Flybe Group Regulatory News (FLYB)

Flybe Group plc

Half-yearly financial report for the six months ended 30th September 2015

Responsibility Statement

For the six months ended 30th September 2015

We confirm that to the best of our knowledge:

By order of the Board

Flybe Group plc

Interim management report

To the shareholders of Flybe Group plc

Cautionary statement

This Interim Management Report (IMR) has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed. The IMR should not be relied on by any other party or for any other purpose. This preliminary announcement contains certain forward-looking statements. Such statements are made by the directors in good faith based on information available to them at the time of their approval of this report, and they should be treated with caution due to the inherent uncertainties underlying such forward-looking information.

This IMR has been prepared for the Group as a whole and therefore gives greater emphasis to those matters which are significant to Flybe Group plc and its subsidiary undertakings when viewed as a whole.

Flybe turnaround on course: Results for the six months to 30th September 2015

Flybe, Europe's largest regional airline, announces continued progress in its turnaround with revenue growth in its core business and a return to profitability. This complements last week's announcement that Flybe has resolved its last major legacy issue with the completion of Project Blackbird concerning surplus E195 jets, and positions Flybe well for future profitable growth.

Financial highlights - Group

Flybe UK

o 1.6% increase in yield to £72.05

o 2ppts decrease in load factor to 76.3%

o Lower surplus aircraft cost with the mitigations from flying three E195 aircraft in H1

o Non-recurrence of one-time charge of £4m for historic EU261 liabilities

o Lower costs in aircraft ownership and marketing

Flybe Aviation Services (FAS, previously MRO)

Board

Long-term Strategy and Business Objectives

Q3 Trading Update (as at 9th November 2015).

Flybe UK's current forward booking profile for Q3 2015/16 shows the following % changes vs. prior year:

Saad Hammad, Chief Executive Officer, commented:

"Our turnaround is on course with a very encouraging performance in the first half. We have returned to profit by delivering significant revenue growth through capacity investment and improved commercial execution, while reducing unit cost. We are also pleased to have resolved all our key legacy issues with the completion of Project Blackbird. The benefits from this will start to come through next financial year.

Competitive pressures are expected to grow in the second half with industry-wide benefit from lower fuel costs and growth in seat capacity. Against this backdrop, we are remaining disciplined in cost control and our capacity growth plans. Our focus will be on building service frequency on our established routes to maximise our appeal to time-sensitive business travellers.

While there are still a number of challenges ahead, Flybe enters the winter season with solid momentum".

Enquiries:

There will be an analyst presentation at 09.00 BST on 11th November 2015 at Andaz Hotel, 40 Liverpool Street, London, EC2M 7QN.

A live webcast of the presentation will be available at www.flybe.com

Detailed Results for the six months ended 30th September 2015

1. EBITDAR defined as operating profit/(loss) after adding back depreciation, amortisation and aircraft rental charges.

2. Adjusted profit/(loss) before tax and USD loan revaluation gains of £1.8m (H1 2014/15: revaluation losses of £(2.3)m). 2014/15 disclosures have been represented to exclude discontinued operations of (£(12.0)m) and include surplus capacity costs of £14.5m. Surplus capacity costs are superseded by the impact of project Blackbird as they are now part of the operating costs.

EBITDAR and profit measures

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

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

Unadjusted profit/(loss) before tax is adjusted to remove the revaluation loss/(gain) on USD aircraft loans.

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

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

2. H1 2014/15 disclosures have been represented to include surplus capacity costs of £14.5m. H1 2014/15 excludes discontinued operations operating loss of £(12.2)m for Finland.

3. The increase in depreciation in H1 2015/16 is the depreciation on maintenance assets.

Fleet

Flybe's total fleet under management at 30th September 2015 totalled 70 aircraft with an average age of 7.3 years (31st March 2015: 66 aircraft, average age 7.0 years), as summarised below:

1. Six aircraft are owned in a finance lease structure. Eight aircraft are owned by Flybe Limited and have loan financing secured against them.

