Final Results

Released : 21/06/2013

RNS Number : 5447H
Flybe Group PLC
21 June 2013
 



Flybe Group plc

 

Preliminary Results for the Year Ended 31 March 2013

 

Flybe today announces its results for the year to 31 March 2013 and a further update on the progress of 'Delivery and Future Direction', the significant package of measures it has implemented in order to return its UK based businesses to profitability. 

 

KEY HEADLINES

·                Revenue under management in the year, including the full year impact of Flybe Finland, to 31 March 2013 up 15.1% to £781.5m (2011/12: £678.8m).

·                Adjusted loss before tax, restructuring and surplus capacity costs* in 2012/13 of £23.2m (2011/12: loss of £7.1m) and a reported loss before tax of £40.7m (2011/12: loss of £6.2m), in line with expectations.

 

·                Total cash of £54.7m at 31 March 2013 (2012: £67.6m), and net assets of £48.1m (2012: £89.4m).

·                Target cost savings of £25m under Phase 1 of turnaround plan exceeded, with £30m of annual cost savings now secured for year 2013/14 onwards.

·                Phase 2 of the plan being implemented, targeting a further £10m of savings in 2013/14, rising to around £20m from 2014/15.  This would take total annual cost savings to some £50m from 2014/15 onwards.

·                UK based head count being reduced by more than 20%.

·                Agreement in principle reached with the British Airlines Pilots Association ('BALPA'), for up to a 5% reduction in salary in return for extra time off.

·                The turnaround plan is being financed through:

®    The transfer of arrival and departure slots at London Gatwick Airport ('LGW') to easyJet for £20m, subject to a simple majority shareholder approval; over 54% of shareholders have given their irrevocable approval to the transaction;

®    The deferral of 16 Embraer E175 (E-series regional jet) aircraft deliveries, saving £20m of cash outflow for pre-delivery payments in winter 2013/14;

®    The disposal of various other minor assets.

 

*              Adjusted loss before tax, revaluation (loss)/gain on USD aircraft loans, restructuring and surplus capacity costs. Surplus capacity costs represent the costs incurred in the Winter 2012/13 flying season relating to capacity that is considered by management to be surplus as a result of the restructuring decisions taken in November 2012.  The majority of these costs were removed from the business by May 2013 and form a part of the Phase 1 cost savings.

 

Update on 'Delivery and Future Direction'

The actions taken so far under Phases 1 and 2 of Flybe's turnaround plan, Delivery and Future Direction, are now expected to deliver some £40m of annual cost savings in 2013/14 (against the original target of £25m), and targeted to reach an annual savings figure of around £50m by 2014/15 onwards.

Flybe also announces that as a result of a number of further initiatives under the turnaround plan, including the two significant transactions announced on 23 May 2013, the Group's financial position for 2013/14 will be improved by over £40m, helping finance Flybe's transition. These transactions and initiatives include:

1.           An agreement to transfer its 25 pairs of arrival and departure slots at LGW to easyJet PLC ('easyJet') for a total consideration of £20m.  Completion is expected in July 2013 and, after making a Class 1 Circular available to all shareholders, is subject to simple majority shareholder approval. Over 54% of shareholders have given their irrevocable approval to this transaction as at 20 June 2013.

2.           Flybe has agreed with Embraer the deferral of 16 new E175 aircraft due for delivery during 2014 and 2015. These aircraft will now not be delivered until 2017 to 2019.  This deferral will lead to a reduction in pre-delivery payment commitments in winter 2013/14 of £20m.

3.           The sale of other minor assets, largely surplus inventory, in both the UK airline and MRO businesses.

Flybe identified the need to make substantial changes to its cost base in Autumn 2012 which led to the identification of surplus aircraft, crew and engineers, before progressing on to the detailed planning and implementation of the major restructuring programme. While this led to the Group incurring surplus costs during the winter as we prepared for the major changes required, the full benefit of these changes will be seen in 2013/14 and beyond as costs are lowered and competitiveness significantly improved.

APD and regional aviation policy

Flybe welcomes growing political momentum to devolve APD policy to the UK's regions, as well as growing pressure to create a more coherent regional aviation policy for the UK as a whole.  Flybe and its customers would be significant beneficiaries of both of these developments.

2012/13 results

Flybe delivered a result for the year in line with market expectations.  Revenue under management, including the full year impact of Flybe Finland, increased 15.1% to £781.5m (2011/12: £678.8m).  Adjusted EBITDAR before restructuring and surplus capacity costs fell 19.6% to £71.4m (2011/12: £88.8m) with an adjusted loss before tax, restructuring and surplus capacity costs* of £23.2m (2011/12: loss of £7.1m) and a reported loss before tax of £40.7m (2011/12: loss of £6.2m).

This disappointing performance, which led the company to launch and deliver the turnaround plan outlined above, reflects the combined impact of a further 1% underlying decline in Flybe UK's core domestic market during the year along with high fuel prices and other cost pressures, particularly in US Dollar denominated costs and in regulated areas such as airport charges and air navigation fees.  Flybe UK's adjusted loss before tax, revaluation loss on USD aircraft loans, restructuring and surplus capacity costs was £17.3m, Flybe Outsourcing Solutions recorded an adjusted loss before tax, restructuring and surplus capacity costs of £2.3m and Group costs totalled £3.6m.  In addition, restructuring costs of £8.0m and surplus capacity costs of £4.8m were incurred as a result of the successful implementation of the first phase of our plans to restore both divisions to profitability and positive cash generation.  This first phase has led to 240 people leaving the business through resignation or redundancy, of which just 21 were compulsory redundancies, and another 250 via transfer under TUPE regulations to other businesses as part of the outsourcing of various support functions.  There was a non-cash, non-underlying loss of £4.7m on revaluation of US Dollar denominated aircraft loans. 

The Group's balance sheet had total cash, including restricted funds, of £54.7m at 31 March 2013 (2012: £67.6m), and net debt of £66.3m (2012: net debt £29.7m).

Commenting, Jim French CBE, Flybe's Chairman and Chief Executive Officer, stated:

"Flybe has exceeded its target of taking out £25m from its cost base during 2013/14 and will deliver around £40m in savings in this current financial year, expected to rise to £50m annualised savings from 2014/15 onwards.  In the last few months we have streamlined the business, reducing UK-based headcount by more than 20%. We have also made major progress in reducing the cost of our supplier base.

"Our announcements on 23 May 2013 have acted as a clarion call for action and debate on the injustice of the grossly unfair 'double hit' nature of the APD tax on the UK regions. The plans being developed in Edinburgh, Cardiff and Belfast are aimed at reducing this burden, and bode well for our customers, the regional economies we serve and Flybe itself. We will support these developments and work closely with those seeking to bring about change.

''Our results for 2012/13, while expected, are nonetheless disappointing. During the year, we have taken difficult decisions as part of our turnaround plan, which have affected all our people. Challenging as they have been, these decisions were critical to ensuring the future success of Flybe. 

 

"As outlined above, our turnaround plan has involved considerable efforts to reduce the cost base of the business.  Inevitably, and sadly, this process has to date involved the departure of around 490 people from the business.  We do not underestimate the effect of these difficult decisions on those staff leaving and the friends and colleagues that they leave behind.

 

"I would like to thank all of our employees, staff and union representatives for their hard work, support and resilience through what is proving to be a very challenging period for the business and its staff.

 

"Flybe remains Europe's largest independent regional airline, flying over 200 routes from more than 100 airports across 23 countries. We have a leading brand, a strong reputation for service excellence and a standing amongst our peers that means we can, and do, undertake business with all the major airline groups in Europe. We continue to make real and measurable progress in Europe, with our contract flying business in particular being a stable, income-generating entity which is well positioned for further growth.  With Flybe's future cost base significantly improved, the business will now move to reclaim its position as Europe's leading regional airline."

 

An accompanying presentation will be made available on the investor relations section of the Group's website.

 

21 June 2013

 

 

Enquiries:

 

Flybe

 

Tel: +44 20 7457 2020

Jim French, Chairman & Chief Executive Officer


Andrew Knuckey, Chief Financial Officer


Niall Duffy, Director of Communications


 

College Hill

Tel: +44 20 7457 2020

Mark Garraway


Helen Tarbet


 

 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S STATEMENT

 

Detailed Review

 

Divisional structure

 

As per the Phase 1 announcement on 23 January 2013, the Group has been refocused into two operating divisions:

 

®            Flybe UK, comprising the UK domestic and UK to Europe scheduled airline business. Andrew Strong is Managing Director of this division.  Contract flying activity previously recorded in this division now forms part of the Group's newly formed division, Flybe Outsourcing Solutions.

 

®            Flybe Outsourcing Solutions, comprising all Flybe's contract flying operations and its European scheduled flying businesses, as well as the MRO and Training Academy businesses supporting Flybe's airline divisions and serving third party customers. Mike Rutter heads up this division as Managing Director. Flybe's scheduled services in the Nordic and Baltic States are also managed by this division.

 

Some 82% of European scheduled contract flying is currently delivered by loss making in-house subsidiaries. Flybe strongly believes that pressure on network carriers and small scale state owned airlines to outsource will increase and presents a major contract flying opportunity, along the lines of the US model. The contract flying model delivers predictable income streams per aircraft, with lower commercial risk, producing annuity-style earnings.

 

Due to its success with Finnair, Brussels Airlines and, in previous years, Olympic Air, and its acknowledged expertise in this area, Flybe has developed into the largest independent schedule contract flying provider in the European regional sector operating about 5,000 flights per month, more than twice that of our nearest competitors.

 

The Board anticipates significant growth in European scheduled contract flying over the next few years and believes that Flybe is well placed to exploit this rapidly growing sector.

 

Results

 

Flybe delivered a result for the year in line with market expectations.  Revenue under management, including the full year impact of Flybe Finland, increased 15.1% to £781.5m (2011/12: £678.8m).  Adjusted EBITDAR before restructuring and surplus capacity costs fell 19.6% to £71.4m (2011/12: £88.8m) with an adjusted loss before tax, gains/(losses) on revaluation of USD aircraft loans, restructuring costs and surplus capacity costsof £23.2m (2011/12: loss of £7.1m) and a reported loss before tax of £40.7m (2011/12: loss of £6.2m). 

 

This disappointing performance reflects the combined impact of a further 1% underlying decline in Flybe UK's core domestic market during the year along with high fuel prices and other cost pressures, particularly in US Dollar denominated costs and in regulated areas such as airport charges and air navigation fees.  Both divisions were loss-making with Flybe UK losing, excluding the revaluation loss on USD aircraft loans, restructuring and surplus capacity costs, £17.3m and Flybe Outsourcing Solutions losing £2.3m before restructuring and surplus capacity costs.  In addition, restructuring costs of £8.0m and surplus capacity costs of £4.8m were incurred during the successful implementation of the first phase of our plans to restore both divisions to profitability and positive cash generation.  This first phase has led to 240 people leaving the business through voluntary and compulsory redundancy and resignation, and another 250 via transfer under TUPE regulations to other businesses.

 

The Group's balance sheet had total cash, including restricted funds, of £54.7m at 31 March 2013 (2012: £67.6m), and net debt of £66.3m (2012: net debt £29.7m).

 

Divisional Review

 

Flybe UK

 

Flybe UK recorded revenue of £575.2m (2011/12: £588.1m) and a reported segment loss before tax of £32.5m (2011/12: loss of £2.2m).

 

The Flybe UK results include Group costs of £3.6m (2011/12: £3.3m). Excluding Group costs, Flybe UK's adjusted loss before tax, restructuring of £4.0m, surplus capacity costs of £2.9m and revaluation losses on US Dollar aircraft loans of £4.7m (2011/12: gains of £0.9m) was £17.3m (2011/12: profit of £0.2m).

