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Why you shouldn’t be concerned about booking with Flybe

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I was going to write an article about a good new Avios promotion that Flybe is about to launch, and about what I learned about their frequent flyer plans when I met their new ‘Head of Loyalty’ recently.

I have decided to push that story back to Sunday (EDIT: it is now published and you can read it here) because I wanted to focus on something else today.  If you have been reading the press this week you have probably seen stories about ‘Flybe putting itself up for sale’ and some slightly more scurrilous rumours about the health of the entire group.

We have, without a doubt, seen a lot of airline failures recently which impacted the UK.  Monarch was the big one, of course, but Primera and Cobalt have also disappeared in recent weeks.  Some people seem to be putting Flybe into the same boat, but from what I can see that simply isn’t being realistic.

Will Flybe go bust?

Here is the interim results presentation released on 14th November (PDF).  A quick look at this shows that, on the face of it, Flybe’s restructuring is starting to work.  Revenue per seat was up 7.9% whilst costs per seat (including fuel, constant currency) rose by only 2.6%.  Operating costs fell slightly if you exclude fuel.

Is Flybe losing money?  No.  Whilst all of our City readers know that ‘profit’ can basically mean anything you want it to be, Flybe made £42m EBITDA in the first – admittedly lucrative Summer -half of its financial year.  If you’re not a finance person, EBITDA is ‘profits (earnings) before interest, tax, depreciation / amortisation’.  This figure is basically the cash it generated from day-to-day operations before paying its debts.

Is Flybe massively in debt?  Not really.  Net debt (debt minus cash in the bank) is only £82m.  There is £70m of cash on the balance sheet and £119m of net assets.  Only £19m of debt is repayable within the next 12 months.

Are Flybe planes getting emptier?  No, their load factor rose by 8% year on year – mainly by cutting poorly performing routes – from 76% to 84%.

And, unlike Primera, Cobalt and Monarch, Flybe is generally serving markets with no direct competition and no realistic indirect competition.  As the presentation points out, your alternatives for travelling from Southampton to Glasgow are not exactly enticing.

The caveat, of course, is that these numbers cover the Summer period.  We are now entering the Winter season when demand and fares are lower and where most airlines see lower profits.

The company recently put out a profit warning on the back of softening demand, higher fuel costs and currency weakness.  It also needs to secure financing for scheduled new aircraft deliveries and, as with many retailers, may be asked to provide additional collateral to Visa and Mastercard who are wary of potential Section 75 chargebacks.  It certainly won’t be an easy ride over the next 12-18 months but the fundamental trading pattern looks sound.

Why Flybe will not go bankrupt

Will Flybe be sold?

The company has announced that it is willing to listen to potential takeover or investment offers.

As a quoted company without a dominant shareholder it could, of course, be taken over at any time.  Any bidder could pick up some shares in the market, but it has to make a public statement when it reaches 3% and – at 30% – must launch a formal offer for the whole group.  Flybe is trying to circumvent this process by launching a regulated process which allows interested parties to have access to management without the need to make any hostile moves or publicly identify themselves.

I don’t know if Flybe will remain independent or not.  Stobart Group expressed interest in a bid a few months ago and they could return to the table.  What does concern me is that recent newspaper publicity could put people off booking with Flybe, even though – looking at the numbers released last week – the company seems to be at no immediate risk.

There is an element of self fulfilling prophecy here because if people stop booking Flybe because they believe it is going out of business, it will go out of business.  This will put 2,300 jobs at risk, along with many key airline routes which are vital to regional businesses, and that would not be good news.

I’d be happy to book with Flybe at the moment, and hopefully you would too.  Use a credit card and your money is safe anyway under the Section 75 rules.  Tomorrow I’ll tell you about their new Avios bonus promotion and what the new ‘Head of Loyalty’ is planning.

PS.  Just for clarity, neither I nor any of my family own shares in Flybe and this article is not an attempt to increase the value of my own holdings 🙂

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Comments

  1. When I book with Flybe it tends to be when there is no alternative and tends to be for business, so I won’t be afraid to book them when it’s not my money. However, as a consumer I’m a bit fed up with their service failings. My last few flights with them go as follows:
    MXP-BHX 2:53 hrs late
    BHX-JER 3:00 hrs late
    JER-BHX 1:25 hrs late

    Rob, I totally ageee that Flybe is a vital part of doing business in the UK when you’re not based in London. I think Flybe going bust would be so damaging to the UK economy that it won’t be allowed to happen. I probably will avoid booking with them for leisure in future as I’m not that far from LHR and I tend to travel on Avios.

    • I think you’re confusing some things there.
      The thing that would be damaging to the economy would be the loss of routes, not Flybe itself.

      I think Flybe has over-extended itself – no doubt there are some important routes which give vital air-links, but then again it’s apparent from their results that there are a lot of routes which simply don’t make enough money to be viable.

      If Flybe disappeared tomorrow I think the impact would be modest. The routes deemed the most important by the authorities (ie the ones that have a public subsidy on) would be snapped up by other airlines. The rest, either nobody would miss at all, or would simply be too unprofitable to operate.

