Flybe Group Regulatory News (FLYB)

Flybe Group plc

("Flybe" or "the Group")

Preliminary Results for the Year Ended 31 March 2011

Flybe, Europe's largest regional airline, is pleased to report results for the year ended 31 March 2011.

Key financial headlines

* EBITDAR 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 (see financial review).

** Underlying profit before tax defined as profit before tax before 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 cash/(debt) includes restricted cash

Operational Highlights

·; Leading airline brand in the UK domestic market with 27.0% market share (2009/10: 26.0%)

·; Passenger numbers level at 7.2 million at a load factor of 61.7%

·; Passenger revenue per seat up to £46.96 (2009/10: £46.06)

·; Order for 35 Embraer E-Series regional jets, with options and purchase rights for a further 105 announced in July 2010

·; Announced codeshare with Air France in 2010, covering 62 routes

·; Flotation on London Stock Exchange completed on 15 December 2010 with new capital of £60.3m raised, after expenses

·; £13.0m Training Academy building completed in February 2011, and officially opened in April 2011 by the Chancellor of the Exchequer

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

"We are very pleased with the robust performance of the Group during what has been a challenging period for all airlines. Passenger numbers held steady during the period, and we have maintained and indeed built on our market leading position in the UK domestic market - of which we now hold 27% market share.

We are also continuing our strategy of expansion into continental Europe and the successful flotation in December 2010, which raised new capital of £60.3m, net of expenses, will assist in the delivery of this. This strategy is already showing considerable success, with the codeshare agreement with Air France covering 62 routes and the scheduled delivery of our first four E175 regional jets this summer.

"Flybe has a robust business model, is operationally flexible and efficient and has a strong and well-recognised brand in the UK and mainland Europe. We are confident that the Group is well positioned to benefit from the anticipated upturn in our core UK market and to successfully expand further into Europe. We therefore look forward to the future with confidence."

Enquiries:

Chairman and Chief Executive Officer's Statement

Overview

Looking at the past year, I am pleased to report on a robust performance by Flybe during what has been a transformational and eventful period for the Group. The start of the reporting period saw the eruption of the Eyjafjallajökull volcano in Iceland and the well-publicised disruptions to air travel throughout Europe that ensued. Towards the end of the period, in November and December 2010, extreme weather conditions across the UK also had a negative impact on all airlines, as flights were grounded or cancelled. All airlines also had to contend with an extremely challenging macro-economic environment, as consumer confidence remained fragile.

It was also a year of achievement for Flybe. Our successful flotation on the London Stock Exchange in December 2010 raised £60.3m of new capital, net of expenses. This will enable us to pursue our strategy of expanding our operations on mainland Europe and provides us with a platform for future growth by acquisition, purchase of new aircraft and by developing relationships with carriers across Europe. During the period Flybe reached an important codeshare agreement with Air France by which we became a feeder airline from the UK regions for Air France's transcontinental flights. We also continued our planned fleet expansion with an order placed for up to 140 Embraer E‑series regional jets.

Against the backdrop of an extremely eventful - and sometimes disruptive - environment, we are pleased to have increased our share of the UK domestic market to 27.0% and with the year's results. These demonstrate the robustness of our business model and the strength of our position to capitalise on future growth opportunities, both in the UK and Europe.

Results

Underlying profit before tax for the year was £22.3m compared to an underlying profit before tax of £7.4m in 2009/10. Group revenue was up 4.4% to £595.5m and underlying EBITDAR improved 30.9% to £119.0m.

After IPO costs and losses on fuel and foreign exchange hedges (unwinding gains recognised in the previous year), we reported a loss of £4.3m compared to a profit of £24.6m last year. This result is in line with the Board's expectations for the year and represents a strong performance in view of the challenging conditions faced by all airlines in the period.

Flybe ended the year in its strongest ever financial position. During 2010/11, operating cash inflow improved by 21.5% to £18.1m and, thanks to the IPO cash injection, we moved from a net debt (defined as total cash less borrowings) position at 31 March 2010 of £(21.4)m to a net cash position at 31 March 2011 of £21.9m. Net assets amounted to £107.9m.

None of these achievements would have been possible without nearly 3,000 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.

Conditions in Flybe's current core UK domestic market remain challenging, but Flybe's leadership in this market leaves us well placed to benefit as the market recovers.