 

Flybe UK passenger numbers were stable at 7.2 million, only 1.1% down on 2011/12's 7.3 million despite seat capacity reducing by 2.7% to 11.3 million and sectors flown reducing by 3.5% to 132,600 (137,400 in 2011/12).  Load factor improved by 1.0 percentage points (from 63.1% to 64.1%), continuing the improving trend that started in the previous year.

 

Flybe Outsourcing Solutions

 

The core businesses in this division are the joint venture with Finnair, Flybe Finland, which derives its revenues mainly from contract flying, the maintenance, repair and overhaul business ('MRO'), branded as Flybe Aircraft Maintenance, and Flybe Training Academy operations based in Exeter.

 

With revenue of £167.2m (2011/12: £63.5m) and costs of £173.7m (2011/12: £72.6m), £41.3m of which was fuel, Flybe Finland generated a reduced loss before tax of £6.5m (2011/12: loss before tax of £9.1m) in what has been its first full year of operations.  Flybe's share of loss after tax in the joint venture Flybe Finland was £2.8m (2011/12: £3.0m in the year of acquisition).  The division is on track to deliver profits in 2013/14.

 

The MRO (Flybe Aircraft Maintenance) and Flybe Training Academy support both Flybe's UK and Finnish activities as well as serving third-party customers.  These businesses, together with contract flying arrangements for Brussels Airlines (see below) delivered revenue of £58.1m (2011/12: £47.3m), an adjusted profit before tax of £1.2m and a loss before tax of £4.7m (2011/12: loss of £0.5m), after restructuring costs of £4.0m and surplus capacity costs of £1.9m.

 

MRO revenue declined by 8.6% in 2012/13 to £40.5m (2011/12: £44.3m).  This decrease was driven by the 18.7% decline in man hours from 647,000 hours in 2011/12 to 526,000 hours. Of these total man hours, some 59.3% were for third party customers in 2012/13 (2011/12: 62.3%) with the balance being work on behalf of Flybe.

 

The year saw total training revenue for the Flybe Training Academy increase by 65.4% to £5.0m (2011/12: £3.0m).

 

Contract flying for Brussels Airlines generated revenues of £12.6m for the provision of four crewed Q400 turboprops in arrangements lasting up to two years.  These expire in April and October 2014.

 

People

 

2013 saw the resignations from the Board of Lord Digby Jones on 13 March and Anita Lovell on 17 May.  Both have made positive contributions to the Board and I would like to thank them for their support during their appointments.

 

In November 2012, we announced our plan to split my role as Chairman and CEO, as stated at the time of the IPO. Given the critical importance of successfully delivering on our turnaround plan, we have concentrated all our efforts in that area.  We will appoint a CEO once the Board is satisfied that sufficient development along these lines has been made.

 

As outlined above, our turnaround plan has involved considerable efforts to reduce the cost base of the business.  Inevitably, and sadly, this process has to date involved the departure of around 490 people from the business as a result of redundancy, resignation or transfer to other organisations under TUPE arrangements.  21 of these redundancies were compulsory. We do not underestimate the effect of these difficult decisions on those staff leaving and the friends and colleagues that they leave behind.

 

On behalf of the whole Board, I would like to thank all of our employees for their talent, hard work, support and resilience through what is proving to be a very challenging period for the business and its staff.

 

Outlook

 

Flybe remains Europe's largest independent regional airline, flying over 200 routes from more than 100 airports across 23 countries, with a strong reputation and a standing amongst our peers that means we can do business with all the major airline groups in Europe. We continue to make real and measurable progress in Europe, with our contract flying business in particular being a stable, income-generating entity.

 

Much more importantly than being the largest independent regional airline, though, is our desire to become Europe's most profitable regional airline. The difficult decisions we took in Phases 1 and 2 of our Turnaround Plan represent significant steps in the right direction. Our choices with regard to cost savings, outsourcing, headcount reduction, aircraft delivery deferrals and the sale of our Gatwick slots demonstrate the resilience and single-mindedness of the management team to turnaround Flybe.

 

We expect to see considerable reductions in the cost base of the business in both this year and the next, thanks to the actions taken during the course of 2013 that are targeted to be complete later this year. The Group is now more strongly placed for the future.

 

 

Jim French CBE

Chairman and Chief Executive Officer

 

 

FINANCIAL REVIEW

Summary

 

Flybe has had perhaps its most challenging year since the re-branding and re-launch of the airline over a decade ago, and 2012/13 saw losses generated in both divisions.  However, Group revenue was stable and we saw growth in revenue under management thanks to the first full year of operation of our joint venture with Finnair, Flybe Finland.

 

®           The core Flybe UK business has experienced the dual challenges of a difficult economic backdrop and higher costs, particularly fuel. The division recorded an adjusted loss before tax, restructuring and surplus capacity costs* of £17.3m, and a loss before tax** of £28.9m. We remain one of the leading carriers of UK domestic passengers with a 28.1% market share, the largest UK regional carrier for passengers outside of London with a 52.4% market share and our passenger numbers remained stable at 7.2 million (2012: 7.3 million).

 

®           Flybe Outsourcing Solutions, generated an adjusted loss before tax, restructuring and surplus capacity costs for the year of £2.3m*** and loss before tax of £8.2m, comprising a loss of £2.8m derived from the joint venture, Flybe Finland, plus associated central management costs of £0.7m, and a £4.7m loss (adjusted profit of £1.2m before £5.9m of restructuring and surplus capacity costs) in the Exeter-based maintenance, repair and overhaul ('MRO'), Training Academy and other contract flying businesses.  Flybe Finland recorded its first monthly profits towards the end of the financial year and the division is on track to deliver profits in 2013/14.

 

®           Currently, Flybe's key challenge is to restructure the cost base of its UK-based businesses and refocus the operational activity so that it is able to develop profits and positive operational cash flows.  A regrettable but necessary side effect of this is that we have seen, under Phase 1 of the restructuring plan, 240 people leave the business on redundancy programmes or resignation, while a further 250 were transferred to other employers to support the line maintenance, ground handling and other activities Flybe has outsourced.  £8.0m was provided in the 2012/13 income statement for restructuring costs, with a further £4.8m of surplus capacity costs, taking total restructuring costs in 2012/13 to £12.8m.  We expect that approximately a further £5m will be incurred in 2013/14 on similar measures.  However, the benefits of these very painful and disruptive short-term measures are significant with £30m of year-on-year cost reductions already secured for 2013/14 and a further £19m of cost saving measures targeted for 2014/15.

 

®           Group costs were £3.6m up slightly on last year's £3.3m with an increase in salary costs offset by slightly lower advisor and other fees.

 

*          Flybe UK adjusted loss before tax, restructuring and surplus capacity costs is the segment result after adding back Group costs of £3.6m, total restructuring of £4.0m and surplus capacity costs of £2.9m and revaluation losses/(gains) on USD aircraft loans of £4.7m (2011/12: £(0.9m)). Surplus capacity costs represent the costs incurred in the Winter 2012/13 flying season relating to capacity that is considered by management to be surplus as a result of the restructuring decisions taken in November 2012.  The majority of these costs were removed from the business by May 2013 and form a part of the Phase 1 cost savings.

 

**            Flybe UK loss before tax is the segment result after adding back Group costs of £3.6m.

 

***          Flybe Outsourcing Solutions adjusted loss before tax, restructuring and surplus capacity costs is the segment result after adding back restructuring of £4.0m and surplus capacity costs of £1.9m.

 

At 31 March 2013, Flybe had net assets of £48.1m, total cash of £54.7m, unrestricted cash of £23.3m and net debt (i.e. total cash less borrowings) of £66.3m.

 

Key financial headlines

 


2013

2012

Change


£m

£m

%

Revenue under management

781.5

678.8

15.1

Group revenue

614.3

615.3

(0.2)





Adjusted EBITDAR before restructuring and surplus capacity costs *

71.4

88.8

(19.6)

Adjusted EBITDAR before restructuring **

66.6

88.8

(25.0)





Adjusted loss before tax, restructuring and surplus capacity costs ***

(23.2)

(7.1)

n/m

Adjusted loss before tax and restructuring ****

(32.7)

(6.2)

n/m

Loss before tax

(40.7)

(6.2)

n/m

Loss after tax

(41.8)

(6.4)

n/m

 

*              Adjusted EBITDAR before restructuring and surplus capacity costs defined as operating profit or loss before joint venture results after adding back restructuring and surplus capacity costs of £12.8m, depreciation, amortisation and aircraft rental charges.  Surplus capacity costs represent the costs incurred in the Winter 2012/13 flying season relating to capacity that is considered by management to be surplus as a result of the restructuring decisions taken in November 2012.  The majority of these costs were removed from the business by May 2013 and form a part of the Phase 1 cost savings.

 

**            Adjusted EBITDAR before restructuring defined as operating profit or loss before joint venture results after adding back depreciation, amortisation, aircraft rental charges and restructuring costs of £8.0m.

 

***          Adjusted loss before tax, restructuring and surplus capacity costs defined as loss before tax, restructuring and surplus capacity costs of £12.8m (2011/12: £nil) and revaluation losses/(gains) on USD aircraft loans of £4.7m (2011/12: £(0.9m)).

 

****        Adjusted loss before tax and restructuring defined as loss before tax and restructuring costs of £8.0m (2011/12: £nil).

 

Revenue under management has grown 15.1% to £781.5m from £678.8m due to the Group's joint venture with Finnair in the Nordic and Baltic region, Flybe Finland.  In its first full year of operation, Flybe Finland has built on its good start, achieving our financial expectations by reaching a monthly profit position by the end of the year. The success of this venture was reinforced by the commencement on 28 October 2012 of a five year arrangement to fly a further 12 Embraer E190 regional jets for Finnair.

 

Group revenue was stable at £614.3m, achieved against a backdrop of a continuing decline in the overall UK domestic market and the continuing weakness of the UK economy in general. Flybe has shown considerable resilience over this period, maintaining its UK domestic market share at 28.1% and overall passenger numbers of 7.2 million.

 

Adjusted EBITDAR before restructuring and surplus capacity costs declined to £71.4m, down 19.6% from the previous year's adjusted EBITDAR of £88.8m and reported EBITDAR was down 34.0% to £58.6m from 2011/12's £88.8m. The Group's adjusted loss before tax, restructuring and surplus capacity costs was £23.2m (2011/12: £7.1m), and the reported loss before tax increased from £6.2m to £40.7m.

 

Set out below is a reconciliation from operating loss to the adjusted EBITDAR figures.  All EBITDAR metrics are non-GAAP measures**.

 

EBITDAR is a common airline profit measure which is used for making comparisons between airlines.  An adjusted EBITDAR measure is presented which removes restructuring costs reported in the income statement.

 


2013

2012

Change


£m

£m

%

Operating loss - unadjusted

(34.3)

(4.9)

n/m

Joint venture results

2.8

3.0

(6.7)

Depreciation and amortisation*

12.0

13.1

(8.4)

Aircraft rental charges

78.1

77.6

0.6

EBITDAR - unadjusted

58.6

88.8

(34.0)

Restructuring reported in the income statement

8.0

-

n/m

Adjusted EBITDAR before restructuring costs

66.6

88.8

(25.0)

 

The adjusted EBITDAR before restructuring costs is further adjusted to remove surplus capacity costs within the business during the Winter 2012/13 flying season.  This measure demonstrates how EBITDAR might have appeared if it had been possible to remove these identified surplus costs in November 2012.  More detail on restructuring and surplus capacity costs is provided below:

 


2013

2012

Change


£m

£m

%

Adjusted EBITDAR before restructuring costs

66.6

88.8

(25.0)

Surplus capacity costs***

4.8

-

n/m

Adjusted EBITDAR before restructuring and surplus capacity costs

71.4

88.8

(19.6)

 

The table below sets out a reconciliation from loss before tax to adjusted loss before tax which adjusts the result for restructuring costs reported in the income statement. 