      I do think Rob is being quite bold in putting his stall out like this. Many profitable companies can go to the wall, simply because they run out of cash flow. Flybe sold a property at Exeter and are renting it back for £500k p/a – not really the actions of a company flush with cash. The share price seems to be pricing in failure, or perhaps an equity raise that sees holders diluted out.

      The company have not sought at all to reassure the market of the positives (ie profitability, asset backing) which I regard as slightly suspicious. It seems inevitable that forward bookings would be impacted to a degree. Take an example from Southampton – a family might well choose to go to LGW and pay their £1,000 for summer holiday flights rather than risk Flybe not being around to do it.

      I hold Flybe shares but I regard it almost a casino situation, either you will get multiple times your return or you will lose it all.

      • Yes I agree the routes are the key, and if Flybe went under some of these would continue, but it would be hugely disruptive and there are many key routes which aren’t subsidised which connect major cities such as those from Manchester, Southampton and Birmingham. As you allude to, it annoys me when they claim to have routes with no competition – there’s ALWAYS competition because people don’t live at airports. In my own case, I often travel from my home in Cheltenham to visit family in Edinburgh. One of the ways to do this is fly from Birmingham. Flybe thinks there’s no competition on this route because no one else flies BHX-EDI, but I’ve also got the option to fly from Bristol with EasyJet, BA from LHR, getting the train or driving. Flybe used to be the guaranteed quickest option, but recently it’s rare not to be delayed.

        • I’ve flown MAN-INV around 1,000 times. I live five miles from one and work ten miles from the other.
          Any advice on what the alternative would be?

        • If you were time rich and cash poor and you could make a significant saving by driving to Aberdeen to fly or taking the train you might consider it.

        • Shoestring says:

          @David – you’re going to have to move house or work from home or get another job, as I see it 🙂

          @Raffles – any news on that VR then?

    • David: live closer to where you work? Or work closer to where you live?

  2. A reasonable article but focus is on completely the wrong metric.

    Profits, debts, EBITDA, all useful metrics to some degree about future investment returns. All highly variable in terms of accounting interpretation. All largely irrelevant to whether a business goes bust, believe it or not. EBITDA tells you something about underlying trading, but interest and tax are two of the largest costs to a business – a metric that ignores them tells you pretty much nothing about survival prospects.

    A few businesses go under because they breach banking covenants and lenders pull the plug, or other technical or regulatory issues, but most businesses go bust because they run out of cash, plain and simple. They cannot pay bills and wages due right now. They are insolvent. A “profitable” business can most certainly find itself in this position, and many do.

    Cash is also a figure that is much more difficult to massage or obscure. If you want to assess the imminent risk to a business look at their cash flow and cash position; and the changes in the last few months/years. Have a look at FlyBe’s cash position and how it has changed over the last 2-3 years. THIS is their big problem, and why they are in crisis sale mode with a pittance of a share price and a severe threat to their existence. When what little money is left runs out….

    • I agree, there is a reason that Flybe are desperate to sell, they need cash. As the post above says, look at the trend of their cash. How much did they lose last winter? Roll that forward to this winter with higher fuel prices = problems.

      I just can’t see a way out for them, they will not survive the winter without an equity injection. I would still book on them, for a flight next week, but maybe not into the new year.

  3. I think you’re confusing some things there.
    The thing that would be damaging to the economy would be the loss of routes, not Flybe itself.

    I think Flybe has over-extended itself – no doubt there are some important routes which give vital air-links, but then again it’s apparent from their results that there are a lot of routes which simply don’t make enough money to be viable.

    If Flybe disappeared tomorrow I think the impact would be modest. The routes deemed the most important by the authorities (ie the ones that have a public subsidy on) would be snapped up by other airlines. The rest, either nobody would miss at all, or would simply be too unprofitable to operate.

    I do think Rob is being quite bold in putting his stall out like this. Many profitable companies can go to the wall, simply because they run out of cash flow. Flybe sold a property at Exeter and are renting it back for £500k p/a – not really the actions of a company flush with cash. The share price seems to be pricing in failure, or perhaps an equity raise that sees holders diluted out.

    The company have not sought at all to reassure the market of the positives (ie profitability, asset backing) which I regard as slightly suspicious. It seems inevitable that forward bookings would be impacted to a degree. Take an example from Southampton – a family might well choose to go to LGW and pay their £1,000 for summer holiday flights rather than risk Flybe not being around to do it.

    I hold Flybe shares but I regard it almost a casino situation, either you will get multiple times your return or you will lose it all.

  4. There’s also the small detail of actually getting to your destination. Getting there on time is a miracle. #flymaybe

    • This is the biggest reason I no longer use FlyBe – just can’t be sure the plane will leave of arrive ontime.

      From the number of complaints I see on Twitter and elsewhere got to wonder how much they’re paying out in EU261 compensation

  5. What is the curve position for Amex bills with MBNA?

  6. Does that look like a targeted offer?

  7. Very odd time period!

  8. Peter Huntingdon Bewers says:

    As a person living in Jersey , Flybe is our local airline and has and still does serve the Islands well, so I trust that the current cash flow will soon level out. A buy out ? always a possibility with a public Company. But I want Flybe to continue flying into the future with the Bombardier Q 400 s and the new Embaer 175 s in the future.

