Flybe Group Regulatory News (FLYB)

Flybe Group plc

Preliminary Results for the Year Ended 31 March 2012

Flybe, Europe's largest regional airline and the UK's number one domestic airline brand, announces results for the year ended 31 March 2012.

Key financials

Flybe's results for the year to 31 March 2012 are in line with expectations.

* EBITDAR is defined as operating profit or loss after adding back unrealised gains and losses on fuel and foreign exchange hedges, IPO expenses, depreciation, amortisation and aircraft rental charges. Underlying EBITDAR is EBITDAR after adding back the estimated impact of the disruption caused by volcanic ash and winter weather in 2010/11.

** Underlying (loss)/profit before tax is defined as loss before tax before revaluation gains on USD aircraft loans in 2011/12 and, in 2010/11, the estimated impact of the disruption from volcanic ash and winter weather, unrealised gains and losses on fuel and foreign exchange hedges and IPO expenses.

*** Net (debt)/cash includes restricted cash

Growing in a tough market

·; Revenue under management growth of 14.0% to £678.8m (2010/11: £595.5m)

·; Group revenue growth (excluding joint venture) up 3.3% to £615.3m (2010/11: £595.5m)

·; Passenger numbers under management up 5.8% to 7.6 million (2010/11: 7.2 million)

·; Growing the fleet under management to 83 aircraft with an average age at year end of 4.6 years (2010/11: 69 aircraft with an average age of 4.3 years)

Leading the UK domestic market

·; Leading airline brand in the UK domestic market with 28.0% market share (2010/11: 27.0%)

·; Operating from 14 UK bases and serving 102 airports in total throughout the UK and 17 other European countries

·; Flybe UK's passenger revenue per seat up 3.7% to £48.71 (2010/11: £46.96)

·; Creation of Manchester regional hub

·; Re-positioning Flybe UK to a more customer focussed and transparent pricing model under the strapline 'Making flying better'

Delivering on Flybe's strategic objectives

·; Commencing our development of Continental European based operations through our joint venture with Finnair established in August 2011 and recently expanded to comprise 28 aircraft, 20 of which will be deployed under contract flying arrangements

·; Fleet renewal under way with arrival of first six Embraer E175s, four during the financial year and two subsequently, supported by attractive financing deal from BNDES

Jim French, Chairman and Chief Executive Officer of Flybe, commented:

"Flybe is Europe's largest independent regional airline, flying over 200 routes from more than 100 airports across 18 countries. It has a robust business model and a clear growth strategy. Through a continuing focus on managing costs and capacity we are mitigating the impact of the economic downturn in the UK. We are pleased with the progress we have made with Flybe Finland, underpinning our European expansion plans and the replication of our UK operations. Meanwhile, our fleet substitution programme, along with a de-risking of the business through a significant increase in contract flying, will have a far reaching beneficial impact on the business and one that will benefit the Group for many years to come.

"We will continue to invest in the Group's future ensuring that we maintain our market leading regional position in the UK and, at the same time, seeking to build a similar position across Europe.

"We remain in a challenging environment. However, Flybe today is a business of real scale and substance, and one which has again demonstrated its resilience. Flybe is well placed to take advantage of any improvement in the UK macro environment and has a strong platform in Europe to leverage, leaving the Group strongly placed for the future."

11 June 2012

Enquiries:

CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S STATEMENT

Overview

The headline result, in line with expectations but disappointing nevertheless, reflects the impact of a challenging operating environment, in particular in the UK, and major investment in our business for future growth.

It is a testament to the Group's business model and its resilience that, despite the continued decline in the UK domestic air travel market, which totals some 20% since 2007, combined with significant cost increases - the annualised price of oil being the highest ever recorded in history, airport infrastructure costs increasing significantly above RPI and also government taxation through APD continuing to increase - the Group's overall operating loss for the year was limited to £4.9m.

We continued to invest in the Group's future, making significant progress in the implementation of our three-pronged growth strategy: positioning the Group to capitalise on UK recovery; expansion into Europe; and undertaking a wholesale fleet substitution programme.

Results

Flybe delivered a result for the year in line with expectations. Revenue under management increased 14.0% to £678.8m (2010/11: £595.5m). Underlying EBITDAR fell 22.0% to £88.8m (2010/11: £113.8m) with an operating loss of £4.9m (2010/11: loss of £0.9m) and a loss before tax of £6.2m (2010/11: loss of £4.3m).

This performance, while disappointing, reflects a resilient business able to weather the combined impact of a 5% underlying decline in its core UK market during the year along with high fuel prices and other inflationary pressures. The results also reflect significant investment in the Group as part of the implementation of a long term growth strategy, specifically representing the first year losses associated with our Flybe Europe division (£3.7m) and our new training academy building in Exeter (£1.2m). Without these investments, the loss before tax would have been £1.3m, or approximately 0.2% of turnover.

