Capital Markets Day - Flybe
87
28 November 2014 Capital Markets Day
Transcript of Capital Markets Day - Flybe
28 November 2014
Capital Markets Day
Agenda
11:00 Welcome by Saad Hammad
11:15 Revenue generation and capacity discipline
12.00 Lunch served
12:20 Breakout sessions
13:05 Breakout sessions
13:50 Conclusion - Saad Hammad and Philip de Klerk
14:10 Depart for airport
Breakout session 1 – White Label
Room 104
Breakout session 2 – Financial discipline
Room 102
NB Presentations will be shown in rotation with split groups
Summary
• Operationally strong UK core business
– Sustainable competitive positioning in attractive niche, leveraging
significant scale
– Right aircraft, right routes
– Fresh team for next phase of development
– Analytics to improve customer delivery
– Cultural transformation under way
• Emerging White Label business with good potential
• Remaining legacy issue being addressed (E195)
• Three year turnaround progressing well but more to do
• Disciplined approach to deliver profitable growth under way
Today’s key focus is on our twin engine growth strategy of branded
expansion (Commercial) and White Label
Our business model
• Branded airline in UK and
white label regional
services in Europe
• Flying thin regional
routes, unservable by
mainstream airlines with
larger aircraft and seat
capacity
• Connecting regional
customers
• Faster than road and rail,
which are the principal
alternatives
• Translates into time-
saving access to the
world from the regions
WHAT WE DO HOW WE DO IT VALUE CREATION
• Purple people
• Safe operations
• Right aircraft on right routesPredominantly turboprops
Route assessment model
• Neighbourhood airports, often
with short runways
• High frequency schedule
establishes local preference
• High punctuality, good service
• Codeshares to maximise
access to outside world
• Competitive costs =
competitive pricing vs.
alternatives
• Best in class White Label
solution delivery
• The four disciplines:
Capital allocation
Revenue/customer
Cost
Organisation
• Margin expansion
• Improved asset turn
• Network development
Improved cash and
shareholder returns
Source: 2013 OAG, ICF SH&E Analysis
0
50
100
150
200
250
0 250 500 750 1000 1250 1500 1750 2000 2250 2500
AF-KLM
BA
LH
Monarch
Jet2
Ryanair
easyJet
Flybe
HopWideroe
BMI Regional
Air NostrumCityjet
Blue
Island
Aurigny Eastern
BA
Cityflyer
Ave. seats
per flight
Sector length (miles)
Flybe does not compete with low cost carriers, flag carriers or mid-haul leisure airlines
UK and select European airlines by seat capacity, sector length and flight density
Bubble size =
10m annual seat capacity
Regional airlines
Low cost carriers
Leisure airlines
Flag carriers
Thinner routes can only be served economically by regional aircraft
Flybe analysis of minimum route thickness by aircraft type for a daily frequency
Note: Analysis assumes: 70% Load Factor on Q400, E175 and E195, 89% on A319 and A320 and 85% on B737-800
Source: Flybe analysis
Aircraft type
Min
imu
m a
nn
ual p
assen
gers
req
uir
ed
per
rou
te f
or
a d
aily f
req
uen
cy
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Q400 E175 E195 A319 A320 B737
Strong UK regional position
No. 1 No. 1 No. 1 No. 1 No. 2 No. 2 No. 1Frequency
share
Flybe passenger sector share
Oct13-Sep14
Source: CAA data Oct 2013 - Sep 2014
Flybe
passengers
Strong presence at
regional airports
1.5m 0.5m 1.4m 1.7m 0.7m 0.9m 1.5m
Leader in UK
regional travelAirline share of passengers in regional
domestic sector Oct13-Sep14
Source: CAA data Oct 2013 - Sep 2014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SOU EXT BHD BHX GLA EDI MAN
92%
67%
20%
59%
10% 9% 7%
0%
10%
20%
30%
40%
50%
60%
Flybe easyJet Loganair Other
48%
5%
31%
16%
SOU Southampton
EXT Exeter
BHD Belfast City
BHX Birmingham
GLA Glasgow
EDI Edinburgh
MAN Manchester
Leveraging significant scale
Regional aircraft (<120 seats) in Europe by airline (2014)
Source: ACAS as at 18 November 2014
Source: ERA 2013, OAG Oct 2014Schedule used as baseline
• Europe has the world’s largest regional
airline market
- Over 75m seats are flown on sectors
under 350 miles
• Flybe’s aircraft and infrastructure are
well suited to these short sectors
- c80% of Flybe’s routes are on sectors
under 350 miles
• The European regional market is
opening up
- Network carriers are restructuring
- LCCs moving up gauge potentially
opens up more regional routes
- Limited investment in road and rail
Attractive niche market
7870
62
23
7 7
0
10
20
30
40
50
60
70
80
90
Euro
pe
Fa
r E
ast
&A
ustr
ala
sia
Nort
h A
me
rica
S&
C A
me
rica
and
Ca
rrib
ean
Afr
ica
Mid
dle
Ea
st
Se
ats
(m
)
Annual seats flown under 350 miles -
2014
Legacy issues are being addressed; one to go
Unprofitable
Finland joint
venture
• Exit from Finland
JV agreed
through sale to
Finnair
• Escalating losses
in scheduled
flying more than
offset profit from
White Label
activity
• We are in the
White Label
business not the
JV or risk
business
Unsustainable
cost base
• £47m delivered in
2013/14
• c30% headcount
reduction (-
c1100FTEs)
• Divisions
removed
• 6 smaller bases
closed
• 30 routes culled
• 25 routes
adjusted
• On track to
deliver