An E195 was returned early to the lessor on the 28th May 2015. The four incremental Q400 aircraft in the period are the first of the 10 Republic aircraft expected to be delivered during 2015/16. Two of the Q400 aircraft operate in support of the SN Brussels white label operation. The ATR 72-600 is the first aircraft supporting the SAS white label operation which started in October.

Business results

Flybe's results analysed by segment are summarised below:

1. Flybe UK profit before tax is the segment profit of £23.5m (H1 2014/15: loss of £(0.7)m) after adding back Group costs of £2.1m (H1 2014/15: £1.8m), and revaluation gains on USD aircraft loans of £1.8m (H1 2014/15: losses of £(2.3)m). H1 2014/15 disclosures have been represented to include surplus capacity costs of £14.5m.

2. Group adjusted profit/(loss) before tax and revaluation on USD aircraft loans is defined as profit/(loss) before tax and revaluation gains on USD aircraft loans of £1.8m (H1 2014/15: losses of £(2.3)m).

3. Finland was discontinued in H2 2014/15.

Flybe UK

Revenue

Flybe UK's seat capacity1 increased by 13.1% to 5.9 million in H1 2015/16 (H1 2014/15: 5.2 million) with scheduled sectors increased by 14.2% to 72,132 (H1 2014/15: 63,164). Passenger numbers2 increased 10.2% to 4.5 million (H1 2014/15: 4.1 million). Load factor3 decreased to 76.3%, down 2.0ppts (H1 2014/15: 78.2%), while passenger yield4 increased by 1.6% to £72.05 (H1 2014/15: £70.89). There was a resulting 0.3% fall in passenger revenue per seat5 to £54.56.

Change in definitions:

1. Seats represent the number of scheduled seats flown.

2. Passengers are people with an issued ticket where the ticket has charged a fare and/or a passenger surcharge and tax (if applicable). This includes people who purchase a ticket and do not show up for the flight where, as is usually the case, the ticket is non-refundable.

3. Load factor is the number of passengers divided by seats flown.

4. Passenger yield represents passenger revenue per passenger.

5. Passenger revenue represents total ticket and ancillary revenue including unflown APD less refunds (Passenger revenue per seat represented total ticket and ancillary revenue per seat in 2014/15).

Operating costs

1. Constant currency is calculated for the H1 2014/15 year by applying the effective exchange rates that prevailed for reporting the H1 2015/16 results of $1.53 and €1.37.

Operating costs increased by 3.1% from £299.5m to £308.7m, driven by an increase in capacity of 13.1% to 5.9 million seats. This was partially offset by the reduction in fuel price. The operating costs also include on-board sales cost (£4.0m) in H1 2015/16 vs. (£nil) in H1 2014/15 which in prior year was included net of revenue in Passenger Revenue.

Cost per seat on a constant currency basis, excluding fuel, reduced by 5.8% vs. prior year. Non-fuel cost per seat benefitted from lower surplus aircraft cost with the mitigations from flying three E195 aircraft in H1, non-recurrence of one-time charge for historic EU 261 liabilities and lower costs in aircraft ownership and marketing. Total cost per seat on a constant currency basis reduced by 7%, from £56.60 to £52.63.

H1 2014/15 operating costs included £4.0m in respect of historical EU 261 passenger compensation provision.

Fuel

Flybe UK's results are impacted by movements in the price of fuel which forms a significant variable cost for the business. Although H1 2015/16 initially saw an increase in fuel prices, they declined over the last few months. Brent crude has been in the USD48 to USD67 a barrel range for the majority of the period, although in the last two months prices have fallen with the average price being USD49. The price of jet fuel has traded between USD443 and USD642 per tonne. Aviation fuel prices remain capable of large and unpredictable movements due to a variety of external factors, such as changes in supply and demand for oil and oil-related products, and the role of speculators and funds in the futures markets.

