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Flybe

Delivery and Future Direction


Making Flybe Fit to Compete
Update 23 May 2013
Flybe: Delivery and Future Direction

Agenda
Context and Introduction
Flybe UK
- Making Flybe Fit to Compete
Flybe Outsourcing Solutions Recap
Conclusions and Updating on Progress

Flybe: Delivery and Future Direction

Recap on 23 January 2013 Announcement


On 23 January, Flybe announced Phase 1 of its
turnaround plan, Delivery and Future Direction

A medium term plan with measurable targets

A new slim line business model for Flybe UK and a 25m cost
reduction plan to be delivered by March 2014

The grouping together of all Flybes outsourcing customer


offerings into one business, Flybe Outsourcing Solutions

The promise that Phase 2 of the plan would deal with:

Further business efficiencies and revenue enhancements


A network review for Flybe UK in addition to the strategy
announced on 23 January for Flybe Outsourcing Solutions

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

What is in Todays Presentation?

Flybe UK - Making Flybe Fit to Compete


 Full update on progress on Phase 1 of the turnaround
plan this update being brought forward from June
2013
 Outline of the measures in Phase 2 of the plan and the
progress already made
 Initial output from Flybe UK network review

Recap of strategic plan for Flybe Outsourcing Solutions


Outline of how Flybe will update shareholders and
stakeholders on progress and delivery
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

Agenda
Context and Introduction
Flybe UK
- Making Flybe Fit to Compete
Flybe Outsourcing Solutions Recap
Conclusions and Updating on Progress

Flybe: Delivery and Future Direction

Flybe UK Making Flybe Fit to Compete


(1) Stop the losses by reducing costs
- Update on Phases 1 and 2
(2) Maximise the revenue earning potential
of the network
(3) Generate sufficient cash to fund
transition without recourse to shareholders
(4) Restructure and rebalance Flybes
network into a defensible core

Flybe: Delivery and Future Direction

Phase 1 Delivery
Phase 1 of plan looked for delivery of 25m of cost savings in
Year 1 (2013/14), and cumulative 35m by end of the (Year 2)
2014/15. We announce today that we will deliver 30m in 2013/14
Phase 1 Target Announced January
2013

Savings
Made up of:
- Business
efficiency and
cost
reductions
- Supplier costs

Year 1
cumulative
savings

Year 2
cumulative
savings

25m

35m

26m
9m

Phase 1 Delivery Update April 2013


Year 1
cumulative
savings

Savings
Made up of:
- Headcount
reduction
- Business
efficiency and
outsourcing
- Supplier costs

30m

16m

8m
6m

Restructuring costs for Phase 1 of c13m in 2012/13 results


Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

Year 2
cumulative
savings

Phase 2
announcement
outlines
significant
increased
savings
targets

Phase 1 22% Reduction in Headcount


Breakdown of delivery of Phase 1 headcount savings
Phase 1 - Overview
Flybe UK based
February 2013
Headcount
Redundancies
(voluntary and
compulsory)
Staff leaving the
business through
outsourcing deals

Phase 1 - Highlights
Headcount Reductions:

2,730

290

20% reduction in management roles


13% reduction in overheads

Commercial Functions Outsourced:

Call centre
On-board sales

300
Production Functions Outsourced:

Total staff leaving in


Phase 1

590

Percentage of workforce

22%

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

Major portion of line maintenance


Ground handling functions
Automated check in including bag drop
roll out underway
8

Phase 1 Outsourcing Non-Core Functions


Breakdown of delivery of Phase 1 headcount savings
outsourcing deals
Business
Area

Outsourced
to:

Comment

133

Monarch and
Others

80% of Flybes line maintenance


activity - complete

Ground
Handling
Activity

112

Menzies/
Servisair/
Dalcross

Ticket desk and oversight facilities complete

Call Centre

47

Sitel

Complete

Contract signed, effective from 1


Commissaire August 2013

Line
Maintenance

On-board
Sales

Number of
Staff

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

Phase 1 Improvement in Crew Efficiencies


Breakdown of Delivery of Phase 1 Headcount Savings
Delivering Production Efficiencies
The work done in phase 1 has returned crew sets per aircraft to industry leading
levels, removing in the process significant cost disadvantages

