FLYBE GROUP PLC. (Incorporated in England and Wales under the Companies Act 1985 No )

Transcription

1 THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own financial advice immediately from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser duly authorised under the Financial Services and Markets Act 2000 if you are in the United Kingdom, or from another appropriately authorised independent financial adviser if you are in a territory outside the United Kingdom. If you sell or transfer or have sold or otherwise transferred all of your Ordinary Shares, please forward this document, but not the personalised Form of Proxy, as soon as possible to the purchaser or transferee or to the bank, stockbroker or other agent through or to whom the sale or transfer was effected, for onward delivery to the purchaser or transferee. Any person (including, without limitation, custodians, nominees and trustees) who may have a contractual or legal obligation or may otherwise intend to forward this document to any jurisdiction outside the United Kingdom should seek appropriate advice before taking any action. LR13.3.1(4) LR13.3.1(6) FLYBE GROUP PLC (Incorporated in England and Wales under the Companies Act 1985 No ) Proposed Exchange of Arrival and Departure Slots at London Gatwick Airport Circular to Shareholders and Notice of General Meeting Annex 1 para Your attention is drawn to the letter from Jim French CBE, the Chairman of Flybe Group plc, which is set out in Part 1 of this document and in which the Board of Flybe Group plc unanimously recommends that you vote in favour of the Resolution to be proposed at the General Meeting referred to below. You should read this document in its entirety and consider whether to vote in favour of the Resolution in light of the information contained in this document. Capitalised terms have the meanings ascribed to them in Part 7 of this document. A notice convening a General Meeting of Flybe Group plc to be held at a.m. on 2 August 2013 at the Flybe Training Academy, Exeter International Airport, Exeter EX5 2LJ is set out at the end of this document. A Form of Proxy for use at the General Meeting is enclosed. Whether or not you intend to attend the General Meeting in person, please complete, sign and return the accompanying Form of Proxy in accordance with the instructions printed on it as soon as possible but, in any event, so as to be received by the Registrar no later than a.m. on 31 July 2013, being 48 hours before the time appointed for the holding of the General Meeting. If you hold your Ordinary Shares in uncertificated form (i.e. in CREST) you may appoint a proxy by completing and transmitting a CREST Proxy Instruction in accordance with the procedures set out in the CREST Manual so that it is received by the Registrar (under CREST participant ID RA10) by no later than a.m. on 31 July Shareholders may also register the appointment of a proxy electronically by logging on to so that the appointment is received by the Registrar by no later than a.m. on 31 July The time of receipt will be taken to be the time from which the Registrar is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. Completing and posting of the Form of Proxy or completing and transmitting a CREST Proxy Instruction will not prevent you from attending and voting in person at the General Meeting if you wish to do so. No person has been authorised to give any information or make any representations other than those contained in this document and, if given or made, such information or representations must not be relied on as having been so authorised. The delivery of this document shall not, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date of this document or that the information in it is correct as of any subsequent time. Espirito Santo Investment Bank which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for Flybe Group plc and for no one else in connection with the Exchange and will not regard any other person (whether or not a recipient of this document) as a client in relation to the Exchange and will not be responsible to anyone other than Flybe Group plc for providing the protections afforded to clients of Espirito Santo Investment Bank or for affording advice in relation to the Exchange, the contents of this document or any transaction, arrangement or other matter referred to in this document. For a discussion of certain risk factors which should be taken into account when considering whether to vote in favour of the Resolution, see Part 2 (Risk Factors) of this document.

2 CORPORATE DETAILS AND ADVISERS Secretary: Registered office: Sponsor and financial adviser to the Company: Solicitors to the Company: Auditors to the Company: Reporting accountants to the Company: Registrar: Chris Simpson Jack Walker House, Exeter International Airport, Devon EX5 2HL Execution Noble & Company Limited (which conducts its UK investment banking business as Espirito Santo Investment Bank) London Stock Exchange Building, 10 Paternoster Square, 3rd Floor, London EC4M 7AL Eversheds LLP Eversheds House, 70 Great Bridgewater Street, Manchester M1 5ES Deloitte LLP Abbots House, Abbey Street, Reading RG1 3BD Deloitte LLP 2 Hardman Street, Manchester M60 2AT Capita Registrars The Registry, 34 Beckenham Road, Kent BR3 4TU Annex I para

3 CONTENTS Page Expected timetable of principal events 3 Part 1 Letter from the Chairman of Flybe Group plc 4 Part 2 Risk factors 13 Part 3 Summary of the Exchange Agreement 16 Part 4 Pro Forma Financial Information 20 Part 5 Valuation Report 24 Part 6 Additional information 29 Part 7 Definitions 51 Notice of General Meeting 57 EXPECTED TIMETABLE OF PRINCIPAL EVENTS Announcement of the Exchange 23 May 2013 Latest time and date for receipt of forms of proxy a.m. on 31 July 2013 General Meeting of Flybe Group plc a.m. on 2 August 2013 Expected effective date of the Exchange 2 August 2013 Notes: (1) Reference to times in this document are to London time unless otherwise stated. (2) Each of the times and dates above is indicative only and may be subject to change, in which event details of the new times and dates will be notified to the FCA and where appropriate the Shareholders. 3