During H1 2015/16, Flybe UK used some 92,300 tonnes of jet fuel, an increase on the 83,600 tonnes used in H1 of the prior year. Fuel burn improved to 15.7kg per seat for H1 2015/16 (H1 2014/15: 16.1kg). The average market price during the period was USD551 per tonne (H1 2014/15: USD954), with the Group paying a blended rate (net of hedges) of USD835 per tonne (H1 2014/15: USD959). Including 'into plane' costs, Flybe UK's fuel costs in H1 2015/16 of £52.7m (H1 2014/15: £55.5m) represent an all-in cost of USD933 per tonne (H1 2014/15: USD1055).

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 9th November 2015, 86.1% of the fuel requirement for H2 2015/16 was hedged at an average price of USD855 per tonne, and 70.1% of Flybe UK's expected fuel requirement in H1 2016/17 was hedged at an average price of USD668 per tonne.

The Group foreign currency hedging policy has an objective to reduce the volatility of costs. Flybe manages its foreign exchange positions based on its net foreign currency exposure, being foreign currency expenditure less associated revenue. Flybe UK currently has a relatively small net exposure to the Euro, but has significant US Dollar costs in relation to fuel, maintenance, aircraft operating leases and loan repayments. The Group generates no significant US Dollar revenue and actively manages its US Dollar position through a foreign exchange forward purchase programme similar to that outlined for fuel. As at 9th November 2015, 76.1% of our anticipated US Dollar requirements for H2 2015/16 were hedged at an average exchange rate of USD1.57, and 64.7% of its forecast US Dollar requirements for H1 2016/17 were hedged at an average exchange rate of USD1.54. All existing derivative financial instruments are forward swap arrangements.

The main increase in other operating losses in H1 2015/16 is the net foreign exchange revaluation of cost of sales and revenue at £(1.9)m.

Carbon emissions

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

Following the EU ETS regulation update in April 2014, the fuel emissions for calendar years 2013 to 2016 are subject to reduced scope; therefore the number of free allowances to be issued to aircraft operators each year from 2013 to 2016 was reduced in proportion to the reduced scope. Anticipated carbon allowances required for calendar year 2015 amount to 543,529 tonnes, with the free allowance allocation being maintained at the calendar year 2013's level of 222,800 tonnes. As at 9th November 2015, 100% of our anticipated requirement including free allowances for calendar year 2015 had been purchased at an average effective rate of €5.39. 99% of the anticipated requirement for calendar year 2016 had been purchased at an average effective rate of €7.87.

Flybe Aviation Services/MRO

The main business within this segment is based in Exeter. In addition, FAS provides MRO services to the Royal Air Force fleet of A400M aircraft at RAF Brize Norton.

FAS's revenue in H1 2015/16 decreased to £18.5m (H1 2014/15: £19.3m). Hours produced were impacted by delays of third party work from H1 to H2 and a focus on E195 solution preparation. Hours produced therefore decreased to 244k hours (H1 2014/15: 261k hours), which together with more competitive pricing produced a loss of £(0.3)m (2014/15: profit of £1.5m).

Group costs

Group costs of £2.1m (H1 2014/15: £1.8m) include Group Board salaries and Group legal and professional fees.

Group - overall results

The Group's operating profit of £21.9m compared to H1 2014/15 operating loss of £(0.6)m.

The Group incurred net finance costs of £0.9m (H1 2014/15: £0.2m) and other gains of £1.8m (H1 2014/15: other losses of £2.3m), the latter being due to the gains/ (losses) on translation of US dollar aircraft loans.

Profit before tax for the period was £22.9m (H1 2014/15: loss of £(3.3)m). There was a current tax credit of £3.9m arising from a significant reduction in the pension deficit and recognition of capital allowances (H1 2014/15: charge £0.1m). As a result, the Group reported a profit after tax for H1 2015/16 of £26.8m (H1 2014/15: loss of £(3.4)m).

Basic and diluted earnings/(loss) per share for H1 2015/16 was 12.3p, compared to a loss of (7.1)p in H1 2014/15 (see note 7 to the Condensed Financial Statements). Adjusted basic and diluted earnings per share (see note 7) was 11.5p, compared to (6.0)p for H1 2014/15. 2014/15 EPS disclosures have been represented to include surplus capacity costs of £14.5m.

