Source - RNS
RNS Number : 4823H
Flybe Group PLC
08 June 2017
 

 

Flybe Group plc

8th June 2017

Flybe Group plc

("Flybe" or "the Group")

Results in line with expectations - shaping a sustainable future

Flybe today announces its results for the year ended 31st March 2017. In March we guided the market that we expected a small underlying loss before tax for the year, before IT write-downs of around £5-10m. Today we announce an adjusted loss before tax1 of £(6.7)m, after IT write-downs of £4.8m. This write-down is at the low end of our previous range, but we anticipate further IT costs of around £6m in 2017/18 relating to cancellation penalties on existing contracts.

 

With the fleet size at its peak and planned to reduce during 2017/18, and under the leadership of our new CEO Christine Ourmieres-Widener, we are building the platform to shape a sustainable future.

Financial highlights

·     13.4% increase in group revenue to £707.4m (£623.8m in 2015/16);

·     Stable passenger yield at £70.20;

·     3.0ppts lower load factor to 69.6% reflecting the 12.3% increase in capacity;

·     2.0% increase in cost per seat to £53.74, but a 5.2% reduction at constant currency;

·     £(6.7)m adjusted loss before tax1 (£5.5m profit in 2015/16);

·     £(26.7)m reported loss after tax (£6.8m profit in 2015/16);

·     Strong balance sheet with total cash of £124.3m, with net debt of £(64.0)m after the purchase of ten Q400 aircraft, previously on operating leases.

 

1 Adjusted loss before tax is calculated as reported loss before tax of £(19.9)m excluding USD loan revaluation losses of £(13.2)m (2015/16: profit before tax of £2.7m excluding USD loan revaluation losses of £(2.8)m)

 

Operational highlights

Flybe Limited  

 

·     The legacy commitments to acquire additional aircraft caused the business to increase flown capacity by 12.3% to 12.7m seats. Passenger numbers increased by 7.6% to 8.8 million, reflecting the immaturity of new routes and resulting in a lower load factor (down 3.0ppts to 69.6%);

·     Passenger revenue increased by 8.3% to £619.3m (£571.7m in 2015/16) in line with passenger growth. Total revenue increased by 12.4% to £675.6m (£601.0m in 2015/16) as the White Label and airport partnerships revenues annualised;

·     Significant progress has been made in laying the foundations for future profitable growth:

-      Flybe was again named by OAG as the best UK airline for punctuality (on time performance) and placed sixth worldwide;

-      Heads of Terms have been signed for a new franchise and joint venture alliance with Eastern Airways and a new franchise agreement with Blue Islands in the Channel Islands;

-      Continued to develop our relationships with our airline partners in Cardiff, Doncaster Sheffield and Exeter/Norwich flying the E195s;

-      Routes launched from Scotland to London Heathrow;

-      New codeshares signed with Virgin Atlantic, Air Berlin, Air India and Singapore Airlines;

-      Agreement to return six end-of-lease Bombardier Q400 aircraft to the lessors in 2017/18 allowing Flybe to become a more demand-driven, customer-focused business.

·     Given the capacity increase, the depreciation of sterling and increased E195 and White Label flying, cost per seat has increased 2.0% to £53.74, though this reduced by 5.2% at constant currency.

 

White Label

·     SAS operation flying five ATRs is now successfully established in Scandinavia.

·     The SN Brussels Airlines contract expires in October 2017 and will not be extended.

 

Flybe Aviation Services ('FAS') 

·     FAS continued to perform well. Revenue has increased by 17.1% to £50.1m (2016: £42.8m) driven by a 39.5% increase in third party revenues leading to a 36.0% increase in profit before tax to £3.4m (2016: 2.5m).

·     Sustained momentum continued in our A400M maintenance services for the RAF at Brize Norton through Airbus Military UK. We anticipate a reduced contribution from the A400M service contract in 2017/18 as we complete the start-up phase and move to business as usual.

·     We plan to retain and integrate the MRO into the airline, creating synergies and saving cost.

 

Becoming a customer-centric business

Flybe has achieved many significant changes: a capital raise, a relaunched brand, the cessation of the Finland joint venture, the strategic project addressing legacy fleet issues and a strong cost-conscious culture was introduced to drive effective unit cost reductions.

Despite the substantial progress in reducing the size of legacy fleet orders in 2015/16, Flybe has still seen significant capacity growth in a market where we witnessed slower growth in consumer demand. The Company has deployed its additional capacity on new routes and increased frequencies on existing routes, solely where these deployments could deliver at least a contribution to direct costs. New routes and increased frequencies were targeted to cover marginal costs in the early years of operation, but do not contribute significantly to overall profitability. The capacity growth therefore had a negative effect on profitability.

Flybe reached its peak fleet size of 85 in May 2017. Reduction in the fleet size will start by returning six end-of-lease Q400s in 2017/18. This will enable Flybe to become a more customer centric business and for the first time concentrate the business on profitable routes. Becoming a truly demand and customer-focused business is the key plank of our strategy.

Implementing a clear strategy is about returning to the core of what really works for the airline. We will make Flybe a sustainable business that operates the best routes and at the best times to suit the needs of our customers. We will stay true to our mission to connect people and businesses with safe, reliable and affordable travel.