4 PART 1 LETTER FROM THE CHAIRMAN OF FLYBE GROUP PLC Annex I paras and (Incorporated and registered in England and Wales with registered number: ) Flybe Group plc Jack Walker House Exeter International Airport Exeter EX5 2HL 17 July 2013 Directors and Officers: Executive Jim French CBE Chairman and Chief Executive Officer Andrew Knuckey Chief Financial Officer Mark Chown Director of Corporate Strategy Mike Rutter Managing Director Flybe Outsourcing Solutions Andrew Strong Managing Director Flybe UK Non-executive Charlie Scott Alan Smith David Longbottom Peter Smith Deputy Chairman and Senior Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Dear Shareholder Proposed Exchange of Arrival and Departure Slots at London Gatwick Airport and Notice of General Meeting 1. Introduction On 23 May 2013, the Company announced that Flybe Limited (a wholly owned subsidiary of the Company) (the Transferor ) had entered into a conditional agreement with easyjet Airline Company Limited (the Transferee ) (a wholly owned subsidiary of easyjet plc) ( easyjet ) to exchange the Gatwick Slots for: (i) compensation payments totalling 20 million; and (ii) certain additional Slots (which will not have a value to the Group and which will not be used by the Group) (the Exchange ). LR10.4.1(2)(a) LR (1), (2) and (3) The consideration payable by the Transferee will be satisfied by: (i) an initial amount of 7.5 million paid on Completion (being the date on which the Transferee is notified that the Shareholders have approved the Exchange); (ii) 10 million to be paid in November 2013 after the Summer Slots are exchanged, to occur before the end of the November 2013 IATA Slot Conference; and (iii) the remaining 2.5 million to be paid in June

5 after the Winter Slots are exchanged, to occur before the end of the June 2014 IATA Slot Conference. Flybe Limited will continue to operate the Summer Slots until October 2013 under an arrangement with easyjet to ensure that the Summer Slots qualify for Historical Precedence by operating these Slots to at least the minimum level specified in this regard by the EU Slot Regulation. All rights in respect of the Winter Slots will be transferred by Flybe to easyjet at the June 2014 Slot Conference with those Slots being operated by Flybe for the period from 26 October 2013 to 29 March LR10.4.1(2)(c) After deduction of costs incurred by the Company in connection with the Exchange, estimated to be approximately 900,000 (comprising professional fees), the total net cash proceeds of the Exchange, including the deferred amounts described above, are expected to be approximately 19.1 million. Owing to the size of the Exchange relative to the size of the Company, the Exchange constitutes a Class 1 transaction under the Listing Rules and is, therefore, conditional upon the approval of the Shareholders. The terms of the Exchange impose certain obligations on the Transferor, including operating the Gatwick Slots with sufficient frequency in order to maintain the rights to use them such that they may be transferred to the Transferee. Further details of the Exchange are set out in Part 3 (Summary of the Exchange Agreement) of this document. LR10.4.1(2)(a) Your approval for the Exchange is being sought at a General Meeting of the Company to be held at the Flybe Training Academy, Exeter International Airport, Exeter EX5 2LJ on 2 August 2013 at a.m. A notice of the General Meeting and of the Resolution to be considered at the General Meeting is set out at the end of this document. A summary of the action you should take is set out in Section 9 of this letter and on the Form of Proxy that accompanies this document. The purpose of this document is to provide you with details of the Exchange and the effect of the Exchange on the Group, to explain why your Directors believe that the Exchange is in the best interests of the Group and its Shareholders as a whole and to seek your consent for the Exchange. 2. Information on the Group Shareholders should read the whole of this document and not rely solely on the summarised financial information contained in this section. Flybe operates scheduled and contract flying services in Europe and provides maintenance, repair and overhaul ( MRO ) and training services primarily to the airline industry. The Group s schedule for the 2013 Summer Season comprises 209 routes between 35 UK and 71 European airports across 23 countries. The Group operates through two divisions: LR10.4.1(2) (b)(d)(e) LR Flybe UK Flybe UK comprises all of the Group s scheduled UK based services and passenger operations. The core activities of the division comprise the provision of scheduled airline services both within the UK and from the UK to continental Europe. Flybe Outsourcing Solutions The Flybe Outsourcing Solutions business is a combination of the previous Flybe Europe and Aviation Support divisions, providing an integrated outsourcing offer to customers. The division comprises the Group s European contract flying, MRO and Flybe Training Academy businesses, supporting Flybe s UK and continental European 5