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

Cash flow

Net cash inflows from operating activities before restructuring were £21.3m (H1 2014/15: inflow of £6.5m).

Balance sheet

The £163.7m of net book value of aircraft represents owned aircraft, engines and aircraft modifications.

Net funds at 30th September 2015 of £86.3m increased from the position at 31st March 2015 of £76.7m in the main due to working capital management. Net funds at 30th September 2015 included restricted cash of £18.0m (£18.0m at 31st March 2015) which is predominantly cash held with the Group's bankers to facilitate guarantee arrangements with merchant card acquirers, cash deposits held in favour of aircraft owners to secure operating lease arrangements.

The main movement in other working capital is due to the seasonal change in deferred income. Other non-current assets and liabilities include the £9.7m favourable movement resulting in a defined benefit pension scheme deficit of £11.3m at 30th September 2015, partly offset by an increase in maintenance provisions of £3.6m. At 31st March 2015, the pension scheme, which is closed to future benefit accrual, had a deficit of £21.0m.

Shareholders' equity increased by £32.8m as a result of the profit after tax in the period of £26.8m and the reduction in the pension scheme deficit of £9.7m. This was partially offset by the movement in hedge reserves of £2.0m.

Related party transactions

Other than the Long-Term Incentive Plan activity made to key management personnel (disclosed in note 14), there have been no material related party transactions since the last annual report.

Going concern

Flybe's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Interim Management Report on pages 4 to 6. The financial position of the Group, its cash flows and liquidity position, and events since the balance sheet date are described on pages 7 to 14. In addition, note 36 of the Group's Annual Report for the year ended 31st March 2015 covers Flybe's financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

Flybe had free cash balances of £179.2m at 30th September 2015, and has met all of its operating lease commitments and debt repayments as they have fallen due during the year.

Flybe faces trading risks presented by current economic conditions in the aviation sector, particularly in relation to passenger volumes and yields and the associated profitability of individual routes. In addition, the Group is exposed to fluctuations in fuel prices and foreign exchange rates. The Group's policy is to hedge between 60% and 90% of estimated exposures 12 months in advance. As of 9th November 2015, Flybe had purchased 77.6% of its anticipated fuel requirements and 70.2% of its anticipated US Dollar requirements for the following 12 months.

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

Risks and uncertainties

This section describes the principal risks and uncertainties which may affect Flybe's business, financial results and prospects. The Board has determined that these are the principal risks and uncertainties facing the Group for the remaining six months of the financial year. Pages 28 to 31 of the Group's Annual Report for the financial year ended 31st March 2015, which is available for download from its website at http://www.flybe.com/en/corporate/investors, contains further details on the principal risks, uncertainties and mitigations.

Flybe is exposed to the risk of a safety or security-related incident including a terrorist threat, or attacks from either internal or external sources as well as the risk of adequately responding to a safety or security-related event.

Reputational

Flybe operates an e-commerce business and deals with a significant amount of personal and business information.

Regulatory

Financial risks

Flybe is exposed to risks associated with:

Independent review report to Flybe Group plc

For the six months ended 30th September 2015

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the 6 months ended 30th September 2015 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of changes in equity, the condensed consolidated balance sheet, the condensed consolidated cash flow statement and related notes 1 to 18. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the European Union.

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

We conducted our review in accordance with the International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 6 months ended 30th September 2015 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Chartered Accountants and Statutory Auditor

Reading, United Kingdom

11th November 2015

Consolidated income statement

For the six months ended 30 September 2015 (unaudited)

Consolidated statement of comprehensive income

For the six months ended 30 September 2015 (unaudited)

Consolidated statement of changes in equity

For the six months ended 30 September 2015 (unaudited)

Consolidated balance sheet

As at 30 September 2015

Consolidated cash flow statement

For the six months ended 30 September 2015 (unaudited)

Notes to the condensed set of financial statements

For the six months ended 30th September 2015

1. GENERAL INFORMATION

The information for the year ended 31st March 2015 does not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. A copy of the statutory financial statements for that year has been delivered to the Registrar of Companies. The auditor reported on those financial statements: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

2. ACCOUNTING POLICIES

The annual financial statements of Flybe Group plc are prepared in accordance with IFRS as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted by the European Union.

