FlyBe Is In Financial Trouble: Analysis

Shares in Flybe have fallen around 37% today to a record low of 21p todayafter the budget airline issued its latest profit warning.

For those unfamiliar with the airline, Britain’s Flybe is Europe’s largest regional airline with around 218 routes in 10 countries. The carrier flies domestically within the UK, and operates to European cities, with a specific focus on smaller airports. Just last year, the airline announced losses of almost £20 million, prompting a much-needed overhaul in strategy.

In a bid to overcome its losses, Flybe cut capacity by returning passenger planes to their leasing companies and focused on its popular routes in order to raise load factors and their yield.

Now, in October 2018, the airline has announced a full-year profit warning ahead of its half-year results, whereby Flybe is expected to blame a weaker British pound and higher fuel prices for an estimated loss around £29m— (however, the overall loss would be closer to £12m due to a £10m windfall from the ending of aircraft lease).




Flybe’s profit warning adds to the woes of Europe’s already turbulent airline sector, following the recent and sudden collapse of Primera Air, and cease of operations by Monarch Airlines and Air Berlin, last year.

Flybe is a small airline compared with its European competitors, but it’s headwinds and challenges are the same facing airline low-cost giants such as easyJet and Norwegian Air.

For Flybe, A weak British pound (due to uncertainty over Brexit) will continue to cause financial difficulty, as the airline has to purchase fuel and pay aircraft lease in US dollars. Currently, fuel prices are high — at around $800 per ton. Even earlier this year, jet fuel price was around $94 per barrel in May 2018, around 50% higher than in May 2017.




In addition to this, Flybe is a more ‘vulnerable’ European airline than nearly all of its competitors, given the carrier is a stand-alone airline and not the regional airline subsidiary of a major airline group. Without the backing of a parent group owner such as IAG (who own British Airways, Vueling, Level, among others), the airline may continue to struggle with its battle against its consolidated airline competitors, of whom have the backing of a profitable airline group owner.

Flybe is continuing to focus on flying between UK secondary cities, but it faces fierce low-cost carrier competitors on its European flights, and competitors are often able to undercut Flybe on several routes, given their larger size.

To add to its competition, Flybe is being caught between the established business models of low-cost airlines such as Ryanair, and flag carriers such as British Airways which (like Flybe) fly domestically within the UK — except BA have the advantage of being able to feed passengers from its long-haul services onto its UK regional domestic flights, and vice versa.



Final Thought

Winter is a difficult time for any European airline, given the lower demand but continuing high costs — but the season is even more of a challenge for the financially fragile players of the airline market.

Just two weeks ago, Primera Air ceased operations amid ongoing financial difficulty, and the inability to pay upcoming overheads for the winter months.

Flybe has had a strategy to overcome their losses for at least 16 months, but the financial state of the airline has worsened dramatically over the last year. To make matters worse for the airline, external factors will likely worsen over the coming months, specifically the continued weakening of the British pound, ahead of the UK beginning the process to leave the European Union in as little as five months.

flybe

The impending exit from the EU has added a layer of uncertainty to Britain’s aviation industry outlook, and investors are jittery over the future of smaller British airline players, such as Flybe.

Flybe’s interim results will be released on 14 November 2018.



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