Flybe is a regional airline with 53.7% of the UK domestic flights outside of London, connecting people and regions with one another throughout the UK and to and from Continental Europe, for both business and leisure. In many markets, we provide a true 'lifeline' transport service. We must fly the right routes, at the right times of the day and at the right times of the week according to the demands of the market. Our top eight departure point markets are all in the UK and represent 62.2% of our customers, and our top four represent 42.9% with Birmingham, Manchester, Belfast City and Southampton leading the way.

Our strength is not only in the point-to-point network but also in the connection opportunities for regions via Manchester, Birmingham and now London Heathrow with our increasing number of partners.

Our maintenance, repair and overhaul (MRO) business, Flybe Aviation Services, and our Training Academy are core to our success. These two distinct but key support areas, with their own expertise, need to be managed effectively to support the future profitability of the Group.

Looking beyond the UK at this stage it is neither the right moment, nor do the markets currently support, an expansion of intra-European activity (leaving aside Brexit uncertainty).

Our fleet size will start to decrease during 2017/18 which allows us to enter a phase of stabilisation and consolidation. We need to ensure we are executing what we are best at and making sure everyone knows who Flybe is. We will deliver a controlled expansion mainly via the optimisation of our partnerships.

We have developed a Sustainable Business Improvement Plan consisting of 6 focus areas:

1.   The customer

The customer will be put at the heart of everything we do. Sales and marketing will deliver sustainable revenue growth to maximise profitability, while optimising the customer experience and improving the customer interface at every touch point. Flybe's digital proposition will be enhanced through a strong digital e-commerce platform and the Flybe product will be developed in line with insights gathered from a better understanding of Flybe customers. This requires significant investment and will take several years to deliver in full.

2.   Network and fleet optimisation

We will deliver an optimised network focusing on positive route contribution based on customer and financial analytics starting from Winter 2017. The delivery of the tighter network will follow a structured process with minimal changes once the schedule is published. We intend to make a decision during this financial year on the long-term fleet configuration.

3.   Operational excellence with reliability and on time performance

With a better understanding and knowledge of our customers and a demand-driven network, we need to improve reliability and on-time performance and always seek continuous improvement. We also plan to re-design and implement a new structure for our engineering organisation which remains core to our business. The expert support offered by our Training Academy will be important to plans to drive customer service and profitability.

4.   Organisational excellence

We shall design and implement a cost-effective organisation structure with clear and aligned KPIs cascaded and embedded in every role profile and annual performance measurement. The basics need to be in place combined with a strong backbone of policies, processes and a transparent remuneration policy.

5.   Technology

We will build further resilience into our IT platform during 2017 and invest in the core operational platforms as we move towards improving the digital experience for passengers and implementing industry leading support systems for our engineering platforms. 

In 2018, we will move towards offering our customers a truly digital online experience as we invest in a new platform. The new platform will not just benefit our customers. The first phase will commence this summer when we will launch the Electronic Flight Bag which will bring paperless working to our flight deck, enabling operational data to flow more efficiently into our operations team.

A principal reason for customer dissatisfaction is the quality of our website and their interaction with it. Over 80% of our customers are booking online via our website, with the majority being repeat customers. Our new digital platform, backed by our sales and marketing action plan, will enable us to attract new customers and enhance our customer relationship management.

6.   Costs

We will continue to look for ways to reduce costs at all levels of our business without hindering our performance and the quality service we deliver to our customers. Cost per seat remains a key metric, especially where capacity is likely to reduce in the second-half of 2017/18.

The Sustainable Business Improvement Plan is underpinned by a strong organisation and safety culture, aiming to ensure that every employee believes they can and will contribute to Flybe's success.

Improved employee engagement will be key to delivering the strategy. We will regularly survey our employees to measure progress and adapt our approach as appropriate. To support the delivery of our 2017/18 objectives, we will drive the right behaviours through the following balanced values:

- Care and respect;

- Customer-focused;

- Teamwork;

- Continuous improvement; and

- Accountability.

Outlook

 

Flybe is well placed as it enters 2017/18 as it will be in control of its capacity going forward. Flybe has a clear business plan which will form the foundation of a longer term plan to become the best regional airline in Europe. As part of this plan, we will optimise our fleet and network, expand our partnerships, improve our distribution approach and optimise our customer proposition in the coming years.

The three year project to digitalise Flybe commences this year. Our digital transformation will empower us with industry standard solutions to attract more passengers, improve the customer journey and optimise our revenue per seat. The proximity to our customers and our ability to serve them will be improved through the implementation of a long awaited customer relationship management suite.

 

The year to date performance has benefited from the timing of Easter which fell in April this year and March last year. In H1 capacity growth will slow and in H2 capacity is expected to reduce with the likely outcome being broadly flat capacity for the full year. This slowdown has already shown a benefit in Q1 2017/18 with load factor increasing over the prior year. Revenue per seat is also rising.

 

H1 performance update as at 5th June 2017:

·     2.7% capacity increase vs. prior year

·     45% of capacity sold vs. 44% prior year

·     2.6% increase in yields

·     4.6% increase in passenger revenue per seat

 

As of 5th June 2017, we had purchased 90.0% of our anticipated fuel requirements at USD490 and 88.7% of our anticipated US dollar requirements at USD1.41 for 2017/18.

