Monday, 11 June 2012

Flybe in balancing act as UK economy stumbles

UK regional carrier Flybe is mitigating the downturn in its home market by shifting capacity to Europe, pursuing new codeshare partnerships at Manchester airport, and increasing its oil hedging exposure, chief executive Jim French and CFO Andrew Knuckey said in a media briefing this morning (11 June).

Speaking after the company posted a pre-tax loss of £6.2 million ($9.64 million) for fiscal 2011/12 – marginally beating analyst forecasts – French blamed losses at Flybe Finland, the new joint venture with Finnair, and the opening of a new training academy in Exeter for bringing down the full-year results.

But he emphasised the "resilience" and "scale" of the business model, promising that new regional partnerships and flexibility over aircraft options will mitigate short-term headwinds, positioning the airline to benefit from an eventual macroeconomic recovery.

Noting the ongoing expansion of Flybe Finland, which will take 12 of Finnair's Embraer 190s on contract in October, French said that about 25% of the group's fleet will soon be deployed on contract flying. "That was our big focus about six months ago. We saw this as a market opportunity," he explained. "Whilst the margin is lower than you'd achieve in the peak times, it's actually a consistent long-term margin that we're very pleased with … We sacrifice some of the margin in order to have that secure long-term flow."

The CEO promised to announce further codeshare deals at Manchester airport, where Flybe already partners with Etihad and Air France, saying: "We re-scheduled all of our regional flows through Manchester this year … and the airport are telling us that's made quite a difference to the appeal of the airport from these inter-continental carriers."

Turning to the fleet, Knuckey said while the group aims to have 99 aircraft by the end of the year, UK-based operations will see only modest growth until the economy rebounds. Flybe will receive six E-175s in fiscal 2012/13, he noted, two of which have already arrived, while two Bombardier Q400s will be contracted out to Brussels Airlines and two more returned to their lessors.

Referring to Flybe's purchase of 35 E-175s with 65 options in 2010, Knuckey told Flightglobal the deal was a "predominantly substitution" order, emphasising: "We always wanted to keep the flexibility of the growth through the options." The CFO said although Flybe has historically favoured operating leases, the company's $500 million loan facility with Brazilian export bank BNDES meant that "probably the majority of the E-175s will be debt-financed and on-balance sheet". The financing covers 20 aircraft up to mid-2014, he added.

Asked about the company's fuel hedging positions, Knuckey said Flybe had increased its exposure during the recent dip in Brent Crude prices below $100 per barrel. "Our 2013/14 hedging programme, we've beefed that up quite a bit in the last couple of weeks," he confirmed. "For 2012/13, we are around 72% hedged for the year for our jet fuel at just around $1,000 per tonne."

The company usually hedges about 5% of its fuel costs per month, the CFO noted, and it continued doing so even when Brent was above $120. "But yes, when it's [the price of oil] down where it is, we go to the top end of those parameters."