· £620.5m of Group revenue, up by 1.0% (2012/13: £614.3m)

· Record passenger numbers and load factors in UK business

· 3.3% decrease in Group operating costs (excluding restructuring) at £619.5m (2012/13: £640.9m)

· Adjusted profit before tax, net restructuring and surplus capacity costs* of £1.7m (2012/13: loss of £23.6m), with profit improvement across all areas of the business

· £8.1m of profit before tax (2012/13: loss before tax £41.1m)

· Operating cash inflow before restructuring of £7.3m (2012/13: cash outflow of £1.6m)

· Total cash of £218.4m at 31 March 2014 (2013: £54.7m), and net assets of £194.1m (2013: £48.1m)

· £150.1m net equity fund raise in March 2014 reflecting investor confidence in Flybe's future

OPERATIONAL HIGHLIGHTS

Flybe UK:

· 6.9% increase in passenger numbers in UK scheduled airline at 7.7 million (2012/13: 7.2 million) despite 1.4% reduction in seat capacity

· Load factor of 69.5% (2012/13: 64.1%)

· 1.8% improvement in passenger revenue per seat at £49.70 (2012/13: £48.84)

· 55.1% sector share of UK regional market (2012/13: 52.4%)

· Operating from 7 UK bases and serving 64 airports in total throughout the UK and Europe**

· Major expansion announced at London City

Flybe Finland:

· £247.9m of revenue in first full year of expanded Finnair joint venture operations (2012/13: £167.2m)

· Service standards and punctuality on and above target

MRO:

· Profit before tax and restructuring £2.2m (2012/13: £0.7m)

· Operating costs down £6.6m to £33.2m (2012/13: £39.8m)

* Adjusted loss before tax, revaluation gain/(loss) on USD aircraft loans, net restructuring and surplus capacity costs. Surplus capacity costs represent the costs incurred in the Winter 2012/13 flying season relating to capacity that is considered by management to be surplus as a result of the restructuring decisions taken in 2012/13

** Includes our franchise partner, Loganair

Commenting, Saad Hammad, Flybe's Chief Executive Officer, stated:

"2013/14 marks the rebirth of Flybe!

"We implemented a turnaround plan to stabilise the business and then successfully raised over £150m net to strengthen our balance sheet and drive sustainable profitable growth. The return to profitability is a great step forwards. This enables us to start implementing our twin-engine strategy of growing our UK branded business and our white label operations across Europe.

"We have made a good start to FY15, in line with our expectations.

"We are moving to build on our early success. We have a plan and we have the firepower. The Group is now well-placed to become Europe's best local airline."

There will be a presentation to analysts today at Instinctif Partners, 65 Gresham Street, EC2V 7NQ. To register your attendance please contact james.gray@instinctif.com

There will be a live webcast of the presentation and Q&A facility. Pre-event registration and dial in details below:

Pre-event Registration Page: http://webcast.instinctif.tv/p/795-1188-14479/en 

Participant Dial-In Number: 0808 109 0700

Participant Dial-in International: +44 (0) 20 3003 2666

Conference Password: Flybe

Interviews with the Group's senior management team are available at www.flybe.com

11 June 2014

Enquiries:

Chairman's statement

Introduction

Flybe has undergone great change in the last 12 months, not only in its management, but also in developing its strategy and in cementing its balance sheet strength. This has secured strong foundations for the successful turnaround of this business.

People have a persistent and growing desire to travel, be it for business, visiting friends and family or recreation. Ground transport infrastructure is becoming saturated in the UK, with inadequate investment failing to provide sufficient capacity to meet demand. The London-centric nature of the UK transport debate dictates that transport infrastructure investment is overwhelmingly spent there, and on links to and from London; HS1, HS2, and Crossrail for example. The 'aviation' debate in the UK barely rises above another runway for London. Heathrow declares itself the UK's only 'hub' airport, yet it has air links to only seven UK airports.

Flybe is different. Flybe serves 35 UK airports, taking over 7 million passengers around the UK and from the UK to other European destinations. We get on with the business of carrying customers from A to B as quickly, efficiently and respectfully as possible. All those awkward journeys that otherwise would entail long car, rail or ferry trips, become an easy hour or so flight; Exeter to Glasgow, Edinburgh to Birmingham, Guernsey to Southampton or Belfast City to Manchester, for example.

Flybe operates from regional airports, where typically the runway seems shorter than the terminal walkway at Gatwick, and where the check-in time is even quicker than long-term parking at Heathrow. These airports are usually closer to where people live and work. They are more convenient and reduce car journeys to the airport as well as total journey times.

Regional aviation is a crucial part of the UK's transport infrastructure. It is not a luxury. It is an essential part of a modern thriving economy. So it remains a source of amazement that the Government persists with the arbitrary and discriminatory application of Air Passenger Duty ('APD'), where a typical domestic flight can be charged five times the tax per mile of a long-haul one. This is exacerbated when a return international flight suffers this charge once, but a domestic one is taxed twice. Yet in the last Budget, the Government actually reduced long-haul APD rates by £1 billion, while informing Flybe that it could not afford to reduce domestic rates.

A momentous year for Flybe

Under Jim French, the previous Chairman and Chief Executive Officer, the Board concluded that Flybe needed to reduce its cost base significantly and a programme of cost reductions was initiated. In August 2013, Jim stood down as Chief Executive Officer and Saad Hammad joined in that role. Saad, who came with a strong background in logistics and with easyJet, made an immediate impact. He identified that even more needed to be done to reduce costs to compete in this market and that the business needed to upgrade its processes and capabilities as well as to develop its strategy further.

Jim stood down as Chairman at the beginning of November 2013, and I joined the business as Non-Executive Chairman. Later that month, Saad presented the Interim Results and announced his twin-engined strategy of regional UK scheduled and white label flying, underpinned by further cost reductions, working with all suppliers, and a highly disciplined approach to commercial and route profitability.

In March this year, shareholders contributed £155.7m gross of new equity to provide funds to enable greater resilience to the business, strengthening its balance sheet, and also to fund growth in line with the new strategy, as outlined by Saad. This has now been focused into developing new routes and bases, further efficiency gains and IT investment, fleet optimisation, greater ownership of aircraft and expansion of white label flying. A franchising agreement with Stobart Air was announced covering six routes from London Southend.

The following month, the strategy continued to be rolled out, with five new routes announced from London City airport, as well as a complete re-launch of the Flybe brand; a new purple identity, website, aircraft livery, staff uniforms and customer service initiatives. Many of these are being rolled out over the summer and the positive effect will accumulate over the coming months.