 


2013

2012

Change


£m

£m

%

Loss before tax - unadjusted

(40.7)

(6.2)

n/m

Restructuring reported in the income statement

8.0

-

n/m

Adjusted loss before tax and restructuring

(32.7)

(6.2)

n/m

 

Loss before tax, revaluation gains on USD aircraft loans, restructuring and surplus capacity costs is further adjusted to remove the revaluation loss/(gain) on USD aircraft loans and surplus capacity costs within the business during the Winter 2012/13 flying season.  This measure demonstrates how the loss before tax, and restructuring might have appeared if it had been possible to remove these identified surplus costs in November 2012.

 


2013

2012

Change


£m

£m

%

Adjusted loss before tax and restructuring

(32.7)

(6.2)

n/m

Revaluation loss/(gain) on USD aircraft loans

4.7

(0.9)

n/m

Surplus capacity costs***

4.8

-

n/m

Adjusted loss before tax, restructuring and surplus capacity costs

(23.2)

(7.1)

(227.7)

 

The adjusted loss before tax figures given above are non-GAAP measures**.

 

*              Excludes depreciation on maintenance assets set up in accordance with IFRS requirements.

 

**            Non-GAAP 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 non-GAAP measure is determined from the most directly comparable measure calculated and presented in accordance with IFRS.  The non-GAAP 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.

 

***          Surplus capacity costs represent the costs incurred in the Winter 2012/13 flying season relating to capacity that is considered by management to be surplus as a result of the restructuring decisions taken in November 2012.  The majority of these costs were removed from the business by May 2013 and form a part of the Phase 1 cost savings outlined in the table below. 

 

 

Restructuring the business

 

The costs incurred in restructuring Flybe's business were as follows:

 


Incurred and paid in the period

Incurred but not paid in the period

Total

incurred

in

2012/13


£m

£m

£m

Redundancies

0.9

4.6

5.5

Legal, professional and other support costs

0.2

1.0

1.2

Other restructuring costs

0.3

1.0

1.3

Reported in the income statement

1.4

6.6

8.0

Surplus capacity costs

4.6

0.2

4.8

Restructuring and surplus capacity costs

6.0

6.8

12.8

 

In addition, management expect to incur further restructuring and surplus capacity costs of about £5m in 2013/14, taking the total costs of delivering the turnaround to some £18m.

 

Unfortunately, the restructuring of the business has taken its toll on our loyal and much valued staff in all areas of the business.  Under Phase 1 of the restructuring programme, redundancies of roles identified to the end of March 2013 meant that some 490 people left the business under a mix of redundancy, resignation and TUPE measures, with a further 90 anticipated to be leaving in the next financial year.

 

Legal, professional and other support costs have been incurred on negotiating the redundancies mentioned above as well as on providing outsourcing services to those leaving Flybe.  However, the major cost in this area is in relation to the provision of specialist services around procurement that have helped us to negotiate better terms in relation both to rates and payment periods from our supplier base.  Further costs in both these areas will continue to be incurred during 2013/14.

 

Other restructuring costs relate to reducing space occupied at the many airports Flybe serves, particularly as the outsourcing of services has reduced the need for Flybe itself to have local facilities.

 

Steps were taken over the winter of 2012/13 to improve the efficiency of both divisions, leading to surplus capacity in respect of aircraft, crew and maintenance staff being identified and incurred through the Winter 2012/13 flying season.  An estimate of the cost savings that would have been made had we been able to remove these costs before the 2012/13 Winter flying season is highlighted above as surplus capacity costs.  These costs were removed from the business by May 2013 and form a part of the Phase 1 cost savings outlined in the table below.  Because these costs formed a part of the operating cost base during the year ended 31 March 2013, it is not possible to identify these costs separately within the financial statements.

 

Further efficiency measures are in the process of being developed and will lead to further costs in 2013/14 as activities are further restructured or outsourced.

 

These restructuring costs set out above and the related actions are targeted to deliver the following cost savings:

 


Generated in 2012/13

Target savings in the year to 31 March 2014

Targeted annualised savings from 2014/15 onwards


£m

£m

£m

Staff cost reductions

-

22

25

Business efficiency and outsourcing

1

8

8

Supplier costs

2

10

16

Total

3

40

49

 

Other than for staff costs where headcount reduction has been the prime driver, other cost lines will benefit from the general renegotiation of rates and payment terms across the supplier base.  In addition, costs will benefit from outsourcing activities and marketing and distribution cost savings will also be derived from lower levels of advertising spend.

 

Of the total target savings in 2013/14 of £40m, £30m has been identified as being part of Phase 1, in excess of the £25m previously targeted, and these projects are almost complete. As noted in our announcement on 23 May 2013, we have accelerated the implementation of Phase 2, which is now underway, in order to address additional profit pressures that have arisen from slightly lower revenues than expected in the final quarter of 2012/13 and additional cost pressures from adverse movements in Sterling's exchange rate with the US Dollar. Phase 2 cost savings are expected to amount to £10m in 2013/14. On an annualised basis, ongoing cost savings arising from Phases 1 and 2 estimated to amount to £49m from 2014/15 onwards.

 

Fleet

 

Flybe UK

 

In 2012/13, Flybe UK took delivery of a further five E175 regional jets from Embraer (out of its firm order for 35 E175s), taking the total delivered to nine with another four contracted for delivery between September and December 2013.  Four Bombardier Q400 aircraft are currently being operated on a contract flying agreement with Brussels Airlines that commenced in March 2012.  Two of these aircraft are due to return to Flybe service in April 2014 with the remaining pair finishing their contracts by the end of October 2014.  Another two Q400 turboprops that were contracted for sale to Aero Nigeria at 31 March 2013 completed the disposal process in May 2013 at a small book profit.

 

Since 2011 Flybe has been rebalancing the UK-based fleet towards a more equal combination of regional jets and turboprop aircraft by introducing 88-seat Embraer 175 regional jet aircraft into Flybe UK service.  We expect the increased number of regional jets in our fleet to improve the overall customer product and experience for Flybe's passengers, and indeed are encouraged by the early trends we are experiencing on UK-European routes where we have replaced the Q400 turboprop with the E175 jets.

 

Flybe Outsourcing Solutions

 

12 E190 aircraft were leased by Flybe Finland from Finnair on 28 October 2012, and are now being flown by Flybe Finland under a five-year contract flying arrangement with Finnair.  Flybe Finland has also leased one ATR 72 turboprop and handed back an ATR 42.  It is currently intended that the Flybe Finland fleet will continue to comprise Embraer E-series regional jets and ATR turboprops in the longer term.

 

Embraer E175 order

 

In July 2010 Flybe UK announced the firm order of 35 Embraer 175s for delivery between 2011 and 2016 with options and purchase rights over a further 105 E-series regional jets.  In May 2013, Flybe and Embraer agreed delivery deferrals for 16 aircraft due for delivery in 2014 and 2015 to the period from 2017 to 2019, thus de-risking growth aircraft for the business and providing some £20m of cash alleviation in terms of cash exposure on pre-delivery payments in the winter of 2013/14.

 

Fleet under management

 

The profile of Flybe's fleet under management in the 2012/13 year is summarised below:

 




Number of aircraft



Number of
             seats

At 31 March
             2012

Net movements
             in period

At 31 March

2013

Flybe UK





Embraer E195 regional jet

118

14

-

14

Embraer E175 regional jet

88

4

5

9

Bombardier Q400 turboprop*

78

50

(3)

47



68

2

70

Flybe Finland





ATR 42 turboprop

48

3

(1)

2

ATR 72 turboprop

             68-72

11

1

12

Embraer E170 regional jet

76

2

-

2

Embraer E190 regional jet

100

-

12

12



16

12

28

Total


84

14

98

Held on operating lease


74

14

88

Owned and debt financed*


10

-

10

Total*


84

14

98

Total seats in fleet


6,960


8,390

Average seats per aircraft


82.9


85.6

Average age of fleet (years)


4.6


5.1

 

*                31 March 2012 position restated

 

In 2012/13, three Q400 leases expired in the second half of the year.  As at 14 June 2013, following the completion of the sale of two Q400 turboprop aircraft, the Group's fleet under management now stands at 96 aircraft, consisting of 45 Q400 and 14 ATR turboprops, and 37 E-series jets.

 

The Group will continue to act opportunistically to match capacity to demand, particularly in its core UK market, which drives about 72% of revenue under management. As part of this initiative the Group is currently marketing for sale a further two Q400 aircraft.

 

Divisional results

 

Flybe's divisional results are summarised below.  These results are before tax, other than share of joint venture results.

 


2013

2012

(restated)


£m

£m

Divisional revenues:



Flybe UK

575.2

588.1

Flybe Outsourcing Solutions

225.3

110.8

Inter-segment sales

(19.0)

(20.1)

Revenue under management

781.5

678.8

Less: Revenue from Flybe Finland joint venture

(167.2)

(63.5)

Group revenue

614.3

615.3




Divisional results:






Flybe UK



Adjusted (loss)/profit before tax:

(17.3)

0.2

Restructuring and surplus capacity costs

(6.9)

-

Revaluation (loss)/gain on USD aircraft loans

(4.7)

0.9

(Loss)/profit before tax

(28.9)

1.1




Flybe Outsourcing Solutions



Adjusted loss before tax:

(2.3)

(4.0)

Restructuring and surplus capacity costs

(5.9)

-

Loss before tax

(8.2)

(4.0)




Group



Adjusted (loss)/profit before tax:



Flybe UK

(17.3)

0.2

Flybe Outsourcing Solutions

(2.3)

(4.0)

Group costs

(3.6)

(3.3)

Group adjusted loss before tax:

(23.2)

(7.1)

Restructuring and surplus capacity costs

(12.8)

-

Revaluation (loss)/gain on USD aircraft loans

(4.7)

0.9

Group loss before tax

(40.7)

(6.2)




 

 

Flybe UK

 

Revenue

 


2013


2012


£m

£ per seat


£m

£ per seat

Passenger revenue

551.8

48.84


565.6

48.71

Other revenue

23.4



22.5


Total revenue - Flybe UK

575.2



588.1


 

Flybe UK passenger numbers were down 1.1% at 7.2 million versus 7.3 million in 2011/12, despite the active management of seat capacity which reduced by 2.7% to 11.3 million and sectors flown were down by 3.5% to 132,600 (137,400 in 2011/12).  In recent years, capacity management has been a key theme for Flybe in order to help mitigate the adverse effect of the depressed UK economic environment coupled with the upward march of fuel prices to what are now stable, but high levels.

 

The reduction in passenger numbers, combined with relatively stable passenger revenue per seat, meant that passenger revenue was down from £565.6m to £551.8m.  Passenger revenue per seat was broadly flat at £48.84 (2011/12: £48.71), comprising an increase in load factor of 1.0 percentage points (from 63.1% to 64.1%) and a reduction in passenger yield from £77.21 to £76.16. 

 

Other revenue in Flybe UK totalled £23.4m, representing a 4.0% increase on the £22.5m generated in 2011/12, and arose primarily from increases in charter revenue with other revenue streams remaining broadly stable.

 

Operating costs, excluding restructuring and surplus capacity costs

 


2013


2012


£m

£ per seat


(restated*)

£m

£ per seat

£ per seat at constant currency and fuel price*

Staff costs

85.9

7.60


85.4

7.36

7.36

Fuel

122.6

10.85


106.4

9.17

10.68

Net airport costs, en route charges and ground operations

200.1

17.71


204.8

17.65

17.18

Aircraft ownership and maintenance costs

134.2

11.88


145.7

12.56

12.38

Marketing and distribution costs

24.5

2.17


24.8

2.14

2.12

Other operating costs

26.8

2.37


21.6

1.87

1.86

Operating costs

594.1

52.58


588.7

50.75

51.58

 

*              Staff costs for 2011/12 have been restated by £6.1m to reflect the change in presentation of flight duty allowance of £4.3m from other operating expenses and £1.8m in relation to maintenance staff who transferred from Flybe Aircraft Maintenance (the MRO activity within Flybe Outsourcing Solutions) into the Flybe UK division from April 2012 and, therefore, the comparative has been adjusted accordingly.