Christine Ourmieres-Widener, Chief Executive, said:

"I am truly passionate about the airline industry and I see tremendous opportunities for Flybe to connect and engage with communities and to establish a reputation for excellence in serving our customers. We will be successful in delivering by continually focusing on our costs, increasing our knowledge about who our customers are and what makes them tick, achieving industry-leading operational excellence and implementing a great digital platform.

Flybe has a great future as Europe's largest regional airline. My team is focused on delivering an exceptional customer experience and building value for shareholders."

 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulation EU no. 596/2014 ("MAR"). Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

 

 

Enquiries:

Flybe

Philip de Klerk, Chief Financial Officer

 

 

Tel: +44 (0)20 7379 5151

 

Maitland

Neil Bennett

Andy Donald

 

 

 

Tel: +44 (0)20 7379 5151

 

Continuous focus on cost per seat to drive efficiency

Overview

Through deploying the added legacy fleet commitments, along with an evolving route network and improved customer offering, total revenue increased by 13.4% to £707.4m (2015/16: £623.8m). Seat capacity increased by 12.3% to 12.7 million seats, and passenger numbers increased by 7.6% to 8.8 million. Passenger yield (on seats sold) has been resilient, holding broadly flat at £70.20 but revenue per seat has fallen by 3.6% to £48.84, reflecting the increased capacity and competitive market conditions.

Our cost base is predominantly driven by the 12.3% capacity growth with operating costs increasing by 15.4% from £615.1m to £709.8m. Costs this year are adversely affected by the fall in the value of sterling but as we hedged most of our currency requirements there is a total (spot and hedged) currency gain of £26.0m within other operating gains. At a line level, the main cost variances can be summarised as follows:

·     Fuel costs fell 3.6% from £104.9m to £101.1m with a gain of £16.0m (15.8%) arising from falling fuel prices (net of £7.1m of adverse US dollar movements) offset by c£(12.2)m (12.1%) of higher costs arising due to increased flying;

·     Net airport and en route charges increased by 26.0% to £148.2m due to a combination of higher airport charges, currency and increased flying;

·     Ground operations costs increased by 16.1% to £94.3m due to increased flying and currency impact;

·     Staff costs increased 15.8% to £120.2m mainly due to the increase in capacity and the 2.0% salary increase awarded as part of the three-year pay deal;

·     Aircraft rental costs increased 20.2% to £97.5m due primarily to the fall in sterling as most agreements are denominated in US dollars, and the increase in capacity. At constant currency, aircraft rental costs numbers were c8% higher;

·     Maintenance costs increased by 73.6% to £39.4m. Capacity increased by 12.3%, which along with the disproportionate impact of the increased flying of E195s which have substantially higher maintenance costs per hour, resulted in an increase of £7.4m on underlying maintenance costs. Approximately 70% of maintenance costs are spares purchased in US dollars, and the fall in the value of sterling contributed to an increase of c £6m in costs. The remaining increase is largely driven by increased flying in our White Label operation, which is offset by a corresponding increase in revenue;

·     Depreciation and amortisation increased 21.8% to £39.1m due to more aircraft being owned rather than leased. Included within the amortisation cost is £0.5m of accelerated amortisation on an identified group of intangible assets where the useful economic life has been reduced due to the planned implementation of a digital platform; and

·     Net other operating gains totalled £18.8m (2015/16: £7.0m) resulting from the aforementioned £26.0m of currency gains offset by £7.2m of losses on disposal of assets including £4.3m related to the one-off write-down of IT intangibles arising from the new digital platform.

 

The MRO business, Flybe Aviation Services (FAS) generated a profit before tax of £3.4m (2015/16: £2.5m) as third party revenues increased 39.5% to £31.8m. The A400M facility in Brize Norton maintained its strong contribution to the FAS result. In 2017/18 it is anticipated that there will be a reduced contribution from the A400M service contract as FAS moves from the start-up phase into business as usual.

Flybe made an adjusted loss before tax1 of £(6.7)m (2015/16: profit of £5.5m). This is adjusted by non-cash revaluations on our US dollar loans that are intended to be natural hedges against the value of each aircraft, whose value is denominated in the dollar rate prevailing when acquired. Including these non-cash revaluations, Flybe made a loss before tax of £(19.9)m (2015/16: profit of £2.7m).

Flybe continues to have a strong balance sheet with free cash of £115.1m at the end of March 2017 (2016: £163.6m) net of restricted cash of £9.2m (2016: £7.8m). Net debt at 31st March 2017 was £(64.0)m (2016: net funds of £62.2m). This change was mainly due to £140.3m of capital expenditure primarily reflecting the cost of buying more owned aircraft (£98.4m) and other capital expenditure relating to components (£17.8m), capitalised maintenance (£16.7m), plus IT and other items (£7.4m). 

EBITDAR, a profit measure used for comparisons between airlines, has improved by 10.1% from £121.9m in 2015/16 to £134.2m.

EBITDAR and adjusted (loss)/profit

EBITDAR and adjusted (loss)/profit before tax measures are non-GAAP measures1.