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements.

No material new standards, amendments to standards or interpretations are effective in the period ending 31st March 2016.

IFRS 15 "Revenue from Contracts with Customers" and IFRS 9 "Financial Instruments" have been published, but not yet applied. The Group will apply these standards by year ending 31st March 2019, subject to EU endorsement. The assessment has not yet been finalised by management as to whether the impact of the above standards is likely to have a material impact on the reported results of the Group or its financial position.

3. BUSINESS AND GEOGRAPHICAL SEGMENTS

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:

Under IFRS 8, Flybe reports two business segments in order to comply with accounting standards. The presentation of segments is consistent with the published financial statements for year ended 31st March 2015.

Segment revenues and results

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

1 H1 2014/15 disclosures have been represented to include surplus capacity costs of £14.5m.

2 Finland was discontinued in H2 2014/15.

Flybe UK segment includes Group costs of £2.1m (H1 2014/15: £1.8m), revaluation gains on US dollar aircraft loans of £1.8m (H1 2014/15: losses of £(2.3)m).

Operating costs for H1 2014/15 included Finland £119.2m and historical EU 261 passenger compensation provision of £4.0m.

4. SEASONALITY

Flybe's operating results vary significantly from quarter to quarter within the financial year and the first half of the year is generally significantly stronger than the second half of the year. The airline industry is highly seasonal and demand and yields are significantly higher during the summer.

5. TAX

Current tax for the six month period is charged at 0% (six months ended 30th September 2014: 0%), representing the best estimate of the average annual effective tax rate expected for the full year, applied to the pre-tax income of the six month period. Deferred tax is calculated based on the expected annual outturn. The tax credit of £3.9m represents the capital allowances expected to be claimed in 2016/17. The tax charge of £0.1m reported in the H1 2014/15 results from the revaluation of previously recognised deferred tax assets as a result of the change enacted in the corporation tax rate in the UK.

6. DIVIDENDS

No dividends have been paid or proposed either during the six months ended 30th September 2015 or during the comparative accounting period.

7. EARNINGS/ (LOSS) PER SHARE

The calculation of the basic, diluted, adjusted basic and adjusted diluted earnings per share is based on the following data:

1. H1 2014/15 disclosures have been represented to include surplus capacity costs of £14.5m.

2. For the six months ended 30th September 2014 diluted loss per share is the same as basic loss per share because the Group recorded a loss and as such none of the potentially issuable shares are dilutive. Diluted profit per share is the same as basic profit per share in the six months ended 30th September 2015 because the average market price of ordinary shares during the period was less than the exercise price of the potentially issuable shares.

8. PROPERTY, PLANT AND EQUIPMENT

See note 13 for capital commitments.

9. BORROWINGS

Repayments on bank loans amounting to £6.4m were made during the period. No additional amounts were drawn down.

10. PROVISIONS

The Group's provisions are as follows:

Aircraft maintenance provisions are made in respect of contractual obligations to maintain aircraft under operating lease contracts. The amount and timing of the maintenance costs are dependent on future usage of the relevant aircraft. The additional provision in the period is included within maintenance charges shown in the consolidated income statement.

Recent decisions around EU 261 in the UK's Supreme Court have confirmed passenger rights in the case of technical delays caused to travel that are deemed to be within the airline's control. As a consequence, the management of Flybe UK have looked to assess what would be a reasonable and reliable provision based on the current level of claims experience, and a provision for compensation in relation to flight delays of £3.9m has been recorded as at 30th September 2015. This is being reviewed to ensure that the provision is in line with actual claims that are being processed and paid on a monthly basis.

The onerous lease provision at year end was due to an early termination agreement for aircraft FBEE. The aircraft was returned to the lessor in May 2015 and therefore this provision has been released.