The cost reduction programmes have resulted, sadly, in over 1,000 job losses. Fortunately, through impressive teamwork with both staff and unions, the number of compulsory redundancies has been small. We are, however, sad to have had to lose good and loyal people from our workforce. Flybe has no option but to remain competitive on cost. Total headcount has now reduced by 30% over the financial year. The turnaround has put a great deal of strain on many employees who have put extraordinary levels of work and commitment into restoring Flybe to financial and commercial health. On behalf of the Board, I would like to pay tribute to each and every employee who has contributed to this; be they cabin crew, maintenance staff, manager, pilot or administrator.

As already announced, there will be some further job losses after this summer as seasonal routes are discontinued and some further aircraft are grounded, as planned. However, we believe that we are now on the verge of emerging from this period of retrenchment, and looking forward to future considered and careful profitable growth. The early precursors to this have already been announced with additional routes from Birmingham, London Southend and London City.

Board

Saad Hammad took over as Chief Executive Officer in August 2013. We believe that Flybe has in Saad a talented and inspirational leader. I became Chairman in November last year. We have already announced that Philip de Klerk will join the Board later this year as Chief Financial Officer. Philip has a strong financial pedigree from both Unilever and SAB Miller and we very much look forward to him joining us. Timo Anderson, former Director General of the UK Military Aviation Authority, joined the Board as a Non-Executive Director in May 2014, and brings great experience of aviation, leadership and air safety.

Jim French, the former Chairman and Chief Executive Officer, retired from the Board in November 2013 after more than two decades working for Flybe/Jersey European, building it into a major regional airline. Mark Chown, Mike Rutter and Andrew Strong, resigned from the Board as Executive Directors in August 2013.

Andrew Knuckey, Chief Financial Officer, will retire from the Board in August this year. Andrew has played a key role in the development of Flybe over the last nine years, in particular supporting the turnaround under Saad and this year's successful capital raise.

Anita Lovell stood down as a Non-Executive Director in May last year. Alan Smith has now served nearly nine years on the Board and will retire as a Non-Executive Director in August this year. Chris Simpson stood down as Company Secretary in March this year, having served in this role since before Flybe's 2010 IPO and before that as Finance Director.

For the time being, Andrew Knuckey has taken on the role of Company Secretary, until Annelie Carver joins as General Counsel and Company Secretary in June this year. She is currently a partner in the Corporate and Commercial team at Michelmores Solicitors.

I would like to thank all the departing Directors for their hard work and commitment over many years and wish the new Directors good health for the challenges to come!

Corporate governance

In view of the new standards of best practice and regulations, we have made an additional statement on this important area in the financial statements.

Results

This year has seen a significant improvement in financial performance as a result of the efforts taken to restructure the business. Adjusted profit before tax, restructuring and surplus capacity costs for 2013/14 was £1.7m, which marks a significant improvement on the prior year's £23.6m loss, and reported profit before tax was £8.1m (2012/13: loss before tax of £41.1m). The Group generated operating cash flow before restructuring of £7.3m, and its net assets at 31 March 2014 were £194.1m. These results are in line with market expectations.

General outlook

The general economic outlook in our most important market, the UK, has improved - with growth reported in the year to December 2013 of 1.9% - and most commentators expecting 2014 to see growth in the range of 2.4% to 3.5%. While this provides an encouraging back-drop, it is important we continue to ensure Flybe does not depend on positive macro-economic conditions for its future success.

Our decision last year to remove unprofitable routes will continue to impact revenue and profit into 2014/15. However our disciplined focus on revenue, cost and organisational discipline, our strengthened balance sheet and growth strategy give the Board confidence that we will deliver further improvement in the current year and drive sustainable profitable growth over the coming years.

Simon Laffin

Chairman

Chief Executive Officer's statement

Key financial headlines

1 Adjusted EBITDAR before restructuring defined as operating profit/(loss) after adding back depreciation, amortisation and aircraft rental charges and net restructuring costs of £0.2m (2012/13: £8.0m).

2 Adjusted profit/(loss) before tax, restructuring and surplus capacity costs defined as profit/(loss) before tax, net restructuring and surplus capacity costs of £1.9m (2012/13: £12.8m) and revaluation gains/(losses) on USD aircraft loans of £8.3m (2012/13: £(4.7m)). Surplus capacity costs represent the costs incurred in the year relating to capacity that is considered by management to be surplus as a result of restructuring decisions. See the Financial Review for further detail.

3 Net funds/(debt) includes restricted cash of £40.5m at 31 March 2014 (2013: £31.4m).

Overview

A reinvigorated Flybe

This year has seen a significant turnaround in financial performance as a result of the efforts taken to restructure the business. The £150.1m net raised in March 2014's Firm Placing and Placing and Open Offer provides Flybe with strength and a firm foundation for profitable growth.

Flybe's structure and activities

As reported in our H1 2013/14 results announcement on 11 November 2013, the Group's divisions have been removed and the business has been refocused into 'One Flybe'. We report three business segments - Flybe UK, Flybe Finland and MRO.

Results

Flybe delivered a result for the year in line with market expectations. Revenue under management, including the full year impact of increased white label flying in Flybe Finland, increased 11.1% to £868.4m (2012/13: £781.5m). Group revenue increased 1.0% to £620.5m (2012/13: £614.3m). Adjusted EBITDAR before restructuring costs increased by 55.7% to £98.9m (2012/13: £63.5m), with an adjusted profit before tax, gains on revaluation of USD aircraft loans, net restructuring costs and surplus capacity costs of £1.7m (2012/13: loss of £23.6m) and a reported profit before tax of £8.1m (2012/13: loss of £41.1m).

This significant improvement in Flybe's trading performance resulted mainly from the Turnaround Plans announced in January and May 2013, and the further Immediate Actions announced in November 2013. Combined, these initiatives delivered cost savings of £47m in 2013/14, and this is expected to increase to £71m in 2014/15.

The Group's balance sheet at 31 March 2014 had total cash, including restricted funds, of £218.4m at 31 March 2014 (2013: £54.7m), and net funds of £116.9m (2013: net debt of £66.3m).

The Business Review and Financial Review sections set out the full detail behind the 2013/14 results.

People

Our Turnaround Plan has involved considerable efforts to reduce the cost base of the business. Unfortunately, this process has resulted in the departure of over 1,100 people from the business through redundancy, resignation or transfer to other organisations under TUPE arrangements. While only nine of these redundancies were compulsory, I do not underestimate the effect of these difficult decisions on those staff leaving and the friends and colleagues whom they left behind.

On behalf of the entire Board, I would like to thank all of our employees both past and present for their hard work, support and resilience through what has proved to be a very challenging period for the business and its people.

Summary

2013/14 marks the rebirth of Flybe. Our turnaround plan has enabled the business to return to profitability. With our strengthened balance sheet following the £150.1m net fund raise, we can leverage our position as Europe's largest regional airline and start to implement our twin-engine strategy of growing our UK branded business and our white label operations across Europe.

The Group is now well placed to become Europe's best local airline.