6 Activities and serving third-party customers, including the provision of aircraft maintenance, repair and overhaul services. The Group is headquartered in Exeter and the Company s shares are listed on the Premium Segment of the Official List and admitted to trading on the Main Market of the London Stock Exchange. As at the close of business on 15 July 2013 (being the latest practicable date prior to the publication of this document), its market capitalisation was 42,837,143. The Group s revenue for the year ended 31 March 2013 was million, Adjusted EBITDAR Before Restructuring was 66.6 million and Adjusted Loss Before Restructuring Costs was 32.7 million. As at 31 March 2013, the Group had net assets of 48.1 million and gross assets of million. During the year ended 31 March 2013, the Group s average number of employees was 2,958. LR Turnaround Plan On 23 January 2013, alongside its Interim Management Statement, the Group released a Delivery and Future Direction announcement, setting out medium term per unit (seat) operating profit targets and a plan to return the Group to profitability in the 2013/14 Financial Year. On 23 May 2013, the Group released an update on the progress of this turnaround plan together with details of additional savings and revenue enhancement opportunities targeted by the Group under the banner of Making Flybe Fit to Compete and the Group s refocused network strategy. The Group s turnaround plan comprises four elements: i. Stop the losses by reducing costs The Group announced on 23 May 2013 that Phase 1 of the turnaround plan is now expected to deliver approximately 30 million of costs savings in the 2013/14 Financial Year, versus its original target of approximately 25 million. The Group identified actions to further reduce costs and the Board anticipates that these additional actions should deliver approximately 10 million of additional cost savings in the 2013/14 Financial Year and approximately 19 million of additional cost savings in the 2014/15 Financial Year. ii. iii. iv. Maximise the revenue earning potential of the network The Board announced initiatives to generate additional revenues of approximately 2 million in the 2013/2014 Financial Year and approximately 4 million in the 2014/2015 Financial Year through a series of repositioning initiatives and enhancing ancillary revenue potential. Generate sufficient cash to fund transition without recourse to Shareholders In addition to the Exchange for total gross consideration of 20 million, the Group also announced the deferral of 16 Embraer E175 aircraft deliveries, originally planned for 2014 and 2015, to dates between 2017 and These deferrals will give rise to a reduction in planned pre-delivery payment ( PDP ) commitments of approximately 20 million over the period of November 2013 to January The Group also intends to divest itself of various other minor assets, comprising, amongst other things, surplus aircraft parts inventory, and expects to generate cash proceeds of approximately 5 million from these transactions. Restructure and rebalance the Group s network into a defensible core The Board announced its intention to refocus its activities around a number of core defensible bases in order to build strong foundations for a long-term profitable future 6

7 and restore its position in the UK and European regional flying market. For example, the Board intends to capitalise upon Southampton airport s excellent road and rail access by enhancing the Group s customer experience and maximising flying during peak leisure seasons in order to compete for traffic which currently uses London Heathrow and Gatwick airports. 3. Information on the Gatwick Slots An airport Slot pair is a right to a specific arrival and departure time for an aircraft, including having access to the airport terminal. Under current regulations, Slots are not owned by airlines but are allocated by the airport Slot co-ordinator on request. Under the EU Slot Regulation, airlines cannot sell Slots but are allowed to exchange Slots on a one for one basis with other airlines, with such exchanges accompanied by monetary compensation where market conditions are such that the Slots have a value. Where an airline wishes to acquire by exchange the Slots of another airline, it applies to the airport Slot co-ordinator for additional Slots to give in exchange, for the purposes of conducting the exchange only ( Junk Slots ). The Junk Slots cannot be operated by airlines, nor are they intended to be, because they are not at times of the day that make them operable as an arrival and departure pair. Therefore, Junk Slots do not have any commercial value, and are surrendered by the airline and returned to the Slot pool after the Slot exchange is completed. Airlines that do not use each of their allocated Slots for at least 80 per cent. of the relevant Summer Season or Winter Season can lose the rights to those Slots. This is usually referred to in the industry as the use it or lose it rule. Due to the nature of airlines rights to Slots, there are no definitive accounting policies or regulations as to how Slots should be accounted for by airlines. Currently, best practice under IFRS is to account for Slots that have been acquired through financial compensation as a non-current intangible asset recorded on the balance sheet of an airline, whereas, if the operating rights have been built up through historical usage, such Slots are not normally recorded as assets and are not reported on the balance sheet. In the case of both historical and acquired slots, airlines do not own them but rather operate them as a right. Flybe acquired six pairs of the Gatwick Slots from various airlines in 2007 and 2008 with a further seven pairs of Slots being acquired as part of its acquisition of BA Connect from British Airways in March The value ascribed on acquisition of the seven pairs of BA Connect Slots was based on the values paid for the six other pairs of Slots as these were recent and comparable in timings to the BA Connect Slots. Flybe has therefore accounted for the 13 acquired pairs of Slots on its audited consolidated balance sheet as a non-current intangible asset with a combined value as at 31 March 2013 of 8.5 million. The remaining Slots being exchanged pursuant to the Exchange Agreement have been built up through historical usage and have no value attributed to them, as required by IFRS. The Gatwick Slots are valued at an aggregate of 20 million as described in the valuation report prepared by Nyras which is set out in Part 5 of this document. Flybe has reached a conditional agreement to transfer the Summer Slots and the Winter Slots to easyjet for cash consideration totalling 20 million. Flybe currently operates seven routes year-round into and from Gatwick Belfast City, Guernsey, Inverness, the Isle of Man, Jersey, Newcastle and Newquay and a Summer Season only route between Gatwick and Bergerac. In the financial year ended 31 March 2013, Flybe flew approximately 550,000 passengers on routes departing from Gatwick. 7

