Flybe Group Regulatory News (FLYB)

Flybe Group PLC

('Flybe' or 'the Group')

Update on Progress on Turnaround Plan and Network Strategy for UK Business

Flybe today announces an update on the progress of 'Delivery and Future Direction', the significant package of measures it has implemented in order to return Flybe UK, its UK based scheduled airline, to profitability and to provide a solid base for the future development of the business. The actions taken so far will now deliver £30m of cost savings in 2013/14 against the £25m target.

Flybe also announces further initiatives under the turnaround plan, including two significant transactions which will help finance Flybe's transition without recourse to its shareholders:

1. An agreement to transfer its 25 pairs of arrival and departure slots at London Gatwick Airport ('LGW') to easyJet PLC ('easyJet') for a total consideration of £20m. The realisation of the value of these slots will help Flybe finance its return to profitability. Completion is subject to Class 1 shareholder approval, expected in July 2013.

2. Flybe has agreed with Embraer the deferral of 16 new E175 aircraft due for delivery during 2014 and 2015. These aircraft will now not be delivered until 2017 to 2019. This deferral will lead to a reduction in pre-delivery payment commitments in winter 2013/14 of £20m.

KEY HEADLINES

·; Phase 1 target savings of £25m exceeded, with £30m of annual cost savings now secured for year 2013/14 onwards.

·; Details of Phase 2 of the plan already being implemented, targeting a further £12m of savings in 2013/14, and an annual run rate saving of £23m from 2014/15 onwards.

·; Head count already reduced by 22% from 2,730 to 2,140.

·; Agreement in principle reached with the British Airlines Pilots Association ('BALPA'), for up to a 5% reduction in salary in return for extra time off.

·; The turnaround plan is being financed without recourse to shareholders through:

o The transfer of arrival and departure slots at LGW to easyJet for £20m;

o The deferral of 16 E175 (Embraer E-Jet) aircraft deliveries, saving £20m of cash outflow for pre-delivery payments in winter 2013/14.

o The disposal of various other minor assets.

·; The announcement of revised network plans, with Flybe's exit from LGW routes in March 2014, and the concentration of future investment at core, defensible UK bases.

·; Reconfirmation of the medium term per unit operating profit targets announced on 23 January 2013.

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

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

23 May 2013

Enquiries:

Phase 1 - £30m of cost savings in 2013/14 versus original target of £25m

Flybe will deliver £30m of cost savings in 2013/14 in Phase 1 of its turnaround plan, versus its original target of £25m. These £30m of savings have been achieved in three key areas, outlined below:

(a) Headcount and employment cost reductions

£16m of cost savings have been delivered in employment and headcount costs.

·; 290 staff have left the business through the Group's redundancy programme. Only 43 of these leavers were made compulsorily redundant, with the rest leaving under the Group's voluntary programme.

·; 300 staff have left the business in line with the Group's outsourcing programme under transfer of business undertakings.

·; Flybe and BALPA have reached agreement in principle on up to a 5% reduction in pilot salary across the pilot workforce in return for extra time off.

 (b) Outsourcing projects

£8m of cost savings have been delivered by the outsourcing of non-core functions to third parties, including:

·; Approximately 70% of Flybe's line maintenance work outsourced to Monarch Engineering, in a contract that was implemented on 1 May 2013.

·; A number of ground/airport service functions outsourced to Menzies, Servisair and others with effect from April 2013. This initiative has been supported by the roll out of automated check-in processes (including baggage) across the Flybe UK network.

 (c) Reduction in supplier costs

£6m of cost savings have been delivered by renegotiation of the supplier cost base. Key areas targeted have included airport charges and estate costs

Phase 2 of turnaround plan - targeting additional annual savings of £25m

This initiative, launched under the banner of 'Making Flybe Fit to Compete', is a continuation of the Group's restructuring activities and targets a further permanent reduction in Flybe's cost base to enable it to compete effectively with any airline in its chosen regional market.

Phase 2 of the turnaround plan includes three major initiatives:

·; A further reduction in staff costs of £6m in 2013/14, rising to £9m in 2014/15. This is driven by both further headcount reduction of circa 80 staff (the vast majority of which are expected to be achieved by voluntary redundancy), and the creation of new starter terms and conditions which will effectively deliver an average lower cost base for new staff going forward.

·; The delivery of substantial procurement savings following a radical overhaul and review of the supplier base undertaken during spring 2013. £4m of savings are expected in year 1 (2013/14), rising to £10m by 2014/15. More than £2m of the £4m savings sought in 2013/14 have already been secured.

·; Various ancillary revenue and value repositioning initiatives are expected to deliver a further £4m improvement by 2014/15.