The Group's balance sheet had total cash, including restricted funds, of £67.6m at 31 March 2012 (2010/11: £105.6m), and net debt of £29.7m (2011: net funds £21.9).

Divisional Review

During the period the business was restructured into three operating divisions: Flybe UK, Flybe Europe and Flybe Aviation Support. The restructuring provides greater focus and drive for the implementation of the Group's growth strategy.

Flybe UK

Flybe UK recorded revenue of £588.1m (2010/11: £571.5m) and a segment loss before tax of £2.2m (2010/11: profit of £5.7m). The Flybe UK results include Group costs of £2.8m (2010/11: £2.5m). Excluding these costs, Flybe UK's profit before tax was £0.6m (2010/11: £8.2m).

In the UK, trading conditions remained tough throughout the year. The number of UK domestic air passengers has fallen by circa 20% since 2007 but during that time, Flybe UK has grown its total number of passengers by 2.2% to 7.3 million, and its market share to 28.0%, up from 14.1% in 2007.

We have driven the increase in passenger numbers primarily through a relentless focus on providing the high frequency services from convenient regional airports demanded by, and meeting the needs of, our business and leisure customers. As well as increasing passenger numbers, we continue to benefit from a high level of repeat travel with around a quarter of our passengers travelling with the airline 10 or more times a year.

As part of our commitment to continuously improve our product and overall flying experience, Flybe UK recently unveiled a major brand and product repositioning under the strapline 'Making flying better'. The repositioning, based on extensive consumer research, reinforces Flybe's commitment to openness and transparency in pricing and, supported by a television advertising campaign, introduces a range of exciting new product innovations that have been well received by our passengers. The repositioning is designed above all to positively differentiate Flybe from some of the negative perceptions of low fare travel.

New product initiatives already rolled out include:

·; No charges for customers paying by debit card

·; Credit card customers being charged on a per booking basis regardless of the number of passengers in the booking

·; The creation of three new ticket types:

·; Essentials

·; New Economy

·; Plus

This summer will see a Flybe first with trials of inflight TV programming and entertainment available free of charge for its passengers through onboard wi-fi. Additional product and service enhancements are due to follow throughout the year.

We believe that 'Making flying better' is more than a slogan. It is a promise to our passengers that we will make flying better, more straightforward and fair and, as always, with a quality service-led approach.

2011/12 also saw a number of operational initiatives to ensure Flybe UK maintained its competitive advantage.

In February 2012, Flybe UK saw a significant rise in connecting passenger numbers after it launched its Manchester hub concept. By May 2012, the first six Embraer 175 aircraft had been added to Flybe's fleet, all of which are financed from the circa $500m committed loan facility from BNDES, the Brazilian export bank.

The UK business continued to focus on ensuring it matches capacity to demand through disposals of surplus aircraft (seven Bombardier Q400 aircraft were sold during the year to Rand Merchant Bank of South Africa) and a contract flying agreement with Brussels Airlines for two Q400s.

Separately, the Group has moved quickly to exploit the opportunities arising from the demise of bmi baby, announcing several new routes from Flybe's network into East Midlands Airport.

As at 1 June 2012, Flybe UK's forward ticket sales revenue for June to October 2012 was ahead 4.5% year-on-year on broadly flat seat capacity, with the growth being driven by yield improvements. We will continue to monitor closely trends and review our flying programme to ensure that capacity remains optimally matched to demand.

While conditions in the Group's current core UK domestic market remains demanding, Flybe UK's leadership leaves the business well-placed to benefit as and when the wider economy begins to improve. Furthermore, over 25% of passengers are now carried between the UK regions and Europe and we consider that the recent trends in exchange rates may generate an increase in leisure traffic from the UK to Europe.

Flybe Europe

A key driver of the Group's growth strategy, Flybe's expansion into Europe, took a major step forward on 1 July 2011 with the announcement of the acquisition, through joint venture with Finnair, of Finncomm .

The division commenced trading in August 2011. Revenue for the period was £63.5m with Flybe's share of loss after tax in the joint venture in the year of acquisition of £3.0m.

We are pleased with the progress made in less than a year. Bases have been opened in Helsinki and Stockholm Bromma. Flybe Finland currently operates 25 routes in six countries.

Since the year end, the joint venture signed a Memorandum of Understanding ('MoU') with Finnair for Flybe Finland to fly 12 Embraer E190 regional jets on behalf of Finnair under a contract flying arrangement. This arrangement is scheduled to commence on 28 October 2012 for a number of European short haul routes and take advantage of Flybe Finland's competitive cost base. With this further agreement the number of aircraft flown by Flybe Finland will reach 28, almost double the number flown when the business commenced operations in August 2011, of which 20 will be flying under contract for Finnair.

Once these latest contract flying operations commence, circa 25% of the fleet under Flybe Group's management will be deployed under contract flying arrangements.