8 The Exchange involves: IATA season Days Number of slot pairs Summer Monday to Friday 26 Summer Saturday 22 Summer Sunday 23 Winter Monday, Sunday 22 Winter Tuesday, Wednesday, Saturday 20 Winter Thursday, Friday 24 The Summer Slots will continue to be operated by Flybe until the end of the current Summer Season on 26 October 2013 under an arrangement with the Transferee such that the Transferor operates the Summer Slots during the 2013 Summer Season and returns them to the Transferee at the end of that Summer Season, for a payment of 1 per month or part thereof. All of the Summer Slots will be transferred to easyjet at the November 2013 Slot Conference. All rights in respect of the Winter Slots will be transferred by the Transferor to the Transferee at the June 2014 Slot Conference, with those Slots being operated by the Transferor for the period from 26 October 2013 to 29 March Background to and reasons for the Exchange The Group carried out a review of its performance on the Gatwick routes and concluded that it should withdraw from Gatwick in a controlled and timely way and seek to maximise the value of the Gatwick Slots. The Group approached a number of airlines which it considered would be most likely to have an interest in the Gatwick Slots. It signed Non Disclosure Agreements with four airlines and after a series of negotiations, reached agreement with easyjet on the terms described in this document. LR13.3.1(1), (2) and (3) LR10.4.1(2)(f) The Exchange represents a significant step in the Group s restructuring strategy. The costs incurred by Flybe in respect of airport charges at Gatwick have increased by 110 per cent. over the last five years. It is the view of the Board that the increase in charges, amongst other factors, including, over that period, increases in the level of Air Passenger Duty, has resulted in Flybe s services to and from Gatwick now being unsustainable. The Exchange is conditional upon the passing of the Resolution set out in the notice of General Meeting at the end of this document. Completion of the Exchange is expected to take place upon receipt of the notification of the results of the General Meeting by easyjet. A summary of the principal terms of the Exchange Agreement is set out in Part 3 of this document. 5. Financial effects of the Exchange and use of proceeds The Cash Proceeds arising from the Exchange are expected to be approximately 19.1 million. LR10.4.1(2)(f) and (h) LR13.4.1(5) As a result of the Exchange, Flybe will receive an amount in cash which is significantly above the book value for the Gatwick Slots, thereby increasing Shareholders funds. The Exchange also enables the Group to realise value for the Gatwick Slots which are currently being used by Flybe for routes on which it is not earning a satisfactory operating return on the assets deployed. As described in paragraph 3 above, Flybe will also receive a number of Junk Slots, in Exchange for the Gatwick Slots, which will not be used by the Group and will revert to Airport Co-ordination Limited ( ACL ), the Slot co-ordinator, in accordance with the terms of the Exchange Agreement. 8

9 The initial amount of 6.6 million of the Cash Proceeds of the Exchange will reduce the net indebtedness of the Group from approximately 66.3 million as at 31 March 2013 to approximately 59.7 million on a pro forma basis. Further cash payments are due following the exchange of the Summer Slots ( 10 million to be received in November 2013) and the exchange of the Winter Slots ( 2.5 million to be received in June 2014). They will strengthen the Group s balance sheet and provide working capital for the Group s activities. The Cash Proceeds will help finance the turnaround plan of the Group and help provide a source of funds for the day-to-day trading of the Group. An unaudited pro forma statement of net assets of the Group as at 31 March 2013 is set out in Part 4 (Unaudited Pro Forma Statement of Net Assets of the Group) of this document, which has been prepared for illustrative purposes only as if the Exchange had been completed on that date. An independent valuation of the Gatwick Slots is set out in Part 5 of this document for Shareholders information. 6. Current trading and prospects On 21 June 2013, the Group announced its audited consolidated financial information for the year ended 31 March 2013 which contained the following commentary on the Group s current trading and prospects within the Outlook section of the Chairman and Chief Executive Officer s statement: Annex I para 12.1 Flybe remains Europe s largest independent regional airline, flying over 200 routes from more than 100 airports across 23 countries, with a strong reputation and a standing amongst our peers that means we can do business with all the major airline groups in Europe. We continue to make real and measurable progress in Europe, with our contract flying business in particular being a stable, income-generating entity. Much more importantly than being the largest independent regional airline, though, is our desire to become Europe s most profitable regional airline. The difficult decisions we took in Phases 1 and 2 of our Turnaround Plan represent significant steps in the right direction. Our choices with regard to cost savings, outsourcing, headcount reduction, aircraft delivery deferrals and the sale of our Gatwick slots demonstrate the resilience and singlemindedness of the management team to turnaround Flybe. We expect to see considerable reductions in the cost base of the business in both this year and the next, thanks to the actions taken during the course of 2013 that are targeted to be complete later this year. The Group is now more strongly placed for the future. The current trading and prospects of the Retained Business are consistent with the commentary in respect of the Group set out above. Annex I para Risk factors You should consider fully the risk factors set out in Part 2 of this document. 8. General Meeting In view of its size, the Exchange is conditional upon the approval of Shareholders in general meeting. Set out at the end of this document is a notice convening the General Meeting to be held at the Flybe Training Academy, Exeter International Airport, Exeter EX5 2LJ at a.m. on 2 August 2013 at which the Resolution to approve the Exchange will be proposed. 9. Action to be taken You will find enclosed with this document a Form of Proxy for use at the General Meeting. Whether or not you propose to attend the General Meeting in person, you are asked to 9