incremental
£24m in 2014/15
Weak balance
sheet
• £150m net raised
• £18.5m of
restricted cash
released in H1
FY15
Sub-optimal fleet
• Strategic services
agreement to
upgrade Q400s
• Terminated 2010
Embraer order for
24 E175 jets &
secured
attractively priced
Q400s with
deliveries starting
summer 2015
• Dispose of 14
surplus E195s
- 5 hand-backs
secured
- Project
Blackbird for
remaining nine
E195s
Cultural transformation under way
Edinburgh
Manchester
Glasgow
Exeter
Belfast Southampton Birmingham
The three year turnaround continues: Highlights
Jan
2013
May
2013
March
2014
Jul-Sept
2014 2015-2016
Phase 1
• Cost reductions
Immediate Actions
• Drive cash generation
• Reduce costs further
• Optimise configuration
• Improve commercialisation
Fleet Agreements
• Bombardier Q400 fleet upgrade
• Embraer/Republic deal
More to do on:
• Fleet
• Growth
• IT
• Operations
• Management upgrading
• Revenue management
• Performance management
Phase 2
• Cost reductions
• 16 E175 deferrals
• Sale of LGW slots
Capital Raise
• £150m net
Finland
• JV exit
Nov
2013
Nov
2014
Philip de Klerk
joins as CFO
Aug 2014
Saad Hammad
joins as CEO
Aug 2013
UK Rebirth
• Brand relaunch
• 11 new routes
• London Cityannounced
UK Growth Platforms
• 2 new bases, 23 new routes
• New codeshares
• New partnerships
SAS White Label
Four disciplines to capture profitable growth
• Relentless
customer
focus
• Route
assessment
model
• On-time
performance
• Selective
White Label
development
• Delivery on
cost projects
• Unit cost
performance
• Optimise
productivity
• Right aircraft
on right routes
• Improved
aircraft
utilisation
• Targeted
growth
Capacity
Discipline
Revenue
Discipline
Cost
Discipline
• Purple safety
• Right people
in right roles
• The Purple
Way
• Make Flybe a
great place to
work
Organisation
Discipline
Right team to drive business
Infusion of new talent
• Chairman, CEO
• RemCo and Safety Chairs, CFO, Co Sec
• Replaced 40 of our top 50 managers
– Hires across commercial, operations, finance and procurement
– Real depth of consumer and travel / aviation experience
new talent across the business
Simon Laffin - Chairman
Liz McMeikan - NED Sir Timo Anderson - NED
Philip de Klerk - CFO
Annelie Carver – Co Sec
Saad Hammad - CEO
28 November 2014
Capital Markets Day - Revenue Generation and Capacity DisciplinePaul Simmons, Ronnie Matheson, Paris Anatolitis, Ben Burge
A rigorous approach to driving return on capital
• Strong network, new route and basing decision making process
Focus on day-to-day trading
• Route performance managers
• Internet traffic and conversion (funnel) analysis
• Pricing “traders” actively managing at a flight level
• Focus on yield management and yield development
Clear call to action
• Core proposition: faster and cheaper than the alternative mode of travel
(road or rail); more convenient than other airlines
• Secondary proposition: regions to the world
• Marketing investment guided by econometrics
Key Metrics
• Revenue per seat (RPS)
• Contribution per block hour (CPBH)
• Utilisation
• Load factor
Commercial approach
We are omni-channel but maximisethroughput via Flybe.com
FlybeGDS
Call centre
Flybe.com
Flybe.com (trade sales)
% of
Revenue
(2014)
Nominal
77%
Managed
trade23%
14%
63%
TMCs OTAs
We measure our funnel conversion on daily basis
We constantly “A/B” test small elements on the website and booking
funnel to optimise conversion
Confirmation from home page (Flybe UK) Example: 19 - 25 November 2013 vs. 2014
Home 61%Flight search
30%
Passenger details
55% Extras 99%
Payment 93% Wait 98%
Confirmation from Home
Page 11.2%
Conversion rate
+1.7ppts vs. last year
Our relative web performance has been improving
Share of website hits: May 2014
Share of website hits: Oct/Nov 2014
We have moved from 7th/8th position to 4th/5th over the last 6 months
Source: Hitwise
Our
ambition
is to
achieve
6%
Customer satisfaction is measured consistently across the business
Overall customer satisfaction
Source: Flybe CSAT survey
1-19 October 2014
Booking
64%
Check in
62%
Bag drop
54%
Departure
59%
In flight
60%
Arrival
62%
Consideration
74%
Advocacy
48%
Flybe people
74%
The Flybe customer tends to be older and more affluent
Flybe customer profile 2014 vs. 2006
Age group
Gender Social grade Reason for travel Sector split Customer type Customers p/booking
We customise schedule and message depending on route type
Type of competition Routes Sector capacity
Directly by air 10% 25%
Over land and water
(road, rail, ferry, mixed
mode)
90% 75%
Highest amount of frequency
per route to provide attractive
schedule
• Emphasise convenience
Lower frequency per route
since surface alternatives are
slowest and cumbersome
• Emphasise speed
and price
We prioritise our media spend on return by channel
Digital
National Press
Regional Press
Radio
TV Sponsorship
TV
OOH (posters)
£24
£4
£4
£10
£8
£3
£4
Digital channels achieve highest ROI but traditional media
is required to drive brand saliency
Source: Starcom Media Econometric Modelling
Highest priority
Sales per £1
investment
New routes
• 11 new routes in S14; 23 in
W15 incl. seven new routes to
London City
• Build London footholds e.g.