Saad Hammad

Chief Executive Officer

Business Review

FLYBE UK

2013/14 was a year which saw Flybe UK return to profit as a result of decisive management actions across the business, and relentless focus on five Cs - Cash, Cost, Configuration, Commercialisation and Confidence:

Cash

During the year, in addition to cost reduction measures, we implemented a number of cash generation measures, including the sale of our London Gatwick slots to easyJet for £20.0m and the deferral of 16 E175 aircraft from 2014/15 to 2017 to 2019.

Costs

Phases 1 and 2 of our Turnaround Plan were announced in January and May 2013, and accelerated in November 2013 with a series of Immediate Actions designed to further improve financial performance and resilience. In total, more than £71m per annum of costs are expected to be taken out of the business by 2014/15 with £47m having been achieved in 2013/14. Full details of the turnaround can be found below.

Configuration

The Immediate Actions announced in November 2014 has led to significant changes in the way we operate. By the end of March 2014, we had reduced the number of UK aircraft bases from 13 to seven - Belfast, Birmingham, Edinburgh, Exeter, Glasgow, Manchester and Southampton - in order to reduce costs and deliver improved operational efficiencies. This has entailed a consolidation of crew and aircraft at the bigger bases in order to achieve greater utilisation of both the aircraft and the crew.

Flybe also continued to take a proactive approach to capacity management by removing, or reducing frequency on, a number of loss-making routes. As a result, seats flown in 2013/14 fell by 1.4% to 11.1m. However, commercial actions taken to stimulate demand led to a 5.4ppt improvement in load factor to 69.5%, with passenger numbers increasing by 6.9% to 7.7m.

Flybe continues to operate its fleet in a way that optimises the use of the aircraft in service, responding to market demands while at the same time managing its existing fleet. As part of the strategic review announced in November 2013, it was identified that the fleet of 14 E195 118‑seat regional jets were surplus to Flybe UK's current capacity and route network requirements. Therefore, 10 of these aircraft were grounded at the end of March 2014. The four remaining aircraft are currently being deployed, three on scheduled flying and one on a short-term white label operation for Aurigny. Of the total fleet of 14 aircraft, five will be returned to lessors during 2014/15, three are expected to continue flying through Winter 2014/15 and management is in discussions with a number of airlines on possible white label or sub-leasing opportunities for the remaining six.

Commercialisation

In addition to significant cost reductions, actions taken by the new commercial team to stimulate passenger numbers and improve unit revenues have helped the business return to profitability. In addition to a number of marketing enhancements, these actions included offering more attractive lead-in fares which diluted yields by 6.1% but led to a more than compensating increase in load factors and passenger volumes despite the 1.4% reduction in seat capacity. Load factor improved by 5.4ppt to 69.5% and passenger numbers increased by 6.9% to 7.7m, with a resulting 1.8% improvement in passenger revenues per seat to £49.70.

The new commercial team has also adopted a rigorous route assessment model for the evaluation of new routes. Since November 2013, more than 100 routes have been assessed using the model and, in February 2014, nine new routes were announced, which are to date performing ahead of expectations.

One of the uses of the proceeds from the equity raise has been to refresh Flybe's brand, which had largely remained unchanged since it was created in 2002:

® Our aircraft are being repainted in purple with a light blue tail plane interleaved with yellow and red stripes. The interiors are also being updated and the service offering improved with purple mood lighting on boarding, music playing and a chocolate treat to our passengers on deplaning. The new uniforms being introduced this summer pick up on this theme and provide a new and improved look for our staff.

® To emphasise that one of Flybe's key advantages is its punctuality, we have introduced a '60:60 Guarantee'. If a passenger experiences a delay of more than 60 minutes for reasons within Flybe's control, they have 60 days to claim a £60 voucher towards their next flight.

® In addition, we have made the website simpler and easier to use and renamed our ticket types.

To date, the feedback to all these changes has been very positive and we look forward to seeing their continued impact on the business.

During the year, we have also entered into an agreement with Stobart Air to join Loganair as a franchise partner. Operations will be based at London Southend utilising two aircraft, to commence in June 2014.

Ensuring passengers arrive at their destination safely and on time is core for any airline and 2013/14 was another positive year for Flybe UK.

Of those airlines that operated more than 30,000 flights during 2013 from the ten Civil Aviation Authority ('CAA') reporting airports, the statistics confirmed that Flybe maintained its strong performance, delivering an 84.7% (2012: 83.2%) on-time ranking for its reported sample of 103,400 flights. The airline's performance across our entire network was even better, with an 87.1% (2012: 85.2%) on-time punctuality level, and was among the best delivered in Flybe's 12 years of operations.

Confidence

Active engagement with our employees and their Unions, as well as with business partners, suppliers, regulators and investors has yielded a renewed confidence in Flybe. The successful £150.1m net equity fund raising completed in March 2014 is testament to the strong support amongst investors for Flybe's new management and strategy.

Sector share

Flybe continues to serve multiple customer segments. During 2013/14, around 40% of Flybe's passengers were travelling on business, about a third visiting friends and relatives ('VFR'), and the balance travelling for holiday or leisure. Flybe will continue to adjust its network to match customer needs during 2014/15 and beyond.

Flybe's brand share of the UK domestic airline sector in 2013/14 was 28.3% (2012/13: 28.1%). Excluding London, Flybe's regional share was 55.1%, up from 52.4% in the previous year.

Flybe Training Academy

Flybe continues to develop and promote talent within the aviation industry through the training programmes it provides at the Exeter Training Academy facilities. The state-of-the-art building has 26 classrooms, a simulator hall with two full flight Level D simulators, cabin crew simulator hulls for safety and refresher training, and an engineering apprentice workshop.

Qualifications offered include a flight deck Multi-Crew Pilot's Licence (under the first CAA-approved scheme for a UK airline), cabin crew and customer service NVQs, Foundation and Bachelor degrees, and engineering aircraft type approvals.

Partnership with Brussels Airlines

Contract flying is not confined to Finland, with two aircraft currently operating in Brussels Airlines' colours. Together with two aircraft that returned to Flybe at the end of March 2014, this meant that four Q400 aircraft operated throughout 2013/14 under this white label arrangement.

FLYBE FINLAND

The contract with our joint venture partner, Finnair, to fly Embraer E-Series regional jets and ATR turbo-props on its behalf makes Flybe the largest independent provider of white label services in Europe with, including the Brussels Airlines activity, 4.2 million seats flown in 2013/14 (2012/13: 2.7 million).

Revenues increased by 48.3% to £247.9m (2012/13: £167.2m) and the joint venture generated a significantly reduced loss before tax of £1.0m (2012/13: loss before tax of £6.5m). Flybe's share of loss after tax in the joint venture Flybe Finland was £0.5m (2012/13: £2.8m).