10 complete the Form of Proxy and return it to the Registrar at the address which appears on page 2 of this document, so as to arrive as soon as possible, but in any event so as to be received no later than a.m. on 31 July CREST members may also choose to utilise the CREST electronic proxy appointment service in accordance with the procedures set out in the notice of General Meeting at the end of this document. Completion and return of a Form of Proxy will not preclude you from attending and voting at the General Meeting in person if you wish. Votes can be cast electronically for the General Meeting. In order to cast your vote electronically you must visit and follow the instructions. To use this service you will need to log in to your share portal account or register for the share portal if you have not already done so. To register for the share portal you will need your Investor Code (IVC) which can be found on your share certificate. The use by members of the electronic proxy appointment service will be governed by the terms and conditions of use which appear on the website. Electronic proxies must be completed and lodged in accordance with the instructions on the website by no later than 48 hours before the time appointed for the meeting (or, in the case of an adjournment, no later than 48 hours before the time fixed for the holding of the adjourned meeting). 10. Additional Information Your attention is drawn to the further information set out in Parts 3 to 6 of this document relating to the Group and to the Exchange. 11. Importance of the vote If the Resolution is not passed, the Exchange will not proceed and the Group will not receive the net proceeds of the Exchange of approximately 19.1 million. In such circumstances, the Group would seek alternative means of generating further working capital. LR13.3.1(5) The Board has considered the following actions: the sale of the Gatwick Slots to another airline. Prior to agreeing a sale of the Gatwick slots with the Transferee, the Group discussed the sale of the Gatwick slots with a number of other airlines. The Directors believe that, should the Exchange not proceed, the sale of the Gatwick Slots to another airline, on materially similar terms to the Exchange, could be agreed within a period of three months; the sale of other of the Group s assets. During March and April 2013, the Directors undertook a strategic assessment of the Group s assets in order to determine those assets that were non-core to its current operations or surplus to its current requirements, with a view to selling such assets in order to generate additional working capital. The Group has conditionally agreed the sale of certain of such assets for cash proceeds of approximately 1.6 million. The Directors anticipate that additional sales will be concluded within the current calendar year, and anticipate generating additional cash proceeds of up to 3.4 million from such sales; further working capital management initiatives (with a focus on the active management of cash collection and the payment of creditors). The Board believes that it can implement such initiatives at short notice to respond to the anticipated requirements of the Group and: other restructuring activities (including the consideration of further reductions in the Group s headcount). These are at an early stage of consideration by the Board. 10

11 The Directors are confident that, should the Exchange not proceed, the Group would be able to generate sufficient working capital through such alternative means. Whilst the Directors have no current intention to do so, the Directors might also in the future seek to make an approach to the Company s shareholders in order to secure further equity investment, for example by way of a rights issue. The Directors might also consider seeking new equity investors. If the Resolution was not passed and the Group was unable to generate further working capital as described above, in the period between February 2014 and the end of the 2013/2014 Financial Year: (i) the Group would risk breaching financial covenants that it has given in respect of its banking and aircraft financing arrangements, and (ii) the working capital available to the Group may be materially adversely affected, which might, as a consequence, adversely affect the ability of the Group to continue to operate. It is important that Shareholders vote in favour of the Resolution in order that the Exchange can proceed. 12. Appointment of new CEO On 3 July 2013, the Board announced the appointment of Mr Saad Hammad as Chief Executive Officer of the Group with effect from 1 August He will bring considerable airline, commercial and business transformation experience to Flybe. Mr Hammad was engaged as Chief Commercial Officer of easyjet from October 2005 to April Between May 2011 and October 2012 he was a non-executive director of Air Berlin plc. Mr Hammad is currently a Managing Director at the Gores Group, an operations-focused private equity firm, and has previously held positions in brand management, sales and marketing and retail at a number of companies, including Procter & Gamble and Thorn- EMI. Mr Hammad will join the Flybe Board on 1 August He has had detailed discussions with me about the substantial progress we are making on the turnaround plan and has endorsed the actions taken by the Directors to date. He intends to build on this progress. I have also discussed Flybe s contingency plans, as set out in the Importance of the vote section above and he is supportive of these. I look forward to working with him. I will become non-executive Chairman, also with effect from 1 August Recommendation The Board has received financial advice from Espirito Santo Investment Bank in relation to the Exchange. In providing its financial advice to the Board, Espirito Santo Investment Bank has relied on the Board s commercial assessment of the Exchange. The Board considers the Exchange and the Resolution to be proposed at the General Meeting of the Company to be in the best interests of the Company and its Shareholders as a whole. Accordingly, the Board unanimously recommends that Shareholders vote in favour of the Resolution set out in the notice of General Meeting at the end of this document, as the Directors have irrevocably undertaken to do in respect of their own beneficial holdings which amount to 5,151,600 Ordinary Shares (representing 6.7 per cent. of the existing issued ordinary share capital of the Company as at 15 July 2013, being the last practicable day prior to publication of this document). In addition, the Company has received an irrevocable 11

12 undertaking to vote in favour of the Exchange from Rosedale Aviation Holdings Limited, in respect of its beneficial holding of 36,145,250 Ordinary Shares (representing 48.1 per cent. of the existing issued ordinary share capital of the Company as at 15 July 2013, being the last practicable day prior to publication of this document). Yours sincerely Jim French CBE Chairman and Chief Executive Officer 12