London City, Stansted,
Southend bypassing the big
hubs
• Prioritise European
destinations
Secondary cities
Short-runway airports
• Expand connectivity via
codeshares esp. at Manchester
and Birmingham
• Flybe Shuttle launched:
Aberdeen-Leeds-Southampton-
Jersey
• 50% of UK domestic regional
routes, but less than 15% of
UK regions to Europe routes
New territories
• Mainland Europe
• Shortlisted airports to bid for
one new base planned every
year for next 3 years
• UK infill
Return to Aberdeen,
creating up to 100 jobs
Bournemouth to
complement/back-up
Southampton
New UK bases
Targeting growth in three areas
Underlying principles – capital deployment1. Focus new capacity on existing successful routes
2. Look at Join The Dot opportunities connecting existing
successful network points
3. Review new routes and new bases
We plan to build further our ancillary revenue
Airline Ancillary revenue
as % of total
passenger
revenue
Ancillary revenue
per passenger (£)
Flybe 15% £12
Allegiant 32% £27
Jet2 27% £29
Ryanair 22% £11
easyJet 21% £12
Alaska 11% £13
Source: Airline’s most recent annual reports, IdeaWorksCompany “Top Ancillary Revenue” report, ICF SH&E Analysis
Flybe is ranked number 10 globally in terms of ancillary
revenue as percentage of total revenue
Improvement by:
• Yield managing
flight related
ancillaries
• New non-flight
related ancillaries
Summary
• We have a good understanding of our customers
• The vast bulk of our customers come via the website
• We are managing to attract and convert customers better than before:
― Rigorous approach
― Able to identify opportunity
― Fine tuning media spend in line with sales return
• Early days but basics in place
Capital Markets DayNetwork Planning
Ben BurgeDirector of Network Planning
Network Planning
Activities
- Fleet assignment
- Seasonal schedule build
- New route and base assessment
Guiding principles
- Maximise utilisation of aircraft within operational constraints
- Utilise existing gaps, replace poor performers first, then grow with new aircraft
- Offer route network consistent with our brand mission – regional connectivity
Tools
- Route Assessment model (RAM) – for new routes and bases
- Schedule rules – for route frequency and shape
- Route profitability results – to review and replace/augment poor/good performers
- Schedule plan - to ensure maximum utilisation
Flybe is predominantly a UK domestic carrier
Source: OAG Nov 2014 and Flybe analysis based on IATA Winter 2014 schedule
Spain & Portugal
2% of Int’l Seats
France
22% of Int’l Seats
Italy
5% of Int’l Seats
Republic of Ireland
18% of Int’l Seats
Amsterdam
22% of Int’l
Seats
Germany
23% of Int’l Seats
UK
Flybe international vs. domestic
seat capacity (Nov 2014)
International
30%
Domestic
70%
70% of Flybe’s capacity is on domestic UK routes
UK airport coverage 2014-15
UK airports 67
Flybe 57%
BA 18%
easyJet 25%
Ryanair 24%
Our scheduling rules follow a rigid, consistent and logical process
On markets competed with other airlines
• More frequency than other airlines (unless a codeshare partner such as AF)
• Minimum 2-3 times daily and/or 150% extra frequency (whichever greater)
• Aim is to offer much better connectivity/convenience market to market than competition
On uncompeted markets over 100k annual passengers
• Minimum of 2-3 times daily frequency for effective business itinerates
On markets under 100k annual passengers but business purpose
• Minimum of 2 times daily frequency to allow for decent day return journeys
• E.g. NQY-LGW or BHX-ABZ
On markets under 100k but for leisure purpose
• Single daily or part-week as required to fit market size
• Utilise short runway and other “convenient” airports
• Niche leisure markets in preference to mass market routes
Prioritise short runway airports
When we schedule new routes, it is imperative to provide the RIGHT schedule
Route development process is far reaching but robust
• Network development has been far reaching
―430 routes assessed
• 11 S14 routes launched
―Performed to RAM projections
• 18 core routes launched W14/15
• 5 new summer routes have continued into
winter
Stage Details Number Proportion
1st stage Initial look 430
2nd stage Cost and revenue evaluation 254 59%
3rd stage Detailed recommendation 73 17%
Proposal to launch Business case for sign off 35 8%
Launched 29 7%
Seasonal
Core
Stages of route forecast – each route must pass test
1st stage - Initial route idea and check consistent with range and fit
Base reinforcement, competitor change, gap in market or strategic growth
Quick
analysis
2nd stage – Range, cost and revenue analysis
Range + Payload analysis; costing of operation, load factor and yield sensitivity
If has
potential
3rd stage – Full costing and revenue analysis
Full operational check; discussion/deals with airports and suppliers and run “RAM”
Where the
route return
is positive
4th stage – Proposal for launch submitted to senior management
Operational, finance and CFO/CEO sign off using “RAM” and checklists
Route launch
Route
performance
checked
against
original FAM
for integrity
Data sources include – OAG, QL2 fare analysis, CAA, Surveys and
BSP/MIDT
Route
performance
checked
against
original
Route
Assessment
Model (RAM)
for integrity
Route Assessment Model (RAM)
Rolling list of potential new routes that have reached “Stage 2”
Strategic fit, join the dots, airport costs, sector length and schedule fit