  9. Jon makes a critical point – that many companies fail because of a lack of liquidity, even though they are technically solvent on paper. Airlies sometimes quite simply run out of cash. Norwegian is a candidate for that, Wow almost was.

    I live in Exeter and so have a soft spot for Flybe. It is based there and has a monopoly on domestic flights. No EasyJet here. My favourite route, now discontinued, was to Inverness – surely the longest non-stop flight within Great Britain at the time.

    And the hop to Dublin is very handy for catching North America flights with no APD and US pre-clearance. It’s flight to LCY is handy too.

    I hope it sticks around.

    • Shoestring says:

      Exeter-Inverness would have been handy when I was a student. I studied at University of Exeter (alongside my old mate Jo Rawlings of Harry Potter fame, she was not that brilliant at French). Then in my second year my parents decided to move to the far north of Scotland, not that distant from Cape Wrath. I chose not to take that as a personal insult lol

      The train journey home in the hols was about 24hrs, including the post bus north of Lairg!

      Year 3 onwards (5 years in total for me) I spent all my hols in Europe 🙂

      • It must have been someone else than JK Rowling then? Just a similar-sounding name, right?

        • Shoestring says:

          Always going to be Jo to her mates, she didn’t go around saying ‘Hi, I’m JK’.

          Very nice, pleasant person, you won’t find anybody ever saying anything bad about Jo.

        • Shoestring says:

          But yeah, Rowling I suppose lol

  10. Thomas M. says:

    Flybe has sufficient cash

    Last week Flybe sold an industrial building for over £5m – it has over £50m in cash.

    Flybe made pre-tax profits of £7.4m in the six months to the end of September

    Flybe has an enterprise value of £107m

    • Shoestring says:

      and a stock market listed value of about 10 pence

      • Thomas M. says:

        Have you heard about the economist (defender of efficient markets) and the student walking down the road.

        The student says “Look, there’s a £50 note on the ground!”

        The economist turns to the student and replies, “Can’t be. If there was a £50 note on the ground, somebody would have already picked it up.”

        • Buried in the half year reports is a remark that Flybe may face the possibility of not being able to continue if their card acquirers required them to post more collateral – up to 100%.

          The amount Flybe have posted seems to have jumped from £0.6m to £16.2m, explaining that they needed to post more collateral.

          Considering that the company must take a big chunk of customer payments via payments on its website, that is a hell of a lot of money.

          If there was a bad winter trading period for instance, adverse weather conditions across Europe, would this not lead to an increased level of collateral?

          I’m not so sure they do have sufficient cash myself if the worst did happen.

          At these prices I do wonder if IAG might be interested. There is little strategic fit here, but at its core they could keep it running as a regional airline.

  11. Nigel Williams says:

    To be fair, whenever I have used Flybe (EMA > GLA, Flights to Lyon, etc) they have been decent. A budget airline yes, but budget pricing reflects that. Losing them will just result in the profitable routes going up in price.

    What annoys me FAR more is their “redesigned” Mobile App with is beyond useless. Seriously, redirecting you to a webpage so you can re-enter flight details *again* so you can retrieve a boarding pass (which you cannot store!). I end up having to screenshot my phone the first time I bring it up.

  12. Shoestring says:

    O/T The Priority Pass Black Friday sale will run from 23 November to 1 December.

    Watch this space. 40% discount last year.

  13. OT:
    Anyone advise how long transfers are taking at present from Marriott to partners.
    Thx

  14. O/T as no bits: Is Iberia website still down?

  15. OT: How long are Virgin to Hilton transfers taking these days? It’s been one week. I know it says it could take a month but I’ve experienced having them transferred in a few days.

  16. I’m always quite taken back by the fact that with a £750 million turnover just a 1-2% increase in ticket prices would potentially transform the profitability of a company like this. I’m sure they do their analysis on pricing but it does seem extraordinary they the market is that sensitive to price.

    • My experience of revenue management, especially at BA, is that it is separate from the cost structure. RevMan staff are tasked with selling each flight for as much as possible, which means looking at what other airlines are charging and how seats are selling.

      This is totally separate from the cost structure of the airline. RevMan simply does what is necessary to try to fill every seat for as high a price as possible. If that isn’t enough to cover the cost base, that isn’t their problem – and, arguably, if they have maximised the potential revenue from that flight with the mix of tickets sold v average price then they are right.

  17. OT and maybe sensitive:

    My mum completed treatment for cancer this year and as a treat I thought I would book her a trip overseas –

    Deary me, trying to arrange travel insurance for a four day trip for her – we have been quoted £500 and above for four days (single trip) from Virgin Money 🙁

    Does anyone know of any companies that insures people with history of cancer? We have just received another quote from someone who is supposed to specialise in travel insurance for cancer patients for £1000!!

    TBH, the trip cost far less than this 😀

    I told her for that price, she had better be admitted to several hospitals so that we can get our money’s worth! (we have warped senses of humour)

    Thanks in advance and sorry if this is sensitive

    Vol

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