13 PART 2 RISK FACTORS Shareholders should carefully consider all the information in this document including the risks described below. The Directors have identified these risks as the material risks relating to the Exchange, the new material risks to the Group as a result of the Exchange and the existing material risks to the Group which may be impacted by the Exchange. Annex I para 4 Additional risks and uncertainties not presently known to the Directors, or that the Board considers immaterial, or that the Board considers material to the Group but will not be impacted by the Exchange, may also adversely affect the Group s business, results of operations or financial condition. If any or a combination of the following risks materialise, the Group s business, financial condition, operational performance and share price could be materially adversely affected. In such circumstances, the market price of the Ordinary Shares could decline and you may lose all or part of your investment. Risks relating to the Exchange Financial impact on the Group The Exchange is conditional on the passing of the Resolution at the General Meeting. If the Resolution is not passed, the Exchange will not proceed and the Group will not receive the net proceeds of the Exchange of approximately 19.1 million. In such circumstances, the Group would seek alternative means of generating further working capital. The Board has considered the following actions: the sale of the Gatwick Slots to another airline. Prior to agreeing a sale of the Gatwick slots with the Transferee, the Group discussed the sale of the Gatwick slots with a number of other airlines. The Directors believe that, should the Exchange not proceed, the sale of the Gatwick Slots to another airline, on materially similar terms to the Exchange, could be agreed within a period of three months; the sale of other of the Group s assets. During March and April 2013, the Directors undertook a strategic assessment of the Group s assets in order to determine those assets that were non-core to its current operations or surplus to its current requirements, with a view to selling such assets in order to generate additional working capital. The Group has conditionally agreed the sale of certain of such assets for cash proceeds of approximately 1.6 million. The Directors anticipate that additional sales will be concluded within the current calendar year, and anticipate generating additional cash proceeds of up to 3.4 million from such sales; further working capital management initiatives (with a focus on the active management of cash collection and the payment of creditors). The Board believes that it can implement such initiatives at short notice to respond to the anticipated requirements of the Group and: other restructuring activities (including the consideration of further reductions in the Group s headcount). These are at an early stage of consideration by the Board. The Directors are confident that, should the Exchange not proceed, the Group would be able to generate sufficient working capital through such alternative means. Whilst the Directors have no current intention to do so, the Directors might also in the future seek to make an approach to the Company s shareholders in order to secure further 13

14 equity investment, for example by way of a rights issue. The Directors might also consider seeking new equity investors. If the Resolution was not passed and the Group was unable to generate further working capital as described above, in the period between February 2014 and the end of the 2013/2014 Financial Year: (i) the Group would risk breaching financial covenants that it has given in respect of its banking and aircraft financing arrangements, and (ii) the working capital available to the Group may be materially adversely affected, which might, as a consequence, adversely affect the ability of the Group to continue to operate. The Retained Business may not realise the perceived benefits of the Exchange The Exchange is not expected to result in a material disruption to the Group s operations, but the Retained Business will operate with reduced passenger capacity and will be dependent on the profitable performance of its remaining operations. Should the Retained Business remaining operations generate losses, the Group s financial condition may be materially and adversely affected. The Exchange could result in surplus aircraft and staff within the Retained Business. The ongoing success of the Retained Business depends partly on the ability of the Group to divest itself of surplus aircraft and staff, if any, without a material adverse impact on the Group s financial condition. The Retained Business may experience significant difficulties in achieving the anticipated benefits to the Group set out in Part 1 of this document (Letter from the Chairman of Flybe Group plc), or such benefits may not materialise. Obligations under the Exchange Agreement The Exchange Agreement contains certain warranties, indemnities and undertakings in favour of the Transferee which could result in the Retained Business incurring material liabilities and obligations to make payments to the Transferee which would not have arisen had the Exchange not taken place. Further details of such warranties, indemnities and undertakings are set out in Part 3 (Summary of the Exchange Agreement) of this document. The Retained Business may experience changes to its business prior to Completion Between the date of signing the Exchange Agreement and the proposed date of completion of the Exchange, events or developments may occur which may make the Exchange less attractive to the Group. Flybe Limited will, if the Resolution is passed, be obliged to complete the Exchange notwithstanding such events or developments which may have a material adverse effect on the Group s operations or financial condition. Increased staff turnover The Exchange may cause uncertainty amongst the Retained Business staff, which may result in an increased level of staff turnover. As the Group is exposed to risks relating to a lack of appropriately experienced staff, such an increase may have a material negative impact on the Group s continuing operations and financial condition. Loss of underlying assets If the Exchange does not proceed, the Directors will need to consider ceasing that part of the Group s operations which utilises the Gatwick Slots. If the Group ceases to use the Gatwick Slots it will lose its rights to operate such Gatwick Slots under the EU Slot Regulation, and, as a consequence, some or all of the value in the Gatwick Slots will be lost. The Directors would therefore need to consider reducing or writing off the value of the Gatwick Slots, which had a net book value in the Group s balance sheet of 8.5 million as at 31 March