Reference and benchmarking of route forecast:
Against routes from same UK airport and to/from same “end” destination
– fare, Load factor and profit
Data loaded into model
Route
performance
checked
against
original FAM
for integrity
Market size
and potential
(catchment
and wealth)
Airports and
capacity
offered from
UK
(valid region)
Competitive
market share
and fares
+ seasonality
Market
“value” and
revenue pool
Revenue steal assumptions
based on airline performance
+ market
Profitability determined from
route operations costs
Launch decision based on RAM output
Year 1 and Year 2/3 (mature) profitability of route: Revenue – variable costs – fixed costs
Seasonality shows how summer and winter performance compares
Frequency x2 daily CA & Airport AAA BBB CY13 CPBH AAA BBB
Seasonality Annual 60' pop. 2,400,000 550,000 Base - YR £1,200 £1,400
Market O&D pax 836,000 Aircraft DH4 GDP/cap £24,000 £32,000 Airport - YR £1,050 £1,340
Market Pax/year OD+CX Block time 1h15 (Apt+APD) £12.00 £19.00
BE U2 BA FR FR U2 Stimulation Rev pool (RP)
Airport Pair AAA-BBB LGW-BBB LHR-BBB STN-BBB LTN-BBB BRS-BBB LGW Actual RP FFC
Period Annual Annual Year Round Year Round Year Round Summer area £59.00
Diluted RP FFC
Seats 113,568 372,600 329,347 275,184 247,666 74,160 25% £55.00
Frequency x2 daily x3 daily x3 daily x2 daily x2 daily daily capacity
A/C Size 78 180 156 189 189 180 15%
Load Factor 75% 80% 75% 86% 89% 82% revenue
Actual - Mature fare £59 £50 £88 £38 £38 £55
Revenue after BE (000s) £4,259 £12,881 £21,736 £8,993 £8,376 £3,345
Revenue change (000s) £5,025 -£2,500 -£500 - £0 £0 £1,259
DRP FFC after exit
CCC-BBB DDD-BBB Base fare Y1 FIFA Y1 Proxy avg FIFA Ticket RPS Y1
Adj. FIFA £79 £73 £50 £61 £66 £38
CPBH (FY13) - FY 1,450 1,316
Act. FIFA - Freq (FY13) x2 daily x3 daily
Seasonality Annual Annual Double daily to attract business users and compete with
Maturity Pre-2007 Pre-2007 London area and streal from competition
Block time 01:15 01:30 Fares determined from revenue steal model and referenced to
LF 78% 80% existing similar routes
# carriers (FY13) 1 2 Year round due competition
Directionality (% apt A) 78% (CCC) 74% (DDD)
FIFA Cost gap/pax CPBH CPBH W CPBH S Tot. Contr. Cannibalisation
£55 -£7.00 £909 £700 £1,100 £1,900,000 None
£63 £1.50 £1,221 £850 £1,350 £2,500,000 None
£65 £3.50 £1,390 £901 £1,512 £2,650,000 None
Year 2 & 3 maturity to come through yield development - 85% of mature fare in year 1
Part charter Costs rundate Nov-14
Fuel Cost 938
Screenshot 18/11/2014
+/- £1 fare CPBH +/- £63 Tot. Contr. +/- £82,000 Start season S15
Year - ROCE target
AAA-BBB
Competition
Proxy Flybe routes
Fare / frequency / seasonality choices driven by
Year 1 - £XXXX
Year 2 - £YYYY
Year 3 - £ZZZZ
Comments
Sensitivity
The model provides a detailed analysis of each new route potential on one slide:
Flybe forecast is evaluated
using “revenue steal” from an
appropriate region of the UK
e.g. LGW/LHR area for SOU
This is dependent on
competitive capacity, demand
and fares charged
Revenue steal from existing
operators and possible
stimulation
Unless a warm route there is
usually a discount of c.85%
fare to factor in maturity
Performance of similar routes
from each end provides
benchmark what equivalent
Flybe routes achieve
There is a target contribution
for a route to hit. This table
shows the fare gap from
reaching this in year 1,2,3.
Summary
• The network is continually optimised – all routes and aircraft must
contribute
• Route network reflects our core strategy – “connecting the
regions”
• Route frequency and structure must offer a better product than
competition
– More frequency, better timings or quicker/cheaper journey
• Each new route must pass a rigorous selection process
– Four key stages and signed off by senior management
– Route Assessment Model is a key decision-making aid
Capital Markets DayRoute Performance
Paris AnatolitisDirector of Route Performance
We monitor performance by route every week
• Route KPIs monitored every week, to determine over- or under-
performance and causality
• Trading meeting every Tuesday to drive actions for e.g. marketing,
revenue management, cost management by Friday
Source: Flybe
Route TY v Plan v LY TY v Plan v LY TY v Plan v Plan v LY v Plan v LY
AAABBB 58.36 -2% 0% 81% -5% 13% 2,434 5% 9% 84% 11% 84%
ZZZYYY 35.58 1% 0% 70% 12% 0% 497 10% 1% 0% 0% 0%
AAACCC 34.94 17% 7% 73% -3% 1% 2,446 26% 17% 33% 0% 24%
GGGFFF 35.73 -1% 0% 73% 2% 12% 916 -2% -12% -23% -11% -24%
YYYAAA 68.56 4% 26% 87% 9% 22% 1,863 10% 4% -20% 0% -36%
ZZZEEE 60.16 2% 0% 80% 7% 0% 519 16% -1% 0% -3% 0%
GGGIII 32.21 4% -15% 74% 14% 4% 1,018 11% 4% 33% 0% 56%
RRRBBB 67.82 11% 28% 89% -4% 6% 2,899 19% 11% 16% 0% -9%
SSSQQQ 47.28 3% 7% 83% 5% 18% 1,241 7% 3% 12% 0% 5%
BBBVVV 31.73 6% 6% 67% -13% -8% 1,583 12% 2% 11% -4% 4%
DDDKKK 47.38 -12% 7% 69% -21% -6% 1,771 -20% -13% -4% -2% -10%
Total 45.41 2% 6% 73% 0% 6% 1,427 7% 0% 11% -5% 1%
Example Month - Not Real Data
Revenue per Seat Load Factor Contribution per Block Hour Revenue Capacity
Route performance is about revenue as well as cost
• Quarterly reviews of airports’ cost performance
• Marketing support from tourist boards
• Confirmed PSO and route connectivity funds
• Long term airport contracts, securing:
- Certainty in costs
- Growth incentives
- Volume rebates
Deploying fleet on optimal routes and sector lengths
Sector length in hours
Reve
nu
e / s
ea
t h
ou
r vs.
