Flybe in balancing act as UK economy stumbles

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UK regional carrier Flybe is mitigating the downturn in its home market by shifting capacity to Europe, pursuing new codeshare partnerships at Manchester airport, and increasing its oil hedging exposure.

Speaking after the company unveiled a pre-tax loss of £6.2 million ($9.64 million) for the year to 31 March - marginally beating analyst forecasts - chief executive Jim French blamed first-year losses at Flybe Nordic, its new joint venture with Finnair, and its investment in opening a new training academy in Exeter for dragging down the full-year results.

But he emphasises the "resilience" and "scale" of the business model, promising that new regional partnerships and flexibility over aircraft options will mitigate short-term headwinds, positioning the airline to benefit from an eventual macroeconomic recovery.

Noting the ongoing expansion of Flybe Nordic, which will take over 12 of Finnair's Embraer 190s on contract in October, French says that about 25% of the group's fleet will soon be deployed on contract flying. "That was our big focus about six months ago. We saw this as a market opportunity," he explains. "Whilst the margin is lower than you'd achieve in the peak times, it's actually a consistent long-term margin that we're very pleased with We sacrifice some of the margin in order to have that secure long-term flow."

The CEO promises it will announce further codeshare deals at Manchester airport, where Flybe already partners with Etihad and Air France. He says: "We re-scheduled all of our regional flows through Manchester this yearand the airport is telling us that's made quite a difference to the appeal of the airport from these inter-continental carriers."

Turning to the fleet, CFO Andrew Knuckey says while the group aims to have 99 aircraft by the end of the year, UK-based operations will see only a marginal increase until the economy rebounds. Flybe will receive six E-175s in the current financial year, he notes, two of which have already arrived, while two Bombardier Q400s will be contracted out to Brussels Airlines and two more returned to their lessor.

Flybe has 35 E-175s on order, with 65 options, dating from a 2010 deal with Embraer. Knuckey describes it as a "predominantly substitution" order, emphasising: "We always wanted to keep the flexibility of the growth through the options."

The CFO says although Flybe has historically favoured operating leases, the company's $500 million loan facility with Brazilian export bank BNDES means that "probably the majority of the E-175s will be debt-financed and on-balance sheet". The financing covers 20 aircraft up to mid-2014, he adds.

Knuckey says Flybe has increased its exposure to fuel hedging positions during the recent dip in Brent Crude prices below $100 per barrel. "Our 2013/14 hedging programme, we've beefed that up quite a bit in the last couple of weeks," he confirms. "For 2012/13, we are around 72% hedged for the year for our jet fuel at just around $1,000 per tonne."

The company usually hedges about 5% of its fuel costs per month, the CFO notes, and it continued to do so even when Brent was above $120. "But yes, when [the price of oil is] down where it is, we go to the top end of those parameters."