Wednesday, 17 October 2018

Flybe expects big losses this year, the share price dives and analysts fear for its future.

The UK's regional airline Flybe issued a profits warning on Wednesday, October 17th blaming a weaker British pound, higher fuel prices and a drop in demand for the fall in revenues.

Shares in the company slumped even further after the news broke, prompting many in the industry to question the airlines' long-term survival. By the close of business on Wednesday, the share price had dropped by 41% and could drop even further.

Whilst the airline has seen good revenue performance during the first part of the year,  it faces even more difficulties during the second half. Increasingly high fuel prices are just part of the story, the airline also cites unfavourable currency rates as having an impact on the company's bottom line, increased carbon costs are another issue.

Flybe has in recent times cut routes and capacity to focus on the more popular routes in wide UK network, which seemed to be working as the airline saw load factors were up to just over 86%. The airline had also started to get rid of some of its Embraer jets, which had high leasing contracts and were not as economically suited to the short, regional routes that FlyBe mostly operate. 

At 30th September 2018, flybe has a total fleet size of 78 aircraft, it has returned one of its Bombardier Q400s as it has come to the end of its lease period, one Embraer E195 jet also at the end of the lease has been handed back. Another E195 will be returned next month, a third will be handed back early next year to leave six of the twin jets in the fleet.  

Consumer demand in domestic and near-continent markets has weakened in recent weeks and the FlyBe board expects that to continue for the rest of the year and possibly into next year. It is also facing increased competition from other low-cost carriers and others which has driven lower fare prices at a time when the thin margins are proving difficult to sustain.   

So now the flybe board are estimating that the full-year loss before tax will be around £12 million, including the benefit of a c. £10m onerous lease provision release. This includes an estimated £29m of adverse year-on-year impact from weaker sterling, fuel and carbon prices. Although others in the industry are predicting even greater losses are ahead for the airline.

Christine Ourmières-Widener, Chief Executive Officer, said:  "We have made progress in driving our unit revenues across the Summer season, but we are now seeing a softening in the market.  We are reviewing further capacity and cost-saving measures while continuing to focus on delivering our Sustainable Business Improvement Plan. Stronger cost discipline is starting to have a positive impact across the business, but we aim to do more in the coming months, particularly against the headwinds of currency and fuel costs.  We continue to strengthen the underlying business and remain confident that our strategy will improve performance."

Those further capacity and cost-saving measures could see a number of other routes being culled, at least during the winter period, a change in the top level management structure, further fleet reductions as leases come up for renewal. All of which would help the carrier as it faces the usual seasonal operational difficulties that are further compounded by higher than normal fuel costs, increased currency instability due to uncertainty over Brexit and even weaker demand than previously envisioned.   

Many also wonder why the airline has spent millions on designing and implementing a new 'streamlined' livery for its 78 strong fleet while there is such a financial cloud hanging over the airline. "It is completely bizarre that they should spend so much cash on tarting up their aircraft when they are loosing so much money." one aviation analyst told us this afternoon. 

The future is uncertain for sure, it is perhaps, just like flybe's new livery, a little less purple than previously expected. 

(Images FlyBe)