co
st
/se
at h
ou
r
Source: Flybe
Rolling 12 months ending Oct 14
Routes by sector length and revenue/variable cost
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%
Constantly looking which routes contribute their fair share
% of network capacity
% o
f n
etw
ork
co
ntr
ibu
tio
n
Source: Flybe
Rolling 12 months ending Oct 14
Routes by proportion of capacity and network contribution
We act on loss making routesR
ou
te C
on
trib
ution &
Pro
fit /
Lo
ss
Source: Flybe
Rolling 12 months ending Oct 14
Contribution
Profit/Loss
• 75% actioned (culled,
frequency reduction, timing
change)
• Balance improving and
includes new routes
Route contribution
• Tracking route KPIs weekly
• Managing revenue as well as costs
• Deploying fleet on optimal routes and sector lengths
• Constantly looking which routes contribute their fair share
• Pushing for route performance across the network
• Taking decisive actions
Summary
Capital Markets DayRevenue Management
Ronnie MathesonDirector of Revenue Management
Revenue management - Past
• Yield driven strategy
– Low load factor flights with high yields mid week
– High load factor flights with low yields on weekends
• Perception that the market would not respond to price
• Pricing strategy unclear
• Revenue management team in need of guidance and upskilling
• Revenue management system capability not used to maximum output e.g.
optimisation not switched on
Revenue management - Progress
Moved to volume based strategy delivering 77.2% load factor (+8.6ppts vly)
Revenue management - Progress
A clear shift in our Load Factor distribution demonstrates that demand can
be stimulated when pricing made more attractive
Flybe’s load factor is highest globally for a regional airline
Source: As reported by Airlines in their most recent annual reports (2013-14), CAA Airline Statistics, ICF SH&E Analysis
Flybe LF is 12 months to September 2014
Load factor by regional airline (2013-14)
Revenue management - Progress
Pricing and inventory strategy reviewed
• Growth early in life of flight > 21 days before departure
• Yield focus inside 21 days before departure
• gjks
Revenue management - Future
Introduce yield development
– Research and development arm of revenue management (price/inventory testing)
External expertise
– Michael Heenan – head of yield development (ex easyJet)
– Barry Oaten – head of trading (ex Monarch)
New RM system: AirRM by Revenue Management Systems
– Used by Ryanair, Air Asia and 40 other airlines worldwide
– RASK Improvement in Year 1: Ryanair 10% AirAsia 5%
– Allow trader team to work efficiently and apply consistent inventory strategy across network
– Superior business analytics – including email of reports and potential to replace existing reporting tools
– Flexibility in the revenue management model (forecast, business rules, manual or combinations)
– User analytics to improve and develop our revenue traders’ performance
– Supports further de-averaging through introduction of fare bands by flight
Revenue management - Future
Volume on Flight X
Price
V1
P1
V2
P2
Consumer Surplus
De-averaging: We aim to price on the demand curve
Offer the right price,
to the right customer,
at the right time
De-average further by:
• Setting fare bands
by flight rather than
by route
Summary
• We have engineered a shift from yield to load strategy with success in
driving both volume and unit revenue
• Flybe’s load factor is now the highest globally for a regional airline
• We are aiming to capture both price and time sensitive customers
• We are introducing yield development (R&D) and new systems to price
on the demand curve and optimise revenue capture
28 November 2014
Capital Markets Day – Cost and Capital Discipline
Philip de Klerk
Long term objectives
Strength
Profitable
growth
Strong balance sheet
Reduce fleet ownership costs
Improve productivity
Enhance service to customers
Branded scheduled
commercial expansion
White Label flying expansion
3 – 5 years
• Aim to have restricted cash only for aircraft
deposits
• Sufficient short term cash and cash equivalents
• Target to develop a new base each year, along
with development of new routes at existing bases
• Development of strategic R&D, incl. Flybe Shuttle
• Ambition is one new contract every year
• Target to increase aircraft ownership as funds
and market conditions allow
• Implementation of new ERP and other systems
• Evaluate outsourcing opportunities
• On time performance
• End to end service approach
• Partnerships that deliver value
Capital Markets DayCash and Balance Sheet
Restricted cash
• Restricted cash significantly reduced due to strengthening of the
balance sheet.