The year has seen the bedding-in of the contract to fly an additional 12 E190 jets, taking the number of aircraft flying on a white label contract for Finnair to 22. This white label contract has been a success both financially and operationally, and recorded a profit before tax of £6.3m in 2013/14 (2012/13: £4.6m).

Less successful has been the existing commercial flying programme in Finland, which, despite being remodelled, continues to generate losses from the six aircraft operated during the year. The scheduled flying operation reported a loss of £7.3m in the year (2012/13: £11.1m). Since the year end, two aircraft have been returned to their owners on completion of the lease term. Flybe is in discussions with Finnair on further initiatives to improve the financial performance in the scheduled flying operation.

Notwithstanding the challenges on scheduled flying, the continuing transformation of Flybe Finland towards being a profitable, self-financed, sustainable business for the future bodes well towards meeting Flybe's stated strategic objective of white label expansion in Europe.

Maintenance, Repair and Overhaul ('MRO')

In November 2013, the management structure of the business was changed and each of the activities re‑organised along functional lines. Flybe's MRO, Flybe Aviation Services, is now managed as part of the 'One Flybe' approach as a profit centre and it is reported as a separate segment.

Flybe Aviation Services delivered a solid profitable performance in 2013/14.

The business is based in Exeter and continued to provide third party maintenance coverage of the BAE146/RJ, ATR turboprop and Bombardier Q400 aircraft types, as well as MRO services for Flybe's own fleet.

Revenue for 2013/14 was £35.4m (2012/13: £40.5m) and Flybe Aviation Services delivered a profit before tax of £2.2m (2012/13: loss before tax of £5.1m).

Man hours in the MRO decreased by 13.5% to 455,000 hours (2012/13: 526,000 hours) following the streamlining of the operation as a result of restructuring activities. Of this total, some 59.1% was for third party customers in 2013/14 (2012/13: 59.3%), with the balance being work on behalf of Flybe.

Overall, Flybe Aviation Services has taken positive steps to retain its position as a quality service provider with its focus strongly placed on sustaining an efficient cost base that enables it to react competitively to the needs of an ever-changing and diverse regional aircraft sector.

Saad Hammad

Chief Executive Officer

Strategy and KPIs 

Flybe's strategy is focused on becoming Europe's best local airline.

1 Adjusted EBITDAR before restructuring and surplus capacity costs defined as operating profit/(loss) after adding back net restructuring and surplus capacity costs of £1.9m (2012/13: £12.8m), depreciation, amortisation and aircraft rental charges. Surplus capacity costs represent the costs incurred in the year relating to capacity that is considered by management to be surplus as a result of restructuring decisions. See the Financial Review for further detail.

2 Adjusted profit/(loss) before tax, restructuring and surplus capacity costs defined as profit/(loss) before tax, net restructuring and surplus capacity costs of £1.9m (2012/13: £12.8m) and revaluation gains/(losses) on USD aircraft loans of £8.3m (2012/13: £(4.7m)).

3 Includes passengers travelling with our franchise partner, Loganair.

4 Constant currency is calculated for the 2012/13 year by applying the effective exchange rates that prevailed for reporting the 2013/14 results of $1.55 and €1.18.

As a result of the strategic review announced on 11 November 2013 and the formation of a single organisation structure for Flybe, the management and purpose of both the MRO and the Training Academy changed. The focus of these businesses is now to provide the achievement of a high quality service to the core airline business at a cost that is as low as is achievable.

Financial Review

Summary

2013/14 has been a year of transformation for Flybe, with significant actions taken to reduce the cost base and to refocus the commercial operations of the business. These have entailed the departure of over 1,100 employees, a reconfiguration of the routes we serve and the closure of six bases at the end of March 2014. These actions, along with many others, have enabled a return to profit from last year's substantial losses, on group revenue that was only slightly ahead of 2012/13.

® The Flybe UK business, which also comprises the UK-based contract flying businesses, recorded an adjusted profit before tax, restructuring and surplus capacity costs* of £3.9m (2012/13: loss of £17.2m), and a profit before tax** of £8.6m (2012/13: loss of £28.9m). We are one of the leading carriers of UK domestic passengers with a 28.3% sector share, the largest UK regional carrier for passengers outside of London with a 55.1% sector share and our passenger numbers grew by 6.9% to 7.7 million (2012/13: 7.2 million).

® The MRO business, Flybe Aviation Services, generated a profit before tax of £2.2m (2012/13: adjusted profit before tax £0.7m before restructuring and surplus capacity costs of £5.8m, and a loss before tax of £5.1m).

® Flybe Finland generated a loss from the joint venture of £0.5m (2012/13: £2.8m) plus associated central management costs of £0.3m (2012/13: £0.7m). Flybe Finland did not deliver on its expectations of generating profits in 2013/14 due to poor performance on its scheduled flying operations, but the return of two aircraft in Spring 2014 to their lessor is expected to help reduce losses on scheduled flying in 2014/15.

® In 2013/14, Flybe has continued restructuring the cost base of its UK-based businesses and refocused the commercial and operational activities to enable it to transform its financial performance and be in a position to grow profitably. £10.7m was provided in the 2013/14 income statement for restructuring costs. However, £10.5m profit was recorded on the sale of slots at London Gatwick, resulting in a net £0.2m restructuring cost being recorded in the income statement. With a further £1.7m of surplus capacity costs being incurred in 2013/14, total net restructuring costs stood at £1.9m. Other than ownership costs on grounded E195 aircraft, we do not expect any material further restructuring costs in 2014/15. The benefits of these very painful measures are significant, with £47m of year-on-year cost reductions delivered for 2013/14 and a further £24m of cost saving measures targeted for 2014/15.

® Group costs were in line with last year at £3.6m, with a reduction in Board costs being offset by higher advisor and other fees.

* Flybe UK adjusted profit before tax, restructuring and surplus capacity costs is the segment result after adding back group costs of £3.6m (2012/13: £3.6m), net restructuring of £0.2m (2012/13: £4.1m) and surplus capacity costs of £1.7m (2012/13: £2.9m) and revaluation gains on USD aircraft loans of £8.3m (2012/13: losses of £4.7m). Surplus capacity costs represent the costs incurred relating to capacity that is considered by management to be surplus as a result of the restructuring decisions taken in 2012/13.

** Flybe UK profit before tax is the segment result after adding back group costs of £3.6m (2012/13: £3.6m).

Following the successful firm placing and open offer in March 2014, Flybe had net assets at 31 March 2014 of £194.1m, total cash of £218.4m, unrestricted cash of £177.9m and net funds (i.e. total cash less borrowings) of £116.9m.

Revenue under management has grown by 11.1% to £868.4m from £781.5m due to the Group's joint venture with Finnair in the Nordic and Baltic region, Flybe Finland. 2013/14 saw the first full year of operation of the expanded E190 white label operations on behalf of our joint venture partner, Finnair.