Strategy for growth

The IPO raised new capital in Flybe of £60.3m, net of expenses at a time of considerable market volatility in Europe. The new capital will assist in the export of our business model into Continental Europe and in funding our fleet acquisition programme, while also strengthening our balance sheet. We were very pleased with the reception to the Offer and we look forward to building long-term relationships with our new shareholders.

The balance of the IPO funding, coupled with our own internal resources, will be used to develop relationships with carriers across Europe to provide new opportunities for our regional airline model. During the period, we entered into an important codeshare agreement with Air France, covering 62 routes. This enables us to fly more passengers into Air France's Charles de Gaulle hub from the UK regions, making Paris an attractive long-haul hub airport for UK travellers who wish to avoid the UK's Air Passenger Duty regime. We are confident that our long-standing relationship with Air France will develop further as new strategic opportunities materialise.

The investment opportunities for Flybe presented at the time of the IPO are still very much intact and underpin our strategy for growth. Our aim is to become Europe's largest and most profitable regional aviation group. We will achieve this by exporting our robust business model in the UK to other European geographies, through a combination of acquisition and organic development; retaining market leadership in and optimising profits from our core UK domestic market; continuing to develop our operations from the UK regions to European business cities and growing the turnover and profitability of our complementary MRO and Training Academy businesses.

We are already Europe's largest regional airline and we have been approached by a number of overseas airlines to use our recognised expertise in the regional aviation sector to make acquisitions, participate in joint ventures or manage the introduction of regional aircraft operations. In addition, we believe we are perfectly placed to capitalise on recovery in the UK as volume, yield and frequency gradually return. We will increase capacity on existing routes, develop new ancillary revenue streams and franchise opportunities and optimise fleet capacity by substituting existing carriers where appropriate.

Fleet

In July 2010, Flybe announced its plan to purchase 35 Embraer E175 88-seat regional jet aircraft (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). These regional jets are of a modern, fuel-efficient design. By re-balancing the fleet towards 88-seat Embraer E175 regional jet aircraft that are slightly smaller than our existing fleet of 118-seat E195 jets, we aim to improve the customer product and experience for Flybe's passengers. These new 88-seat E175 aircraft will have similar economics per flight to the 78-seat Bombardier Q400 turboprops they are replacing and, therefore, lower seat costs. During 2016/17, we will have moved - based on contracted deliveries and expected retirements - to an approximate 50:50 split between regional jet and turboprop aircraft in our fleet.

The 35 firm orders and 105 options and purchase rights afford us the opportunity of matching our fleet capacity to expected demand from existing operations while allowing the flexibility to increase the number of aircraft operated should expansion into new markets drive the need for additional capacity.

In the year to 31 March 2011, Flybe took delivery of one Bombardier Q400 turboprop aircraft and completed the sale and leaseback of one Q400. With the delivery since 31 March 2011 of a further two Q400s, our fleet now stands at 71 aircraft with an average age of 4.4 years consisting of 57 78-seat Q400 turboprops and 14 118-seat E-series jets.

As part of our continuing strategy to balance capacity and demand, we are at an advanced stage of negotiations with a purchaser regarding the sale of up to seven Q400 aircraft as we identified that European growth opportunities were more likely to come through acquisitions (with existing aircraft) and we adjusted our organic growth capacity accordingly. The deal removed surplus capacity from the UK market for 2011/12 to reflect the lower level of passenger demand resulting from the recovery of the UK economy being slower and shallower than expected.

In 2011/12, Flybe has scheduled deliveries of three 78-seat Q400 turboprops (two of which were delivered by 29 June 2011) and four 88-seat E175 regional jets, all of which are due to be delivered during the period to 30 September 2011. Two Q400 leases will expire in the second half of the year. The Group will continue to act opportunistically to match capacity to demand, particularly in its core UK market, which drives about 88% of revenues.

As at 31 March 2011, Flybe's fleet was as follows:

We also have the opportunity to acquire further aircraft as follows:

Of these, two Q400 turboprops had been delivered by 29 June 2011.

Aviation Services

This business consists of two activities: Flybe's MRO operation, Flybe Aviation Services, and the Flybe Training Academy.

Flybe Aviation Services has been more affected in 2010/11 by the 2008/09 economic downturn due to the late cycle nature of the MRO industry, where the reduced flying programmes of our regional airline customers led to the deferral of major maintenance programmes. This was reflected in the man-hours worked which were down from 680,000 in 2009/10 to 564,000 in 2010/11. Of these total man hours, some 66.6% were for third party customers in 2009/10 (the balance being work on behalf of Flybe), reducing slightly to 63.1% in 2010/11. The improvement in economic conditions seen from 2010, particularly in Continental Europe, where most of our third party MRO customers are based, means we expect to see an improvement in activity as 2011/12 progresses.