Set out below is a reconciliation from operating (loss)/profit to the EBITDAR figures:


2017

2016

Change



Restated2



£m

£m

%

Operating (loss)/profit

(2.4)

8.7


Depreciation and amortisation

39.1

32.1


Aircraft rental charges

97.5

81.1


EBITDAR

134.2

121.9

10.1

 

The table below sets out a reconciliation from (loss)/profit before tax to adjusted (loss)/profit before tax which adjusts the result for USD loan revaluations: 


2017

2016

Change


£m

£m

%

(Loss)/profit before tax - unadjusted

(19.9)

2.7


USD loan revaluations

13.2

2.8


Adjusted (loss)/profit before tax and USD loan revaluations

(6.7)

5.5

n/m

 

The adjusted loss includes the following one-off items:

·     write-off of intangible assets totalling £4.3m;

·     £0.5m of accelerated amortisation on a group of intangible assets where the useful economic life has been reduced due to the planned implementation of a digital platform;

·     the performance conditions for the 2015/16 bonus were assessed and £3.6m was credited to the income statement; and

·     £4.2m has been credited to the income statement following a detailed review of historic deferred income balances.

1.     Alternative (non-GAAP) profit 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 alternative profit measure is determined from the most directly comparable measure calculated and presented in accordance with IFRS.  The alternative profit 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.     EBITDAR is defined as operating (loss)/profit after adding back depreciation, amortisation and aircraft rental charges. The consolidated income statement has been restated to show each cost line at the transactional spot rate therefore EBITDAR for 2015/16 has been restated.

 

Aircraft fleet

The profile of Flybe's fleet at 31st March 2017 and 2016 is summarised below:

 




Number of aircraft



Number of
seats

At 31st March

2016

Net movements in period

At 31st March 2017

Bombardier Q400 turboprop

78

50

8

58

Embraer E175 regional jet

88

11

-

11

Embraer E195 regional jet

118

9

-

9

ATR72 turboprop (SAS contract)

70

4

1

5

Total


74

9

83

Held on operating lease


57

(1)

56

Owned


17

10

27

Total


74

9

83

Total seats in fleet


6,210

694

6,904

Average seats per aircraft


84.0

(0.8)

83.2

Average age of fleet (years)


7.4

1.0

8.4

 

In 2014/15 Flybe entered into agreements with Embraer S.A. ('Embraer') and Republic Airline Inc. ('Republic') whereby the contractual commitment to acquire 20 (of a backlog of 24) new Embraer E175 jet aircraft was removed and in return Flybe committed to sub-leasing 24 smaller used Republic Q400 aircraft between 2015 and 2019. In 2015/16 Flybe took delivery of five Republic aircraft.

Flybe subsequently entered into a contract in March 2016 with Nordic Aviation Capital ('NAC'), to cancel obligations to lease nine of the 24 used Bombardier Q400 turboprop aircraft it was committed to under the terms of the Embraer and Republic agreement, and in return to take ownership of 10 Q400 aircraft it was under contract to lease, for a cash consideration of USD131.8m (£103.0m). This earned Flybe a return on capital employed of c12% and provided much greater flexibility for aircraft deployment or divestment. Of the 10 aircraft, five were delivered in 2015/16, and another five Q400 have been delivered in 2016/17. As at 31st March 2017, eight aircraft were delivered from NAC, three of which remain under operating lease. The final two aircraft were delivered during the first two months of 2017/18 on operating lease agreements.

In support of White Label operations in Sweden, Flybe leased one additional ATR72 aircraft as per the original agreement (increasing the total to five), which was delivered in May 2016.

The following table shows the number of aircraft that are contracted for delivery (either acquired or leased) to the Group as at 31st March 2017:


E175s

Q400s

2017/18

-

2

2018/19

3

-

2019/20

1

-

Total

4

2

 

The fleet will peak in May 2017 before Flybe starts to return end-of-lease aircraft to its lessors. Six Bombardier Q400 aircraft will be handed back later in 2017 at, or slightly ahead of, lease expiry. The number of owned aircraft moved from 17 to 27 year-on-year with owned aircraft now representing 32.5% (2015/16: 23.0%) of the fleet.

Business results

Flybe's results before tax, analysed by segment, are summarised below:


2017

2016


£m

£m

Business revenues:



Flybe UK

675.6

601.0

FAS

50.1

42.8

Inter-segment sales

(18.3)

(20.0)

Group revenue

707.4

623.8




Business adjusted (loss)/profit before tax:



Flybe UK1

(5.8)

8.8

FAS

3.4

2.5

Group costs

(4.3)

(5.8)

Adjusted (loss)/profit before tax and USD loan revaluations2

(6.7)

5.5

Revaluation losses on USD aircraft loans

(13.2)

(2.8)

Group (loss)/profit before tax

(19.9)

2.7




1                Flybe UK adjusted (loss)/profit before tax reports a segment loss of £(5.8)m (2015/16: profit of £8.8m) after excluding Group costs of £(4.3)m (2015/16: £(5.8)m) and revaluation losses on USD aircraft loans of £(13.2)m (2015/16: £(2.8)m).

2                Adjusted (loss)/profit before tax is defined as (loss)/profit before tax excluding losses on USD aircraft loans of £(13.2)m (2015/16: £(2.8)m). 