15 Risks relating to the Retained Business The Exchange may damage the Group s reputation or brand As part of its overall business model, the Group relies on its reputation and positive brand recognition, amongst other things, to attract customers. Damage to the Group s reputation or brand as a result of the Exchange, and the cessation of the Group s operations at Gatwick, could adversely impact the Group s ability to market its services and attract and retain customers, and could ultimately have a material adverse effect on the Group s business, results of operations, growth prospects and/or financial condition. The Group s revenues may fall as a result of the Exchange The Exchange involves the Group continuing to operate the Gatwick Slots following Completion until 29 March 2014, as described in Part 3 (Summary of the Exchange Agreement). As a result of consumer uncertainty, or other reasons, the revenue expected to be received by the Group as a result of its operation of the Gatwick Slots during such periods may not materialise, resulting in losses being incurred by the Group. The Group s industrial relations may suffer as a result of the Exchange Many of the Group s employees are represented by trade unions and the Group has voluntary recognition agreements in place with BALPA in respect of its pilots, UNITE in respect of its cabin crew and Prospect in respect of its engineers. The Group undertakes collective bargaining with such unions on a financial yearly basis. A consequence of the Exchange may be that a number of staff are reassigned or made redundant by the Group. Any such reassignments or redundancies could lead to a general deterioration in the Group s relationships with the unions, or could lead to strikes or other industrial action (or the threat of strikes or industrial action) which could damage the Group s reputation or cause passengers to book with the Group s competitors. A breakdown in the relationship with employee representative bodies, or the employees themselves, could lead to industrial action being taken which could in turn have a material adverse effect on the Group s business, results of operations, growth prospects and/or financial condition. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements which are based on the beliefs, expectations and assumptions of the Directors and other members of Senior Management about the Group s businesses and the Exchange. Generally, words such as may, could, will, expect, intend, estimate, anticipate, believe, plan, seek, continue or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance, and although the Group believes that they are reasonable there can be no assurance that the expectations reflected in such forward-looking statements will prove to have been correct. Rather, they are based on current beliefs, expectations and assumptions and involve known and unknown risks and uncertainties, many of which are outside the control of the Group and are difficult to predict, that may cause actual results, performance or events to differ materially from those expressed or implied in such forward looking statements. Any forward-looking statement contained in this document based on past or current trends and/or activities of the Group should not be taken as a representation that such trends or activities will continue in the future. No statement in this document is intended to be a profit forecast or to imply that the earnings of the Group for the current year or future years will match or exceed the historical or published earnings of the Company. The Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein as a result of new information, future events or other information, except to the extent required by the Listing Rules, the Disclosure and Transparency Rules, the Prospectus Rules, the rules of the London Stock Exchange or by applicable law. 15

16 PART 3 SUMMARY OF THE EXCHANGE AGREEMENT The following is a summary of the principal terms of the Exchange Agreement, which is available for inspection by the Shareholders in accordance with paragraph 13 of Part 6 of this document. LR10.4.1(2)(a) 1. PARTIES AND STRUCTURE The Exchange Agreement was entered into on 22 May 2013 between the Transferor and Transferee for the purposes of: effecting the transfer of the Summer Slots and Winter Slots from the Transferor to the Transferee; and allowing for the continued use of the Summer Slots by the Transferor for the remainder of the 2013 Summer Season. All Slot transfers provided for under the Exchange Agreement will be effected by way of exchanges in compliance with the requirements of the EU Slot Regulation. Following the Completion Date and payment of the Advance Payment (as defined below) by the Transferee to the Transferor, the Summer Slots will be transferred to the Transferee, and following registration of the Summer Slots in the Transferee s name with ACL, those Summer Slots will be immediately transferred back to the Transferor (the First Summer Slots Exchange ), with the Transferee granting the Transferor permission to use the Summer Slots for the remainder of the 2013 Summer Season. After completion of the 2013 Summer Season, and no later than the last day of the November 2013 Slot Conference, the Summer Slots will be permanently transferred from the Transferor to the Transferee (the Final Slots Exchange ). The Transferor will operate the Winter Slots during the 2013/2014 Winter Season. After completion of the 2013/2014 Winter Season and no later than the end of the June 2014 Slot Conference, the Winter Slots will be permanently transferred from the Transferor to the Transferee (the Winter Slots Exchange ). Following the Winter Slots Exchange all of the Gatwick Slots will have been transferred to the Transferee and registered in the Transferee s name with ACL, with the right to the use and disposal of the Gatwick Slots having vested in the Transferee. Pursuant to the terms of the Exchange Agreement: on the Completion Date, the Transferor will execute an irrevocable power of attorney in favour of the Transferee allowing the Transferee to effect the transfer of the Summer Slots to the Transferee in the event of the Transferor s default under the Exchange Agreement; and on the Completion Date, the Transferor will issue a letter to ACL setting out the principal terms of the Exchange Agreement, notifying ACL of the Transferee s interests in the Gatwick Slots and authorising the Transferee s read only access to ACL s computer records for the purpose of monitoring the Transferor s use of the Summer Slots following the First Summer Slots Exchange; and the Transferor will by 30 June 2013 agree to security documents which (inter alia) will assign to the Transferee any contract and the proceeds thereof for the sale of 16