The Board believes that there will continue to be consolidation in the European regional aviation industry which will present further opportunities for Flybe. These will be evaluated on a selective basis with a view to further expanding Flybe's growing presence in Europe.

Flybe Aviation Support

This division, which comprises the MRO and Training Academy businesses supporting both Flybe's UK and Europe divisions as well as serving third-party customers, delivered revenue of £47.3m (2010/11: £39.7m) and a loss before tax of £0.3m (2010/11: loss of £1.5m).

The MRO business saw improved activity levels with man-hours worked up from 564,000 in 2010/11 to 647,000 in 2011/12. Of these total man hours, some 62.2% were for third party customers in 2011/12 (2010/11: 63.1%) with the balance being work on behalf of Flybe. The MRO business reported a profit before tax of £0.9m (2010/11: loss before tax £1.1m). We continue to see increasing MRO activity and expect a continued improvement in performance from this division in the current year.

Our Training Academy's building has 26 classrooms, workshop training facilities, cabin crew emergency training facilities and a flight simulator hall which can accommodate up to four flight simulators, saw the commissioning of a second simulator in March of this year. This brought self-sufficiency to the UK operation for training pilots, cabin crew and engineers for the first time. The Training Academy has proved to be an attractive facility with external customers being trained from as far away as the UAE. The year saw total training revenue of £3.0m, with most of this activity supporting Flybe's own training programmes, and a loss before tax in its first full year of operation of £1.2m. We are confident about the long term prospects for the Training Academy.

Fleet

We have started rebalancing the fleet towards a combination of regional jets and turboprop aircraft by introducing the 88-seat Embraer E175 regional jet aircraft into Flybe UK service. We expect the increased number of regional jets in our fleet to improve the overall customer product and experience for Flybe's passengers, and indeed are encouraged by the early trends which we are experiencing on UK-European routes where we have replaced the Q400 turboprop with the E175 jets. The six arrivals since November 2011 are the first since Flybe announced, in July 2010, the purchase of 35 Embraer E175s (for delivery between 2011 and 2016) together with options and purchase rights over a further 105 E-series regional jets (for delivery up to 2020). As these regional jets are of a modern, fuel-efficient design, the E175 aircraft will have similar economics per flight to the 78-seat Bombardier Q400 turboprops they are replacing and, therefore, lower seat costs. By 2015/16 and based on contracted deliveries and expected retirements, I expect over half of Flybe UK's fleet will be E-series regional jets.

In early 2011, with no immediate recovery in the UK air travel market in sight, Flybe took the decision to de-risk the business by removing any growth aircraft for the UK business in 2011/12. Given there were committed aircraft deliveries scheduled for the year, in order to retain the net base line number of aircraft, Flybe entered into a programme of aircraft disposals. In the year to 31 March 2012, Flybe UK took delivery of four Embraer E175 regional jet aircraft and three Bombardier Q400 turboprops. It also sold seven Q400s to Rand Merchant Bank and handed back two Q400s to lessors at the end of lease periods thereby achieving its goal of ensuring no surplus aircraft in Flybe UK's fleet.

The acquisition of Finncomm as part of Flybe's joint venture with Finnair in August 2011 added a further 14 ATR turboprops and two E170s to our fleet.

Since 1 April 2012, Flybe UK has taken delivery of two E175s and handed back one Q400. As at 1 June 2012, our fleet under management now stands at 84 aircraft with an average age of 4.6 years consisting of 48 Q400 and 14 ATR turboprops, and 22 E-series jets.

For the remainder of 2012/13, Flybe has scheduled deliveries of a further four 88-seat E175s, (in addition to the two described above), and 12 leased E190s under the new contract flying agreement with Finnair. Two Q400 leases expire in the first half of the year (one of which was handed back by 8 June 2012). The Group will continue to act opportunistically to match capacity to demand, particularly in its core UK market, which drives about 87% of revenue under management.

Board and People

Following the restructuring of the Group into three operating divisions, the Board agreed a major management re-organisation:

·; Flybe UK (comprising the UK domestic and UK-Europe airline business): Andrew Strong, previously the Group's Chief Operating Officer, was appointed Managing Director of this division.

·; Flybe Europe (comprising the European airline businesses, including Flybe Finland and any future acquisitions, as well as organic development): Mike Rutter, previously Chief Commercial Officer of Flybe, heads up this division as Managing Director.

·; Flybe Aviation Support (comprising the MRO and Training businesses supporting Flybe's airline divisions and serving third party customers): John Palmer, previously Director of Airline Operations, is Managing Director of Flybe Aviation Support.

As part of the continuing development of Corporate Governance within the Group, in addition to the Audit, Safety, Remuneration and Nominations Committees, a Mergers and Acquisitions ('M&A') Committee has been established to monitor and review all potential acquisitions, and make appropriate recommendations to the Group Board. The M&A Committee is chaired by Alan Smith (Independent Non-Executive Director since 2006).

