Flybe is a regional airline that operates mostly in UK. There are a number of publications about this airline, including this one that talks about Brexit.
Saad Hammad replaced Jim French as the CEO in August 2013. Saad brought better aircraft utilization, unit cost reductions, a sensible idea of what types of aircraft to fly and how to finance them. He improved revenue management, which is evidenced in greater load factors and yields. The airline is on course to profitability.
The competition on 80% of the routes is self-driving, trains and buses. Flying with Flybe is faster and often not more expensive. It is these routes that I call “core” in the table below. New non-core routes usually take 18-24 months to stop losing money.
Some routes are flown in Europe. The latest figure is 40%.
The share of business travelers on all routes is between 40% and 50%.
Given the aircraft committed for the near-term, the range of outcomes for 2017, or even a typical year, is:
Low
|
Base
|
High
| |
Seats, m
|
9.08
|
11.49
|
12.63
|
Load factor, %
|
64.13%
|
70.37%
|
73.94%
|
Passenger yield, GBP
|
68.62
|
69.43
|
70.13
|
Operating cost before fuel and rent, GBP
|
(38.40)
|
(33.53)
|
(33.09)
|
Aircraft rent per seat, GBP
|
(8.90)
|
(7.04)
|
(6.40)
|
Effective fuel expense per seat 2017, GBP
|
(6.74)
|
(6.74)
|
(6.74)
|
Aircraft utilisation, block hours per day
|
5.30
|
6.37
|
7.00
|
Core routes share
|
80.00%
| ||
Non-core routes RPS discount compared to network average
|
30.00%
| ||
Profit per core seat
|
(6.73)
|
5.21
|
9.53
|
Profit per non-core seat
|
(23.23)
|
(13.11)
|
(9.92)
|
Profit per seat, network
|
(7.92)
|
3.83
|
8.04
|
EBITDAR, network
|
47.86
|
163.77
|
221.38
|
FCF, network
|
(67.16)
|
25.57
|
71.66
|
FCF, core routes(incl. group costs and e195)
|
(33.56)
|
49.49
|
91.55
|
FCF, non-core routes
|
(33.59)
|
(23.93)
|
(19.89)
|
Value of core routes
|
(223.76)
|
329.96
|
610.30
|
Value of non-core routes,b.-even in 3 years
|
(50.91)
|
(36.26)
|
(30.14)
|
Value of business per share @ 15%
|
(1.27)
|
1.36
|
2.68
|
Value of business per share @ 10%
|
(1.79)
|
2.11
|
4.08
|
A number of things needs to go wrong at the same time for the “Low” scenario. This scenario approximates 2013.
“Base” scenario is the case of a moderate stress. “High” scenario is the case where the level of operations of 2015 and 2016 is sustained. Operating metrics for the Q1-Q2 FY2017 fell in between these two scenarios.
Flybe’s earnings are most sensitive to load factor, passenger yield, operating expenses and aircraft utilisation. They can be influenced by management to a significant degree. Most of the assumptions in “Low” are from the Jim French era.
It’s unlikely that the next couple of years are going to be close to “Low”, based on the number of things that need to go wrong at the same time and Saad’s performance so far. Should it happen, Flybe should be able to comfortably survive at least 2 “Low” years in a row.
Successful Flybe attracts competition. A major airline will have to decide between two alternatives: enter and compete with Flybe on short routes in small airports using a specific type of aircraft or take advantage of Flybe’s White Label or codeshare programs. The latter two are going to become more attractive, as Flybe takes on residual value risk in owning a higher proportion of its aircraft and reducing costs further.
The fuel expense is going to drop due to the $100-per-barrel era hedges finally expiring. If Flybe had to pass the savings to consumers due to price pressure from train, driving or airlines, then it would have been experiencing tremendous pressure on yields and load factors at the moment. That doesn't appear to be happening - both are close to 70. If the fuel savings need to be passed on, then the value becomes one fourth of the base case.
The fuel expense is going to drop due to the $100-per-barrel era hedges finally expiring. If Flybe had to pass the savings to consumers due to price pressure from train, driving or airlines, then it would have been experiencing tremendous pressure on yields and load factors at the moment. That doesn't appear to be happening - both are close to 70. If the fuel savings need to be passed on, then the value becomes one fourth of the base case.
At least 0.30 GBP per share can be attributed to excess cash. The key risks are execution and macro events. I own FLYB shares.
Added October 7th:
I think Flybe earns 15m FCF in 2017. Its business is worth 1.49-2.38 (15%-10% cost of capital).
At 100m, market believes in no FCF improvement. But the profitability of the routes is set to improve with E195 jets going away in 2017-2019. In addition to that, new routes shall mature in 18-24 months.
It's worth .55-.68 as a UK-only airline with core routes only, 8m annual scheduled seats, charges for excess planes and with excess cash.