 

Flybe UK

Revenue


2017


2016


£m

£ per seat


£m

£ per seat

Passenger revenue

619.3

48.84


571.7

50.64

White Label flying revenue

33.0



13.9


Other revenue

23.3



15.4


Total revenue

675.6

53.28


601.0

53.23

 

Flybe UK's seat capacity increased by 12.3% to 12.7 million (2015/16: 11.3 million) with scheduled sectors increasing by 10.1% to 153,000 (2015/16: 139,000). The increased flying of the E195 fleet contributed approximately half of the additional seats. Flybe served 8.8 million customers on its network, a 7.6% increase (2015/16: 8.2 million). The combination of overcapacity in the market, fragile consumer confidence and tough competition resulted in a load factor decrease from 72.6% to 69.6%. Passenger yield held broadly flat at £70.20 (2015/16: £70.23) though revenue per seat fell from £50.64 to £48.84, reflecting the additional capacity and a highly competitive market.

White Label flying increased from £13.9m to £33.0m, reflecting the annualisation of the White Label operation on behalf of SAS in Sweden. The SN Brussels contract which commenced in March 2012 comes to an end in October 2017.

 Operating costs (on a Flybe UK basis)


2017


2016


£m

£ per seat


£m

£ per seat

Fuel and aircraft operations

343.6

27.10


303.7

26.90

Aircraft ownership and maintenance

194.0

15.30


155.7

13.80

Staff and other net operating expenses

143.8

11.34


135.3

11.97

Operating costs

681.4

53.74


594.7

52.67

 

Operating costs have increased by 14.6% to £681.4m, substantially driven by the increase in capacity of 12.3% along with higher flying-related airport and maintenance costs. At constant currency, the increase in total operating costs is 6.5%.

Cost per seat including fuel increased by 2.0% to £53.74, though on a constant currency basis reduced by 5.2%. Excluding fuel, cost per seat increased 5.5% to £45.76 but fell 0.6% on a constant currency basis.

Fuel

Flybe UK's results are impacted by movements in the price of fuel which forms a significant variable cost for the business.  Brent crude per barrel has been in the USD37 to USD58 range (2016: USD27 to USD68) for the period, with the average price over the period being USD50 (2016: USD49). The price of jet fuel has traded between USD351 and USD550 (2016: USD271 and USD645) 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 2016/17, Flybe UK used some 206,897 tonnes of jet fuel, an increase of 19.4% on the 173,254 tonnes used in the prior year. Fuel burn decreased to 14.9kg per seat for 2016/17 (2015/16: 15.2kg). The average market price during the period was USD470 per tonne (2015/16: USD470), with the Group paying a blended rate (net of hedges) of USD556 per tonne (2015/16: USD826).  Including 'into plane' costs, Flybe's fuel costs in 2016/17 of £101.1m (2015/16: £104.9m) represent an all-in cost of USD637 per tonne (2015/16: USD911).

Flybe UK operates a policy of managing fuel price volatility by entering into derivative contracts representing a portion of its aviation fuel requirements a minimum of 12 months forward from the current date. The intention of this programme is to provide a significant element of certainty over its forthcoming fuel costs. As at 31st March 2017, 83.2% of the fuel requirement for 2017/18 was hedged at an average price of USD489 per tonne. Taking into account our hedged position, each USD50 increase/decrease in the price of jet fuel reduces/improves Group profits in 2017/18 by £1.0m.

Net finance costs

Net finance costs increased from £6.0m to £17.5m mainly due to a £(13.2)m non-cash, non-underlying loss on the retranslation of US dollar-denominated debt used to fund the acquisition of aircraft (2015/16: £(2.8)m). Under International Financial Reporting Standards, US dollar aircraft are non-monetary assets and are therefore held at the rate as at the date of acquisition, whereas the US dollar liability is a monetary item and is retranslated at each month end and therefore Flybe does not have a natural offset. This income statement loss of £(13.2)m has therefore been removed in arriving at adjusted (loss)/profit before tax. Other net finance costs increased by £1.1m due to the increase in aircraft loan financing.

Foreign exchange

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.  Historically treasury policy capped hedging at 90%, though treasury policy now allows hedging up to 100% to protect against increased risks to profit.  The Group 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. The post-Brexit deflation of sterling has been largely mitigated due to hedging levels.

As at 31st March 2017, 85.8% of Flybe's anticipated US dollar requirements for 2017/18 were hedged at an average exchange rate of USD1.42.  All existing derivative financial instruments are cash flow hedges. Taking into account our hedged position, each USD 0.05 reduction/improvement in the US dollar exchange rate has the effect of reducing/increasing Flybe UK's profits in 2017/18 by approximately £1.1m.