• We have targeted a further reduction in restricted cash of £10m by the
end of this financial year.
• Security deposits might vary depending on new aircraft deals
Mar-14 Oct-14 Mar-15*
Restricted cash £m £m £m
Financial guarantees 31.3 15.0 5.0
Security deposits for aircraft 7.6 7.1 7.1
Total 38.9 22.1 12.1
(*) : estimated restricted cash as per 12th November
Strong balance sheet since capital raise
• The reduction in net assets is largely due to the write down of the joint venture (£12m)
and the EU261 flight delay provision (£6m).
September
2014
March
2014change
£m £m £m
Aircraft 169.9 147.0 22.9
Other property, plant and equipment 23.1 23.6 (0.5)
Interest in joint venture - 12.4 (12.4)
Net funds 72.0 116.9 (44.9)
Derivative financial instruments (2.0) (7.6) 5.6
Other working capital - net (89.5) (105.4) 15.9
Deferred tax 4.9 4.5 0.4
Other non-current assets and liabilities (5.3) 2.7 (8.0)
Net assets and shareholders' funds 173.1 194.1 (21.0)
Total assets 517.2 548.0 (30.8)
Total liabilities (344.1) (353.9) 9.8
Net assets and shareholders' funds 173.1 194.1 (21.0)
Capital Markets DayFleet and Ownership Cost
Propeller aircraft are dominant for short haul regionals
Silver Airways
Cape Air
Flybe
bmi regional
BA Cityflyer
Aurigny
Porter
Air Canada Jazz
Horizon Air
Blue Islands
Eastern
Wideroe
Cityjet
Rex
HOP!
Air Nostrum
0
20
40
60
80
100
120
140
0 50 100 150 200 250 300 350 400 450 500
Ave
sea
ts p
er
sec
tor
Ave sector length (miles)
Jet
Prop
Mix
Aircraft size, sector length and seat capacity for Flybe and
comparator airlines
Source: 2013, OAG, ICF SH&E Analysis
Jets provide range but higher unit costs if they do not fill seats
Cost Versus Range For Q400 vs. Competitor Aircraft
(Cost Per Seat Relative To Q400 at 750km)
= 78 seat aircraft
60
80
100
120
140
160
180
200
220
0 1,000 2,000 3,000 4,000 5,000 6,000
Maximum range (km)
Q400
A319
E175
Note: Analysis assumes: 750km stage length
Source: Flybe analysis
E195
A320
B737-800
Unit cost Index
vs. Q400
with only
78 seats sold
Q400 benefits
• Speed
• Power for short runways
• Economics
• Carbon footprint
• Lower noise
Fleet: legacy and future
• Q400 (78 seats): 45 in our fleet (we lease 38, own 7)
– Bombardier funded Q400 modification programme, transforming our Q400 fleet into one of the most operationally efficient regional fleets in the world
– 24 Q400 subleased from Republic; phased deliveries through to December 2017
– Potential ‘new metal’
• E175 (88 seats): 11 in our fleet (we lease 4, own 7)
– Removed $750m of future liabilities with Embraer. The 2010 order for 20 new E175 cancelled and transferred to Republic in exchange for the 24 Q400
– Retained four E175 options
• E195 (118 seats): 14 in our fleet (all leased)
– We announced in 2013 that these E195 jets are not suitable for our strategy
– We are in the process of handing back five early to lessors: three have left in November and two will leave before the end of the fiscal year.
– Project Blackbird: exit solution for remaining nine E195s
• Active dialogue continues with a number of airlines concerning individual aircraft and package transactions
• Exit timing and costs will be dependent on the terms of each specific transaction
Flybe UK scheduled flying - Fleet
• Options to increase the fleet:– Extension of leases (8 handbacks 2017/18)– Possible use of Q400 currently deployed for contract flying (2 Brussels airlines)– New aircraft
• Fleet configuration at year end – committed fleet
Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
E175 11 11 11 11 11
E195 8 3 - - -
Q400 38 43 43 43 35
Q400 - Republic - - 8 16 24
Total at year end 57 57 62 70 70
Committed fleet
• Opportunities to increase seat capacity:– Use of some E195s in Summer 15– Aircraft utilisation– Extension of leases– New aircraft
Average seat capacity
Flybe UK Scheduled Flying – Seat capacity
Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
E175 (88) 2.2 2.1 2.2 2.2 2.2
E195 (118) 2.2 0.8 - - -
Q400 (78) 6.8 7.3 7.7 7.7 6.9
Q400 - Republic (74) - - 0.7 2.0 3.4
Total at year end 11.1 10.2 10.5 11.9 12.5
% growth (8.2)% 3.2 % 12.8 % 5.4 %
Committed seats, million
Fleet ownership of Flybe UK
Current ownership mix: 20% owned (excluding E195 - 25% owned)
Cost differential is at least £240k per year in favour of owned aircraft, though owned aircraft have a residual value risk
Target to increase aircraft ownership as funds and market conditions allow
Split of H1 aircraft rental charges by aircraft type:
FY15 H1 £m
Q400 (23.1)
E195 (13.1)
E175 (3.7)
Other (0.9)
Aircraft rental (40.8)
Capital Markets DayCost Saving and Cost Per Seat
Strong core UK business: cost savings on track
• Cost savings of £47m delivered in FY14
• On track with £24m expected in FY15 as previously announced
Good progress on headcount, procurement and other cost saving initiatives
30 30
1015
7
26
0
10
20
30
40
50
60
70
80
2012/13 2013/14 2014/15
£m
Immediate actions
Phase 2 benef its
Phase 1 benef its
£3m
£47m
£71m
Cost sensitivity analysis
Sensitivity in operating cost to certain variables :
March 2014
Minimum Maximum
2.5% movement in seats (capacity) 1.5 % 2.5 %
2.5ppt movement in load factor - 1.0 %
2.5% movement in effective fuel price - 1.0 %
2.5% movement in fixed costs - 0.5 %
Note:
- Based on March 2014 operating cost of £599.9m
- Movement in seats assumes same load factor (so passengers also increase)
Increase in cost
Operational leverage highest with load factor increase
Flybe UK costs per seat H1
(52.56) 1.02
(51.53) 0.09 0.36
0.20
(0.61)
(1.19)
(1.12)
(1.16) (54.96)
(50)
(51)
(52)
(53)
(54)
(55)
(56)
H1 2013/14Operating cost
per seat
Foreignexchange
H1 2013/14Operating cost
per seat atconstantcurrency
Fuel Net airport, enroute charges
and groundoperations
Aircraftownership and
maintenancecosts
Staff costs Marketing anddistribution
costs
Other operatingexpenses
Flight delayprovision
H1 2014/15Operating cost
per seat
Op
era
tin
g c
os
t pe
r s
eat e
xc.r
estr
uctu
rin
g &
su
rplu
s c
os
ts (£)
Staff
bonus