Our Training Academy has had a successful year both in terms of development of the facilities and revenue growth. The new Flybe Training Academy building, opened officially by the Chancellor of the Exchequer on 20 April 2011, is now in use with 26 classrooms, workshop training facilities, cabin crew emergency training facilities and a flight simulator hall which can accommodate up to four flight simulators. We currently have one simulator installed and another is due to start operating in early 2012. This facility brings together all our training activities under one roof and will allow us to provide a much more attractive proposition to other regional airlines as we look to replicate the third party work profile already achieved by our MRO business. The year also saw good growth in third party training revenues which reached £1.3m, up from £0.9m last year.

Impact of current fuel prices

This calendar year has seen a sustained and high price for oil, with Brent Crude priced over $110 per barrel on all but one day since late February 2011 until 23 June 2011 when the International Energy Agency released 60 million barrels from government stocks. Although we have a strong hedge book for 2011/12 (being 69% hedged at the beginning of the year at $783 per tonne), this only provides protection for a limited period of time, with higher fuel prices impacting the Group from the second half of 2011/12 onwards, as the current hedging arrangements start to unwind. Flybe has therefore introduced a fuel surcharge of £3 per passenger for flights on or after 1 September 2011. The surcharge will be removed should the price of Brent Crude return to below $75 per barrel for a period of 28 consecutive days.

Board

There have been no changes to the Group Board or Operating Board structures during the year, although we were sorry to lose the wise counsel of Non-Executive Director David Brown who retired from his long‑standing Board membership - which included a five year period as Chairman - and representation for our major shareholder, Rosedale. I would like to thank David for his tremendous contribution to Flybe over many years. Anita Lovell replaced David as Non-Executive Director representing Rosedale in July 2010 and her depth of experience and supportive approach has already shown that she will be a strong contributor to our continuing development. The stability of our Board underpins the resilience of our business, and the expert and experienced advice of our independent Non-Executive Directors has helped us to remain robust during the economic downturn and to effectively position ourselves for growth.

The Executive Management team, comprising the second tier of management reporting to the Operating Board, has provided tremendous support to the Operating and Group Boards during the year, and continues to be developed and strengthened.

Outlook

We expect single digit percentage growth in 2011/12 in passenger numbers and revenues in our core UK domestic and UK to Europe businesses. Current trading is encouraging, with forward ticket sales revenue up 8.4% year-on-year on broadly flat capacity. We repeat our guidance for 2011/12 of a profit before tax broadly comparable to the 2010/11 underlying profit before tax and one-off items.

Flybe's main opportunities for revenue growth will come from delivering our strategy of expansion into new European markets. As the UK's number one domestic airline and already Europe's largest regional airline, Flybe is seen as an attractive potential partner by European flag carriers, and we remain in active discussions with several of them. These discussions have already led to the Air France codeshare announced in July 2010 and we expect further announcements to be made in due course.

We take delivery this summer of our first four aircraft from the 35 E175 aircraft order announced last summer. This order, together with the 105 options and purchase rights, affords us a cost effective and flexible fleet growth plan through to 2020.

Flybe enjoys a market leading position in the UK and is actively pursuing clear opportunities for further growth in Europe. With our strong brand, robust business model and financial stability, we are well placed to continue our European expansion and to capitalise on economic upturn in the UK. We therefore look forward to the future with confidence.

Jim French CBE

Chairman and Chief Executive Officer

Financial Review

Summary

Flybe has had a successful 2010/11 year, a highlight of which was the successful listing of our shares on the London Stock Exchange on 15 December 2010, raising £60.3m net of expenses. We have grown revenue and underlying profits, maintained our position as the leading carrier of UK domestic passengers with a 27.0% market share and our passenger numbers have been stable at 7.2 million.

Flybe finished the year in its strongest ever financial position, with net assets of £107.9m, total cash of £105.6m and net cash (i.e. total cash less borrowings) of £21.9m.

In addition, we completed the construction of the new Training Academy building, providing us with a superb facility for our own pilots, cabin crew and engineers and our third party customers. 2010/11 also saw the completion of our contract with Olympic Air which had started over a year previously. This wet lease of up to four Q400 aircraft ensured we had no surplus capacity through the economic recession.