Mark Chown, previously Deputy Chairman of Flybe and a Trustee of the Walker Trust, one of the Group's major shareholders, has been appointed as Director of Corporate Strategy at Flybe. The Corporate Strategy role will include responsibility for identifying, evaluating and delivering M&A opportunities. Mark has worked with Flybe since 1996 and has been closely involved with significant strategic developments at the Group, including the acquisition and integration of BA Connect, Flybe's IPO in December 2010 and leading the acquisition of Finncomm.

In light of his new executive role, Mark has been replaced as Deputy Chairman by Charlie Scott, Flybe's Senior Independent Director.

In April 2012, I was delighted to confirm the appointment of Lord (Digby) Jones of Birmingham as a Non-Executive Director. Digby is a former Minister of State for Trade & Investment and Director-General of the Confederation of British Industry, a post he held between January 2000 and June 2006. He understands the UK regions perhaps better than anyone in the public arena and shares Flybe's passionate commitment to training and skills development.

Flybe's achievements in the UK and Europe would not have been possible without over 3,400 loyal and motivated employees whose talent, commitment and can-do attitude make Flybe what it is today. On behalf of the whole Board, I would like to thank them for their hard work and continuing support.

Regional Aviation and the UK Economy

Flybe's regional aviation business model is predicated on meeting the transport requirements of our seven million plus passengers who need to get from A to B for reasons of business, visiting family and friends or leisure but who have limited alternative transport options, either because of a lack of road and rail infrastructure both into and within the UK regions or because their journeys take them across large bodies of water.

A combination of practical and political obstacles, compounded by a London-hub driven transport policy, will ensure, for decades to come, no adequate rail infrastructure will be developed in the UK regions. For anyone needing to get from, say, Exeter to Glasgow and back in a day the choice is under 2 hours on an aircraft versus 14 hours on a train.

Flybe, and other regional airlines, therefore play a critical role in facilitating regional economic and business development. Indeed, we are a lifeline to certain regions. As we do our utmost to keep costs and ticket prices down in the face of increasing oil prices and other inflationary pressures (for instance, through a multi-billion pound investment in more fuel-efficient aircraft over the last decade), it is extraordinary that our passengers continue to be hit by continuing increases in APD. The UK APD domestic 'double dip' needs to be addressed. This is where UK domestic passengers pay APD twice, while those flying abroad pay just once because APD only applies to flights that start from the UK. It is inequitable that a return passenger travelling between Glasgow and Belfast City (208 miles) pays double the tax of someone flying between Glasgow and Dalaman in Turkey (4,086 miles).

Flybe has paid £64.0m and £55.0m respectively to the UK government in respect of APD. This equates to about 11% of the revenue we have generated in Flybe UK. Furthermore over 40% of the 7.3 million passengers carried have been travelling for business to and from the UK regions and consequently Flybe UK's contribution to the regional economies is even more important.

The rise in APD is symptomatic of successive governments failing to lay out an aviation policy which sets out specific goals and objectives to ensure that the UK has a 21st century transport infrastructure.

We would hope that the UK government's Aviation Strategy, to be published in the summer, will fully recognise the role that regional aviation plays in the country's international and domestic trade. At a time of economic difficulty, a lack of a coherent and comprehensive transport policy, combined with illogical hikes in stealth taxation on an industry critical to the country's economic prosperity, is having a detrimental impact on airlines such as Flybe and ultimately the economic prosperity of the UK's regions.

Outlook

Flybe is Europe's largest independent regional airline, flying over 200 routes from more than 100 airports across eighteen countries. It has a resilient business model and a clear growth strategy. Through a continuing focus on managing costs and capacity we are mitigating the impact of the economic downturn in the UK. We are pleased with the progress we have made with Flybe Finland, underpinning our European expansion plans and the replication of our UK operations in terms of scale. Meanwhile, our fleet substitution programme, along with a de-risking of the business through a significant increase in contract flying, will have a far reaching beneficial impact on the business and one that will benefit the Group for many years to come.

We will continue to invest in the Group's future ensuring that we maintain our market leading position in the UK regions and, at the same time, building a similar position across Europe.

We remain in a challenging environment. However, Flybe today is a business of real scale and substance, and one which has again demonstrated its resilience. Flybe is well placed to take advantage of any improvement in the UK macro environment and has a strong platform in Europe to leverage, leaving the Group strongly placed for the future.

Jim French CBE

Chairman and Chief Executive Officer

FINANCIAL REVIEW

Summary

Flybe has had a challenging 2011/12 but despite this saw growth in both revenue under management and Group revenue.

·; The core Flybe UK business has experienced a difficult economic backdrop and higher fuel costs. Despite these challenges, the division recorded a profit before tax* of £0.6m. We have maintained our position as the leading carrier of UK domestic passengers with a 28.0% market share and our passenger numbers have increased by 2.2% to 7.3 million.