11. CALLED UP SHARE CAPITAL

In the six months ended 30th September 2015 no shares were issued. The Company has one class of ordinary shares which carry no right to fixed income.

12. CONTINGENCIES

The Group has entered into arrangements to guarantee the Group's credit card arrangements and has placed bonds in favour of various aircraft lessors, handling agents, fuel suppliers and customs offices as follows:

The reduction in guarantees is due to having fewer guarantees and there is now no cash cover on the guarantees.

13. CAPITAL COMMITMENTS

The Group has, over time, contractually committed to the acquisition of aircraft with a total list price before escalations and discounts as follows:

Four aircraft were covered by these arrangements at 30th September 2015 (31st March 2015: four). Embraer has agreed to defer delivery of the four remaining E175s until calendar year 2018, in line with current fleet planning needs. It is intended that these aircraft will be financed partly though cash flow and partly through external financing and operating lease arrangements.

14. SHARE-BASED PAYMENTS

The company has a share award scheme under which employees of the Group maybe granted awards. Awards are exercisable at nil consideration.

July 2015 Award

Eligible employees were granted awards of 2,430,337 shares under the PSP with a grant date of 29th July 2015. The awards were in the form of an option over a number of Flybe shares with strike price of 1p per share, which vests subject to TSR and EPS performance conditions. 50% is subject to EPS, a non-market related condition, so the fair value of this portion does not take into account the performance condition. The charge taken each year will use an estimated level of vesting.

The performance period is over 3 years, commencing 1st April 2015. 50% of the award vesting is subject to TSR exceeding the median of the constituents of the FTSE SmallCap Index (excluding Investment

Trusts and Flybe Group) at the commencement of the Performance Period. If any options vest, they will have an exercise price of 1p.

To the extent the award vests, 50% of the shares under option will vest on the third anniversary of grant (28th July 2018), 25% will vest on the fourth anniversary of grant (28 July 2019), and the final 25% on the fifth anniversary of grant (28th July 2020).

September 2015 Award

Eligible employees were granted awards of 92,879 shares under the PSP with a grant date of 29th September 2015. The awards were in the form of an option over a number of Flybe shares with strike price of 1p per share, which vests subject to TSR and EPS performance conditions. 50% is subject to EPS, a non-market related condition, so the fair value of this portion does not take into account the performance condition. The charge taken each year will use an estimated level of vesting.

The performance period is over 3 years, commencing 1st April 2015. 50% of the award vesting is subject to TSR exceeding the median of the constituents of the FTSE SmallCap Index (excluding Investment Trusts and Flybe Group) at the commencement of the Performance Period. If any options vest, they will have an exercise price of 1p.

To the extent the award vests, 50% of the shares under option will vest on the third anniversary of grant (28th September 2018), 25% will vest on the fourth anniversary of grant (28th September 2019), and the final 25% on the fifth anniversary of grant (28th September 2020).

15. EMPLOYEE BENEFITS

The defined benefit obligation as at 30th September 2015 is calculated on a year-to-date basis, using the latest actuarial valuation as at 30th September 2015. There have not been any significant fluctuations or one-time events since that time which would require adjustment to the actuarial assumptions made at 31st March 2015. The defined benefit scheme liability as at 30th September 2015 has been updated to reflect the scheme cash flows and asset valuation movements which have occurred in the period, although the scheme's liabilities and membership numbers have not been updated for half year purposes.

16. FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURES

Carrying amounts and fair values

Valuation techniques and assumptions applied for the purposes of measuring fair value

The fair values of financial assets and financial liabilities are determined as follows:

The following table provides an analysis of the Group's financial instruments, all of which are grouped into Level 2 in the fair value measurement hierarchy:

17. RELATED PARTIES

Details of the compensation paid to the Directors will be disclosed in the Group's annual report for the year ending 31st March 2016.

18. POST BALANCE SHEET EVENTS

Project Blackbird: Flybe announced on 2nd November 2015 the resolution of the last major legacy issue. All of the remaining six E195s will be redeployed effective from end March 2016:

Glossary