 

**            Constant currency is calculated for the 2011/12 year by applying the effective exchange rates that prevailed for reporting the 2012/13 results of $1.55 and €1.18 and constant fuel is calculated for the 2011/12 year by applying the effective blended rate paid for jet fuel per tonne in 2012/13.

 

Operating costs increased by 0.9% from £588.7m to £594.1m largely as a result of the increase in the price of jet fuel which went up by £1.68 per seat, more than 90% of the overall rise of £1.83 per seat.  On a constant currency and fuel basis, underlying operating costs decreased by 0.7% from £598.3m in 2011/12 to £594.1m.

 

Operating costs per seat increased by 3.6% from £50.75 to £52.58.  On a constant currency and fuel basis, this unit cost measure increased by 1.9% to £52.58 (2011/12: £51.58).

 

Operating costs, including restructuring and surplus capacity costs

 


2013


2012


£m

£ per seat


£m

£ per seat

£ per seat at constant currency and fuel price*

Staff costs

90.3

7.99


85.4

7.36

7.36

Fuel

122.6

10.85


106.4

9.17

10.68

Net airport costs, en route charges and ground operations

200.1

17.71


204.8

17.65

17.18

Aircraft ownership and maintenance costs

135.4

11.98


145.7

12.56

12.38

Marketing and distribution costs

24.5

2.17


24.8

2.14

2.12

Other operating costs

28.1

2.49


21.6

1.87

1.86

Operating costs

601.0

53.19


588.7

50.75

51.58

 

*              Constant currency is calculated for the 2011/12 year by applying the effective exchange rates that prevailed for reporting the 2012/13 results of $1.55 and €1.18 and constant fuel is calculated for the 2011/12 year by applying the effective blended rate paid for jet fuel per tonne in 2012/13.

 

Restructuring and surplus capacity costs

 

The division incurred costs of restructuring and surplus capacity as follows:

 


Incurred and paid in the period

Incurred but not paid in the period

Total incurred in the period


£m

£m

£m

Redundancies

0.5

2.2

2.7

Legal, professional and other support costs

0.2

1.0

1.2

Other restructuring costs

0.1

-

0.1

Reported as restructuring in the income statement

0.8

3.2

4.0

Surplus capacity costs

2.7

0.2

2.9

Restructuring and other surplus capacity costs

3.5

3.4

6.9

 

These costs are discussed in more detail above.

 

Fuel

 

Flybe UK's results are subject to significant change as a result of movements in the price of fuel which forms a significant variable cost for this business.  Although 2012/13 has seen a reduction in volatility for fuel prices, it has been at the expense of that price stabilising at a relatively high level - Brent crude has been in the $110 to $120 a barrel range for most of the year.  Overall, the price of jet fuel was slightly lower than in 2011/12, peaking at $1,116 per tonne on 3 April 2012.  Flybe's fuel costs increased to £122.6m from £106.4m, largely due to the realisation of favourable hedge positions during 2011/12 that had been taken out in 2009/10 and 2010/11 - the benefit of these was not available in 2012/13.  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 the year to 31 March 2013, Flybe UK used some 179,300 tonnes of jet fuel, a reduction on 2011/12 of 2.3% from 183,500 tonnes.  The average market price during the year was $1,018 per tonne (2011/12: $1,036), with the Group paying a blended rate (net of hedges) of $1,002 per tonne (2011/12: $853).  Including 'into plane' costs, Flybe's fuel costs in 2012/13 of £122.6m (2011/12: £106.4m) represent an all-in cost of $1,061 per tonne for 2012/13 (2011/12: $916).  Using constant currency and fuel prices, our fuel costs per seat increased by 1.6% from £10.68 to £10.85.

 

Flybe UK operates a policy of managing fuel price volatility by entering into derivative contracts representing a portion (between 60% and 90%) of its aviation fuel requirements up to 12 months forward.  The intention of this programme is to provide a significant element of certainty over its fuel costs for any forthcoming IATA season.  As at 14 June 2013, 73.2% of the year to 31 March 2014 was hedged at an average price of $996 per tonne.  Taking into account our hedged position, each $50 increase/decrease in the price of jet fuel reduces/improves Group profits in 2013/14 by £1.2m.

 

Efficiencies have been derived from our fleet replacement programme, operational improvements and careful management of routes and frequencies.  Overall, 15.9kg of fuel was consumed for each seat flown (2011/12: 15.8kg per seat) as a result of the introduction and use of slightly larger jet aircraft as the continuing replacement of some of the division's turboprops continues.  This remains a significant improvement on the 19.1kg per seat in 2007/08 due to our investment in a modern, fuel-efficient two-type aircraft fleet best suited to regional flying.

 

Other operating costs

 

Staff costs, before restructuring and surplus capacity costs, at £85.9m were higher by 0.6%.

 

Net airport costs, en route charges and ground operations decreased by 2.3% largely due to lower charges levied by air traffic control and ground handling providers more than offsetting the small increase in airport costs.  On a constant currency per seat basis, net airport costs, en route charges and ground operations increased by 3.1% to £17.71 (2011/12: £17.18).

 

Aircraft ownership and maintenance costs decreased by 7.9%, primarily due to lower maintenance costs as the fleet moves into its more mature phase and lower depreciation from a smaller owned-fleet size across the year.  In part, these were driven by exchange rate movements as, on a constant currency per seat basis, aircraft ownership and maintenance costs decreased by 4.1% to £11.88 (2011/12: £12.38).

 

Other operating costs, before restructuring and surplus capacity costs, increased to £26.8m from £21.6m in 2011/12 since 2012/13 did not benefit to the same extent from non-reoccurring other operating gains predominantly related to the profit on sale of aircraft assets and income related to aircraft performance reliability compensation.

 

Net finance costs increased by £5.1m largely due to the £4.7m of non-cash losses arising on the retranslation of US Dollar denominated debt used to fund the acquisition of aircraft, particularly the newer E175 regional jets.  The movement in this US Dollar liability cannot be naturally offset against the value of the aircraft as the latter are recorded in UK Sterling in order to comply with the requirements of International Financial Reporting Standards.  This income statement charge has therefore been adjusted in arriving at adjusted profit before tax.

 

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. Flybe UK 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.  As at 14 June 2013, 72.5% of our anticipated US Dollar requirements for the year to 31 March 2014 were hedged at an average exchange rate of $1.56.  All existing derivative financial instruments are forward swap arrangements.

 

The table below sets out Flybe UK's US Dollar hedging position for each of the periods under review:

 


2013

2012

Anticipated foreign currency requirement

$385m

$349m

Proportion hedged at beginning of period

61%

82%

Effective exchange rate

$1.55

$1.58

 

Taking into account our hedged position, each $0.05 reduction/improvement in the US Dollar exchange rate has the effect of reducing/increasing Flybe UK's profits in 2013/14 by approximately £3.4m.

 

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 each of the periods under review:

 


2013

2012

Anticipated carbon allowances required, tonnes (actual for calendar year 2012)

572,600

566,800

Free allowance allocation, tonnes

259,800

274,900

Proportion hedged at beginning of period

53%

n/a*

Effective carbon rate

€4.87

n/a*

 

*              The carbon hedging programme for Flybe commenced in April 2012, therefore the comparative for 2012 is not available for the beginning of the period for 2012.

 

Flybe Outsourcing Solutions

 

The core businesses in this division are the joint venture with Finnair, Flybe Finland, which derives its revenues mainly from contract flying, and the maintenance, repair and overhaul ('MRO') and Training Academy operations based in Exeter.

 


2013

2012

Change


£m

£m

%

Revenue




Flybe Finland

167.2

63.5

163.3

Contract flying revenue

12.6

-

n/m

MRO

40.5

44.3

(8.6)

Training Academy

5.0

3.0

66.7


225.3

110.8

103.3

Joint venture revenue

(167.2)

(63.5)

163.3

Divisional revenue

58.1

47.3

22.8

Adjusted costs (excluding restructuring and surplus capacity costs and Flybe Finland)

(57.6)

(48.3)

(19.3)

Joint venture result

(2.8)

(3.0)

6.7

Divisional adjusted loss before tax

(2.3)

(4.0)

42.5

Restructuring and surplus capacity costs

(5.9)

-

n/m

Divisional loss before tax

(8.2)

(4.0)

105.0





 

 

Flybe Finland's results are summarised as follows:

 


2013


2012*


£m

£m


£m

£m

Flybe Finland joint venture






Revenue






Contract flying


132.4



41.3

Passenger revenue


30.6



19.6

Other revenue


4.2



2.6



167.2



63.5

Costs






Fuel

(41.3)



(12.3)


Other operating costs

(132.4)



(60.3)




(173.7)



(72.6)

Loss before tax


(6.5)



(9.1)

Tax credit


1.6



4.3

Loss after tax


(4.9)



(4.8)







60% share of Flybe Finland joint venture loss*


(2.8)



(3.0)

Other net costs including interest


(0.7)



(0.5)

Business result - Flybe Finland


(3.5)



(3.5)

 

*              For the period from acquisition on 18 August 2011 to 31 March 2012

 

With revenue of £167.2m (2011/12: £62.7m) and costs of £173.7m (2011/12: £72.6m), £41.3m of which was fuel, Flybe Finland generated a significantly smaller loss before tax of £6.5m (2011/12: loss before tax of £9.1m) in what has been its first full year of operations.  A tax credit of £1.6m relating to deferred tax on the losses generated was also reported, resulting in a loss after tax for Flybe Finland of £4.9m (2011/12: loss after tax £4.8m).  Flybe Finland also reported its first months of profit in the final quarter of 2012/13 and is on course to deliver annual profitability in 2013/14.

 

Contract flying for Finnair accounted for 1.6 million passengers (period from acquisition to 31 March 2012: 0.5 million passengers). In addition, Flybe Finland's passenger numbers on commercial flying represented 0.4 million passengers (period from acquisition to 31 March 2012: 0.3 million) with a load factor of 41.8% (2011/12: 40.4%).  Contract flying is expected to dominate this business in 2013/14 onwards and will provide a stable platform for future profit and cash generation.

 

The exposures of Flybe's joint venture in Finland to fuel price and exchange rate volatility have been monitored during 2012/13, but no hedging has yet been undertaken due to the minimal nature of the underlying exposure.  This is because Flybe Finland's leases are denominated in Euros, its main operating currency, leaving fuel prices and US Dollar exposure on fuel and maintenance costs as its primary exposures. These costs are currently smaller exposures to the business and are related to the commercial rather than contract flying operations.  Management will continue to monitor these exposures and hedge them should they become significant.

 

During the year, Finnish Aircraft Maintenance Oy which had previously sat elsewhere within the Flybe Nordic joint venture with Finnair was acquired by Flybe Finland for a cash consideration of £0.3m.  All of its activities are treated as part of the activities of Flybe Finland for the year under review.

 

Central overhead costs, net of interest amounted to £0.7m (2012: £0.5m).