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. The table below sets out Flybe UK's emissions and carbon allowances for 2016 and the budget for 2017:

Calendar year

2017

2016


Budget

Actual

Anticipated carbon allowances required, tonnes

556,902

593,119

Free allowance allocation, tonnes

222,778

222,778

Proportion hedged at beginning of period

100%

100%

Effective carbon rate

€2.64

€4.85

 

Flybe Aviation Services (FAS)

The results for FAS in 2016/17 were as follows:


2017

2016

Change


£m

£m

%

Revenue

50.1

42.8

17.1

Operating costs

(46.7)

(40.3)

15.9

Profit before tax

3.4

2.5

36.0

 

Revenue increased by 17.1% to £50.1m (2015/16: £42.8m), of which £31.8m was for third party customers (2015/16: £22.8m), a 39.5% increase. In the previous year, we had more Flybe related work as we brought the E195s back into service. In 2017/18, we expect less third party customer revenue as the A400M Brize Norton contract moves from the start-up phase into the business as usual phase and also the MRO will be heavily involved in the handback of leased aircraft.  Man-hours reduced 5.2% from 547,600 in 2015/16 to 519,400 in 2016/17. The increase in revenue generating capacity resulted in a 15.9% increase in operating costs from £40.3m to £46.7m.

Group costs

Group costs of £(4.3)m (2015/16: £(5.8)m) include Group Board salary costs and Group-related legal and professional fees.  The decrease year-on-year is primarily due to a £3.6m staff bonus accrual release offset by a £1.2m increase to share-based payments costs.

(Loss)/profit before and after tax

The Group's reported loss before tax was £(19.9)m (2015/16: profit of £2.7m).

The Group's adjusted loss before tax and USD aircraft loans revaluation was £(6.7)m (2015/16: profit of £5.5m).

The reported loss after tax was £(26.7)m (2015/16: profit of £6.8m). The deferred tax charge was £(6.8)m (2015/16: tax credit of £4.1m) reflecting the non-recognition of temporary timing differences on capital allowances.

EPS and dividends

The loss per share for the year was (12.3) pence (2015/16: earnings per share of 3.1 pence).

No dividends were paid or proposed in either 2016/17 or 2015/16.

Cash flow


2017

2016

Change


£m

£m

£m

Net cash inflow from operating activities

34.9

64.1

(29.2)





Net capital expenditure after disposal proceeds

(140.3)

(64.3)

(76.0)

Interest received

0.7

0.8

(0.1)

Net cash flows from investing activities

(139.6)

(63.5)

(76.1)





Net proceeds/(repayments) from/of loans

64.5

(12.8)

77.3

Interest paid

(5.0)

(2.1)

(2.9)

Cash paid for purchase of shares for employee benefit trust

(3.3)

-

(3.3)

Net cash flow from financing activities

56.2

(14.9)

71.1





Net decrease in cash and cash equivalents

(48.5)

(14.3)

(34.2)

Cash and cash equivalents at beginning of year

163.6

177.9

(14.3)

Cash and cash equivalents at end of year

115.1

163.6

(48.5)

Restricted cash

9.2

7.8

(1.4)

Total cash

124.3

171.4

(47.1)

Net borrowing

(188.3)

(109.2)

(79.1)

Net (debt)/funds

(64.0)

62.2

(126.2)

 

The Group generated £33.5m from operating activities excluding the increase in restricted cash of £1.4m to give a net cash inflow from operating activities of £34.9m (2016: £53.9m excluding the £10.2m fall in restricted cash to give a net cash inflow from operating activities of £64.1m). Restricted cash increased from £7.8m to £9.2m almost entirely due to the adverse foreign exchange impact of sterling against the US dollar.

Net capital expenditure included out flows of £(134.6)m on purchases of property, plant and equipment plus an out flow of £(5.7)m for intangible software additions (2016: total capital expenditure of £(65.6)m plus a reduction on pre-delivery deposits of £1.3m to give a net out flow of £(64.3)m).

Net inflow on borrowings of £64.5m was as a result of £84.3m of new borrowings offset by £(19.8)m of repayments (2016: repayments of £(12.8)m).

Total cash was £124.3m at the year-end (2016: £171.4m). 

Balance sheet


2017

2016

Change


£m

£m

£m





Aircraft

287.3

192.3

95.0

Other property, plant and equipment

21.8

21.4

0.4

Intangibles

11.9

13.3

(1.4)

Net (debt)/funds

(64.0)

62.2

(126.2)

Net derivative financial instruments

24.5

(9.9)

34.4

Other working capital - net current liabilities

(116.4)

(123.5)

7.1

Deferred taxation

(0.6)

11.3

(11.9)

Defined benefit pension scheme deficit

(20.8)

(15.3)

(5.5)

Other non-current assets and liabilities

9.8

2.4

7.4

Net assets

153.5

154.2

(0.7)

 

The £287.3m of net book value of aircraft represents owned aircraft, engines and aircraft modifications. The increase of £95.0m is mainly due to the increase in owned aircraft complemented by the capital expenditure on new components and capitalised maintenance.

Net debt, representing total cash offset by borrowings, totals £(64.0)m at 31st March 2017 compared to net funds of £62.2m at 31st March 2016. Debt is greater due to the increase in owned aircraft from 17 owned at 31st March 2016 to 27 owned at 31st March 2017.  The net debt calculation at 31st March 2017 includes restricted cash of £9.2m (2016: £7.8m) which represents predominantly cash deposits held as security in favour of aircraft lessors.

The mark-to-market valuation of derivative financial instruments improved from a net liability of £(9.9)m at 31st March 2016 to a net asset of £24.5m at 31st March 2017, reflecting positive moves in Flybe's portfolio of net currency and fuel hedging contracts. Net current liabilities decreased from £(123.5)m to £(117.2)m largely due to increased trade and other payables.