Yr 2009

Yr 2010

Yr 2011

Yr 2012

Phase 1
2013

British
Airways

6.9

6.9

7.0

6.9

6.94

easyJet

5.2

5.0

4.7

4.7

4.74

Flybe

4.8

5.0

5.3

5.8

4.7

Monarch

6.6

6.3

6.6

6.5

6.54

Ryanair

5.0

4.7

4.3

4.4

4.44

: 2009-2011 figures provided from Cranfield University study


: Flybe figures
: Flybe estimates
4: 2012 figures rolled through to 2013

Flybe: Delivery and Future Direction


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10

Phase 2 Making Flybe Fit to Compete


As part of the implementation of Phase 1 we have identified
additional opportunities to enhance revenue and reduce
costs in 2013/14 and beyond
these opportunities become our Phase 2 targets
Cost Savings and
Revenue Increases
Target 13/14
m

Cost Savings and


Revenue Increases
Target 14/15 onwards
m

Staff Cost Reductions

Procurement

10

Revenue Enhancement

TOTAL
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12

23

Flybe: Delivery and Future Direction

11

Phase 2 Making Flybe Fit to Compete


Phase 2 staff cost reductions are driven by two major
initiatives
2013/14

2014/15
Cumulative

84

84

6m

7m

2m

6m

9m

1. Further Headcount Reductions:

Staff numbers and other initiatives

Total cost reduction

2. New Starter Terms:

Package of salary and benefit changes

Total
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

12

Phase 2 Making Flybe Fit to Compete


Phase 2 procurement cost savings driven by major initiative
implemented in March 2013

10m of cost savings targeted on an annualised basis (4m


in 2013/14)

Supplier cost reduction programme launched, as part of


Making Flybe Fit to Compete

Supplier base split into 3 groups (low, mid and high tier suppliers)
and targeted with separate teams, including outsourced resources

Cost reductions and working capital improvement targeted

2m already booked for 13/14

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

13

Making Flybe Fit to Compete


Lowering costs permanently makes Flybe competitive

Reducing costs to be competitive with LCCs ....

Enables lower fares, generating more passengers .

Leads to higher frequencies and more flights ....

Reduces costs further through airport incentives .

Spreads fixed costs and overheads across a broader


base ....

Leads to lower fares, more passengers, more flights .

 Creating a positive spiral


Flybe: Delivery and Future Direction
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14

Flybe UK Making Flybe Fit to Compete


(1) Stop the losses by reducing costs
- Update on Phases 1 and 2
(2) Maximise the revenue earning potential
of the network
(3) Generate sufficient cash to fund
transition without recourse to shareholders
(4) Restructure and rebalance Flybes
network into a defensible core

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15

Maximise Revenue Earning Potential of Network


Volume and growth strategy

Maximise revenue per seat by adopting more aggressive


volume over yield strategy to drive up load factors

Management teams dedicated to specific markets


Re-engineer and extend revenue management capability
Selectively price for market share
Launch strong retail price focused marketing campaign
Refresh ancillary revenue model
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

16

Phase 2 Making Flybe Fit to Compete


Phase 2 revenue initiatives of 4m per annum are driven by
three initiatives
1.

Flybe UK returning to a value brand


positioning:

Volume orientation
Everyday value positioning
Lower price offering

2.

Returning Flybe to the consumer


consideration list through a return to retail
advertising

3.

Re-energisation of approach to ancillary


revenue generation

Innovation
Revenue management of ancillaries
4m of annual value
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

17

Flybe UK Making Flybe Fit to Compete


(1) Stop the losses by reducing costs
- Update on Phases 1 and 2
(2) Maximise the revenue earning potential
of the network
(3) Generate sufficient cash to fund
transition without recourse to shareholders
(4) Restructure and rebalance Flybes
network into a defensible core

Flybe: Delivery and Future Direction

18

Making Flybe Fit to Compete


Generate sufficient cash to fund transition without recourse
to shareholders asset disposals to realise 25m
Major Initiative Gatwick slot portfolio

Gatwick Airport is determined to maximise revenues from single


runway airport by increasing prices for regional/smaller aircraft

Gatwicks charges to Flybe have increased by 100%+ in past 5 years


- CAA will not interfere

Coalition has no aviation policy to protect regional connectivity

Therefore, Flybes network review concluded:

Gatwick route performance had become unsustainable; and

We should withdraw from LGW in a timely basis, seeking to maximise


value of our 25 pairs of slots
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19

Making Flybe Fit to Compete


Generate sufficient cash to fund transition without recourse
to shareholders asset disposals to realise 25m
Major Initiative Gatwick slot portfolio (continued)

Engaged third party to advise on sale process - NDAs signed with 5


airlines

Contract signed with easyJet on 22 May 2013:


 Total consideration 20.0m, payable 7.5m on completion, 10.0m in
November 2013, 2.5m in June 2014
 Completion is subject to shareholder approval expected July 2013
 Flybe will continue its operations at Gatwick to 29 March 2014

Net book value of Flybes Gatwick slots carried on balance sheet at


September 2012 at 8.5m

Initiatives involving other asset disposals should realise c5m

Flybe: Delivery and Future Direction


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20

Making Flybe Fit to Compete


De-risking the business by removing surplus and growth
aircraft deferrals deliver a 20m cash improvement

In the announcement on 23 January, we targeted sale of 4 remaining owned


Q400s and removing growth aircraft in 2013/14 and 2014/15

Sale of Q400s:
 Sale of 2 Q400s completed at modest book profit
 Sale process ongoing for remaining 2 owned Q400s

E175 deliveries:
 Contract signed in July 2010 for 35 firm aircraft included 16 aircraft
deliveries in 2014 and 2015
 Agreement signed with Embraer in May 2013 deferring delivery dates for
these 16 aircraft to between 2017 and 2019
 4 E175s due for delivery in Autumn 2013 then no further committed
deliveries until 2016

 Deferrals deliver a reduction in PDP commitments of 20m in Winter


2013/14
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

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UK Aircraft De-risking Programme


The next 3 years have been de-risked by E175 deferrals
100
E175
90

E195

100

Flybe UK Fleet
March 2010 to March 2016

90

Q400

Aircraft

80

Fleet profile in Group Board


presentation July 2010

De-risking of fleet
* Deferral of 16 E175 aircraft
* 13 Q400 sales

80

E175s

70

70

60

60

E175s
50

50

E195s
40

40

30

30

Q400s

20

10

10

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

20

Quarter ending

22

Flybe UK Making Flybe Fit to Compete


(1) Stop the losses by reducing costs
- Update on Phases 1 and 2
(2) Maximise the revenue earning potential
of the network
(3) Generate sufficient cash to fund
transition without recourse to shareholders
(4) Restructure and rebalance Flybes
network into a defensible core

Flybe: Delivery and Future Direction

23

Network Review
Restructure and rebalance the network into a
defensible core
Short term goals:
1. Exit unsustainable markets
2. Focus on building defensible core bases in the UK regional
market
3. Compete using convenience and frequency as Flybes main
USP
4. Compete by restoring Flybes price competitiveness
underpinned by the restructured cost base
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

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Exit Unsustainable Markets


Withdraw from Gatwick under our timescale and
maximise value realisation for slot assets

London Gatwick
easyJet have
declared LGW is
their priority. They
now have 40%+ of
LGW slots

Gatwick determined to
maximise their
revenues from a single
runway by increasing
prices for our size of
aircraft

The Regulator will not interfere

The Government have no aviation


policy to protect regional
connectivity

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

LGWs charges to
Flybe increased by
100%+ in past 5
years poor route
performance
unsustainable

25

Rebalance Network into Defensible Core

Focus on Selected Core Airports


Defend

Compete

Develop

Commercial Focus
Investment Priority
On Trunk Routes use 88/118-seat E-series jet aircraft to
provide competitive, high frequency jet services at low sector
cost

On Secondary Routes use 78-seat Q400 turboprop aircraft to


develop and maintain daily services at lowest cost

Flybe: Delivery and Future Direction


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26

Example of Selected Core Airport

Southampton
Use volume incentives to maximise growth at the lowest
incremental cost

Compete for
traffic which
currently uses
LHR and LGW

Capitalise on
excellent road and
rail access

Use physical
constraints at the
airport (which limit
aircraft size) to defend

Capitalise on the
convenience and
simplicity model
customer experience on
LCY

Develop year round


Build a network of top
Government
short haul business
andhave noleisure flying - maximise
the E195 flying during
Aviation
leisure routes
from Policy
LHR to
and protect
LGW Regional Co peak leisure seasons

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

27

Route Development from Southampton


Target largest routes served from London, and increase
leisure route profile

Routes flown by Flybe from SOU


Pax

Destinations served from London


Flybe: Delivery and Future Direction
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Rebalance Network into Defensible Core

Reinvigorate Key Developing Airports


Feed the core bases
Operate direct hub bypass routes where there is
sufficient market demand
Operate leisure routes where (i) markets are not served
and (ii) Flybe aircraft can operate economically
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