·; The key driver of the overall Group loss arises from the expansion into Europe with Flybe Europe generating a £3.7m loss, being its share of loss from its joint venture operations in Finland together with related management costs. This result was broadly in line with expectations. The Flybe Finland joint venture is an important foothold for the Group as it looks to export its regional business model into continental Europe. Flybe Finland already operates more flights in the Finnish domestic market than any other airline, and Flybe and Finnair have ambitions to further expand the joint venture in the Nordic and Baltic regions.

·; Flybe Aviation Support generated a loss for the year of £0.3m, comprising a profit of £0.9m on the maintenance, repair and overhaul ('MRO') business, and a loss of £1.2m in the Training Academy's first full year of trading in its new building.

·; Group costs were £2.8m up slightly on last year's £2.5m with an increase in salary costs offset by slightly lower advisor and other fees.

* profit before tax is the segment result after adding back Group costs as appropriate

At 31 March 2012, Flybe had net assets of £89.4m, total cash of £67.6m, unrestricted cash of £42.9m and net debt (i.e. total cash less borrowings) of £29.7m.

Key financial headlines

* 2010/11 restated to reclassify £5.2m of maintenance depreciation to maintenance assets.

Revenue under management has grown 14.0% to £678.8m from £595.5m largely due to the Group's new joint venture in the Nordic and Baltic region, Flybe Finland. Our partnership with Finnair has got off to a good start with our financial expectations largely being met. The joint venture has contributed £63.5m of the £83.3m increase in revenue under management seen over the course of the year. The relationship was further strengthened with the announcement post year end, on 22 May 2012, of a Memorandum of Understanding with Finnair to fly 12 Embraer E190 regional jets on behalf of Finnair under a contract flying arrangement, commencing in October 2012 for a five year term.

Group revenue increased by 3.3% to £615.3m from £595.5m in the previous year, a period that had been affected by disruption caused by the volcanic ash cloud and adverse weather conditions in November and December 2010. This growth in revenue was against a backdrop of a continuing decline in the overall UK domestic market. Flybe has shown considerable resilience over this period, growing its UK domestic market share to 28.0% and overall passenger numbers to 7.3 million.

Underlying EBITDAR declined to £88.8m, down 22.0% from the previous year's underlying EBITDAR of £113.8m and down 7.2% from the 2010/11 reported EBITDAR of £95.7m. The Group's underlying loss before tax was £7.1m (2010/11: underlying profit before tax £22.3m), and the reported loss before tax increased by £1.9m to £6.2m.

Set out below is a reconciliation from unadjusted EBITDAR and loss before tax to underlying figures, which adjust the 2012 results for revaluation gains on USD aircraft loans and the 2011 figures for the estimated impact of disruption from volcanic ash and extreme weather, unrealised gains and losses on fuel and foreign exchange hedges and IPO expenses incurred:

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

Fleet

Our fleet transition to a two-type, modern, fuel-efficient aircraft fleet in Flybe UK was completed in May 2009, comprising Embraer E-series regional jets and Bombardier Q400 turboprops. The fleet is being rebalanced towards jets with the introduction of E175s to improve the customer experience while retaining fuel-efficient aircraft at its core.

2011/12 has seen considerable activity with the acquisition of operations in Finland though our joint venture with Finnair, and the sale by Flybe UK of seven Q400 turboprop aircraft to Rand Merchant Bank. In addition, the UK operations took delivery of its first four E175 regional jets from Embraer (out of its firm order for 35 E175s, for delivery in the period to October 2016), and three Bombardier Q400 turboprops.

A total of 16 aircraft were acquired with the Finncomm (now Flybe Finland) business on 18 August 2011. Since that date, Flybe Finland has acquired one ATR 72 turboprop and handed back an ATR 42. It is currently intended that the Flybe Finland fleet will continue to comprise of Embraer E-series regional jets and ATR turboprops in the longer term.

The profile of Flybe's fleet under management in the 2011/12 year is summarised below:

Two of the Q400 aircraft are currently being operated on a two-year contract flying agreement with Brussels Airlines that commenced in March 2012.

Divisional results

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

Included with net finance costs for Flybe UK is the revaluation gain on USD dominated aircraft loans of £0.9m (2010/11: nil).

Flybe UK

Revenue

Flybe UK passenger numbers grew slightly to 7.3 million from 7.2 million. Seat capacity was stable at 11.6 million and we flew slightly fewer sectors at 137,400 (138,200 in 2010/11). Capacity management has been a key theme for Flybe in recent years as strenuous efforts have been made to manage the adverse effect of the depressed UK economic environment.