 

The results of Flybe's MRO, Training Academy and non-Finnish contract flying arrangements are summarised as follows:

 


2013

2012

Change


£m

£m

%

Revenue




Contract flying

12.6

-

n/m

Maintenance, repair and overhaul

40.5

44.3

(8.6)

Training Academy

5.0

3.0

66.7


58.1

47.3

22.8

Operating costs before restructuring and surplus capacity costs

(56.9)

(47.8)

(19.0)

Adjusted profit/(loss) before tax

1.2

(0.5)

n/m

Restructuring and surplus capacity costs

(5.9)

-

n/m

Business loss before tax

(4.7)

(0.5)

n/m

 

Contract flying represents the provision of four crewed Q400 turboprops to Brussels Airlines in arrangements lasting up to two years and which expire in April and October 2014.

 

MRO revenue declined by 8.6% in 2012/13 to £40.5m (2011/12: £44.3m), of which £25.0m was for third party customers (2011/12: £26.4m).  This decrease was driven by the 18.7% decline in man hours from 647,000 hours in 2011/12 to 526,000 hours.

 

In its second full year of operation, the Training Academy successfully grew its revenue to £5.0m from £3.0m, helping to reduce reported losses to £0.3m (2011/12: loss of £1.2m).

 

The MRO, Training Academy and non-Finnish contract flying arrangements recorded a loss before tax of £4.7m (2011/12: £0.5m) after total restructuring and surplus capacity costs of £5.9m (2011/12: £nil).  Excluding these restructuring and surplus capacity costs, the adjusted profit before tax for this business was a profit of £1.2m (2011/12: loss £0.5m).

 

Restructuring and surplus capacity costs

 

The division incurred costs of restructuring and surplus capacity as follows:

 


Incurred and paid in the period

Incurred but not paid in the period

Total incurred in the period


£m

£m

£m

Redundancies

0.5

2.4

2.9

Other restructuring costs

0.2

0.9

1.1

Reported as restructuring costs in the income statement

0.7

3.3

4.0

Surplus capacity costs

1.9

-

1.9

Restructuring and surplus capacity costs

2.6

3.3

5.9

 

These costs are discussed in more detail above.

 

Group costs

 

Group costs of £3.6m (2011/12: £3.3m) include Group Board salary costs and group related legal and professional fees.  The movement is largely the result of the full year impact of the new internal audit function coupled with the internal realignment of responsibilities within the business as a whole.

 

Loss before tax

 

The Group's adjusted loss before tax, revaluation loss/(gain) on USD aircraft loans, restructuring and surplus capacity costs was £23.2m (2011/12: loss of £7.1m).

 

After restructuring and surplus capacity costs of £12.8m (2011/12: £nil) and non-cash losses on USD aircraft loans of £4.7m (2011/12: gain of £0.9m), the Group's reported loss before tax was £40.7m (2011/12: £6.2m loss).

 

Loss after tax

 

Loss after tax was £41.8m (2011/12: loss after tax £6.4m). The current year tax charge was £1.1m (2011/12: charge of £0.2m).

 

EPS and dividends

 

Basic loss per share for the year was (55.6)p, compared with loss per share of (8.5)p in 2011/12.  Adjusted loss per share was (38.7)p, compared with adjusted loss per share of (9.7)p for 2011/12.

 

No dividends were paid or proposed in either the current or prior financial year.

 

Cash flow

 


2013

2012

Change


£m

£m

£m

Net cash (outflow)/inflow from operating activities before restructuring

(1.5)

3.0

(4.5)

Cash flows associated with restructuring activities

(1.4)

-

(1.4)

Net cash (outflow)/inflow from operating activities after restructuring

(2.9)

3.0

(5.9)





Net capital expenditure after disposal proceeds

(33.0)

(40.7)

7.7

Net proceeds from new loans

18.5

13.6

4.9

Acquisition of joint venture interest

(0.3)

(18.2)

17.9

Net interest paid

(1.9)

(2.5)

0.6

Net decrease in cash and cash equivalents

(19.6)

(44.8)

25.2

Cash and cash equivalents at beginning of year

42.9

87.7

(44.8)

Cash and cash equivalents at end of year

23.3

42.9

(19.6)

Restricted cash

31.4

24.7

6.7

Total cash

54.7

67.6

(12.9)

 

The losses incurred this year have led the Group to net cash operating outflow on a reported basis.  However, if surplus capacity costs of £4.6m are added back, the Group delivered an adjusted net cash inflow before restructuring and surplus capacity costs of £3.1m.  The activities of both divisions are being restructured in order to return the Group to both operating profit and cash generation.  Costs incurred on IFRS restructuring largely relate to redundancies.

 

The largest movements in net capital expenditure were in relation to pre-delivery deposits for new aircraft and the acquisition, during the year, of five Embraer E175 regional jets, two of which were financed by loans from BNDES.  Deposits were received in respect of the disposal of two Q400 turboprops to Aero Nigeria.

 

Balance sheet

 


2013

2012

Change


£m

£m

£m

Airport landing slots

8.5

8.5

-

Aircraft

140.4

136.9

3.5

Other property, plant and equipment

25.0

25.2

(0.2)

Interest in joint ventures

13.2

16.2

(3.0)

Net debt

(66.3)

(29.7)

(36.6)

Derivative financial instruments

4.2

3.9

0.3

Other working capital - net

(81.5)

(71.8)

(9.7)

Deferred taxation

2.0

3.1

(1.1)

Other non-current assets and liabilities

2.6

(2.9)

5.5

Net assets

48.1

89.4

(41.3)

 

The value of airport landing slots remained unchanged, with no additions, disposals or impairments.  On 23 May 2013, Flybe announced the sale of all of the airport landing slots to easyJet for a gross cash consideration of £20.0m.  The contract is subject to Flybe shareholder approval, and this approval is expected to be received in July 2013.

 

The £140.4m of net book value of aircraft represents owned aircraft, engines and aircraft modifications, with two further Embraer E175s aircraft being acquired under finance lease.

 

On 18 August 2011, Flybe and Finnair entered into a 60:40 joint venture which completed the acquisition of Finnish Commuter Airlines Oy ('FCA') and also involved Flybe acquiring a 46.3% stake in Finnish Aircraft Maintenance Oy (collectively, 'Flybe Nordic').  Flybe's share of the total consideration was £18.2m (€21.0m).  Due to the nature of the shareholders' agreement, which requires certain key decisions to be agreed jointly between Flybe and Finnair, these acquisitions have been treated as joint ventures.  In June 2012, Flybe purchased a further 13.7% of the share capital of Finnish Aircraft Maintenance Oy for cash consideration of £0.3m and the company was transferred through the Group structure, becoming a subsidiary within the Flybe Nordic AB group.  On 31 January 2013, Finnish Aircraft Maintenance Oy merged with Flybe Finland Oy leaving the latter as the surviving company.  After Flybe's share of joint venture losses of £2.8m in 2012/13, the carrying value of the interest in joint ventures at 31 March 2013 stood at £13.2m (2012: £16.2m).

 

Net debt at 31 March 2013 of £66.3m (2012: net debt of £29.7m) reflected the capital outflows referred to in the cash flow section above.  Borrowings increased by £23.7m to £121.0m as a result of new loans being taken out to finance two new finance leased Embraer E175s delivered during the year.  Net debt at 31 March 2013 includes restricted cash of £31.4m (£24.7m at 31 March 2012) which represents, predominantly, cash held with the Group's bankers to facilitate card acquiring services and guarantee arrangements with suppliers, and cash deposits held in favour of aircraft owners to secure operating lease arrangements.

 

The mark-to-market asset of derivative financial instruments increased from £3.9m to £4.2m, as foreign exchange rates and fuel prices remained broadly stable across the year.  Net negative other working capital increased from £71.8m to £81.5m, largely due to a combination of reductions in trade and other receivables and increases in trade and other payables.  Two Q400 aircraft reported as assets held for sale under contracts with Aero Nigeria that completed in April 2013 did not offset all of this increase in negative other working capital.

 

Shareholders' equity decreased by £41.3m driven principally by the losses generated in the period of £41.8m.  The balance sheet does not include the impact of the defined benefit pension scheme surplus of £1.5m.  The scheme is closed to future benefit accrual and the surplus has not been recognised as the assets cannot be recovered by the Group.

 

Covenants

 

The Group has certain financial performance covenants in relation to some of its aircraft financing agreements.  These specify performance, depending on the contractual terms, against a series of tests, which are, performed either quarterly, half yearly or annually.  Flybe has met all the terms of the covenants tested since the inception of the arrangements to 31 March 2013.

 

Country and currency risk

 

Flybe's UK and European businesses operate in a global market place. Most of Flybe's customers are based in Europe, although the MRO business also has customers in Africa and the central Asian republics.  Most of Flybe UK's revenues are derived from UK-based customers (about 85% of Group revenue) and the joint venture operations largely from those based in Finland and Sweden.  Aircraft are bought and sold in US Dollars as are other key costs such as fuel and aviation insurance.  Airport and en route charges are payable in a mix of Sterling and Euros and the further development of European operations will mean greater exposure to Euro revenues and costs.  This is further considered in the Risks and uncertainties section.

 

Going concern

 

Flybe's business activities, together with the factors likely to affect its future development, performance and position, are set out in the Chairman and Chief Executive Officer's statement. The financial position of the Group, its cash flows and liquidity position, and events since the balance sheet date are described in the financial performance section of that statement and in the financial review.

 

As part of their regular assessment of the business working capital and financing position, the Directors have prepared a detailed trading budget and cash flow forecast for a period which covers at least 12 months after the date of approval of these financial statements.  In assessing the forecast, the Directors have considered:

 

·      trading risks presented by current economic conditions in the aviation sector, particularly in relation to passenger volumes, yields and routes, and the delivery of cost reduction plans;

·      the impact of certain macro-economic factors, specifically fluctuations in fuel prices and foreign exchange rates; and

·      the status of the Group's financial arrangements including the provision of card acquiring services and the related level of collateral required, the investment in and financing of new aircraft, other sources of finance, the Group's covenant obligations under existing finance arrangements or operating leases and the management of working capital.

 

The progress made against the Group's plans for cost reduction is set out in the financial review.  Not all of the Phase 2 cost reductions are secured, although there are firm plans in place as to how they will be achieved.

 

Under the terms of the provision of card acquiring services, collateral is required to be made available by the Group in order to provide security against the amounts that would be repayable to ticket purchasers should the Group be unable to provide the relevant flights.  These collateral arrangements are regularly reviewed with the card acquiring service provider using information on the trading performance of the Group.  A significant increase in the level of collateral required would require the Group to consider the need to obtain additional finance or to take other mitigating actions.  The Directors maintain a regular dialogue with the card acquiring service provider as part of the process to manage the risk of variations in collateral requirements

 

The Group has new aircraft on order for delivery in 2013.  An export credit loan facility is already in place which will allow the Group to finance up to 85% of the purchase price.  Should the Directors determine not to finance the remaining equity stake, they would need to secure alternative finance arrangements either for the remaining equity stake, or, for the whole aircraft under operating leases.  Discussions are in progress with potential lenders or lessors and the Directors consider, on the basis of these discussions that suitable facilities would be available if necessary.

 

The Directors note that significant adverse movements in any of the above trading, macro-economic and financing areas could lead to a significant further deterioration in profitability, cash generation and free cash flow compared to the amounts that the Directors believe that the Group will achieve.

 

Flybe had free cash balances of £23.3m at 31 March 2013, and has met all of its operating lease commitments and debt repayments as they have fallen due during the year.

 

The Group is selling its rights to airport slots at Gatwick for £20.0m subject to a simple majority shareholder approval; over 54% of shareholders have given their irrevocable approval to this transaction as at 20 June 2013.  The forecast assumes that these proceeds will be received.  Closure of the Gatwick routes will create capacity within the aircraft fleet from April 2014 and the Directors are putting plans in place to address this through a combination of changes to the route network and management of the aircraft fleet.

 

The forecasts indicates that Flybe will be able to trade using operating cash flows for at least 12 months from the date of signing these accounts and will be able to meet its operating lease commitments and debt repayments as they become due.

