Flybe Fit to Compete May 2013

Flybe: Delivery and Future DirectionFlybe: Delivery and Future Direction

Flybe

Delivery and Future Direction Making Flybe Fit to Compete

Update 23 May 2013

Flybe: Delivery and Future Direction

Agenda

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Conclusions and Updating on Progress

Flybe UK- Making Flybe Fit to Compete

Context and Introduction

Flybe Outsourcing Solutions Recap


Recap on 23 January 2013 Announcement

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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


What is in Todays Presentation?

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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


Agenda

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Flybe UK Making Flybe Fit to Compete

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(3) Generate sufficient cash to fund transition without recourse to shareholders

(4) Restructure and rebalance Flybesnetwork into a defensible core

(2) Maximise the revenue earning potential of the network

(1) Stop the losses by reducing costs- Update on Phases 1 and 2


Phase 1 Delivery

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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

Year 1 cumulative

savings

Year 2 cumulative

savingsSavings 25m 35mMade up of:- Business

efficiency and cost reductions

- Supplier costs26m9m

Year 1 cumulative

savings

Year 2 cumulative

savingsSavings 30mMade up of:- Headcount

reduction- Business

efficiency and outsourcing

- Supplier costs

16m

8m6m

Phase 2 announcement

outlines significant increased savings targets

Phase 1 Target Announced January 2013 Phase 1 Delivery Update April 2013

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


Phase 1 22% Reduction in Headcount

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Breakdown of delivery of Phase 1 headcount savings

Phase 1 - Overview Phase 1 - Highlights

Flybe UK basedFebruary 2013Headcount 2,730Redundancies (voluntary and compulsory) 290Staff leaving the business through outsourcing deals 300Total staff leaving in Phase 1 590

Percentage of workforce 22%

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


Phase 1 Outsourcing Non-Core Functions

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Breakdown of delivery of Phase 1 headcount savings outsourcing deals

Business Area

Number of Staff

Outsourced to:

Comment

Line Maintenance 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 CompleteOn-boardSales 8 Commissaire

Contract signed, effective from 1 August 2013


Phase 1 Improvement in Crew Efficiencies

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Breakdown of Delivery of Phase 1 Headcount Savings Delivering Production Efficiencies

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 4.74Flybe 4.8 5.0 5.3 5.8 4.7Monarch 6.6 6.3 6.6 6.5 6.54

Ryanair 5.0 4.7 4.3 4.4 4.44

The work done in phase 1 has returned crew sets per aircraft to industry leading levels, removing in the process significant cost disadvantages

: 2009-2011 figures provided from Cranfield University study: Flybe figures: Flybe estimates4: 2012 figures rolled through to 2013


Phase 2 Making Flybe Fit to Compete

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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 onwardsm

Staff Cost Reductions 6 9Procurement 4 10

Revenue Enhancement 2 4

TOTAL 12 23



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Phase 2 staff cost reductions are driven by two major initiatives

2013/14 2014/15 Cumulative

1. Further Headcount Reductions:

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



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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


Making Flybe Fit to Compete

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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



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Maximise Revenue Earning Potential of Network

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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



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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



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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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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



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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


UK Aircraft De-risking Programme

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

-

10

20

30

40

50

60

70

80

90

100

-

10

20

30

40

50

60

70

80

90

100

A

i

r

c

r

a

f

t

Quarter ending

Flybe UK Fleet

March 2010 to March 2016E175

E195

Q400

Fleet profile in Group Board

presentation July 2010

E195s

E175s

Q400s

E175s

De-risking of fleet

* Deferral of 16 E175 aircraft

* 13 Q400 sales



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Network Review

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Short term goals:

1. Exit unsustainable markets2. 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

Restructure and rebalance the network into a defensible core


Exit Unsustainable Markets

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

easyJet have declared LGW is

their priority. They now have 40%+ of

LGW slots

easyJet have declared LGW is

their priority. They now have 40%+ of

LGW slots

LGWs charges to Flybe increased by

100%+ in past 5 years poor route

performance unsustainable

LGWs charges to Flybe increased by

100%+ in past 5 years poor route

performance unsustainable

Gatwick determined to maximise their

revenues from a single runway by increasing prices for our size of

aircraft

Gatwick determined to maximise their

revenues from a single runway by increasing prices for our size of

aircraft

The Regulator will not interfereThe Government have no aviation

policy to protect regional connectivity

London Gatwick


Rebalance Network into Defensible Core

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DefendDefend CompeteCompete DevelopDevelop

Focus on Selected Core Airports

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


Example of Selected Core Airport

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Use volume incentives to maximise growth at the lowest incremental cost

Southampton

Compete for traffic which

currently uses LHR and LGW

Compete for traffic which

currently uses LHR and LGW

Use physical constraints at the

airport (which limit aircraft size) to defend

Use physical constraints at the

airport (which limit aircraft size) to defend

Capitalise on the convenience and simplicity model

customer experience on LCY

Capitalise on the convenience and simplicity model

customer experience on LCY

Capitalise on excellent road and

rail access

Government have no Aviation Policy to protect Regional Co

Build a network of top short haul business and leisure routes from LHR

and LGW

Develop year round leisure flying - maximise

the E195 flying during peak leisure seasons


Route Development from Southampton

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

PaxRoutes flown by Flybe from SOU

Destinations served from London


Rebalance Network into Defensible Core

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Feed the core basesFeed the core bases

Reinvigorate Key Developing Airports

Operate direct hub bypass routes where there is sufficient market demand

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

Operate leisure routes where (i) markets are not served and (ii) Flybe aircraft can operate economically


Network Review

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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

Restructure and rebalance the network into a defensible core


Agenda

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Flybe: Delivery and Future DirectionFlybe: Delivery and Future Direction 32

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

Fixed fee with escalations for cost

Predictable cash flows

Predictable profit streams

No risk on fuel, statutory charges, revenue

82% of Scheduled contract flying in Europe is currently delivered by

loss making in-house subsidiaries of the network carriers

82% in-house network carrier subsidiaries

18% independent

Major Outsourcing Opportunity

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



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The pressure on network carriers and small scale state owned airlines to

outsource will only increase

Primary NeedsLowest cost feed for core

intercontinental operations

Rising labour costs and

decreasing labour

flexibility

Pressure from LCCs on

volume routes

Pressure from Middle East carriers on

network return

Fleet re-equipment

needs

Long term fuel cost pressure



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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 - 26Number of passengers carried - 2.8mNumber of airports served - 50Number of seats flown - 4.4mTurnover - c250m

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


Agenda

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36

Medium Term Operational Profit Targets by Division

Unit profit targetsYear 1 Year 2 Medium Term

13/14 14/15 3 to 5 years

Flybe UK (i) - profit per seat () B'even 0.60 3.00

Flybe Outsourcing Solutions (ii) - profit per contract flying aircraft (000) (iii) 200 300 400

(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



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

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Financing the turnaround of Flybes UK based business


Making Flybe Fit to Compete Commitment to 6 Monthly 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

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


Summary

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

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Flybe

Delivery and Future Direction Making Flybe Fit to Compete

Update 23 May 2013

Documents

Flybe Fit to Compete May 2013