Flybe: Delivery and Future Direction

Transcription

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

2 Agenda Context and Introduction Flybe UK - Making Flybe Fit to Compete Flybe Outsourcing Solutions Recap Conclusions and Updating on Progress 2

3 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 Flybe s 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 3

4 What is in Today s 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 4

5 Agenda Context and Introduction Flybe UK - Making Flybe Fit to Compete Flybe Outsourcing Solutions Recap Conclusions and Updating on Progress 5

6 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 Flybe s network into a defensible core 6

7 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 Phase 1 Delivery Update April 2013 Year 1 cumulative savings Year 2 cumulative savings Savings 25m 35m Made up of: - Business efficiency and cost reductions - Supplier costs 26m 9m Year 1 cumulative savings Savings 30m Made up of: - Headcount reduction - Business efficiency and outsourcing - Supplier costs 16m 8m 6m Year 2 cumulative savings Phase 2 announcement outlines significant increased savings targets Restructuring costs for Phase 1 of c 13m in 2012/13 results 7

8 Phase 1 22% Reduction in Headcount Breakdown of delivery of Phase 1 headcount savings Phase 1 - Overview Flybe UK based February 2013 Headcount 2,730 Redundancies (voluntary and compulsory) 290 Staff leaving the business through outsourcing deals 300 Total staff leaving in Phase Percentage of workforce 22% 8 Phase 1 - Highlights Headcount Reductions: 20% reduction in management roles 13% reduction in overheads Commercial Functions Outsourced: Call centre On-board sales Production Functions Outsourced: Major portion of line maintenance Ground handling functions Automated check in including bag drop roll out underway

9 Phase 1 Outsourcing Non-Core Functions Breakdown of delivery of Phase 1 headcount savings outsourcing deals Business Area Number of Staff Line Maintenance 133 Ground Handling Activity 112 Outsourced to: Monarch and Others Menzies/ Servisair/ Dalcross Comment Call Centre 47 Sitel Complete On-board Sales 8 Commissaire 80% of Flybe s line maintenance activity - complete Ticket desk and oversight facilities - complete Contract signed, effective from 1 August

10 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 British Airways¹ Yr 2009 Yr 2010 Yr 2011 Yr 2012 Phase ³ easyjet¹ ³ Flybe¹ ² 4.7² Monarch¹ ³ Ryanair¹ ³ ¹: figures provided from Cranfield University study ²: Flybe figures ³: Flybe estimates 4: 2012 figures rolled through to

11 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 6 9 Procurement 4 10 Revenue Enhancement 2 4 TOTAL

12 Phase 2 Making Flybe Fit to Compete Phase 2 staff cost reductions are driven by two major initiatives 1. Further Headcount Reductions: 2013/ /15 Cumulative Staff numbers and other initiatives Total cost reduction 84 6m 84 7m 2. New Starter Terms: Package of salary and benefit changes - 2m Total 6m 9m 12

13 Phase 2 Making Flybe Fit to Compete Phase 2 procurement cost savings driven by major initiative implemented in March m 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 13

14 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. 14 Creating a positive spiral

15 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 Flybe s network into a defensible core 15

16 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 16

17 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 17

18 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 Flybe s network into a defensible core 18

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 Gatwick Airport is determined to maximise revenues from single runway airport by increasing prices for regional/smaller aircraft Gatwick s 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, Flybe s 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 19

20 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 Flybe s Gatwick slots carried on balance sheet at September 2012 at 8.5m Initiatives involving other asset disposals should realise c 5m 20

21 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 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 21

22 UK Aircraft De-risking Programme The next 3 years have been de-risked by E175 deferrals E175 E195 Flybe UK Fleet March 2010 to March Q Fleet profile in Group Board presentation July 2010 De-risking of fleet * Deferral of 16 E175aircraft * 13 Q400 sales E175s Aircraft 50 E195s E175s Q400s Quarter ending 22

23 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 Flybe s network into a defensible core 23

24 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 Flybe s main USP 4. Compete by restoring Flybe s price competitiveness underpinned by the restructured cost base 24

25 Exit Unsustainable Markets Withdraw from Gatwick under our timescale and maximise value realisation for slot assets London Gatwick easyjet have Gatwick determined to declared LGW is maximise their their priority. They revenues from a single now have 40%+ of runway by increasing LGW slots prices for our size of aircraft LGW s charges to Flybe increased by 100%+ in past 5 years poor route performance unsustainable The Regulator will not interfere The Government have no aviation policy to protect regional connectivity 25

26 Rebalance Network into Defensible Core Focus on Selected Core Airports Defend Compete Develop Commercial Focus 26 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

27 Example of Selected Core Airport Southampton Use volume incentives to maximise growth at the lowest incremental cost Capitalise on the Compete for Use physical convenience and traffic which constraints at the simplicity model currently uses airport (which limit customer experience on LHR and LGW aircraft size) to defend LCY Capitalise on excellent road and rail access Build a network of top Develop year round short haul business Government and have no leisure flying - maximise leisure routes Aviation from Policy LHR to the E195 flying during and protect LGW Regional Co peak leisure seasons 27

28 Route Development from Southampton Target largest routes served from London, and increase leisure route profile Pax Routes flown by Flybe from SOU Destinations served from London 28

29 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 29

30 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 30

31 Agenda Context and Introduction Flybe UK - Making Flybe Fit to Compete Flybe Outsourcing Solutions Recap Conclusions and Updating on Progress 31

32 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 Over the last 15 months, Flybe has developed into the largest independent scheduled contract provider in the Europe regional sector 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 32 Company Sectors per Month 1. Flybe 4, Augsberg 2, Aer Arran 1, Airlinair 1, Golden Air 1,241

33 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 LCC s on volume routes Fleet reequipment needs Pressure from Middle East carriers on network return 33

34 Making Flybe Fit to Compete Flybe Outsourcing Solutions Over the last 18 months Flybe has grown to become one of Europe s 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 - c 250m Key Customers: - Finnair (One World Alliance) - Brussels Airlines (Star Alliance) 34

35 Agenda Context and Introduction Flybe UK - Making Flybe Fit to Compete Flybe Outsourcing Solutions Recap Conclusions and Updating on Progress 35

36 Making Flybe Fit to Compete Unit profit targets Medium Term Operational Profit Targets by Division Year 1 Year 2 Medium Term 13/14 14/15 3 to 5 years Flybe UK (i) - profit per seat ( ) B'even 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 36

37 Making Flybe Fit to Compete Financing the turnaround of Flybe s 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 37

38 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 38

39 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 Flybe s network into a defensible core 39

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