Key financial headlines

*See table below for reconciliation from unadjusted to underlying results

Revenue increased by 4.4% despite the impact of volcanic ash and weather disruption, without which the growth rate would have been significantly higher.

Underlying EBITDAR grew by £28.1m (or 30.9%) to £119.0m, and underlying profit before tax also advanced strongly, increasing by £14.9m (or 201.4%) to £22.3m.

After adjusting 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, Flybe reported an EBITDAR of £100.9m and a loss before tax of £(4.3)m. Set out below is a reconciliation from unadjusted EBITDAR and profit before tax to underlying figures:

Volcanic ash and weather disruption

During 2010/11, Flybe experienced two significant periods of disruption, both of which were communicated to shareholders during the course of the year:

·; Ash cloud resulting from the eruption of the Eyjafjallajökull volcano in Iceland during April and May 2010 shut down airspace across northern Europe and, in particular, our main operations in the UK. This led to Flybe cancelling 3,177 flights, representing approximately 2.2% of our planned flying programme for the year. We have estimated that the net negative impact on profits amounted to £11.6m, representing approximately 2.0% of the Group's revenues. With the changes implemented by the CAA (in May 2010) in the regulations concerning the safe flying of aircraft in the presence of volcanic ash, future eruptions are likely to have a much lower impact on Flybe's flying programme when compared to the disruption experienced in 2010. This was borne out during the recent eruption of the Grimsvotn volcano, during which only 90 flights were cancelled under the new regulations.

·; The widely reported extreme weather conditions across a major part of the UK's regions in November and December 2010 resulted in prolonged disruption to a significant proportion of our network. Some airports were either closed or seriously restricted for up to 30% of the time available, with Scotland, Northern Ireland and the South Coast of England being particularly badly affected. As a result, some 1,980 of Flybe's flights were cancelled, representing approximately 1.4% of our planned flying programme for the year. We have estimated that the net negative impact on profits amounted to £6.5m. 

The table below details our estimate of the financial impact of the above disruptions in the year to 31 March 2011:

Fleet

Our fleet transition to a two-type modern, fuel-efficient aircraft was completed in May 2009, and 2010/11 saw little activity in terms of fleet movement. One Q400 aircraft was acquired during the year and one was sold and leased back.

Flybe's fleet profile in the 2010/11 year is summarised below:

Financial review

Revenue

Even with the challenges highlighted previously, revenue grew to £595.5m from £570.5m in the previous year. Without the impact of the disruption caused by the volcanic ash cloud and the adverse weather in November and December 2010 passenger numbers would have grown rather than remain broadly stable at 7.2 million. Seat capacity rose from 11.3 million in 2009/10 to 11.6 million and sectors flown increased to 138,200 from the 135,100 flown in 2009/10.

The growth in revenue has largely come from improved ticket and ancillary yields. Total passenger yield was up 5.0% to £76.15 from £72.54 in 2009/10, comprising a 3.0% increase in ticket yield (from £60.56 to £62.35) and a 15.2% increase in ancillary yield (from £11.98 to £13.80). This improvement in yields per passenger meant that, despite a reduction in load factor of 1.8 percentage points (from 63.5% to 61.7%), passenger revenue per seat increased by 2.0% from £46.06 to £46.96, and total passenger revenues increased by 4.8% from £520.7m to £545.7m.

Maintenance, training and other revenue was flat year-on-year at £49.8m. Our MRO and training businesses suffered in 2010/11 from the late cycle nature of these sectors within the aviation industry, as airlines' reduced flying programmes during the economic recession resulted in delayed maintenance programmes. We expect to see third party revenue from MRO activities return to more normal levels during the course of 2011/12. At the same time, we expect to see continued growth in third party training revenues.

Operating costs

* Underlying operating costs are defined as operating costs before IPO expenses and unrealised gains and losses on fuel and foreign exchange hedges

** Constant currency is calculated for the 2009/10 year by applying the effective exchange rates that prevailed for reporting the 2010/11 results of $1.62 and €1.18

Underlying operating costs increased by 5.0% from £560.1m to £587.9m largely as a result of a weaker sterling to US dollar exchange rate ($1.86 in 2009/10 but $1.62 in 2010/11), and volume-related increases. On a constant currency basis, underlying operating costs were broadly stable at £587.9m (2009/10: £580.8m).