Group revenue increased by 1.0% to £620.5m, a satisfactory performance against the backdrop of major restructuring activities throughout the UK business and a 1.4% reduction in seat capacity. Flybe UK has shown considerable resilience over this period, maintaining its UK domestic sector share at 28.3% and grown overall passenger numbers by 6.9% to 7.7 million.

Adjusted EBITDAR before restructuring costs increased to £98.9m, up 55.7% from the previous year's adjusted EBITDAR of £63.5m, and reported EBITDAR increased 77.8% to £98.7m from 2012/13's £63.5m. The Group's adjusted profit before tax was £8.3m (2012/13: loss of £33.1m), and the reported profit before tax was £8.1m (2012/13: loss before tax of £41.1m).

Set out below is a reconciliation from operating loss to the adjusted EBITDAR figures. All EBITDAR metrics are non-GAAP measures**.

EBITDAR is a common airline profit measure which is used for making comparisons between airlines. The adjusted EBITDAR measure presented removes restructuring costs reported in the income statement.

The table below sets out a reconciliation from profit/(loss) before tax to adjusted profit/(loss) before tax which adjusts the result for net restructuring costs (which include the profit on disposal of the take-off and landing rights at London Gatwick to easyJet reported in the income statement).

Adjusted profit/(loss) before tax and net restructuring is further adjusted to remove the revaluation (gain)/loss on USD aircraft loans and the surplus capacity costs within the business. This measure demonstrates how adjusted profit/(loss) before tax and net restructuring might have appeared if it had been possible to remove these surplus capacity costs arising from restructuring decisions taken in 2012/13.

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

* Excludes depreciation on maintenance assets set up in accordance with IFRS requirements.

** 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.

*** Surplus capacity costs represent the costs incurred relating to capacity that is considered by management to be surplus as a result of the restructuring decisions taken in 2012/13.

Restructuring the business

The costs incurred in restructuring Flybe's business were as follows:

Other than ownership costs on grounded E195 aircraft, management does not expect to incur significant further restructuring costs in 2014/15.

Legal, professional and other support costs have been incurred on negotiating the redundancies mentioned above as well as on providing outsourcing services to those leaving Flybe. However, the major cost in this area is in relation to the provision of specialist services around procurement that have helped us to negotiate better terms in relation both to rates and payment periods from our supplier base.

Other restructuring costs in 2012/13 related to reducing space occupied at the many airports Flybe serves, particularly as the outsourcing of services has reduced the need for Flybe itself to have local facilities.

In 2012/13, steps were taken to improve the efficiency of the UK-located businesses, leading to surplus capacity in respect of aircraft (and also crew and maintenance staff in 2012/13) being identified and incurred in both this year and the previous one. The cost savings that would have been made had we been able to remove these costs is highlighted above as surplus capacity costs. Because these costs formed a part of the operating cost base during the periods under review, it is not possible to identify these costs separately within the Financial Statements.

These restructuring costs set out above and the related actions are targeted to deliver the following cost savings:

Other than for staff costs where headcount reduction has been the prime driver, other cost lines have benefited from the general renegotiation of rates and payment terms across the supplier base, and from outsourcing activities and marketing and distribution cost savings.

Of the £71m target cumulative annual savings from 2014/15 onwards, £30m has been identified as being part of Phase 1 announced in January 2013, and these projects are complete. Phase 2, announced in May 2013, is expected to deliver annualised savings of £15m, and these projects are almost complete. The further Immediate Actions announced in November 2013 are expected to deliver a further £26m of savings from 2014/15 onwards, and projects comprising some 65% of this target have been completed.

Fleet

Flybe UK

In 2013/14, Flybe UK took delivery of a further two E175 regional jets from Embraer (out of its firm order for 35 E175s), taking the total delivered to 11. No further aircraft are contracted for delivery until October 2015.

2013/14 saw the sale of two Q400 owned aircraft for a modest book profit.

During the year, four Bombardier Q400 aircraft were operated on a contract flying agreement with Brussels Airlines that commenced in March 2012. Two of these aircraft returned to Flybe service in April 2014 with the remaining pair being scheduled to complete their contracts by the end of October 2014.

Five E195 regional jets are expected to be handed back to lessors in 2014/15 - two are contracted to return in the year, and agreement has been reached with another lessor for the early hand back of a further three E195s (originally scheduled for return in 2015/16).

Five Q400 aircraft are contracted to return to lessors in H1 2014/15. These aircraft are being purchased post-year end from the lessors in order to provide capacity for the expansion at London City commencing in late October 2014.

Flybe Finland

One ATR 42 was returned at the end of its operating lease to the owner in May 2014 with a further ATR 42 due to be returned later in June 2014.

Embraer E175 order

In July 2010, Flybe UK announced the firm order of 35 Embraer 175s for delivery between 2011 and 2016. Options over a further 65 E-series regional jets were cancelled in November 2013. Flybe UK retains 40 Embraer aircraft purchase rights that do not lapse until November 2017.

In May 2013, Flybe and Embraer agreed delivery deferrals for 16 aircraft due for delivery in 2014 and 2015 to the period from 2017 to 2019, and a further six aircraft that were due for delivery in 2016 were deferred to 2019. In November 2013 two of the four aircraft due for delivery in 2013/14 were deferred to October and November 2015.

The following table shows the current number of aircraft that are contracted for delivery to the Group. No aircraft are due to be delivered to Flybe Finland.

Fleet under management

The profile of Flybe's fleet under management in the 2013/14 year is summarised below:

As at 10 June 2014, following the return of four Q400 turboprop aircraft and purchase of the same four Q400 turboprop aircraft by Flybe UK and the return of one leased ATR42 by Flybe Finland, the Group's fleet under management was 97 aircraft, consisting of 45 Q400s, 13 ATR turboprops, and 39 E-series jets of which 13 are owned and 84 leased.

The Group will continue to match capacity to demand, particularly in its core UK market. As at 10 June 2014, some 10 E195 aircraft were grounded, and Flybe is in active discussions with a number of airlines whereby these aircraft could be deployed under white label operations or sub-leased.

Business results

Flybe's results analysed by segment are summarised below. These results are before tax, other than share of joint venture results.

1 Flybe UK adjusted profit before tax, restructuring and surplus capacity costs is the segment profit of £6.7m (2012/13: segment loss of £32.5m) after adding back group costs of £3.6m (2012/13: £3.6m), net restructuring of £0.2m (2012/13: £4.1m) and surplus capacity costs of £1.7m (2012/13: £2.9m) and revaluation gains on USD aircraft loans of £8.3m (2012/13: losses of £4.7m).

2 MRO adjusted profit before tax, restructuring and surplus capacity costs is the segment profit of £2.2m (2012/13: segment loss of £5.1m) after adding back restructuring of £nil (2012/13: £3.9m) and surplus capacity costs of £nil (2012/13: £1.9m).

