Monday, January 26, 2015

Flybe shares fall as London routes face competition

SHARES in Flybe have dropped by more than 20 per cent after the regional airline posted a fall in third quarter passenger revenue.

The Exeter-based company now expects to come in a "break even" level for the full year, before tax and one-off charges.

Flybe saw passenger revenue fall by 3.8 per cent to £126.8 million in light of new competition on some London routes. This has come since it launched six new routes to and from London City in October.

It now expects it to take longer for the business to realise the full benefit of the routes.

At the same time, poor demand led Flybe to suspend its Inverness to London route, and reduce the frequency of flights between Exeter and the UK capital.

The extra capacity was redeployed to increase the frequency on better performing routes, with the airline now flying six times a day between Edinburgh and London City.

It has also upped its schedule between Belfast and London City to four times a day.

Flybe said passenger revenue is now on schedule to fall by a further three per cent in the fourth quarter, based on forward bookings to date.

The update is a further setback for Flybe chief executive Saad Hammad, who is now 12 months into a three-year transformation plan at the business.

A cost-cutting strategy, which saw the airline axe 133 jobs and bases in Scotland, had seen Flybe return to profit for the first time in four years in June.

However it fell back into the red when it posted a pre-tax loss of £15.3 million in the six months to September 30, after one-off costs and a charge related to its exit from its joint venture in Finland.

Exiting the Finnish business is expected to cost Flybe around £1 million, including redundancies.

Black Star

The company is also seeking to cut costs by offloading nine surplus aircraft in an initiative dubbed Project Blackbird. It has put the cost of running the Embraer E195s at a maximum of £26 million a year.

One analyst said the latest forecast implied a £9 million cut to profit estimates.

Gerald Khoo at Liberum cut his target price on the stock to 140p from 180p, but held his recommendation to buy.

Mr Khoo said the update was encouraging for the third quarter itself but stated: "We have cut our forecasts to reflect the new London City routes taking longer to mature. We also adjust our assumptions on Project Blackbird to allow for the surplus aircraft being retained for longer.

"Despite the slower progress we still see significant turnaround potential."

Flybe told investors yesterday that there had been 2.4 per cent growth in passenger revenue per seat to £50.23 over the quarter, as well as 6.1 per cent fall in seat capacity to 2.5 million seats - the latter in line with its strategy.

Although oil prices have fallen significantly, Flybe said its hedging arrangements mean that it will see no benefit in the current financial year and minimal effect in 2016.

But it hinted at potential upside if the prices remain low. Flybe said: "Continued lower input prices may also provide us with the flexibility to take commercial decisions if needed, which could bring a benefit to our customers through lower lead in fares."

Mr Hammad maintained Flybe was making progress on the turnaround plan. He said: "Only a year into our three-year transformation, we now have a platform which enables us to compete in a tough environment where the consumer demands value. We have responded to that by keeping our fares low and launching new routes.

"Having removed nearly $1 billion of future liabilities over the course of this year in relation to the firm legacy order for additional Embraer E175 aircraft and ongoing losses of Flybe Finland, we are making solid progress towards finding a solution to our last remaining legacy issue, Project Blackbird.

"We are now well positioned to continue our positive momentum towards delivering sustained profitability and value to shareholders."

Shares in Flybe closed...


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