 

The Directors, having considered the forecasts, the risks and the associated mitigating actions, have a reasonable expectation that Flybe has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

 

 

 

Andrew Knuckey

Chief Financial Officer

 

 

Principal risks and uncertainties

 

This section describes the principal risks and uncertainties which may affect Flybe's business, financial results and prospects.

 

Risk description

Potential impact

Inherent risk trend

(Movement against prior year)

Mitigation

Safety and security




Failure to prevent a safety or security related incident including terrorist threat, or attacks from either internal or external sources or to respond adequately to a safety or security related event.

Significant adverse effect on Flybe's reputation, financial results and operational performance.

Same

Safe and secure operation is the key priority for all of Flybe's management and staff.  It operates a strong safety management system.

 

Flybe has appropriate systems and procedures in place, including trained staff, to respond effectively to such incidents.

External risks




Macroeconomic environment




Flybe is exposed to sustained deterioration in general economic conditions.

 

Flybe is exposed to a reduction in UK and Finnish domestic air travel.

Adverse pressure on revenue and load factors. 

Adverse effect on Flybe's growth prospects, financial condition and the value of its assets, particularly, aircraft.

Same

 

Flybe monitors route performance within its commercial teams and adjusts flying patterns to customer demand.

 

Flybe's fleet planning is designed to provide it with the most fuel‑efficient aircraft available under a mix of ownership and lease terms.

 

Reduced reliance on the UK domestic market through the joint venture with Finnair and increased contract flying activities.

 

The management team continues to seek to exploit opportunities to grow its business outside the UK domestic market.

Competition




Flybe operates in a highly competitive transport market.

Adverse effect on market share leading to reduced revenue.

Same

 

Flybe has a strong position in the markets where it operates and extends the reach of its brand through franchising, joint ventures and alliances.  Processes are in place to monitor and report on route by route performance and competitor activity and to react rapidly where necessary.

 

Expansion plans outside existing markets are well advanced.

 

Risk description

Potential impact

Inherent risk trend

(Movement against prior year)

Mitigation

Regulation




Regulatory changes in the airline industry may have an adverse impact on an airline's costs, operational flexibility, marketing strategy, business model and ability to expand.

 

Flybe is exposed to various regulators across its network.  This will increase as Flybe expands its operations in other countries.

Adverse impact on reputation, costs and market share coupled with decline in growth opportunities.

 

Lack of adequate knowledge or misinterpretation of local regulations may result in fines or enforcement orders.

Same

Management engages with governments through direct contact and membership of industry organisations.

 

Specific regulatory issues arising from Flybe's market position and its business development are identified and addressed promptly.

Duties and Taxes




Airlines may be adversely affected by increases in Air Passenger Duty in the UK and its equivalent in other countries.

 

 

 

Increased costs and reduced demand across the airline industry which may result in reduced profitability for Flybe.

 

Same

Management monitors governments' proposals with regard to changes in planned approach to aviation taxation and engages with governments through direct contact and membership of industry organisations.

 

Flybe seeks to pass on additional duties to its passengers through higher yields.

Environment




 

Risk description

Potential impact

Inherent risk trend

(Movement against prior year)

Mitigation

Airlines may be adversely affected by any future amendment with regard to regulation of emissions trading and other environmental laws and regulations.

 

Flybe is exposed to negative environmental perception of the airline industry.

Reduced demand for aviation across the industry.

Same

Flybe continues to be compliant with the new ETS regime.

 

Flybe operates fuel-efficient aircraft for its flying pattern and seeks to develop further fuel efficiencies through changes in its practices.

Implementing growth strategy




Flybe may not be successful in implementing its growth strategy.

 

Costs will be incurred in developing new routes, and new routes proposed by Flybe may not be profitable.

Adverse impact on revenue and costs, resulting in reduced profitability.

 

Increased investment not supported by profit generation.

Same

 

The management team successfully integrated BA Connect into its operations after its acquisition in March 2007.

 

The management team is experienced in identifying business opportunities and developing them profitably.

Flybe's ongoing joint venture arrangement is not successful.

Failure of the Flybe Nordic joint venture may have a material impact on profitability for the Flybe Group.

 

New

 

Joint venture commenced in August 2011

Expertise and strength within the Flybe Board and senior management ensures the working relationship between the parties is strong and driving towards a common goal.

 

 

 

Risk description

Potential impact

Inherent risk trend

(Movement against prior year)

Mitigation

Reputation




Flybe is exposed to an event damaging its fleet reputation, company reputation or brand.

Reduced demand, market share and revenue any of which may adversely affect Flybe's financial condition.

Same

Flybe has a strong culture of safety management and a positive business culture supported by a code of ethics and appropriate HR policies.  Flybe has procedures in place to respond to events with the potential to cause damage to its reputation or brand.

Flybe is exposed to the effects of extraneous events, such as epidemics, natural occurrences or disasters (such as severe weather or ash cloud disruption).

Adversely affect Flybe's reputation, financial results or operational performance.

Same

Well-developed contingency plans are in place to react to such scenarios and communicate effectively with passengers and other stakeholders.

IT Systems and the Internet




Flybe is heavily dependent on its information technology systems, the ongoing development of those systems, and the internet to operate its business.

Loss of systems or connectivity to the internet, as a result of internal or external threat, could lead to disruption and lost revenue with an adverse impact on Flybe's financial condition.

 

Breaches in IT security, or fraud, could adversely affect Flybe's brand and reputation, and have an adverse impact on revenue.

 

Inability to implement successful development could lead to Flybe's business plans not being fulfilled.

Same

A disaster recovery plan is in place and includes moving certain operations to other sites.

 

Flybe has robust security procedures in place which are tested and reviewed by independent third parties.

 

Flybe uses third parties to supplement its own resources where possible and effective to do so.

Flybe operates an e-commerce business and deals with a significant amount of personal and business information.

A security breach could lead to material reputational damage.

Same

Flybe has robust security procedures in place which are tested and reviewed by independent third parties.

 

Risk description

Potential impact

Inherent risk trend

(Movement against prior year)

Mitigation

People




Flybe is dependent on good industrial relations, across all its regions, with a workforce that is, in part, unionised.

Adversely affect Flybe's reputation, financial results or operational performance.

Same

Flybe has well-developed consultation and negotiation processes with its employees and its unions.

Supplier




Flybe is exposed to the failure or non-performance of commercial counterparties as well as requiring the services of key suppliers such as airports, air traffic control systems, and fuel supply companies.

Adversely affect Flybe's reputation, financial results or operational performance.  A loss or adverse change in the contractual relationship with key suppliers could significantly increase its future operating costs.

Increase

 

Due to the general downturn in economic conditions, this risk is considered to have increased.

 

 

Most suppliers can be replaced by an alternate.

Contract negotiation teams are highly experienced and knowledgeable of the industry with a strong track record of developing value for Flybe.

Financial risks




Flybe is exposed to risks associated with fluctuations in fuel prices and foreign exchange rates.

Adverse movements in these areas can adversely affect both Flybe's profit and financial position.

Same

While hedging cannot guarantee against significant long term price changes, a well-established hedging strategy is in place that is designed to provide certainty over a significant proportion of Flybe's cost base in the coming 12 months.





Flybe is exposed to the unavailability of suitable financing.

Lack of adequate liquid resources could result in business disruption and adversely affect Flybe's financial results.

Same

Flybe's policy seeks to maintain appropriate levels of free cash which will be available to meet costs in the event that our normal activities are temporarily disrupted by, for example, severe weather, volcanic ash, extended industrial dispute or fleet grounding.

 

This cash is deposited in order to manage counter-party risk and to develop appropriate returns.

 

Flybe has secured committed financing for all scheduled aircraft deliveries up to August 2014.

 

Flybe is reliant on the continuing performance of its financial counter-parties.

Flybe invests its surplus funds in money market funds or bank deposits and hedged its fuel, forex and ETS exposures with financial counter-parties. There is a risk of material loss in the event of non-performance by a financial counter-party.

Same

Flybe's policy is to invest surplus funds and enter into hedging agreements only with financial counter-parties that meet certain credit rating criteria.

The residual value of assets could be materially less than budgeted disposal costs.

 

Material differences between the budgeted residual value of an asset and its actual disposal value could see a moderate impact on the Group's income statement.

Same

There are rigorous terms and conditions in place to protect Flybe interests. 


Flybe's aircraft fleet remains predominately financed by operating leases, on which there is no residual value risk for Flybe.

 

 

Responsibility statement of the directors on the annual report

 

 

The responsibility statement below has been prepared in connection with the company's full annual report for the year ended 31 March 2013.  Certain parts thereof are not included within this announcement.

 

We confirm that to the best of our knowledge:

 

 

·           the financial statements, prepared in accordance with International Financial Reporting Standards adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

 

·           the review of the business, which is incorporated into the Directors' report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

 

By order of the Board

  

Jim French CBE

Andrew Knuckey



Chairman and Chief Executive Officer

Chief Financial Officer

 

20 June 2013

 

 

Consolidated income statement

Year ended 31 March 2013

 

 


Note

2013

Before restructuring costs

£m

2013 Restructuring costs

(note 5)

£m

             2013

Total

£m

             2012

(restated)

£m

Total revenue under management

            

781.5

-

781.5

678.8

Less: Joint venture revenue


(167.2)

-

(167.2)

(63.5)

GROUP REVENUE


614.3

-

614.3

615.3







Consisting of:






Passenger revenue


551.8

-

551.8

565.6

Contract flying revenue


12.8

-

12.8

-

Revenue from other activities


49.7

-

49.7

49.7



614.3

-

614.3

615.3













Staff costs


(124.0)

(5.6)

(129.6)

(120.7)

Fuel


(122.6)

-

(122.6)

(106.4)

Net airport and en route charges


(117.0)

-

(117.0)

(118.1)

Ground operations


(83.7)

-

(83.7)

(86.7)

Maintenance


(33.7)

-

(33.7)

(37.7)

Depreciation and amortisation


(12.0)

-

(12.0)

(13.1)

Aircraft rental charges


(78.1)

-

(78.1)

(77.6)

Marketing and distribution costs


(25.1)

-

(25.1)

(25.5)

Other operating (losses)/gains


(1.2)

-

(1.2)

4.2

Other operating expenses


(40.4)

(2.4)

(42.8)

(35.6)

Operating loss before joint venture results


(23.5)

(8.0)

(31.5)

(1.9)







Share of joint venture loss


(2.8)

-

(2.8)

(3.0)

OPERATING LOSS

4

(26.3)

(8.0)

(34.3)

(4.9)







Investment income


0.6

-

0.6

0.8

Finance costs


(2.5)

-

(2.5)

(3.3)

Other (losses) and gains


(4.5)

-

(4.5)

1.2

LOSS BEFORE TAX


(32.7)

(8.0)

(40.7)

(6.2)







Tax charge

6

(1.1)

-

(1.1)

(0.2)

LOSS FOR THE YEAR


(33.8)

(8.0)

(41.8)

(6.4)







Loss per share:






Basic and diluted

7



(55.6)p

(8.5)p

 

 

Consolidated statement of comprehensive income

Year ended 31 March 2013

 



             2013

             £m

             2012

             £m

Loss for the financial year


(41.8)

(6.4)





Items that will not be reclassified to profit or loss:




Actuarial loss on defined benefit pension scheme


(0.2)

(0.4)





Items that may be reclassified subsequently to profit or loss:




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


3.7

1.8

Reclassification of losses on cash flow hedges included in the income statement


(2.8)

(19.0)

Deferred tax arising on cash flow hedges


-

5.0

Foreign exchange translation differences


(0.8)

-



0.1

(12.2)





Other comprehensive loss for the year


(0.1)

(12.6)

Total comprehensive loss for the year


(41.9)

(19.0)

 

 

