Recent Posts

Comments?

 

Have you got any thoughts on this feature?  Do you want to have your say?  If so please get in touch with us using the form below:

Thanks! Message sent.

Follow Us
  • Facebook Basic Square
  • Twitter Basic Square
  • Google+ Basic Square

Aviation: Dark skies ahead for Flybe?

It seems almost certain that there’s more turbulence ahead for beleaguered UK carrier Flybe. A month ago the airline issued a profits warning, which it followed on November 14 with an announcement that it was open to takeover bids. The latest financial filing shows that it made a profit during the first half of 2018 which was lower than the equivalent last year. Passenger volumes were up slightly but yield (the margin made from each passenger) was down. This came despite changes already having taken place within the business and an acknowledgement that urgent improvements to its financial position were going to be necessary.

Difficult trading conditions

The airline’s 2018 H1 results included some interesting titbits that further explain why Flybe is in a precarious position. Average revenue per seat increased to just over £60 during the first half of 2018 but the firm was hit by a 5.9% increase in costs, mainly from currency fluctuations and hikes in fuel prices. As a result its shares, which were valued near £0.50 in March and have been as high as £1.50, dropped substantially. Although there was a rebound immediately after the interim results were posted, the stock price has since bumped along at near £0.12.

​Clearly the business is in need of further reform. Looking forward, a significant proportion of its current major problems – future currency and fuel costs – are hedged (committed in advance at a pre-determined price). But securing those deals has been expensive – fuel is now booked at £663 per tonne rather than £518 previously. Taking into consideration staffing that costs Flybe an average of £10.09 per passenger, £16.03 going to acquisition and maintenance the fleet, and £30.83 required to operate the aircraft (fuel, airport and navigation charges), it becomes obvious that there’s slim pickings left from the £60-odd that it typically extracts from each customer.

The predicament

The fundamental problem is that the majority of Flybe’s business comes from short domestic flights. While lucrative business travel is part of the mix, it also competes with rail and road. Flybe’s lead-in fares are often competitive with – and sometimes lower than – surface transport, and even over shorter booking horizons it often betters flexible train fares. But the airfare paid by UK domestic travellers includes £13 Air Passenger Duty (APD) that goes directly to the government; on that basis alone the treasury makes more from every Flybe customer than the airline does itself.

On the other hand several train companies that Flybe competes against receive a subsidy (Cross Country - £0.051 per passenger per kilometre, Great Western - £0.048/pax/km, Virgin West Coast - £0.016/pax/km). On a 403 miles trip from London to Glasgow the direct tax take from an airline passenger is £13, while the railway receives £10.39 from the government for an equivalent journey. Another problem is that Flybe’s fuel and currency costs have also risen much faster than inflation. Flybe anticipates that these costs could increase further, and credit card issuers might demand additional cash to secure payments. And yet if it raises fares it risks losing customers, especially to rail where some ticket prices are regulated and can’t be increased by more than RPI + 1% each year.