The balance sheet also includes the impact of the defined benefit pension scheme deficit of £20.8m (2016: £15.3m) which is included in other non-current assets and liabilities above. This scheme is closed to future benefit accrual. The year-on-year increase in the deficit is primarily due to the fall in the discount rates arising since the Brexit referendum.

The triennial valuation at 31st March 2016 has now been agreed with the Trustees at a deficit of £(12.2)m. The revised recovery plan will result in Flybe making contributions of £0.83m per annum (previously £0.5m per annum). The next valuation will be at 31st March 2019.

 

Consolidated income statement

Year ended 31st March 2017

 

 


2017

 

Total

£m

2016

Restated

Total

£m

Group revenue


707.4

623.8









619.3

571.7


33.0

  13.9

Revenue from other activities


55.1

38.2

Group revenue


707.4

623.8





Staff costs


(120.2)

(103.8)

Fuel


(101.1)

(104.9)

Airport and en route charges


(148.2)

(117.6)

Ground operations


(94.3)

(81.2)

Maintenance


(39.4)

(22.7)

Depreciation and amortisation


(39.1)

(32.1)

Aircraft rental charges


(97.5)

(81.1)

Marketing and distribution costs


(27.1)

(25.4)

Other operating gains


18.8

7.0

Other operating expenses


(61.7)

(53.3)

Operating (loss)/profit


(2.4)

8.7





Investment income


0.7

0.8

Finance costs


(5.0)

(4.0)

Losses on USD loan revaluations


(13.2)

(2.8)

(Loss)/profit before tax


(19.9)

2.7





Deferred tax (charge)/credit


(6.8)

4.1

(Loss)/profit after tax


(26.7)

6.8













(Loss)/earnings per share:




Basic and diluted


(12.3)p

3.1p


Prior year restatements

 

1.     A new finance system was implemented in the year which has resulted in a change in the presentation of transactional foreign exchange impacts. Previously each line had been shown at the effective exchange rate. From 1st April 2016, each line has been shown at the transactional spot rate and the gains on foreign exchange cash flow hedges shown in the other operating gains line. The prior period has therefore been restated with no impact to the operating profit for the year. The prior period consolidated income statement has therefore been restated which includes adjustments to fuel of £(3.3)m, airport and en route charges of £3.1m and other operating gains of £2.4m. There is no impact to operating profit.

2.     During the year the Group restated its 2015/16 income statement to reclassify contractor costs of £3.9m from the other operating expenses line to the staff costs line.

 

An analysis of prior year restatements can be seen in Appendix 1.

Consolidated statement of comprehensive income

Year ended 31st March 2017


2017

£m

2016

£m

(Loss)/profit for the financial year

(26.7)

6.8




Items that will not be reclassified to profit or loss:



Remeasurement of net defined benefit obligation

(4.9)

6.3

Deferred tax arising on net defined benefit obligation

   1.0

(1.3)


(3.9)

5.0




Items that may be reclassified subsequently to profit or loss:



Gains/(losses) arising during the year on cash flow hedges

48.2

(26.4)

Reclassification of (losses)/gains on cash flow hedges included in the income statement

(12.4)

30.6

Deferred tax arising on cash flow hedges

(6.1)

-

Foreign exchange translation differences

2.1

(2.4)


31.8

1.8




Other comprehensive income for the year

27.9

6.8

Total comprehensive income for the year

1.2

13.6

 

Consolidated statement of changes in equity

Year ended 31st March 2017


               

 

Share

   capital

          £m

 

Share

premium account

          £m

 

 

Own shares

£m

               

 

Hedging

reserve

             £m

               

 

Merger

reserve

          £m

   Capital

redemp-

         tion

reserve

          £m

               

Retained (deficit)/earning

          £m

 

 

      Total

    equity

          £m

Balance at 1st April 2015

2.2

209.3

-

(11.7)

6.7

22.5

(89.0)

140.0

Profit for the year

-

-

-

-

-

-

6.8

6.8

Other comprehensive income for the year

-

-

-

1.8

-

-

5.0

6.8

Equity‑settled share‑based payment transactions

-

-

-

-

-

-

0.6

0.6

Balance at 31st March 2016

2.2

209.3

-

(9.9)

6.7

22.5

(76.6)

154.2

Loss for the year

-

-

-

-

-

-

(26.7)

(26.7)

Other comprehensive income/(expense) for the year

-

-

-

31.8

-

-

(3.9)

27.9

Equity‑settled share‑based payment transactions

-

-

-

-

-

-

1.4

1.4

Capital reduction (see note 27)

-

-

-

-

-

(22.5)

22.5

-

Purchase of shares for employee benefit trust (see note 27)

-

-

(3.3)

-

-

-

-

(3.3)

Balance at 31st March 2017

2.2

209.3

(3.3)

21.9

6.7

-

(83.3)

153.5

 

 

Consolidated balance sheet

As at 31st March 2017

 