Consolidated statement of changes in equity

Year ended 31 March 2013

 

 


 

 

Share

capital

£m

 

 

Share

premium

£m

 

 

Hedging

reserve

£m

 

 

Other

reserves

£m

Capital

redemp-

tion

reserve

£m

 

Retained earnings/(deficit)

£m

 

 

Total

equity

£m

Balance at 1 April 2011

0.7

60.6

15.7

6.7

22.5

1.7

107.9

Loss for the year

-

-

-

-

-

(6.4)

(6.4)

Other comprehensive expense for the year

-

-

(12.2)

-

-

(0.4)

(12.6)

Equity‑settled share‑based payment transactions

-

-

-

-

-

0.5

0.5

Balance at 31 March 2012

0.7

60.6

3.5

6.7

22.5

(4.6)

89.4

Loss for the year

-

-

-

-

-

(41.8)

(41.8)

Other comprehensive expense for the year

-

-

0.1

-

-

(0.2)

(0.1)

Equity‑settled share‑based payment transactions

-

-

-

-

-

0.6

0.6

Balance at 31 March 2013

0.7

60.6

3.6

6.7

22.5

(46.0)

48.1

 

 

Consolidated balance sheet

At 31 March 2013

 



2013

£m

2012

£m

NON-CURRENT ASSETS




Intangible assets


13.2

10.1

Property, plant and equipment


165.4

162.1

Interests in joint ventures


13.2

16.2

Other non-current assets


42.5

40.0

Restricted cash


7.2

7.9

Deferred tax asset


4.6

8.6



246.1

244.9





CURRENT ASSETS




Inventories


6.8

6.6

Trade and other receivables


87.8

98.5

Cash and cash equivalents


23.3

42.9

Restricted cash


24.2

16.8

Derivative financial instruments


5.7

5.3

Assets held for sale


11.9

0.3



159.7

170.4

TOTAL ASSETS


405.8

415.3





CURRENT LIABILITIES




Trade and other payables


(97.9)

(89.0)

Deferred income


(63.2)

(63.2)

Borrowings


(18.7)

(21.3)

Provisions


(26.9)

(25.0)

Derivative financial instruments


(1.5)

(1.3)



(208.2)

(199.8)





NON-CURRENT LIABILITIES




Borrowings


(102.3)

(76.0)

Deferred tax liabilities


(2.6)

(5.5)

Provisions


(33.8)

(32.1)

Deferred income


(10.8)

(12.4)

Derivative financial instruments


-

(0.1)



(149.5)

(126.1)

TOTAL LIABILITIES


(357.7)

(325.9)





NET ASSETS


48.1

89.4





EQUITY ATTRIBUTABLE TO OWNERS OF THE COMPANY




Share capital


0.7

0.7

Share premium account


60.6

60.6

Hedging reserve


3.6

3.5

Other reserves


6.7

6.7

Capital redemption reserve


22.5

22.5

Retained deficit


(46.0)

(4.6)

TOTAL EQUITY


48.1

89.4

 

 

Consolidated cash flow statement

Year ended 31 March 2013

 


2013

£m

2012

£m

Cash flows from operating activities



Loss for the year

(41.8)

(6.4)

Adjustments for:



Restructuring costs

8.0

-

Unrealised losses on derivative contracts

0.7

-

Depreciation, amortisation and impairment

13.5

16.2

Investment income

(0.6)

(0.8)

Finance costs

2.5

3.3

Other net losses/(gains)

4.5

(1.8)

Loss/(profit) on sale of property, plant and equipment

1.4

(0.6)

Transfer of property, plant and equipment to assets held for sale

(11.6)

-

Equity-settled share-based payment expenses

0.6

0.5

Joint venture result

2.8

3.0

1.1

0.2


(18.9)

13.6




Cash paid in respect of restructuring costs

(1.4)

-

Increase in restricted cash

(6.7)

(6.8)

Decrease/(increase) in trade and other receivables

8.4

(18.3)

Increase in inventories

(0.2)

(0.8)

Increase in trade and other payables

7.3

4.5

Increase in assets held for sale

11.6

0.1

(3.0)

10.7


16.0

(10.6)

-

      -



(2.9)

3.0




Cash flows from investing activities



Proceeds from sale of property, plant and equipment

10.6

72.4

(Increase)/decrease in pre-delivery deposits

(0.2)

1.0

Interest received

0.6

0.8

Acquisition of property, plant and equipment

(39.4)

(113.4)

Capitalised computer software expenditure

(4.0)

(0.7)

Acquisition of joint venture interest

(0.3)

(18.2)



(32.7)

(58.1)




Cash flows from financing activities



Proceeds from new loans

39.5

90.9

Interest paid

(2.5)

(3.3)

Repayment of borrowings

(21.0)

(77.3)



16.0

10.3




Net decrease in cash and cash equivalents

(19.6)

(44.8)




42.9

87.7



Cash and cash equivalents at end of year

23.3

42.9

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.         GENERAL INFORMATION

 

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 March 2013 or 2012, but is derived from those accounts. Statutory accounts for 2012 have been delivered to the Registrar of Companies and those for 2013 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.

 

Full financial statements which comply with IFRSs can be found on our website from 21 June 2013 at www.flybe.com/corporate/investors.

 

2.         CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

 

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources.  The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant.  Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Critical judgements in applying the Group's accounting policies

 

The following are the critical judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in financial statements:

 

Carrying value of aircraft

 

The Group had a net book value of approximately £140.4m for aircraft as at 31 March 2013.  Changes to the Group's estimation of useful lives, residual values and potential for impairment would have a material effect on the valuation of the Group's assets and on its operating loss.

 

Useful lives and residual values are reviewed at the end of each reporting period.  Estimates of useful lives of aircraft are based on judgements as to expected usage of the aircraft, timing of maintenance events, the Group's route and fleet plans and on changes within the wider aviation industry.  Estimates of residual value are based on current market values of aircraft in the same expected age and condition expected at the end of the asset's useful life to the Group.

 

The carrying value of aircraft, property, equipment and other tangible assets is reviewed for impairment at least annually and when events or changes in circumstances indicate the carrying value may not be recoverable.  Factors that would indicate a potential impairment of aircraft would include a significant reduction in market values based on appraisers' data for the aircraft type, a significant change in the physical condition of the aircraft and a reduction in forecast cash flows arising from operating the asset.  Carrying value is assessed based on the appraised data and forecast cash flows.

 

Aircraft maintenance

 

On acquisition of an aircraft, a proportion of the cost of the aircraft is allocated to engines and other material components with different useful lives to the airframe.  Judgement is required to determine the amount of cost to allocate based on the estimated cost of overhauling the component, and the time between maintenance events. This judgement affects the amounts recognised as a depreciation expense given the different useful lives of the components.

 

For aircraft held under operating leases, the Group has a commitment to return the aircraft in a specific maintenance condition at the end of the lease term.  Estimating the provision for maintenance costs requires judgement as to the cost and timing of future maintenance events.  This estimate is based on planned usage of the aircraft, contractual obligations under lease agreements, industry experience, manufacturers' guidance and regulations.  Any change in these assumptions could potentially result in a significant change to the maintenance provisions and costs in future periods.

 

Recognition of deferred tax assets

 

The Group recognises deferred tax assets and liabilities based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities.  Deferred tax assets are reviewed regularly to assess potential realisation, and where the Directors believe that realisation is not probable, that portion of the asset is not recorded.  In performing this review, Flybe makes estimates and assumptions regarding projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax planning strategies.  A change in these assumptions could cause an increase or decrease in the amount recognised resulting in an increase or decrease in the effective tax rate, which could materially impact the results of operations.  As a result of the Group's performance, the deferred tax asset has reduced from £3.1m to £2.0m at 31 March 2013.

 

Restructuring provision

 

The Group recognises a restructuring provision when the detailed formal plan for the restructuring has been determined and has raised valid expectations in those affected that it will carry out the restructuring by announcing its main features to those affected by it or implement the plan.  Flybe makes estimates and assumptions particularly in relation to whether a cost will be incurred, its value and the period in which cash (or other resources) will leave the Group.  A change in these assumptions could cause an increase or decrease in the amount recognised as a provision which could materially impact the results of operations.

 

Key sources of estimation uncertainty

 

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

 

Employee benefits

 

The Directors have determined that the surplus of assets over projected liabilities within the defined benefit pension scheme should not be recognised on the basis that there is insufficient certainty that this surplus will be recoverable by the Group when the scheme has eventually settled all of its obligations.

 

Accounting for pensions and other post-retirement benefits involves judgement about uncertain events including, but not limited to, discount rates, life expectancy, future pay inflation, expected rate of return on plan assets and expected health care cost trend rates.  Determination of the projected benefit obligations for the Group's defined benefit schemes and post-retirement plans are important to the recorded amount of benefit expense in the income statement and valuation of the balance sheet.  Any change in these assumptions could potentially result in a significant change to the pension assets, commitments and pension costs in future periods.

 

 

3.         BUSINESS AND GEOGRAPHICAL SEGMENTS

 

As part of the Turnaround plan announced on 23 January 2013, Flybe Group plc was restructured to create a leaner, more focused business, with the number of divisions reduced to two, Flybe UK and Flybe Outsourcing Solutions.

 

The chief operating decision maker responsible for resource allocation and when assessing performance of operating segments has been identified as the Operating Board.  Operating segments are reported in a manner which is consistent with internal reporting provided to the chief operating decision maker:

 

Flybe UK                                   This business segment comprises the Group's main scheduled UK domestic and UK-Europe passenger operations and revenue ancillary to the provision of those services.

 

Flybe Outsourcing Solutions        This business segment aims to provide low cost outsourcing to short haul aviation customers in Western Europe. It comprises three business units: Flybe Contract Flying (including Flybe Finland which was previously within the Flybe Europe segment), Flybe Aircraft Maintenance and Flybe Training Academy (the MRO and training businesses which were previously in the Flybe Aviation Support segment).

 

Comparatives for the year ended 31 March 2012 have been restated to correspond with the new structure.

 

Segment revenues and results

 

Transfer prices between business segments are set on an arm's length basis.

 




2013

£m

2012

(restated)

£m

Segment revenues:





Flybe UK



575.2

588.1

Flybe Outsourcing Solutions



225.3

110.8

Inter-segment sales



(19.0)

(20.1)

Revenue under management



781.5

678.8

Less: Revenue from Flybe Finland joint venture



(167.2)

(63.5)

Group revenue (excluding investment income)



614.3

615.3







2013

Before restructuring costs

£m

2013 Restructuring costs
(note 5)

£m

2013

Total

£m

2012

(restated)

£m

Segment results:





Flybe UK (including net finance costs of £1.6m in 2013 and £1.6m in 2012)

(28.5)

(4.0)

(32.5)

(2.2)

Flybe Outsourcing Solutions (including investment income of £0.3m in 2013 and £0.3m in 2012)

(4.2)

(4.0)

(8.2)

(4.0)

Total segment loss before tax

(32.7)

(8.0)

(40.7)

(6.2)

 

The Flybe UK segment includes group costs of £3.6m (2011/12 restated: £3.1m) and revaluation losses on USD aircraft loans of £4.7m (2011/12: gains of £0.9m).

 

Flybe Outsourcing Solutions results include both the appropriate share of the Flybe Finland joint venture results and other costs of running this business unit.

 

For the purposes of monitoring segment performance and allocation of resources between segments, the Operating Board monitors the tangible, intangible and financial assets attributable to each segment.  All assets are allocated to reportable segments with the exception of revalued open fuel and foreign exchange derivatives, and tax assets and liabilities.  Assets used jointly by reportable segments are allocated on the basis of the revenue earned by individual reportable segments.