29

Network Review
Restructure and rebalance the network into a
defensible core
Medium term goals:
1. Develop European routes from core bases
2. Reduce exposure to short-term market shocks by growing
advance sales
3. Rebalance the network to generate a greater proportion of
leisure travel
Flybe: Delivery and Future Direction
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Agenda
Context and Introduction
Flybe UK
- Making Flybe Fit to Compete
Flybe Outsourcing Solutions Recap
Conclusions and Updating on Progress

Flybe: Delivery and Future Direction

31

Making Flybe Fit to Compete Flybe Outsourcing Solutions


Flybe believes that the European scheduled contract flying market is set for
substantive growth over the next few years, and that it is best positioned to
exploit this low risk market

US Model of regional
contract flying is
transferring to Europe

82% of Scheduled
contract flying in Europe
is currently delivered by
loss making in-house
subsidiaries of the
network carriers

Fixed fee with


escalations for
cost
Predictable
cash flows
Predictable
profit streams
No risk on fuel,
statutory
charges,
revenue

18%
independent

82% in-house network


carrier subsidiaries

Major Outsourcing
Opportunity

Flybe: Delivery and Future Direction


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32

Over the last 15 months,


Flybe has developed into
the largest independent
scheduled contract
provider in the Europe
regional sector

Company

Sectors per Month

1. Flybe

4,942

2. Augsberg

2,479

3. Aer Arran

1,964

4. Airlinair

1,785

5. Golden Air

1,241

Making Flybe Fit to Compete Flybe Outsourcing Solutions


The pressure on network carriers and
small scale state owned airlines to
outsource will only increase
Rising labour
costs and
decreasing
labour
flexibility

Long term
fuel cost
pressure

Primary Needs
Lowest cost
feed for core
intercontinental
operations

Pressure from
Middle East
carriers on
network return

Fleet reequipment
needs

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

Pressure from
LCCs on
volume routes

33

Making Flybe Fit to Compete Flybe Outsourcing Solutions


Over the last 18 months Flybe has grown to become one of
Europes largest scheduled contract flying providers

Contract Flying Dimensions


Annualised 12/13 Run Rate
Number of Aircraft deployed - 26
Number of passengers carried - 2.8m
Number of airports served
- 50
Number of seats flown
- 4.4m
Turnover
- c250m

Key Customers:
- Finnair (One World Alliance)
- Brussels Airlines (Star Alliance)

Flybe: Delivery and Future Direction


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34

Agenda
Context and Introduction
Flybe UK
- Making Flybe Fit to Compete
Flybe Outsourcing Solutions Recap
Conclusions and Updating on Progress

Flybe: Delivery and Future Direction

35

Making Flybe Fit to Compete


Medium Term Operational Profit Targets by Division
Unit profit targets

Flybe UK

Year 1

Year 2

Medium Term

13/14

14/15

3 to 5 years

(i)

- profit per seat ()

B'even

0.60

3.00

200

300

400

Flybe Outsourcing Solutions (ii)


- profit per contract flying aircraft (000) (iii)
(i) Includes all overhead costs relating to Flybe UK
(ii) Flybe Outsourcing Solutions includes Flybe Finland, a 60:40 joint venture with Finnair
(iii) Includes profits from all outsourcing activities, inc. MRO and training, and all overheads relating Flybe Outsourcing Solutions

Note the above information represents management unit targets only, and should in no way be construed as forecasts

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

36

Making Flybe Fit to Compete


Financing the turnaround of Flybes UK
based business

As part of Phases 1 and 2, Flybe has undertaken a


review of its assets and commitments, with a view to
optimising its cash position

That review has led Flybe to decide to:


1.

Realise the value of its LGW slot portfolio

2.

Realise value of certain assets/stock through sale or SALB

3.

Reduce its cash commitments to aircraft pre-delivery


payments and purchases

Flybe: Delivery and Future Direction


Flybe: Delivery and Future Direction

37

Making Flybe Fit to Compete Commitment to 6 Monthly Updates


As part of the plan, we commit to regular progress updates

Regular updates

Next update with 12/13 full year results in June 2013

Updating at each interim and full year results

Full reporting on each project and cost target

Flybe: Delivery and Future Direction


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38

Summary
Making Flybe Fit to Compete

Stop the losses by reducing costs strong


progress on Phases 1 and 2

Re-energise the revenue earning potential of the


network

Generate sufficient cash to fund transition without


recourse to shareholders

Restructure and rebalance Flybes network into a


defensible core
Flybe: Delivery and Future Direction
Flybe: Delivery and Future Direction

39

Flybe
Delivery and Future Direction
Making Flybe Fit to Compete
Update 23 May 2013
Flybe: Delivery and Future Direction