The growth in revenue has largely come from passenger numbers which advanced by 2.2%, coupled with improved ticket and ancillary yields. Total passenger yield was up 1.4% to £77.21 from £76.15 in 2010/11, comprising a 1.0% increase in ticket yield (from £62.35 to £62.97) and a 3.2% increase in ancillary yield (from £13.80 to £14.24). In addition, load factor improved by 1.4 percentage points (from 61.7% to 63.1%), largely reversing the fall in the previous year.

This improvement in yields per passenger and load factor resulted in passenger revenue per seat increasing by 3.7% from £46.96 to £48.71, and total passenger revenue increasing from £545.7m to £565.6m.

Other revenue in Flybe UK totalled £22.5m, down from £25.8m in 2011, a year which had benefitted from the revenue generated under our contract flying arrangement with Olympic Air.

Operating costs

* Constant currency is calculated for the 2010/11 year by applying the effective exchange rates that prevailed for reporting the 2011/12 results of $1.58 and €1.16 and constant fuel is calculated for the 2010/11 year by applying the effective blended rate paid for jet fuel per tonne in 2011/12.

Operating costs increased by 4.7% from £562.4m to £588.7m largely as a result of the increase in the price of jet fuel which went up by £1.21 per seat or half the overall rise of £2.36 per seat. On a constant currency and fuel basis, underlying operating costs increased from £580.4m in 2010/11 to £588.7m.

Operating costs per seat increased by 4.9% from £48.39 to £50.75. On a constant currency and fuel basis, this unit cost measure increased by 1.4% to £50.75 (2010/11: £50.03).

Fuel

Fuel is a significant variable cost which has a material impact on Flybe UK's results. A variety of external factors, such as changes in supply and demand for oil and oil-related products and the increasing role of speculators and funds in the futures markets, have played their part in making aviation fuel prices highly volatile. During 2011/12, the price of jet fuel remained significantly higher than in 2010/11, peaking at $1,140 per tonne on 11 April 2011.

During the year to 31 March 2012, Flybe UK used some 183,500 tonnes of jet fuel, a reduction on 2010/11 of 0.8%. The average market price during the year was $1,036 per tonne (2010/11: $795), with the Group paying a blended rate (net of hedges) of $853 per tonne (2010/11: $735). Including 'into plane' costs, Flybe's fuel costs in 2011/12 of £106.4m (2010/11: £92.5m) represent an all-in cost of $916 per tonne for 2011/12 (2010/11: $810). Using constant currency and fuel prices, our fuel costs per seat improved by 1.6% from £9.32 to £9.17, reflecting a continuing reduction in fuel burn per seat.

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 up to 12 months forward. The intention of this programme is to provide a significant element of certainty over its fuel costs for any forthcoming IATA season. As at 1 June 2012, 72.4% of the year to 31 March 2013 was hedged at an average price of $1,028 per tonne. Taking into account our hedged position, each $50 increase/decrease in the price of jet fuel reduces/improves Group profits in 2012/13 by £0.6m.

Efficiencies have been derived from our fleet replacement programme, operational improvements and careful management of routes and frequencies. The fuel used by the Group was 183,500 tonnes in the year to 31 March 2012 (representing 15.8kg per seat) and 185,000 tonnes in the year to 31 March 2011 (15.9kg per seat). Fuel efficiency in Flybe UK has continued to improve (in 2007/08, our fuel usage was 19.1kg per seat), reflecting our investment in a modern, fuel-efficient two-type aircraft fleet best suited to regional flying.

In the course of 2012/13, a fuel and foreign exchange hedging programme will be introduced into Flybe's joint venture in Finland, following the procedures already being used by Flybe UK. As at 31 March 2012, no hedging was undertaken there, although the exposure is more limited than that for Flybe UK as its leases are denominated in Euros, its main operating currency, leaving fuel and maintenance costs as its primary exposure.

Other operating costs

Staff costs increased by 6.2% of which 3.8% was due to increases in salaries. The remainder was as a result of increased social security and pension costs as well as the more frequent use of temporary labour to meet the peaks and troughs of demand. There have been a number of Group-wide voluntary staff cost saving initiatives in place relating to pensions, extra holidays, sabbaticals, part-time working and delayed recruitment that have helped manage the overall cost base.

Net airport costs, en route charges and ground operations increased by 1.1% largely due to higher charges levied by air traffic control providers partially offset by a small favourable movement in exchange rates. On a constant currency per seat basis, net airport costs, en route charges and ground operations increased by 0.8% to £17.66 (2010/11: £17.52).

Aircraft ownership and maintenance costs increased by 5.3% primarily due to movements in exchange rates and maintenance rate increases. On a constant currency per seat basis, aircraft ownership and maintenance costs increased by 4.1% to £12.72 (2010/11: £12.21).

Other operating costs (after adjusting for a net gain of £2.5m recognised in 2010/11 on settlement of the Group's claims against the manufacturer of some of the landing gear used on aircraft in the Group's fleet) decreased by £5.1m mainly due to savings in overheads and media spend.