 




2013

2012

(restated)




£m

£m






Segment assets:





Flybe UK



346.4

351.5

Flybe Outsourcing Solutions



49.0

49.9

Total segment assets



395.4

401.4

Unallocated assets



10.4

13.9

Consolidated total assets



405.8

415.3






Segment liabilities:





Flybe UK



(326.8)

(300.4)

Flybe Outsourcing Solutions



(24.3)

(18.8)

Total segment liabilities



(351.1)

(319.2)

Unallocated liabilities



(6.6)

(6.7)

Consolidated total liabilities



(357.7)

(325.9)

 

Other segment information




2013

2012

(restated)




£m

£m






Depreciation and amortisation:





Flybe UK



12.5

15.2

Flybe Outsourcing Solutions



1.0

1.0




13.5

16.2






Investment income:





Flybe UK



0.3

0.5

Flybe Outsourcing Solutions



0.3

0.3




0.6

0.8






Additions to non‑current assets:





Flybe UK



42.3

112.2

Flybe Outsourcing Solutions



1.1

1.9




43.4

114.1

 

Geographical information

 

The Group's revenue from external customers by geographical location is detailed below:

 


2013

2012


£m

£m

Revenue under management from external customers:



United Kingdom

528.5

524.0

Europe excluding United Kingdom

237.8

142.6

Rest of world

15.2

12.2

Total revenue under management

781.5

678.8

Less: Joint venture revenue (all categorised as Europe excluding United Kingdom)

(167.2)

(63.5)

Group revenue

614.3

615.3

 

No non‑current assets were based outside of the United Kingdom for any of the periods presented other than joint venture assets.

 

Information about major customers

 

None of the Group's customers exceeded 10% of its Group revenue.

 

 

4.         OPERATING LOSS

 


2013

2012


£m

£m

This has been arrived at after charging/(crediting):



Depreciation of property, plant and equipment

12.6

15.2

Amortisation of intangible assets

0.9

1.0

Loss/(profit) on the disposal of property, plant and equipment

1.4

(0.4)

Write-down of inventories as a result of restructuring

0.2

-

Operating leases:



Land and buildings

4.1

3.7

Plant and machinery

1.9

1.0

Aircraft

78.1

77.6

Foreign exchange losses/(gains)

1.9

(1.0)

 

 

Auditor's remuneration



The analysis of auditor's remuneration is as follows:



Fees payable to the Company's auditor and its associates for the audit of the Company's annual financial statements

-

-

Audit of the financial statements of subsidiaries pursuant to legislation

0.2

0.2

Total audit fees

0.2

0.2

Tax advisory services

0.1

0.2

Expenses in connection with the IPO and other strategic projects

-

0.3

All other services

-

-

Total audit and non-audit fees

0.3

0.7

 

Fees payable to Deloitte LLP and its associates for non-audit services to the Company are not required to be disclosed because the financial statements are required to disclose such fees on a consolidated basis.

 

5.         RESTRUCTURING COSTS

 

On 23 January 2013, the Group announced the setting of medium-term operational profit targets and a turnaround plan to return the Group to profitability.  Costs incurred include redundancies for 200 staff, outsourcing of activities previously performed by the Group itself (250 staff), cost reduction programme with suppliers and legal, professional and support costs associated with these activities.

 


2013


Flybe UK

£m

Flybe Outsourcing Solutions

£m

Total

£m

Redundancy costs

2.7

2.9

5.6

Staff costs

2.7

2.9

5.6

Legal, professional and support costs

1.2

-

1.2

Property and other exit costs

0.1

1.1

1.2

Other operating expenses

1.3

1.1

2.4

Total restructuring costs

4.0

4.0

8.0

 

 

6.         TAX ON LOSS ON ORDINARY ACTIVITIES

 


2013

2012


£m

£m

Deferred tax



Origination of temporary differences

1.2

(0.9)

Reversal of tax losses recognised

(0.1)

1.1

Total tax (credit)/charge for the year

1.1

0.2

 

The Group did not incur or pay any current tax in this or the prior year.

 

The difference between the total tax shown above and the amount calculated by applying the standard rate of United Kingdom corporation tax to the loss before tax is as follows:

 


2013

2012


£m

£m

Loss on ordinary activities before tax

(41.8)

(6.2)




Tax on loss on ordinary activities before tax at 24% (2012: 26%)

(9.6)

(1.6)




Factors affecting tax (credit)/charge for the year



Items outside the scope of UK taxation

0.1

0.1

Effect of change in corporation tax rate

(0.2)

-

Effect of tax losses

(0.6)

(0.3)

Capital allowances in excess of depreciation

11.4

2.0

Total tax charge for the year

1.1

0.2

 

In the Budget on 21 March 2012 the UK Government announced that legislation will be introduced in the Finance Bill 2012 to reduce the main rate of corporation tax from 24% to 23% from 1 April 2013. On 3 July 2012 a resolution approving the rate change to 23% was passed and therefore 23% has been used to calculate the position on deferred tax at 31 March 2013 (2012: 24%). The further phased reductions discussed in the Budget on 20 March 2013, reducing the corporation tax rate to 20% from 1 April 2015, have not yet been enacted. The Directors are not aware of any other factors that will materially affect the future tax charge.

 

 

7.         EARNINGS PER SHARE

 

The calculation of the basic, diluted, adjusted basic and adjusted diluted earnings per share is based on the following data:

 


2013

2012

(restated)

Earnings

£m

£m




Loss for the purposes of unadjusted earnings per share being net loss attributable to owners of the Group

(41.8)

(6.4)




Add back:



Restructuring costs

8.0

-

Revaluation loss/(gain) on USD aircraft loans

4.7

(0.9)

Loss for the purposes of adjusted earnings per share

(29.1)

(7.3)





No.

No.




Weighted average number of ordinary shares for the purposes of basic and diluted earnings per share

75,152,881

75,152,881




Loss per ordinary share - basic and diluted

(55.6)p

(8.5)p




Adjusted loss per share - basic and diluted

(38.7)p

(9.7)p

 

Diluted earnings per share is the same as basic earnings per share in the years ended 31 March 2013 and 31 March 2012 because the Group recorded a loss and as such none of the shares that could, potentially, be issued are dilutive.

 

 

8.         BORROWINGS

 

This note provides information about the contractual terms of the Group's interest bearing loans and borrowings.

 


2013

2012


£m

£m

Secured bank loans



Amount due for settlement within 12 months

18.7

21.3

Amount due for settlement after 12 months

102.3

76.0


121.0

97.3

 

Borrowing costs amounting to £9.1m (2012: £5.6m) were capitalised in relation to qualifying assets.

 

Terms

 


2013

2012


Interest rate

Amount

Interest rate

Amount


%

£m

%

£m






Floating rate sterling loans

2.7

17.7

3.2

20.6

Floating rate US dollar loans

1.4

97.9

1.2

65.5

Fixed rate sterling loans

3.2

4.6

7.0

10.4

Fixed rate US dollar loans

5.4

0.8

5.4

0.8



121.0


97.3

 

The interest rate above relates to the weighted average for the year or period. Floating rates are based upon LIBOR with margins of between 0.1% and 8.5%.  The loans are repayable over a period to 31 March 2027.  All loans are secured on specific aircraft assets or land and buildings.  All of the covenants tested have been satisfied since inception of the agreements.

 

At 31 March 2013, the Group had £2.7m of unused borrowing facilities in the form of guarantees (2012: £2.2m).

 

 

9.         CAPITAL COMMITMENTS

 

The Group has, over time, contractually committed to the acquisition of aircraft with a total list price before escalations and discounts as follows:

 


2013

2012


£m

£m

Embraer E-Series aircraft

636.2

720.9

 

It is intended that these aircraft will be financed partly though cash flow and partly through external financing and leasing arrangements. 26 aircraft were covered by these arrangements at 31 March 2013 (31 March 2012: 31) with the next four aircraft due to be received in 2013/14.  No further deliveries are contracted until 2015/16.

 

 

10.       RELATED PARTIES

 

At 31 March 2013, the Group is 48.1% (unchanged from 2012) owned by Rosedale Aviation Holdings Limited, incorporated in Jersey.

 

Group companies entered into the following transactions with related parties which are not members of the Group:


Sales of services


2013

£m

2012

£m

Preston Travel (CI) Limited

1.1

1.3

Flybe Finland Oy

5.5

2.6





Amounts owed by related parties


2013

£m

2012

£m

Preston Travel (CI) Limited

0.4

0.3

Flybe Finland Oy

0.5

1.5

 

The Group provided services to Preston Travel (CI) Limited which, together with Rosedale Aviation Holdings Limited, is a subsidiary of Rosedale (J.W.) Investments Limited.

 

The Group also provided services to its 60.0% owned operations, Flybe Finland.  At 31 March 2013, £6.3m (2012: £2.9m) was owed in respect of revenue collected on behalf of Flybe Finland.

 

Flybe Group plc and Finnair Oyj entered into a guarantee to secure the overdraft obligations of Flybe Finland Oy to Nordea Bank Finland Plc in February 2012.  Flybe Group plc has entered into an undertaking to provide a general guarantee limited in value to 60.0% of the aggregate liability of Flybe Finland Oy to a maximum amount of €3m.

 

In June 2012, a wholly owned subsidiary of Flybe Group plc acquired, for a consideration of £295,000 (€358,000), a further 13.7% holding (6.3% of which was acquired from a subsidiary of Finnair Oyj) of FAM, to give a total ownership of 60.0%. In order to simplify the joint venture arrangements, FAM was transferred, via a share-for-share exchange, into the Flybe Nordic AB group becoming a wholly owned subsidiary within that group.  On 31 January 2013, FAM merged with Flybe Finland Oy leaving the latter as the surviving entity.

 


Purchases of services


2013

£m

2012

£m

Edenfield Investments Limited

0.4

0.4

Downham Properties Limited

0.4

0.4

 

No amounts were owed to related parties at years ended 2013 or 2012.

 

The transactions with Edenfield Investments Limited and Downham Properties Limited are disclosed although there is no holding or subsidiary company relationship between these two companies and Rosedale Aviation Holdings Limited.  These two companies are owned and controlled by the EJ Walker 1964 settlement, established by the former wife of the late Mr Jack Walker; this trust is separate for tax purposes from the Jack Walker Settlement which controls Rosedale Aviation Holdings Limited.  The Group also purchased property services from Edenfield Investments Limited and from Downham Properties Limited.

 

Transactions with key management personnel

 

Directors of the Company and their immediate relatives control approximately 6.9% of the voting shares of the Company (2012: 6.9%).

 

The remuneration of the Directors, who are the key management personnel of the Group, is set out below. Further information about the remuneration of individual Directors is provided in the audited part of the Directors' Remuneration Report and form part of these audited financial statements.

 


2013

£m

2012

£m

Key management emoluments

1.9

1.8

Company contributions to personal pension schemes

0.2

0.2

 

A subsidiary of the Group has the following outstanding loans due from Directors, made prior to their appointment as Directors, to enable them to acquire a beneficial interest in shares in Flybe Group plc:

 


2013

£000

2012

£000

Mike Rutter

63

63

Andrew Knuckey

20

20

 

In addition, the following Directors have received loans from the Group's then immediate parent company, Rosedale Aviation Holdings Limited, to enable them to acquire an interest in shares in Flybe Group plc:

 


2013

£000

2012

£000

Andrew Knuckey

134

134

Andrew Strong

36

36

David Longbottom

9

9

Charlie Scott

9

9

Alan Smith

9

9

Peter Smith

9

9

 

The loans made by the Group and Rosedale Aviation Holdings Limited total £289,000 at 31 March 2013 (2012: £289,000). These loans bear no interest and are repayable out of the proceeds receivable by each Director from a subsequent sale of his respective ordinary shares and at the discretion of Rosedale Aviation Holdings Limited.

 

There are no other transactions or balances with key management.

 


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