17 any or all of the Gatwick Slots entered into between the Transferee and a third party in contravention of the terms of the Exchange Agreement. Following Completion, the Transferee s use of the Gatwick Slots will be subject to various Slot use conditions as set out under the Exchange Agreement, including restrictions on the re-timing of the Gatwick Slots and a requirement to use the Gatwick Slots for more than 80 per cent. of the remainder of the 2013 Summer Season and the 2013/2014 Winter Season so as to preserve the Transferor s right under the EU Slot Regulation to have the Summer Slots and Winter Slots allocated to it by ACL for the next Summer Season and Winter Season respectively following the completion of the exchanges contemplated under the Exchange Agreement. The Exchange Agreement: is subject to standard confidentiality provisions; provides for cooperation between the Transferee and Transferor in the event of (i) any litigation by a third party or (ii) any regulatory investigation in respect of the Gatwick Slots or the Exchanges contemplated by the Exchange Agreement; and preserves the right for either Party to apply for any available injunctive relief in respect of the other Party s default of the Exchange Agreement. 2. CONSIDERATION The total consideration payable by the Transferee to the Transferor for the sale of the Gatwick Slots is 20,000,000 (the Total Consideration ), payable to the Transferee by telegraphic bank transfer in cleared and immediately available funds in the following tranches: LR10.4.1(2)(c) 7,500,000 payable on the Completion Date, or as soon as reasonably possible thereafter (the Advance Payment ); 10,000,000 payable immediately upon ACL confirming that the Summer Slots have been transferred to the Transferee as part of the Final Slots Exchange (the Second Payment ); and 2,500,000 payable immediately upon confirmation from ACL that the Winter Slots have been transferred to the Transferee as part of the Winter Slots Exchange (the Third Payment ). The Second Payment will be subject to a reduction where the Transferor considers that the operation of up to six pairs of Summer Slots is not economically viable and (at the Transferee s election) effects an early return of the relevant Summer Slots to the Transferee or returns them to ACL. In such circumstances a reduction of up to 475,200 will be applied to the Second Payment, depending on the number and class of Summer Slots involved. If the Transferor fails to return some or all of the Summer Slots as required under the Exchange Agreement, the Transferor shall pay liquidated damages of: 63,800 or 27,500 per unreturned daily Summer Slot on the basis of the predefined Slot values under the Exchange Agreement (save for those in respect of which the early return option described above applies); or up to 10,000,000 in circumstances where the unreturned Summer Slots are of a sufficient number and class as prescribed in the Exchange Agreement (with such thresholds principally based on the timings and days of the week on which the unreturned Summer Slots fall). Such liquidated damages will be reduced by (i) any 17

18 amount paid by the Transferor to the Transferee in the exercise of the early return option described above and (ii) the proceeds of any sale of all or part of the Summer Slots to a third party in breach of the Exchange Agreement, which proceeds would be payable to the Transferee under the terms of the Exchange Agreement and the related security documents granting a charge over such sales proceeds. The Transferee may demand the early return of the Summer Slots pursuant to its rights under the Exchange Agreement on the basis that (inter alia) the Transferor; has breached warranties or Slot use conditions in relation to the Summer Slots under the Exchange Agreement; is the subject of litigation in respect of the Summer Slots; ceases or threatens to cease its flying operations; or is subject to a bankruptcy event which could jeopardise the return of the Summer Slots to the Transferee. In such circumstances the Transferee s reasonable costs in operating the Summer Slots for the remainder of the Summer Season (net of any revenue generated through such operation) will be deducted from the Second Payment. The deduction of such costs is capped at the aggregate value of the Slots which are subject to an early return, with each having been ascribed a pre-defined value of either 63,800 or 27,500 under the Exchange Agreement. The Transferee and Transferor consider the exchanges contemplated under the Exchange Agreement to be zero rated for VAT purposes. Should HM Revenue and Customs deem VAT to be payable, such VAT will be payable by the Transferee, subject to the Transferor having (inter alia) given the Transferee sufficient notice of such VAT liability pursuant to the terms of the Exchange Agreement. Late payment of any sums due under the Exchange Agreement will be subject to interest at LIBOR plus four per cent. 3. CONDITIONS The passing of the Resolution by the Transferor s Shareholders is a condition precedent to Completion. The Winter Slots Exchange and payment of the Third Payment will not occur where the Summer Slots have not been registered with ACL in the name of the Transferee for the 2014 Summer Season and this is attributable to a breach by the Transferor of its obligations under the Exchange Agreement. 4. REPRESENTATIONS, WARRANTIES AND INDEMNITIES On execution of the Exchange Agreement: the Transferor and Transferee gave a number of representations and warranties including as to their financial solvency, the lack of litigation regarding any Slots which are to be transferred under the Exchange Agreement, the holding of necessary licences, certificates and permits and the taking of necessary corporate action to authorise the obligations created under the Exchange Agreement; and the Transferor gave a number of representations and warranties including as to the allocation of the Summer Slots by ACL to the Transferor for its use during the 2013 Summer Season, its use of the Summer Slots for at least 80 per cent. of the time during the proportion of the Summer Season that had already expired at the time the Exchange Agreement was executed, the lack of any bankruptcy event affecting the Transferee and the accuracy of information provided to the Transferee s lawyers. As at the time of each exchange of Slots provided for under the Exchange Agreement: the Transferor and Transferee will each give a number of representations and warranties, including as to their valid incorporation, that the Slots they are required 18