3 Adjusted profit/(loss) before tax, net restructuring and surplus capacity costs defined as profit/(loss) before tax, net restructuring and surplus capacity costs of £1.9m (2012/13: £12.8m) and revaluation gains on USD aircraft loans of £8.3m (2012/13: loss of £4.7m). Surplus capacity costs represent the costs incurred in the year relating to capacity that is considered by management to be surplus as a result of restructuring decisions taken in 2012/13.

Flybe UK

Revenue

Flybe UK's passenger numbers were up 6.9% at 7.7 million versus 7.2 million in 2012/13, despite the active management of seat capacity, which reduced by 1.4% to 11.1 million.

Passenger revenue per seat was 1.8% higher at £49.70 (2012/13: £48.84), comprising an increase in load factor of 5.4 percentage points (from 64.1% to 69.5%) and a reduction in passenger yield from £76.16 to £71.55.

The increase in passenger revenue per seat of 1.8% was offset by the 1.4% reduction in seat capacity, meaning that passenger revenue increased by 0.4% from £551.8m to £553.9m.

Contract flying for Brussels Airlines generated revenues of £16.2m for the provision of four crewed Q400 turboprops in arrangements lasting up to two years, and expiring in April (two aircraft) and October 2014 (remaining two aircraft). Other revenue in Flybe UK totalled £29.5m, representing an 18.0% increase on the £25.0m generated in 2012/13, and arose primarily from increases in charter and codeshare revenues and sale of surplus fixed assets, with other revenue streams remaining broadly stable.

Operating costs, excluding restructuring and surplus capacity costs

* Operating costs for 2012/13 have been restated to reflect the change in segments.

** Constant currency is calculated for the 2012/13 year by applying the effective exchange rates that prevailed for reporting the 2013/14 results of $1.55 and €1.18.

Operating costs decreased by 1.7% from £608.1m to £597.9m largely as a result of a 17.3%, or £27.1m, saving in staff and other net operating costs following implementation of the Turnaround Plan and Immediate Actions. This saving was offset by a 7.7% increase in aircraft ownership and maintenance costs due to a larger average fleet in the year (70 aircraft versus 68 in 2012/13), higher maintenance costs and unfavourable foreign exchange movements. In addition, fuel and aircraft operations costs increased by 1.9% as a result, mainly, of increases in airport and navigation charges. On a constant currency and fuel basis, underlying operating costs decreased by 3.4% from £618.8m in 2012/13 to £597.9m.

On a constant currency basis, operating costs per seat decreased by 1.6% from £54.76 to £53.86, again driven by a significant reduction in staff and other net operating costs (down 15.9% to £11.70), offset by increases in aircraft ownership and maintenance (up 7.6% to £13.71) and fuel and aircraft operations (up 1.2% to £28.45).

Fuel

Flybe UK's results are subject to significant change as a result of movements in the price of fuel which forms a significant variable cost for this business. Although 2013/14 has seen a reduction in volatility for fuel prices, it has been at the expense of that price stabilising at a relatively high level - Brent crude has been in the $100 to $115 a barrel range for most of the year. Overall, the price of jet fuel was slightly lower than in 2012/13, peaking at $1,047 per tonne on 29 August 2013. Flybe UK's fuel costs decreased to £120.0m in 2013/14 from £122.6m in 2012/13. Aviation fuel prices remain capable of large and unpredictable movements due to a variety of external factors, such as changes in supply and demand for oil and oil-related products and the role of speculators and funds in the futures markets.

During the year to 31 March 2014, Flybe UK used some 175,200 tonnes of jet fuel, a reduction on 2012/13 of 2.3% from 179,300 tonnes. The average market price during the year was $974 per tonne (2012/13: $1,018), with the Group paying a blended rate (net of hedges) of $982 per tonne (2012/13: $1,002). Including 'into plane' costs, Flybe's fuel costs in 2013/14 of £120.0m (2012/13: £122.6m) represent an all-in cost of $1,062 per tonne for 2013/14 (2012/13: $1,101). Using constant currency, our fuel costs per seat decreased from £11.06 to £10.81.

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 6 June 2014, 75.2% of the year to 31 March 2015 was hedged at an average price of $960 per tonne. Further details are given in note 36 to the Consolidated Financial Statements. Taking into account our hedged position, each $50 increase/decrease in the price of jet fuel reduces/improves group profits in 2014/15 by £2.0m.

Efficiencies have been derived from our fleet replacement programme, operational improvements and careful management of routes and frequencies. Overall, 15.7kg of fuel was consumed for each seat flown (2012/13: 15.9kg per seat). This remains a significant improvement on the 19.1kg per seat consumed in 2007/08 due to our investment in a modern, fuel-efficient two-type aircraft fleet best suited to regional flying.

Operating costs, including restructuring and surplus capacity costs

* Operating costs for 2012/13 have been restated to reflect the change in segments.

** Constant currency is calculated for the 2012/13 year by applying the effective exchange rates that prevailed for reporting the 2013/14 results of $1.55 and €1.18.

Restructuring and surplus capacity costs

The business incurred costs of restructuring and surplus capacity as follows:

These costs are discussed in more detail above.

Net finance costs

Net finance costs improved by £13.7m due to a £13.0m non-cash, non-underlying movement on the retranslation of US Dollar denominated debt used to fund the acquisition of aircraft, particularly the newer E175 regional jets, from a loss of £4.7m in 2012/13 to a gain of £8.3m in 2013/14. The movement in this US Dollar liability cannot be naturally offset against the value of the aircraft as the latter are recorded in pounds Sterling in order to comply with the requirements of International Financial Reporting Standards. This income statement charge has therefore been removed in arriving at adjusted profit before tax.

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 6 June 2014, 72.2% of our anticipated US Dollar requirements for the year to 31 March 2015 were hedged at an average exchange rate of $1.59. All existing derivative financial instruments are forward swap arrangements.

Taking into account our hedged position, each $0.05 reduction/improvement in the US Dollar exchange rate has the effect of reducing/increasing Flybe UK's profits in 2014/15 by approximately £4.4m.

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:

Flybe Finland

Flybe Finland's results are summarised as follows:

With revenue of £247.9m (2012/13: £167.2m) and costs of £248.9m (2012/13: £173.7m), Flybe Finland generated a significantly smaller loss before tax of £1.0m (2012/13: £6.5m loss). A tax credit of £0.2m relating to deferred tax on the losses generated was also reported, resulting in a loss after tax for Flybe Finland of £0.8m (2012/13: loss after tax £4.9m). The small loss remains disappointing, although there has been a significant turnaround from the previous year.

Flybe Finland's white label operation for Finnair accounted for 2.7 million passengers (2012/13: 1.6 million passengers). Contract flying will continue to dominate this business and this white label activity recorded a profit of £6.3m (2012/13: £4.6m).