Underlying operating costs per seat increased by 2.2% from £49.56 to £50.68. On a constant currency basis, this unit cost measure showed a reduction from £51.39 to £50.68.

Fuel

Fuel is a significant variable cost which has a material impact on Flybe'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 the course of the year to 31 March 2011, the price of jet fuel has risen from $740 per tonne, peaking at $1,074 per tonne at 31 March 2011.

During the year to 31 March 2011, Flybe used some 185,000 tonnes of jet fuel. The average market price during the year was $795 per tonne, with the Group paying a blended rate (net of hedges) of $735 per tonne. Including 'into plane' costs, Flybe's fuel costs of £92.5m represent an all-in cost of $810 per tonne for 2010/11. Using constant currency and fuel prices, our fuel costs per seat improved by 7.5% from £8.62 to £7.97 reflecting a continuing reduction in fuel burn per seat.

During normal market conditions, Flybe 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 24 June 2011, 79.0% of the year to 31 March 2012 was hedged at an average price of $817 per tonne. Further details are given in note 35 to the consolidated financial statements.

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 182,400 tonnes in the year to 31 March 2010 (representing 16.1kg per seat) and 185,000 tonnes in the year to 31 March 2011 (15.9kg per seat). Fuel efficiency 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.

As a private company, Flybe had historically prepared its financial statements under UK GAAP, and its fuel hedges qualified for hedge accounting under the requirements of UK accounting standards. However, IFRS requires significantly greater documentation at the time of entering the hedges in order for financial instruments to qualify for hedge accounting. Therefore, hedges entered into by Flybe up to 31 March 2010 did not qualify for hedge accounting under IFRS, hence the unrealised gains and losses on hedges recorded in the IFRS accounts for 2009/10 (gain £18.3m) and 2010/11 (loss £6.8m). All hedges entered into since 1 April 2010 have been documented to the standards required to meet IFRS hedging requirements, and we do not therefore expect to see material unrealised gains or losses on hedges in future years' income statements.

Other operating costs

Staff costs decreased by 1.3% due to the reduced use of contract workers and overtime to meet the lower level of demand for services within our Aviation Services' business, together with a number of Group-wide voluntary staff cost saving initiatives completed during the year including salary sacrifice for pensions and extra holidays as well as voluntary sabbaticals, part time working and early retirement/severance. The combined effect of these initiatives more than offset the slight increase in permanent Airline staff numbers and average employee costs as a result of agreed pay awards.

Net airport costs, en route charges and ground operations increased largely due to higher charges levied by air traffic control providers coupled with movements in exchange rates. The extreme weather conditions in November and December 2010 also had an impact, with de-icing costs increasing significantly year-on-year. On a constant currency per seat basis, net airport costs, en route charges and ground operations increased by 2.2% to £17.47 (2009/10: £17.10).

Aircraft ownership costs increased because of movements in exchange rates, maintenance rate increases and additional leased aircraft. On a constant currency per seat basis, aircraft ownership costs were stable at £10.80 (2009/10: £10.71).

Other operating costs include a net gain of £2.5m recognised on settlement of the Group's claims against the manufacturer of some of the landing gear used on aircraft in the Group's fleet. The original faults became apparent in the service of another airline in 2007 and were quickly resolved with a design that was developed by Flybe Aviation Services before being approved by the manufacturers of both the aircraft and that of the landing gear.

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 revenues), Flybe 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. Flybe generates no significant US dollar revenues and actively manages its US dollar position through a foreign exchange forward purchase programme similar to that outlined for fuel. As at 24 June 2011, 91.0% of our anticipated US dollar requirements for the year to 31 March 2012 were hedged at an average exchange rate of $1.58. All existing derivative financial instruments are forward swap arrangements.

The table below sets out for each of the periods under review (i) Flybe's US dollar and Euro requirements, (ii) forward derivative instruments taken out in each currency and (iii) blended exchange rate achieved for each currency:

Profit after tax

Profit after tax was £3.8m (2010: £22.2m). The current year tax credit was £8.1m (2010: charge of £2.4m). The tax credit results from the historical position of the Group, which had been loss-making, being converted into a profitable position and the associated deferral of build-up of accumulated capital allowances. The tax credit results from the recognition of previously unrecognised deferred tax assets (relating primarily to capital allowances) due to our expectation that taxable profits will increase as time progresses.

EPS and dividends

Basic earnings per share for the year were 6p, compared with 42p in 2010. Adjusted earnings per share (see note 13 to the consolidated financial statements) were 17p, compared with 19p for 2010.