The turnaround plan is being financed without recourse to shareholders

As part of the announcement on 23 January 2013, Flybe indicated that it would seek to finance the turnaround plan without recourse to shareholders. The Board confirms that the Group remains on target to achieve this, following the delivery of three key initiatives.

(a) Transfer of London Gatwick slots to easyJet for consideration of £20m

Flybe has separately announced that it has reached agreement with easyJet for the transfer of its slots at LGW for a total consideration of £20m. Under the terms of the agreement, which is subject to Flybe shareholder approval, Flybe will continue to operate all of its LGW slots until 29 March 2014, and there will be no changes to flights, frequencies or timings to or from LGW until after that date.

Flybe would then exit all seven routes operated to and from the London Gatwick market from April 2014. This decision was taken as a result of the discriminatory pricing regime applied by the airport's owners to the operators of smaller, regional aircraft which, in Flybe's case, has resulted in a 102% increase in charges over the last five years.

The increase in charges, combined with the penalistic levels of Air Passenger Duty imposed on UK domestic airlines by successive Governments, mean that Flybe's services to and from LGW have become unsustainable. Flybe will continue to operate as normal all its seven LGW routes until 29 March 2014 and the funds generated by the disposal of the slots will be re-invested in the remaining 159 Flybe routes, with medium term expansion of services planned from core target bases. Decisions relating to the future use of those slots now rest with easyJet.

 (b) Deferral of new aircraft orders and sale of surplus aircraft

Flybe has agreed with Embraer the deferral of 16 new E175 aircraft due for delivery during 2014 and 2015. These aircraft will now not be delivered until 2017 to 2019. This deferral will lead to a reduction in pre-delivery payment commitments in winter 2013/14 of some £20m.

Flybe also confirms that it has sold two of its four surplus Q400 aircraft for a modest book profit.

(c) Sale of other assets

Flybe expects to conclude various smaller agreements relating to surplus assets which are expected to generate further cash of approximately £5m, of which approximately £2.5m is currently at contract stage.

Flybe confirms refocused network strategy

Following its proposed exit from London Gatwick in April 2014, Flybe will focus upon developing a number of core defensible bases. These bases will represent the network points that will be prioritised for investment and growth. Flybe also announces plans to reinvigorate its developing markets.

Flybe is confident that this revised focus will provide it with strong foundations for a long term profitable future, and restore its leading position in the UK and European regional flying market.

Reconfirmation of medium term operating profit targets

With substantial delivery of its turnaround plan now in place, significant announcements made regarding further cost savings and a revised network strategy in place, Flybe reconfirms the unit operating profit targets announced on 23 January 2013.

Note - the above information represents management unit targets only, and should in no way be construed as forecasts

Commenting on the progress of Flybe's turnaround plan, Jim French CBE, Flybe's Chairman and Chief Executive Officer, stated:

"Flybe has exceeded its target of taking out £25m from its cost base during 2013-14 and will deliver £30m in savings in this current financial year. I am therefore confident that we will deliver the additional initiatives we have announced today.

"In the last few months we have streamlined the business, reducing headcount by more than 20%. We have also made major progress in reducing the cost of our supplier base.

"I am particularly pleased that we are delivering these plans without recourse to shareholders, as a result of raising funds for restructuring through well timed and managed asset disposals and aircraft delivery deferrals.

"With Flybe's future cost base improved and with the reshaping of our network announced today, the business will now move to reclaim its position as Europe's leading and most profitable regional airline."

Commenting specifically about the sale of its Gatwick slots, Mr French stated:

"No business can swallow cost increases of more than 100% over five years and Flybe simply cannot bear such punitive rises. We have therefore taken the very difficult decision to withdraw our services from London Gatwick from 29 March 2014, because of the airport's policy of year-on-year above inflation rises in landing fees for operators of smaller regional aircraft.

"When you add to these cost increases the government's policy of charging Air Passenger Duty (APD) on both legs of a domestic flight, I'm afraid it's inevitable that high frequency services from the UK's regions will be squeezed out of Gatwick, as they have been from Heathrow.

"We will continue to operate all our seven Gatwick routes - to Belfast City, Guernsey, Inverness, the Isle of Man, Jersey, Newcastle and Newquay - until the end of March 2014, offering our customers reliable, punctual and good value services, with no changes to pricing, frequency or timings.

"Flybe will carry on offering more than 150 routes on our extensive regional network. The connectivity we provide for our seven million passengers through major international airports like Manchester, Southampton, Birmingham, Glasgow, Edinburgh, Amsterdam and Paris also mean that that hundreds of international connections will still be available.

"Gatwick airport may not want those connecting passengers, but others do. We will work with our airports to ensure the UK's regional passengers don't get left in the cold. I reiterate that no other services from any of the seven airports will be affected and the funds generated by the sale of our Gatwick slots will be reinvested in the remaining 159 Flybe routes."