In the six aircraft scheduled flying operation, passenger numbers on commercial flying represented 0.3 million passengers (2012/13: 0.4 million) with a load factor of 44.0% (2012/13: 41.8%), and the business reported a loss of £7.3m (2012/13: £11.1m loss). In addition to the removal of two lines of flying from Summer 2014, further action is necessary to improve financial performance in Flybe Finland's scheduled flying, and Flybe is in discussions with Finnair on a number of actions.

The exposures of Flybe's joint venture in Finland to fuel price and exchange rate volatility have been monitored during 2013/14, but no hedging has yet been undertaken due to the minimal nature of the underlying exposure. This is because Flybe Finland's leases are denominated in Euros, its main operating currency, leaving fuel prices and US Dollar exposure on fuel and maintenance costs as its primary exposures. These costs are currently smaller exposures to the business and are related to the commercial rather than contract flying operations. Management will continue to monitor these exposures and hedge them should they become significant.

Central overhead costs, net of interest amounted to £0.3m (2013: £0.7m). Further details on the joint venture's performance are given in the Financial Statements.

MRO

MRO revenue declined by 12.6% in 2013/14 to £35.4m (2012/13: £40.5m), of which £20.9m was for third party customers (2012/13: £24.9m). This decrease was driven by the 13.5% decline in man hours from 526,000 hours in 2012/13 to 455,000 hours. This, in turn, resulted from lower fixed costs and available capacity in the MRO business following phases 1 and 2 of the Turnaround Plan. This cost reduction programme led to a 16.6% reduction in operating costs from £39.8m to £33.2m, and a significantly improved profit performance.

Restructuring and surplus capacity costs

The division incurred no costs of restructuring and surplus capacity in the year, compared with £3.9m of restructuring and £1.9m of surplus capacity costs incurred in the prior year. These costs are discussed in more detail above.

Group costs

Group costs of £3.6m (2012/13: £3.6m) include Group Board salary costs and group related legal and professional fees. The reduction in Board costs in the year has been offset by higher advisor and other fees.

Profit/(loss) before and after tax

The Group's adjusted profit before tax, revaluation gain on USD aircraft loans, restructuring and surplus capacity costs was £1.7m (2012/13: loss of £23.6m).

After net restructuring and surplus capacity costs of £1.9m (2012/13: £12.8m) and non-cash gains on USD aircraft loans of £8.3m (2012/13: loss of £4.7m), the Group's reported profit before tax was £8.1m (2012/13: £41.1m loss).

Profit after tax was £8.0m (2012/13: loss after tax £42.2m). The current year tax charge was £0.1m (2012/13: charge of £1.1m).

EPS and dividends

Basic earnings per share for the year were 9.6p, compared with loss per share of 56.0p in 2012/13. Adjusted loss per share was 0.2p, compared with adjusted loss per share of 39.1p for 2012/13.

No dividends were paid or proposed in either the current or prior financial year.

Cash flow

Net cash inflows from operating activities before restructuring were £7.3m (2012/13: outflow of £1.6m). However, the cash flows as a result of restructuring have resulted in an overall net cash outflow from operating activities after restructuring of £5.5m (2012/13: outflow of £3.0m).

The most significant cash flow benefit was the £150.1m of net cash proceeds from the issue of new equity on 12 March 2014.

The largest movements in net capital income were proceeds of £17.5m being received from easyJet on sale of the slots at London Gatwick, £12.3m proceeds from sale of two Q400 aircraft in May and £11.8m in relation to pre-delivery deposits for new aircraft being returned to Flybe during the year following negotiations with Embraer to reschedule deliveries. Repayment on loans exceeded those drawn down on a new loan related to the acquisition of an Embraer E175 regional jet.

Balance sheet

All of Flybe's landing slots were sold to easyJet for a gross cash consideration of £20.0m. The sale was approved by shareholders on 2 August 2013 with £7.5m of cash deposit received on that day, £10.0m in November 2013 with the balance of £2.5m received in May 2014.

The £147.0m of net book value of aircraft represents owned aircraft, engines and aircraft modifications, with one further Embraer E175 aircraft being acquired with debt finance.

After Flybe's share of joint venture losses of £0.5m in 2013/14 plus associated central management costs of £0.3m, the carrying value of the interest in joint ventures at 31 March 2014 stood at £12.4m (2013: £13.2m).

Net funds at 31 March 2014 of £116.9m (2013: net debt of £66.3m) benefited from the £150.1m of net cash proceeds from the issue of new equity on 12 March 2014 and reflected the capital inflows referred to in the cash flow section above. Borrowings decreased by £19.5m to £101.5m as a result of the new loan to fund an Embraer E175 delivered during the year being less than the loans on the two Q400 aircraft sold during the year (classified as assets held for sale at 31 March 2013) and normal repayments on loan agreements. Net funds at 31 March 2014 includes restricted cash of £40.5m (£31.4m at 31 March 2013) which represents, predominantly, cash held with the Group's bankers to facilitate card acquiring services and guarantee arrangements with suppliers, and cash deposits held in favour of aircraft owners to secure operating lease arrangements. Since the year end, a net £10.6m of restricted cash has been released by the Group's bankers.

The mark-to-market valuation of derivative financial instruments moved from an asset of £4.2m at 31 March 2013 to a liability of £7.6m, as foreign exchange rates and fuel prices moved against Flybe's portfolio of contracts. Net negative other working capital increased from £81.5m to £105.4m, largely due the sale of two Q400 aircraft in May 2013 which were reported as assets held for sale at 31 March 2013, higher current maintenance provisions and increased current deferred income being offset by a decrease in trade and other payables.

The balance sheet also includes the impact of the defined benefit pension scheme deficit of £2.5m. At March 2013, this scheme, which is closed to future benefit accrual, had been in surplus with no amounts being reported in the balance sheet.

Shareholders' equity increased by £146.0m to £194.1m, driven principally by issue of new shares and the profit generated in the period.

Covenants

The Group has certain financial performance covenants in relation to some of its aircraft financing agreements. These specify performance, depending on the contractual terms, against a series of tests, which are performed either quarterly, half yearly or annually. Flybe has met all the terms of the covenants tested since the inception of the arrangements to 31 March 2014.

Country and currency risk

Flybe's UK and European businesses operate in a global market place. Most of Flybe's customers are based in Europe, although the MRO business also has customers in Africa and the central Asian republics. Most of Flybe UK's revenues are derived from UK-based customers (about 85% of group revenue) and the joint venture operations largely from those based in Finland and Sweden. Aircraft are bought and sold in US Dollars as are other key costs such as fuel and aviation insurance. Airport and en route charges are payable in a mix of Sterling and Euros and the further development of European operations will mean greater exposure to Euro revenues and costs.