provision
Extra
marketing
Transactional
forex
Top-grading
Fixed cost
platform
EU261
Efficiency opportunities excluding inflation
• We aim to:
– achieve a reduction in fuel costs as proportion of jets within the fleet
decreases (assumes price remains constant)
– deliver a reduction in aircraft ownership cost as part of our ambition to
increase aircraft ownership, as funds and market conditions allow
– contain fixed cost (including overhead, marketing)
• We aim to reduce cost per seat over time
Flybe UK impact of fuel and hedging positions
H1 2014/15 H1 2013/14 Change
Jet fuel, $ / metric tonne
Market rate $959 $964 $(5)
Effective price $959 $975 $(17)
Current hedge portfolio:
- H2 2014/15 – 90% hedged at $950 per tonne
- H1 2015/16 – 80% hedged at $937 per tonne
- H2 2015/16 – 73% hedged at $900 per tonne
GBP:USD rate
Market rate $1.62 $1.62 $0.00
Effective price $1.59 $1.53 $0.06
Current hedge portfolio:
- H2 2014/15 – 77% hedged at $1.64
- H1 2015/16 – 68% hedged at $1.66
- H2 2015/16 – 43% hedged at $1.60
Actual cost of fuel, £ / metric tonne 604 638 (34)
Note: Euro - small net exposure of <€20m, no formal hedging
Summary
• Enhance resilience:
– Strong balance sheet
– Expected further reduction in restricted cash
• Fleet and capacity are managed in a disciplined way, while we have future opportunity to flex
• We apply cost discipline and aim to reduce cost per seat over time:
– Fixed cost base means operational leverage: incremental load factor assists margin development
– Savings programme on track
– We will aim to achieve further cost reductions, esp. fuel consumption and aircraft ownership cost
– We hedge to ensure cost certainty
28 November 2014
Capital Markets Day – Revenue Generation – White Label Jochen Schnadt
What is White Label?
Definition:
“A White Label product by one company (the producer) that other companies (the marketers) rebrand
under their own brand or an alternative brand of choice so as to make it appear as their own product.”
The Flybe definition of White Label (‘XWL by Flybe’):
The provision of tailor-made and strategic capacity solutions for other airlines
• Applying Flybe’s economies of scale, expertise
• With optimised set-up for cost-efficient production on smaller-gauge aircraft
• Maximising company synergies for the overall benefit of the Flybe Group
• Effecting sustainable growth for the business at greatly reduced commercial and financial risk
Key ingredients for success in White Label
• Clear-cut contractual relationship
• Separation of powers
• Effective firewalling
• Optimised structure for capacity productions
• Bespoke proposition
Flybe’s compelling USP
Mix of pedigree, experience, structure and scale:
• XWL concept:
– Clear-cut and transparent contractual set-up including incentives to align both parties’ interests
• Scale and experience:
– Flybe can offer clear economy-of-scale benefits
– Infrastructure in place enabling rapid growth
– Extensive experience with capacity production
• Independence:
– Independent ownership structure and not aligned with any major alliance
– Independence creates effective “firewalls”
Generating traction with prospective customers:
Flybe’s White Label strategy
Market Intelligence:
• Network understanding
Research:
• Customer SWOT
• ‘Needs and wants’
Contextual proposition
The White Label opportunity for Flybe
• General market observations and trends
• Increasing convergence of business models creates opportunities with network and point-2-point carriers
• Network carriers under pressure by LCCs and strong non-EU carriers on long-haul
• Timing is right for XWL
• The ‘Converted’ and the ‘Yet-to-convert’
+ Alternative capacity production models being widely considered
+ External partners as catalysts to achieve step-change in production costs
+ Increased focus on core business activities driving business simplification
However:
– Ongoing reluctance or inability to look “outside” for appropriate solutions
– Multitude of challenges dictate priorities - production optimisation may not be highest priority
– External factors frequently constraining (eg local government intervention)
White Label is incremental, but magnitude yet to be established
The White Label opportunity for Flybe
A sizeable potential opportunity in Europe
Number of Aircraft
Res
ou
rce
in
ten
sit
y
Discussion maturity
White Label opportunity matrix
Contract y
Preferred Bidder / LOI y y y
Short-list y y y y
RFP y y y y y y
Evaluation y y y y y y y y y y
Introduction y y y y y y y y y y y
Contact y y y y y y y y y y y y y
Customer IB EI SK EK EY FI LH LX OS SN TCX UX TP OK TUI GIB
Closed y y y y
The White Label opportunity for Flybe
Solid business development pipeline
Closed
• Early indications encouraging:
– Good initial responses well received, but long lead times
• Timing is critical:
– White Label increasingly relevant with most European airlines; first mover advantage
for Flybe
• Focused approach:
– Rigorous evaluation process and delivery
• Progress to date:
– First agreement with major carrier signed (SAS); ongoing discussions with several
other carriers
• Summary outlook
– White Label is incremental, but magnitude yet to be established
– External factors frequently constraining (eg local government intervention)
White Label outlook
Capital Markets Day
Biographies
Biographies
Paul Simmons
Chief Commercial Officer
Paul joined Flybe in October 2013 having spent seven years at easyJet where he was
responsible for the commercial side of their UK business as Director, UK Market. During
his five year tenure in this specific role the UK region grew substantially and improved in
profitability (on a CPBH basis) from being the lowest region within the company to the
second highest. Prior to easyJet Paul held senior commercial roles with InterContinental
Hotels (Global VP, Intercontinental Brand) and Oberoi Hotels (EVP, Commercial). His
earlier career was in FMCG with companies including Procter & Gamble, Helene
Curtis/Unilever and Kelloggs.