                         Note

                2017

                £m

                2016

                £m

Non-current assets




Intangible assets

13

11.9

13.3

Property, plant and equipment

14

309.1

213.7

Other non-current assets

15

69.6

40.7

Restricted cash

18

9.2

7.8

Deferred tax asset

23

4.0

11.3

Derivative financial instruments

22

0.4

0.8



404.2

287.6





Current assets




Inventories

16

6.3

6.4

Trade and other receivables

17

108.0

101.4

Cash and cash equivalents

18

115.1

163.6

Derivative financial instruments

22

26.0

9.7



255.4

281.1

Total assets


659.6

568.7





Current liabilities




Trade and other payables

20

(116.9)

(104.3)

Deferred income

19

(83.5)

(84.7)

Borrowings

21

(20.6)

(14.7)

Provisions

24

(30.3)

(42.3)

Derivative financial instruments

22

(1.3)

(18.8)



(252.6)

(264.8)





Non-current liabilities




Borrowings

21

(167.7)

(94.5)

Deferred tax liabilities

23

(4.6)

-

Provisions

24

(53.0)

(30.9)

Deferred income

19

(6.8)

(7.4)

Retirement benefits

32

(20.8)

(15.3)

Derivative financial instruments

22

(0.6)

(1.6)



(253.5)

(149.7)

Total liabilities


(506.1)

(414.5)





Net assets


153.5

154.2





Equity attributable to owners of the Company




Share capital

25

2.2

2.2

Share premium account

26

209.3

209.3

Own shares

27

(3.3)


Hedging reserve


21.9

(9.9)

Merger reserve


6.7

6.7

Capital redemption reserve


-

22.5

Retained deficit

27

(83.3)

(76.6)

Total equity


153.5

154.2

                                   

The financial statements of Flybe Group plc, registered number 01373432, were approved by the Board of Directors and authorised for issue on 7th June 2017.

 

 

Consolidated cash flow statement

Year ended 31st March 2017                      

 

                         2017

                            £m

                         2016

                            £m

Cash flows from operating activities



(Loss)/profit for the year

(26.7)

6.8

Adjustments for:



Unrealised losses on financial instruments

4.9

4.6

Depreciation and amortisation

39.1

32.1

Investment income

(0.7)

(0.8)

Interest expense

5.0

2.1

Losses on USD loan revaluations

13.2

2.8

Loss on disposal of plant, property and equipment

2.9

4.3

Loss/(profit) on write offs of intangible fixed assets

4.3

(0.1)

Share-based payment expenses

1.4

0.2

Deferred taxation

6.8

(4.1)


50.2

47.9




Cash paid for defined benefit pension funding

(0.5)

(0.5)

(Increase)/decrease in restricted cash

(1.4)

10.2

Increase in trade and other receivables

(35.5)

(7.1)

Decrease in inventories

0.1

0.7

Increase in trade and other payables

10.8

14.8

Increase/(decrease) in provisions and retirement benefits

11.2

(1.9)


(15.3)

16.2

Tax paid

-

-

Net cash flows from operating activities

34.9

64.1




Cash flows from investing activities



Interest received

0.7

0.8

Decrease in pre-delivery aircraft deposits

-

1.3

Purchases of property, plant and equipment         

(134.6)

(59.7)

Capitalised computer software expenditure

(5.7)

(5.9)

Net cash flows from investing activities

(139.6)

(63.5)




Cash flows from financing activities



Proceeds from new loans

84.3

-

Cash paid for purchase of shares for employee benefit trust

(3.3)

-

Interest paid

(5.0)

(2.1)

Repayment of borrowings

(19.8)

(12.8)

Net cash flows from financing activities

56.2

(14.9)




Net decrease in cash and cash equivalents

(48.5)

(14.3)




Cash and cash equivalents at beginning of year

163.6

177.9




Cash and cash equivalents at end of year

115.1

163.6

 

 

General information

The financial information set out above does not constitute the company's statutory accounts for the years ended 31st March 2017 or 2016, but is derived from those accounts.  Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under S498(2) or (3) Companies Act 2006.

 

 

 

 

Appendix 1 - Analysis of income statement prior year restatement


2016

Reclassification

Restatement from

2016



of contractor

budget rate 

Restated


Total

costs

to spot rate

Total


£m

£m

£m

£m






Group revenue

623.8

0

0

623.8





Consisting of:




Passenger revenue

571.7



571.7

Contract flying revenue

13.9



13.9

Revenue from other activities

38.2



38.2

Group revenue

623.8

0

0

623.8






Staff costs

(99.8)

(3.9)

(0.1)

(103.8)

Fuel

(101.6)


(3.3)

(104.9)

Net airport and en route charges

(120.7)


3.1

(117.6)

Ground operations 

(82.5)


1.3

(81.2)

Maintenance

(21.3)


(1.4)

(22.7)

Depreciation and amortisation

(32.1)


0

(32.1)

Aircraft rental charges

(79.3)


(1.8)

(81.1)

Marketing and distribution costs

(25.3)


(0.1)

(25.4)

Other operating gains 

4.6


2.4

7.0

Other operating expenses

(57.1)

3.9

(0.1)

(53.3)






Operating profit

8.7

0

0

8.7






Investment income

0.8



0.8

Finance costs

(4.0)



(4.0)

Losses on USD loan revaluations

(2.8)



(2.8)






Profit before tax

2.7

0

0

2.7






Tax credit

4.1



4.1






Profit after tax

6.8

0

0

6.8

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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