Going concern

Flybe's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Chairman and Chief Executive Officer's statements. The financial position of the Group, its cash flows and liquidity position, and events since the balance sheet date are described in the financial performance section of that statement and in the Financial Review.

Flybe had free cash balances of £177.9m at 31 March 2014, and has met all of its operating lease commitments and debt repayments as they have fallen due during the year.

Flybe faces trading risks presented by current economic conditions in the aviation sector, particularly in relation to passenger volumes and yields and the associated profitability of individual routes.

The Group is exposed to fluctuations in fuel prices and foreign exchange rates. The Group's policy is to hedge between 60% and 90% of estimated exposures 12 months in advance. As of 6 June 2014, Flybe had purchased 72.7% of its anticipated fuel requirements and 70.5% of its anticipated US Dollar requirements for the following twelve months.

The Directors have prepared a detailed trading budget and cash flow forecast for a period which covers at least 12 months after the date of approval of these Financial Statements. Having considered the forecasts and making other enquiries, the Directors have a reasonable expectation that Flybe has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the Annual Financial Statements.

Andrew Knuckey

Chief Financial Officer

Risks and uncertainties

This section describes the principal risks and uncertainties which may affect Flybe's business, financial results and prospects.

Responsibility statement of the directors on the annual report

The responsibility statement below has been prepared in connection with the company's full annual report for the year ended 31 March 2014. Certain parts thereof are not included within this announcement.

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with International Financial Reporting Standards adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

· the review of the business, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By order of the Board

Saad Hammad Andrew Knuckey

Chief Executive Officer Chief Financial Officer

10 June 2014

Consolidated income statement

Year ended 31 March 2014

Consolidated statement of comprehensive income

Year ended 31 March 2014

Consolidated statement of changes in equity

Year ended 31 March 2014

Consolidated balance sheet

At 31 March 2014

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2014 or 2013, but is derived from those accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 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.

Full financial statements which comply with IFRSs can be found on our website from 11 June 2014 at www.flybe.com/corporate/investors.

IAS 19 (revised 2011) 'Employee Benefits' and the related consequential amendments have impacted the accounting for the Group's defined benefit scheme, by replacing the interest cost and expected return on plan assets with a new net interest charge on the pensions scheme surplus or deficit. For the current period, the profit and other comprehensive income is in line with what would have been prior to the adoption of IAS 19 (revised 2011). For the comparative period, the restated loss is £0.4m higher, giving a loss before tax of £41.1m (previously a loss of £40.7m), and other comprehensive profit/(loss) is £0.4m better than previously reported at a profit of£0.3m (previously a loss of £0.1m). There is no impact on the net assets or reserves position at either 31 March 2013 or 31 March 2012.

2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group's accounting policies the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Critical judgements in applying the Group's accounting policies

The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in financial statements:

Carrying value of aircraft

The Group had a net book value of approximately £147.0m for aircraft as at 31 March 2014. Changes to the Group's estimation of useful lives, residual values and potential for impairment would have a material effect on the valuation of the Group's assets and on its operating profit/(loss).

Useful lives and residual values are reviewed at the end of each reporting period. Estimates of useful lives of aircraft are based on judgements as to expected usage of the aircraft, timing of maintenance events, the Group's route and fleet plans and on changes within the wider aviation industry. Estimates of residual value are based on current market values of aircraft in the same expected age and condition expected at the end of the asset's useful life to the Group.

The carrying value of aircraft, property, equipment and other tangible assets is reviewed for impairment at least annually and when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that would indicate a potential impairment of aircraft would include a significant reduction in market values based on appraisers' data for the aircraft type, a significant change in the physical condition of the aircraft and a reduction in forecast cash flows arising from operating the asset. Carrying value is assessed based on the appraised data and forecast cash flows.

Aircraft maintenance

On acquisition of an aircraft, a proportion of the cost of the aircraft is allocated to engines and other material components with different useful lives to the airframe. Judgement is required to determine the amount of cost to allocate based on the estimated cost of overhauling the components, and the time between maintenance events. This judgement affects the amounts recognised as a depreciation expense given the different useful lives of the components.

For aircraft held under operating leases, the Group has a commitment to return the aircraft in a specific maintenance condition at the end of the lease term. Estimating the provision for maintenance costs requires judgement as to the cost and timing of future maintenance events. This estimate is based on planned usage of the aircraft, contractual obligations under lease agreements, industry experience, manufacturers' guidance and regulations. Any change in these assumptions could potentially result in a significant change to the maintenance provisions and costs in future periods.

Recognition of deferred tax assets

The Group recognises deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are reviewed regularly to assess potential realisation, and where the Directors believe that realisation is not probable, that portion of the asset is not recorded. In performing this review, Flybe makes estimates and assumptions regarding projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions could cause an increase or decrease in the amount recognised resulting in an increase or decrease in the effective tax rate, which could materially impact the results of operations. As a result of the Group's performance, the net deferred tax asset has increased from £2.0m to £4.5m at 31 March 2014.

Restructuring provision

The Group recognises a restructuring provision when the detailed formal plan for the restructuring has been determined and has raised valid expectations in those affected that it will carry out the restructuring by announcing its main features to those affected by it or implementing the plan. Flybe makes estimates and assumptions particularly in relation to whether a cost will be incurred, its value and the period in which cash (or other resources) will leave the Group. A change in these assumptions could cause an increase or decrease in the amount recognised as a provision which could materially impact the results of operations.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Employee benefits

Accounting for pensions and other post-retirement benefits involves judgement about uncertain events including, but not limited to, discount rates, life expectancy, future pay inflation and expected health care cost trend rates. Determination of the projected benefit obligations for the Group's defined benefit scheme is important to the recorded amount of benefit expense in the income statement and valuation of the balance sheet. Any change in these assumptions could potentially result in a significant change to the pension assets/(liabilities), commitments and pension costs in future periods.

3. BUSINESS AND GEOGRAPHICAL SEGMENTS

During the financial year, the Group's divisions have been removed and the business has been refocused into One Flybe. Under IFRS 8, Flybe reports three business segments in order to comply with accounting standards. Comparatives for the year ended 31 March 2013 have been restated to correspond with the new structure.

The chief operating decision maker responsible for resource allocation and when assessing performance of operating segments has been identified as the Operating Board. Operating segments are reported in a manner which is consistent with internal reporting provided to the chief operating decision maker:

Flybe UK This business segment comprises the Group's main scheduled UK domestic and UK-Europe passenger operations and revenue ancillary to the provision of those services.

Flybe Finland This business segment comprises the Group's Finnish contract flying and scheduled passenger operations and revenue ancillary to the provision of those services.

MRO This segment aims to provide aviation services to customers, largely in Western Europe. The MRO supports Flybe's UK and Finnish activities as well as serving third-party customers.

Segment revenues and results

Transfer prices between business segments are set on an arm's length basis.