Foreign exchange

The Group manages its foreign exchange positions based on its net foreign currency exposure. As regards 'net' foreign currency exposure (i.e. foreign currency expenditure less associated revenue), Flybe UK currently has a relatively small net exposure to the Euro, but has to purchase a significant volume of US dollars to settle expenditure on items such as fuel, maintenance, and aircraft operating leases and loan repayments. Flybe 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 1 June 2012, 83.5% of our anticipated US dollar requirements for the year to 31 March 2013 were hedged at an average exchange rate of $1.60. All existing derivative financial instruments are forward swap arrangements.

The table below sets out for each of the periods under review Flybe UK's US dollar requirements, forward derivative instruments taken out and blended exchange rate achieved:

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 2012/13 by approximately £2.7m.

In 2011/12, the income statement benefited by £0.9m from non-cash movements in the value of the Group's debt denominated in US Dollars that is held to purchase Embraer E-series jets. The movement in this US Dollar liability cannot be naturally offset against the value of the aircraft as the latter are recorded in UK Sterling in order to comply with the requirements of International Financial Reporting Standards. The income statement credit of £0.9m has therefore been adjusted in arriving at underlying profit before tax. Flybe UK will continue to be exposed to non-cash revaluation gains/losses on its US Dollar denominated aircraft loans, which will be adjusted in arriving at the Group's underlying results.

Flybe Europe

* For the period from acquisition on 18 August 2011 to 31 March 2012

** Group share of joint venture loss of £3.0m comprises Flybe Finland £3.2m loss and Finnish Aircraft Maintenance ('FAM') £0.2m profit. FAM is included within the Flybe Aviation Support division

With revenue of £62.7m and costs of £72.3m (£12.3m of which was fuel), Flybe Finland generated a loss before tax of £9.6m. A tax credit of £4.3m relating to deferred tax on the losses generated was also reported, resulting in a loss after tax for Flybe Finland of £5.3m.

Flybe Finland passenger numbers for the period from acquisition to 31 March 2012 were 0.3 million with a load factor of 40.4%. In addition, contract flying for Finnair accounted for a further 0.5 million passengers.

Overall, our 60% share from the Flybe Finland joint venture with Finnair was the largest contributor to the division's overall loss of £3.7m. In the period since its acquisition in August 2011, the joint venture has traded broadly in line with our expectations.

Flybe Aviation Support

MRO revenue grew by 18.1% in 2011/12 to £44.3m (2010/11: £37.5m), of which £26.4m was for third party customers (2010/11: £22.8m). This increase was driven by a 14.8% growth in man hours from 564,000 hours in 2010/11 to 647,000 hours. The MRO business recorded a profit before tax of £0.9m (2010/11: loss before tax £1.1m).

In its first full year of operation, the Training Academy successfully grew its revenue to £3.0m from £2.2m. However, Flybe has invested significantly to the future success of this business and as expected the Training Academy reported a loss of £1.2m (2010/11: loss of £0.4m).

Group costs

Group costs of £2.8m (2010/11: £2.5m) are included within the Flybe UK segment, and include Group Board salary costs and group related legal and professional fees. The movement is largely the result of the increase in directors' remuneration.

Loss before tax

The Group's operating loss was £4.9m (2010/11: loss of £0.9m).

After net finance costs of £2.5m (2010/11: £2.3m) and other gains of £1.2m (2010/11: loss of £1.1m), the loss before tax was £6.2m (2010/11: £4.3m loss).

(Loss)/profit after tax

Loss after tax was £6.4m (2010/11: profit after tax £3.8m). The current year tax charge was £0.2m (2010/11: credit of £8.1m).

EPS and dividends

Basic loss per share for the year was (8.5)p, compared with earnings per share of 6.4p in 2010/11. Adjusted loss per share was also (8.5)p, compared with adjusted earnings per share of 16.7p for 2010/11.

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

Cash flow

Despite the losses incurred this year, the Group has remained cash generative from an operating perspective.

The IPO in 2010/11 brought in £60.3m of net cash to the Group. As outlined at the time of the IPO, these proceeds are being used to assist in financing the Group's growth plans (via the creation of the joint venture with Finnair and the acquisition of Finncomm) as well as to provide equity deposits on new aircraft.

The largest movements in net capital expenditure were in relation to pre-delivery deposits for new aircraft and the acquisition, during the year, of four Embraer E175 regional jets and three Bombardier Q400 turboprop aircraft, financed by loans from BNDES and EDC respectively. Seven Q400 aircraft were sold to Rand Merchant Bank, and the associated loans repaid.

Balance sheet

The value of airport landing slots remained unchanged, with no additions, disposals or impairments.

The £136.9m of net book value of aircraft represents owned aircraft, engines and aircraft modifications, with seven aircraft being acquired (three Bombardier Q400s and four Embraer E175s) and seven Q400s sold during the year.

