3 Reasons to add Flybe #FLYB to your Watchlist - Vox Markets
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3 Reasons to add Flybe #FLYB to your Watchlist

The content of this blog (or content associated with it) is not intended as investment advice. The author holds an interest in the company mentioned. Please do your own research.

Flybe #FLYB
Share Price: 34.375p
Market Capitalisation: £74.5m

Results for Year Ended 31 March 2017
Revenue: £707.4m (£623.8m in 2015/16)
Loss after Tax: £26m
Cash: £124m
Debt: £64m
Net Assets: £153m

What Do They Do?

Flybe is Europe largest independent regional airline with 53.7% of the UK domestic flights outside of London, connecting people and regions with one another throughout the UK and to and from Continental Europe, for both business and leisure.

3 Reasons to add Flybe #FLYB to your Watchlist



On the 20th December 2016, Flybe announced it had appointed Christine Ourmieres-Widener as its Chief Executive Officer, with effect from 16 January 2017.

Christine has previously worked for Air France as Vice President International Sales, General Manager UK & Ireland, then Vice President in New York for Air France KLM. Between 2010 and 2015, she was the CEO of Cityjet, and since then has been Chief Global Sales Officer for American Express Global Business Travel.

FOCUS ON PROFITABILITY

Previous management seemed more focussed on growing the amount of routes they operated, rather than profitability.

The new management have developed a, “Sustainable Business Improvement Plan consisting of 6 focus areas”.

1. The customer

Sales and marketing will deliver sustainable revenue growth to maximise profitability, while optimising the customer experience and improving the customer interface at every touch point. 

2. Network and fleet optimisation

We will deliver an optimised network focusing on positive route contribution based on customer and financial analytics starting from Winter 2017.

3. Operational excellence with reliability and on time performance

The expert support offered by our Training Academy will be important to plans to drive customer service and profitability.

4. Organisational excellence

We shall design and implement a cost-effective organisation structure with clear and aligned KPIs cascaded and embedded in every role profile and annual performance measurement. 

5. Technology

Over 80% of our customers are booking online via our website, with the majority being repeat customers. Our new digital platform, backed by our sales and marketing action plan, will enable us to attract new customers and enhance our customer relationship management.

6. Costs

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

The size of the fleet, is a legacy issue, which peaked at 85 aircraft in May. The reduction in the size of the fleet is key to turning Flybe around and it’s starting this year.

“The first of this year’s six end-of-lease Q400 handbacks is in the process of being returned to the lessor”, and from May throughout Winter, CEO Christine is concentrating on profitable routes.

RECENT TRADING STATEMENTS

In their Q1 2017/18 Trading statement released on 26th July 2017 they stated:

“With greater control over fleet capacity, the concentration on profitable routes is beginning to show through in Flybe’s performance. In Q1, passenger revenue grew by 11.7% with seat capacity growth slowing to 3.5%. Both load factor and passenger yield improved, bringing an increase in revenue per seat.”

Forward sales in Q2 as at 24th July 2017 improved as the slowdown in capacity growth continued to drive yield and revenue per seat:

· 14% increase in passenger revenue vs. prior year

· 2% increase in seat capacity vs. prior year

· 4% increase in yield vs. prior year

· 52% of seats sold vs. 48% in the prior year

· 12% increase in revenue per seat vs. prior year

Capacity growth as a whole for H1 is likely to be around 2%, but we are now planning for H2 capacity to reduce by around 7%, reflecting a smaller fleet and winter scheduling plans.

CEO, Christine Ourmieres-Widener stated, “There remains a lot to be done, but we have the firm foundations needed to progress our plans for the business. In the second half of 2017/18, given the planned capacity reductions, there will be an increased focus on efficiency to improve operational performance and manage unit costs.”

 


Flybe’s market capitalisation is currently £74.5m. For the year ended 31st March 2017 they generated £707m in revenue. Yes they made a loss of £26m but this was before any of the restructuring measures had been implemented.

This is where I have to make some, conservative, assumptions.

Part of their efficiency drive is to reduce their fleet and cut out the less profitable routes. So with less routes flown, revenue will go down. By how much, I have no idea but if assume a 20% reduction in revenue then this would mean they’d generate £565.6m, for their next full year results.

easyJet has a net margin of 10% and Ryanair’s margin is 22%. It’s still early days for Flybe so I am not going to suggest Flybe will achieve this level. On £565.6m revenue, applying a 5% net margin means Flybe would earn profit before tax of £28.28m.

easyjet’s price earnings (P/E) ratio is 10 and Ryanair’s is 13. Again being conservative, if I put Flybe on a P/E of 5 this would mean their markat capitalisation should be £141.4m, 90% above where their valuation is currently.

I say the above estimates are conservative BUT they do have to achieve their stated effiency targets, in the first place, in order to meet this valuation.

 

On Wednesday, Flybe released a profit warning. Implementing a turnaround strategy is never going to be easy and never comes without hiccups. Never the less, there were positives within the release, that confirmed the strategy is on track.

The share price is down 22%, from 44p to 34p since this release and this is off the back of a long downtrend, which means the share price is close to all time lows. I am hoping all the bad news is now baked into the current share price as it has bounced, slightly, off those all time lows.

“A full review of the maintenance strategy has now been launched which aims at a significant improvement of aircraft performance and costs.

As a result, adjusted profit before tax is currently expected to be in the range of GBP5m to GBP10m for the first half of this financial year (H1 2016/17 adjusted PBT of GBP15.9m)”

Christine Ourmieres-Widener, said:
“While half-year profits are lower than expected, I am confident that we are still on a clear sustainable path to profitability in line with our stated plan. Our Sustainable Business Improvement Plan is delivering benefits with the fleet size now reducing, and consequently both yield and load factors are increasing.”

(Click to enlarge)

There’s very strong support in this 32p area, which it has bounced off previously. If it goes below this level then a bigger fall could be expected but it has used this area as previous support 3 times, as the relative strength index enters oversold territory.

Let’s not make any bones about it, the short hall flight market is highly competitive and over crowded. This year alone, has seen Monarch, Alitalia and Air Berlin go out of business. We’ve also seen Ryanair cancel 20,000 flights displacing 700,000 customers.

For a second you may think this is a negative but it means, there’s less competition and according to a report by Skyscanners website, flight prices to popular European destinations rose by 23% in October as the remaining budget airlines take monopoly of the skies.

It suggested that the recent turmoil of Ryanair’s flight cancellations and Monarch going bust, may have contributed to the rise, by taking supply out of the market.

Flybe has a strong brand and a big market share. They are Europe’s largest independent regional airline with 53.7% of UK domestic flights outside of London. They know their niche, the UK market and are focussing in on it, reducing fleet size and concentrating on the most profitable routes. It’s going to be a turbulent ride but if the CEO executes her stated plan then the share price could start to take off, rather than just bumping along the runway, at all time lows.

In a recent interview with Airline Network News and Analysis Christine Ourmieres-Widener said, I think that any decision that we are taking now is about profitable growth and making sure that as a network we fly the routes that work well for us. We are now starting to consolidate, helping to bring a positive impact on the bottom line.”

Flybe will announce its Interim Results on 9th November 2017.

To add Flybe #FLYB to your Vox Markets Watchlist, click here and tap the, “Follow”, button.

The content of this blog (or content associated with it) is not intended as investment advice. The author holds an interest in the company mentioned. Please do your own research.

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