Paris Anatolitis
Director of Route Performance
Paris joined Flybe in September 2014. He joined from Sportingbet, an online
gaming operator, where he was Country Manager – Greece.
Prior, he spent eight years with easyJet in different roles in UK, looking after
routes' performance, analysis and revenue forecasting.
Biographies
Ronnie Matheson
Director of Revenue Management
Ronnie joined Flybe in November 2013. He has more than 11 years of experience in
revenue management in the aviation and hospitality sectors, including the development of
bespoke processes and strategies. Ronnie worked for easyJet for seven years as part of
the yield management team, increasing revenue contribution per flight. He has also
worked for GB Airways and Whitbread/Premier Inn.
Ben Burge
Director of Network Planning
Ben has been the Director of network planning at Flybe since early 2014. Previously, Ben
held senior positions in network planning in bmi and British Airways for more than 10 years
as well as working in airport consultancy. With his experience of the UK and European
aviation marketplace, aircraft scheduling, route forecasting and airport-airline relationship
management, Ben will be driving forward the development of the network at Flybe.
Biographies
Jochen Schnadt
Director – White Label programme
A senior airline / aviation executive with over 20 years experience in commercial aviation.
Jochen has worked in commercial, strategic, planning and operational leadership roles in
the aviation industry, including Belfast City Airport and previously Monarch Airlines, Aer
Lingus, Qatar Airways, BA CityFlyer and SkyWest. He has been involved in or created
various leading-edge projects, developments and ventures within the industry during his
career, especially in the capacity solution space, leaving him well placed to lead the
development of the Flybe white label programme.
Capital Markets Day
Glossary
Glossary
ACMI Aircraft, Crew, Maintenance and Insurance
Air Passenger Duty (APD) An excise duty which is charged on the carriage of passengers flying from a United
Kingdom or Isle of Man airport.
ATM Air Traffic Movement
Available Seat Kilometres (ASK) Seats flown multiplied by the number of kilometres flown.
Block hours Hours of service for aircraft, measured from the time that the aircraft leaves the terminal
at the departure airport to the time that it arrives at the terminal at the destination airport.
Billing and Settlement Plan (BSP) A system to facilitate and simplify the selling, reporting and remitting procedures of IATA
Accredited Passenger Sales Agents.
CAA Civil Aviation Authority
CASK Cost per available seat kilometre
Codeshare An aviation business arrangement where two or more airlines share the same flight.
Contribution per Block Hour (CPBH) Expresses total contribution in terms of aircraft operating time, using the industry
standard metric, namely "block hour".
Entry into Service (EIS) Point when aircraft passes test phase and joins the fleet.
Global Distribution System (GDS) A network enabling automated transactions between third parties and booking agents.
IATA season The scheduling calendar based on two seasons, Summer and Winter.
LCC Low cost carrier
Load factor (LF) Number of passengers as a percentage of number of seats flown. The load factor is not
weighted for the effect of varying sector lengths.
MRO Flybe’s Maintenance, Repair and Overhaul operation
OAG (formerly Official Airline Guide) United Kingdom-based business for aviation information and analytical services.
OTA Online travel agents
Public Service Obligation (PSO) Arrangement by which an authority offers an auction for subsidies on a route
Glossary
RASK Revenue per available seat kilometre
Route Assessment Model (RAM) The process used for assessing existing and potential routes
Route thickness An indication of the passenger demand on a particular route.
Revenue Passenger Kilometres (RPK) Number of passengers multiplied by the number of kilometres those passengers were
flown.
Revenue per seat (RPS) Revenue divided by seats flown.
Sector block The scheduled length of a flight sector from when the aircraft starts moving on the
ground to when it stops on the stand
Sector length The length of the journey flown by the aircraft.
Service Level Agreement (SLA) Part of a service contract where a service is formally defined.
TMC Travel Management Company
XWL Flybe's White Label business