On 18 August 2011, Flybe and Finnair entered into a 60:40 joint venture which completed the acquisition of Finnish Commuter Airlines Oy ('FCA') and also involved Flybe acquiring a 46.3% stake in Finnish Aircraft Maintenance Oy (collectively, 'Flybe Nordic'). Flybe's share of the total consideration was £18.2m (€21.0m). Due to the nature of the shareholders' agreement, which requires certain key decisions to be agreed jointly between Flybe and Finnair, these acquisitions have been treated as joint ventures. After Flybe's share of joint venture losses of £3.0m in 2011/12, the carrying value of the interest in joint ventures at 31 March 2012 stood at £16.2m.

Net debt at 31 March 2012 of £29.7m (2011: net funds of £21.9m) reflected the capital outflows referred to in the cash flow section above. Borrowings increased by £13.6m to £97.3m as loans associated with the seven Q400 aircraft sales were repaid and new loans were taken out to finance the four new Embraer E175s and three new Bombardier Q400s delivered during the year. Net debt at 31 March 2012 includes restricted cash of £24.7m (£17.9m at 31 March 2011) 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.

The mark to market asset of derivative financial instruments reduced from £21.2m to £3.9m, largely as a result of the significant 'in the money' position at 31 March 2011 of fuel hedges entered into during 2010/11. Net negative other working capital decreased from £77.9m to £71.8m, largely due to the reductions in short-term maintenance-related provisions; increases in trade and other receivables were largely offset by increases in trade and other payables. Long-term maintenance-related items are largely responsible for the movement in other non-current assets and liabilities.

Shareholders' equity decreased by £18.5m driven principally by losses generated in the period of £6.4m and the reduction in derivatives fair value (reflected through the hedging reserve) of £12.2m. The balance sheet does not include the impact of the defined benefit pension scheme surplus of £0.8m. The scheme is closed to future benefit accrual and the surplus has not been recognised as the assets cannot be recovered by the Group.

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 these covenants since the inception of the arrangements.

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 statement. 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.

The Directors have considered the sensitivities presented by current economic conditions in the aviation sector in relation to passenger volumes and yields, fuel prices, foreign exchange, route selection and investment in new aircraft and will assess any actions they feel are necessary.

Flybe had free cash balances of £42.9m at 31 March 2012, met all of its operating lease commitments and debt repayment obligations as they have fallen due and passed all its financial covenants during the year.

The Directors have prepared a detailed trading budget and cash flow forecast which indicates that Flybe will be able to trade using operating cash flows for at least 12 months from the date of signing these accounts and will be able to meet its operating lease commitments and debt repayments as they become due.

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

Principal 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 2011. 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

Jim French CBE Andrew Knuckey

 Chairman and Chief Executive Officer Chief Financial Officer

8 June 2012

CONSOLIDATED INCOME STATEMENT

Year ended 31 March 2012

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended 31 March 2012

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 March 2012

CONSOLIDATED BALANCE SHEET

At 31 March 2012

CONSOLIDATED CASH FLOW STATEMENT

Year ended 31 March 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Year ended 31 March 2012

1. GENERAL INFORMATION

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2012 or 2011, but is derived from those accounts. Statutory accounts for 2011 have been delivered to the Registrar of Companies and those for 2012 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 2012 at www.flybe.com/corporate/investors.

2. critical accounting judgements and key sources of estimation uncertainty

Critical accounting judgements and key sources of estimation uncertainty

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 £136.9m for aircraft as at 31 March 2012. 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 (loss)/profit.

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 component, 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 the portions of such assets that the Directors believe will not be ultimately realised are 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. At 31 March 2012, the Directors had recorded previously unrecorded assets due to changes in the Group's future estimated profitability that were attributable to the Directors' expectation of the Group's future performance.

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

The Directors have determined that the surplus of assets over projected liabilities within the defined benefit pension scheme should not be recognised on the basis that there is insufficient certainty that this surplus will be recoverable by the Group when the scheme has eventually settled all of its obligations.

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, expected rate of return on plan assets and expected health care cost trend rates. Determination of the projected benefit obligations for the Group's defined benefit schemes and post-retirement plans are 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, commitments and pension costs in future periods.

3. business and geographical segments

Following the acquisition by Flybe Group plc of a joint venture, the divisional operating structure was organised into three separate operating divisions to support the Group's ongoing delivery of its strategy of European expansion and continued growth in its UK market.

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 Europe This business segment comprises the European airline businesses, including Flybe Finland and any future acquisitions, as well as organic development.

Flybe Aviation Support This business segment comprises the MRO and Training businesses supporting Flybe's UK and Europe divisions and serving third party customers, including aircraft maintenance, overhauls and the associated rotables and consumable parts.

Segment revenues and results

The segment result is (loss)/profit before tax, IPO expenses, and unrealised gains and losses on fuel and foreign exchange hedges.