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

Cash flow

The IPO, on 15 December 2010, was the most significant event during 2010/11 from a cash flow perspective, bringing in £60.3m of net cash to the Group. In addition, net cash from operating activities increased by 21.5% to £18.1m.

The largest movements in net capital expenditure were in relation to deposits for aircraft and the new Training Academy building. As at 31 March 2011, there were four aircraft deposits in place against deliveries due in the early part of the year to March 2012; only one option deposit was in place at 31 March 2010. Other aircraft-related capital expenditure movements reflect the one Q400 that was delivered in January 2011 and the disposal of another on a sale and leaseback transaction in April 2010. The funding of the Training Academy building construction and fit-out was achieved through a mix of contributions from government agencies (reflected in deferred income and the movement in working capital), loan finance and Flybe's own resources.

Balance sheet

The value of airport landing slots remained unchanged, with no additions, disposals or impairments. The £110.9m of net book value of aircraft represents owned aircraft, engines and aircraft modifications, with one aircraft being acquired and another being sold and leased back during the year.

Net debt of £21.4m became net funds of £21.9m as free cash increased by £41.6m to £87.7m largely as the result of the cash inflow from our December 2010 IPO, and cash generated from operations. Borrowings remained stable at £83.7m. The finance raised at our IPO on 15 December 2010 has largely been retained as free cash which we expect to use to assist funding the Group's expansion into Europe and our contracted aircraft purchase of 35 E-series jets from Embraer announced in July 2010. Net funds at 31 March 2011 include restricted cash of £17.9m (£16.0m at 31 March 2010) which represents, predominantly, cash deposits held in favour of aircraft owners to secure operating lease arrangements and cash held with the Group's principal banker to facilitate guarantee arrangements with suppliers.

Net negative other working capital fell by £35.0m mainly due to the increase in the aircraft deposits (as noted above) and the value of financial instruments classed as current assets.

Shareholders' equity increased by £86.4m driven principally by the issue of new shares in December 2010 for £60.3m (net of share issue expenses) and the derivatives fair value increase of £15.7m. This does not include the impact of the defined benefit pension scheme surplus of £4.6m. The scheme is closed to future benefit accrual and the surplus has not been recognised as the assets cannot be recovered by the Group.

Net funds/(debt)

Following the raising of new capital on IPO in December 2010, offset by further pre-delivery payments of £13.8m in the year on Q400 and E175 contracted deliveries, we have been able to convert our net debt position of £21.4m at 31 March 2010 to a net funds position at March 2011 of £21.9m.

Covenants

The Group has certain financial performance covenants in relation to some of our aircraft financing agreements. These specify performance, depending on the contractual terms, against a series of tests, which are, generally, performed quarterly. Flybe has met all the terms of these covenants since the inception of the arrangements (see note 23 to the consolidated financial statements).

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. In addition, note 35 to the consolidated financial statements covers Flybe's financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

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 has free cash balances of £87.7m, has met all of its operating lease commitments and debt repayment obligations as they have fallen due and passed all its financial covenants.

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.

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

Consolidated Income Statement

Year ended 31 March 2011

Consolidated Statement of Comprehensive Income

Year ended 31 March 2011

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Year ended 31 March 2011

Consolidated Balance Sheet

At 31 March 2011

Consolidated Cash Flow Statement

Year ended 31 March 2011

1. GENERAL INFORMATION

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2011 or 2010 but is derived from those accounts. Statutory accounts for 2010 have been delivered to the Registrar of Companies and those for 2011 will be delivered in due course. The auditors' reports on those accounts were unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) ofthe Companies Act 2006.

Full financial statements which comply with IFRSs can be found on our website from 30 June 2011 at [www.flybe.com/investors].

2. critical accounting judgements and key sources of estimation uncertainty

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 £110.9m for aircraft as at 31 March 2011. 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.

2. critical accounting judgements and key sources of estimation uncertainty (continued)

Carrying value of aircraft (continued)

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 2011, the Directors recorded £2.8m of previously unrecorded assets due to a change in the Group's future estimated profitability attributable to the Directors' expectation that both the Group itself and the airline industry as a whole would see increasing profitability over the next 12 months.

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.

2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued)

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

3. BUSINESS AND GEOGRAPHICAL SEGMENTS (continued)

Geographical information

The Group's revenue from external customers by geographical location is detailed below: