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General Category => Investment Ideas => Topic started by: Laxputs on August 16, 2016, 12:08:18 PM

Title: FLYBE.L - Flybe
Post by: Laxputs on August 16, 2016, 12:08:18 PM
Flybe. LON:FLYB Regional UK/Europe airline.

Detailed write up here: http://quinzedix.blogspot.ca/2015/11/normal-0-false-false-false-en-us-x-none.html

Anyone a shareholder? Has anyone tried to breakdown the unit costs ex D&A, Fuel, Rent for the fleet excluding the E195 jets?  Pretty murky given the culling/adding of routes. And the parking/flying of some of the E195s.  And the restructuring/one-time costs, etc. But doing so is likely where the obscured value lies.

140m EBITDAR is straight forward. That's 120m plus the 20m drag from the E195s that are on their way out (2019). That in turn would lead to a 2.5x share price appreciation if the Brexit hysteria calms.

Thoughts?
Title: Re: FLYBE.L - Flybe
Post by: sampr01 on August 16, 2016, 02:27:32 PM
Hi Laxputs,

Did you check GWINVESTORS.COM. He has a right up and usually have updates in his letters too.

http://www.gwinvestors.com/research/public/

http://www.gwinvestors.com/blog/

Title: Re: FLYBE.L - Flybe
Post by: muscleman on August 16, 2016, 03:20:07 PM
Flybe. LON:FLYB Regional UK/Europe airline.

Detailed write up here: http://quinzedix.blogspot.ca/2015/11/normal-0-false-false-false-en-us-x-none.html

Anyone a shareholder? Has anyone tried to breakdown the unit costs ex D&A, Fuel, Rent for the fleet excluding the E195 jets?  Pretty murky given the culling/adding of routes. And the parking/flying of some of the E195s.  And the restructuring/one-time costs, etc. But doing so is likely where the obscured value lies.

140m EBITDAR is straight forward. That's 120m plus the 20m drag from the E195s that are on their way out (2019). That in turn would lead to a 2.5x share price appreciation if the Brexit hysteria calms.

Thoughts?

I never look at EBITDA for capex intensive industry. Not a good measure of underlying economics.

Title: Re: FLYBE.L - Flybe
Post by: KJP on August 16, 2016, 03:22:36 PM
Flybe. LON:FLYB Regional UK/Europe airline.

Detailed write up here: http://quinzedix.blogspot.ca/2015/11/normal-0-false-false-false-en-us-x-none.html

Anyone a shareholder? Has anyone tried to breakdown the unit costs ex D&A, Fuel, Rent for the fleet excluding the E195 jets?  Pretty murky given the culling/adding of routes. And the parking/flying of some of the E195s.  And the restructuring/one-time costs, etc. But doing so is likely where the obscured value lies.

140m EBITDAR is straight forward. That's 120m plus the 20m drag from the E195s that are on their way out (2019). That in turn would lead to a 2.5x share price appreciation if the Brexit hysteria calms.

Thoughts?

I'm a shareholder and have engaged Red in the comments section of that post.  Unfortunately, I don't have anything to add to the analysis/models of his that he has linked to in the comments and the discussion contained there. 

I'm skeptical of Greenwood's projections, because they appear to depend on profitable European (as opposed to intra-UK) growth.  What is the evidence that Flybe can effectively compete on those types of routes, versus the intra-UK routes in which they're the only (airborne at least) game in town?
Title: Re: FLYBE.L - Flybe
Post by: KJP on August 16, 2016, 03:25:36 PM

I never look at EBITDA for capex intensive industry. Not a good measure of underlying economics.

To be fair, the analysis in the blog post and accompanying comments focuses on how much cash the company will generate.  EBITDAR is used, I think, for relative valuation purposes.
Title: Re: FLYBE.L - Flybe
Post by: Laxputs on August 16, 2016, 05:18:15 PM

I never look at EBITDA for capex intensive industry. Not a good measure of underlying economics.

To be fair, the analysis in the blog post and accompanying comments focuses on how much cash the company will generate.  EBITDAR is used, I think, for relative valuation purposes.

Right, I too as a shareholder am hoping they focus on their core, their short-hop intra-UK flights and not the intra-Europe connections. But Saad has stated he is targeting a 40%-50% mix so we will likely see funds spent trying to establish routes outside the U.K. Their rationale is that they have a more optimal fleet, the Q400's than the fleet of the larger competitors. I have no opinion either way if he is right. I'm just sure it will cost money to find out.

I too prefer FCF over EBITDAR. The market will likely value Flybe on a 4.5x-6.5x multiple of EBITDAR so it is worth looking at that too. But, yeah, in the end, it's all about cash made and more importantly cash returned to shareholders.

The way to analyze Flybe is to breakdown the unit costs of the Q400/other operating costs, and then the yield and LF of their core routes.  Then giving a range of LFs and the addition/run rate of the new routes. I'm just finding that very tricky to do given how much noise there is with the changing fleet and restructuring (and as usual marvel at Red Corner's work). 
Title: Re: FLYBE.L - Flybe
Post by: ukvalueinvestment on August 17, 2016, 12:24:43 AM
I am sceptical about this idea that a fleet of Q-400s is some sort of competitive advantage if it has better unit economics.  If so, surely another airline can buy a bunch in the medium term and there goes that advantage.  That said, the stock is cheap on metrics, seems to have a good incentived owner, it's a beaten up uk stock post brexit and there's oil hedges rolling off. 
Title: Re: FLYBE.L - Flybe
Post by: KJP on August 17, 2016, 06:25:36 AM
I am sceptical about this idea that a fleet of Q-400s is some sort of competitive advantage if it has better unit economics.  If so, surely another airline can buy a bunch in the medium term and there goes that advantage.  That said, the stock is cheap on metrics, seems to have a good incentived owner, it's a beaten up uk stock post brexit and there's oil hedges rolling off.

I don't think they need the Q-400s to be a "competitive advantage" on the domestic routes.  Rather, the "competitive advantage" is that most of the domestic routes don't have the volume to support additional flights, so the company faces no competition from other airlines.  Instead, it competes with ground transportation.  The Q-400s are important because they're much lower cost to fly, so they can actually make a profit on these routes.

The European routes are a different matter.
Title: Re: FLYBE.L - Flybe
Post by: ebdem on June 08, 2017, 09:03:11 AM
Hey there, I like to bring the topic back on the table. Share price dropped to all time lows: http://www.flybe.com/corporate/investors/share-price-charting.html
Terror in Britian was one cause - i think.
The numbers from 31.03.2016 till 31.03.2017 are out: http://otp.investis.com/clients/uk/flybe1/rns/regulatory-story.aspx?cid=59&newsid=880817.

They changed their strategy to a more customer focussed business:
Quote
Flybe reached its peak fleet size of 85 in May 2017. Reduction in the fleet size will start by returning six end-of-lease Q400s in 2017/18. This will enable Flybe to become a more customer centric business and for the first time concentrate the business on profitable routes. Becoming a truly demand and customer-focused business is the key plank of our strategy.

Implementing a clear strategy is about returning to the core of what really works for the airline. We will make Flybe a sustainable business that operates the best routes and at the best times to suit the needs of our customers. We will stay true to our mission to connect people and businesses with safe, reliable and affordable travel./quote]

Any thoughts?
Title: Re: FLYBE.L - Flybe
Post by: Fly on June 08, 2017, 05:11:01 PM

Sounds like antiquated IT systems are bogging down the company (among other issues):

https://www.thetimes.co.uk/article/new-plan-for-flybe-as-airline-posts-annual-loss-jf9whq0s3

I'm not so sure I would want to jump in until a new IT system was implemented. Lots of old IT systems can't handle new ancillary charges airlines push to customers. And with such low load factors it sounds like poor fare management.

Additionally, "shrink to profitability" rarely works in the airlines since broad reductions result in laying off the most junior (cheapest) employees leaving the more expensive employees which drives up unit costs, which causes more reductions, etc etc. Additionally, their old E195s will need to be replaced in the next 3-5yrs (either new E2s or CSeries, big $$$).

Today airlines are generally doing really really well, so for Flybe to be struggling so much is not a good sign. Maybe take a look at RYAAY or ESYJY for better performing Euro LCCs.
Title: Re: FLYBE.L - Flybe
Post by: KJP on June 08, 2017, 06:02:16 PM

Additionally, "shrink to profitability" rarely works in the airlines since broad reductions result in laying off the most junior (cheapest) employees leaving the more expensive employees which drives up unit costs, which causes more reductions, etc etc. Additionally, their old E195s will need to be replaced in the next 3-5yrs (either new E2s or CSeries, big $$$).

Today airlines are generally doing really really well, so for Flybe to be struggling so much is not a good sign. Maybe take a look at RYAAY or ESYJY for better performing Euro LCCs.

Might be worth taking another look at this.  Do the E195s need to be replaced, or are they a major drag that Flybe has been trying to get rid of?  Are the routes that will be eliminated as a result of the planned shrinkage of the fleet currently profitable or causing significant losses?
Title: Re: FLYBE.L - Flybe
Post by: ebdem on June 09, 2017, 03:37:28 AM
This webcast is quite helpful to understand the moves of the company: http://view-w.tv/909-1220-17635/en
The fullyears webcast is also quite interesting: http://streamstudio.world-television.com/CCUIv3/frameset.aspx?ticket=909-1220-18369&target=en-default-&status=preview&browser=ns-0-1-0-0-0&stream=html5-video-500

As I understood the story, FlyBe was mostly bound to manage a overcapacity of planes and bring them to fly. Now they have the power to manage the fleet and the lines activly. So there is now the chance to resort the planes and routes - the potential is showen in the attached graphic.

FlyBe owns 27 aircraft. I think at least 20 are Q400, which were recently bought. So the E195 can be just given back after the lease ends, or?

The IT thing is new and a bit bad. But the price of Flybe is also quite attractive to take it in consideration.
Title: Re: FLYBE.L - Flybe
Post by: KJP on June 09, 2017, 06:24:20 AM
The various presentations on Flybe's website and its annual reports provide timelines for the upcoming surrender at end of lease for the E195s and some of the Q400s.  This past year should turn out to be the turning point in terms of fleet size.  Of course, Brexit is also looming, and I don't think anyone can really predict what that's going to do to Flybe, either in terms of demand on its wholly domestic routes or its ability to continue flying its UK-Europe routes. 
Title: Re: FLYBE.L - Flybe
Post by: LightWhale on June 16, 2017, 11:53:10 AM

Additionally, "shrink to profitability" rarely works in the airlines since broad reductions result in laying off the most junior (cheapest) employees leaving the more expensive employees which drives up unit costs, which causes more reductions, etc etc. Additionally, their old E195s will need to be replaced in the next 3-5yrs (either new E2s or CSeries, big $$$).

Today airlines are generally doing really really well, so for Flybe to be struggling so much is not a good sign. Maybe take a look at RYAAY or ESYJY for better performing Euro LCCs.

Might be worth taking another look at this.  Do the E195s need to be replaced, or are they a major drag that Flybe has been trying to get rid of?  Are the routes that will be eliminated as a result of the planned shrinkage of the fleet currently profitable or causing significant losses?

From what I gather, this shrink-to-profit is different:

1. The E195 planes will not be replaced. They are the over-expansion legacy problem that caused the company to struggle. From here the fleet should gradually shrink in seat capacity. BTW, the E195 lose money when grounded and when utilised. So their rouets result in a net loss, and utilised only to partly cover sunk costs. After their retirement, revenues should fall but load factor and margins should improve.

2. The company is actually understaffed. It is retiring big planes in favour of smaller ones, so crew size should remain constant.

Even the unexpected IT cost should lead to profit making in the medium term (2-4Y), assuming it's successful and costs remain in check. 

What seems puzzling is the underfunded pension liabilities. The H1 presentation shows the deficit to grow from (15.3)m to (47)m, but then it shrinks back to (20)m in the full year presentation. Anyone knows which is the right number?
 
Title: Re: FLYBE.L - Flybe
Post by: KJP on June 16, 2017, 12:29:25 PM

What seems puzzling is the underfunded pension liabilities. The H1 presentation shows the deficit to grow from (15.3)m to (47)m, but then it shrinks back to (20)m in the full year presentation. Anyone knows which is the right number?

The calculations were both "right" as of the time they were made.  Most of the variance between the reporting periods has been caused by changes to the discount rate used to value the estimated future defined benefit obligations.  The discount rate, in turn, is driven by the yields on long-term UK government securities.  You can see the current assumptions in footnote 32 of the annual report.
Title: Re: FLYBE.L - Flybe
Post by: ebdem on June 17, 2017, 03:04:41 AM
1. The E195 planes will not be replaced. They are the over-expansion legacy problem that caused the company to struggle. From here the fleet should gradually shrink in seat capacity. BTW, the E195 lose money when grounded and when utilised. So their rouets result in a net loss, and utilised only to partly cover sunk costs. After their retirement, revenues should fall but load factor and margins should improve.

That's a good aspect. They show in the graphic attached in my previous post. There is space to close certain flights to achieve a higher profitability. Remember: They also had some much planes, that management was busy with just making planes fly. Now they can get back to a much more structured approach for managing the fleet and growth.
They can also focus on the "sweetspot" or niche they are trying to serve. With their focus on shorter trips with props, they have the ability to work in a nice, which is different to the market of EasyJet, Rynair and other low cost carriers.
By the way, this week there was some small insider buying.
Title: Re: FLYBE.L - Flybe
Post by: LightWhale on June 18, 2017, 08:20:15 AM
Thanks for the clarification on the pension deficit. After going through some annuals and presentations to get a wider perspective, that's what comes out of it:

Commoditised industry economics – check
Regulatory uncertainty regarding post Brexit Visa and landing rights  - check
Management with high salary, little skin in the game, high turnover – check
Failed promises and Loss making culture – check
High sensitivity to external factors (exchange rate, fuel price) due to slim margins - check
Growing leverage, diminishing cash - check

It's a tempting investment  ;)   
But seriously, with the right tailwinds, I can see how the stock might skyrocket. It does however involve a lot of ‘if’s and risk. For example, winding down the fleet expenses requires buying some of it from lessors, which results in greater debt.

Also, the idea that the company faces little competition in its core routes might be too stretched: considering its fixed costs, if Flybe had flown only those routes, it would have lost money. There’s just not enough of them to make profit. For that it will always have to compete in the busier hubs, like London, so we’re back to the problem of a commoditised industry, albeit where Flybe is the least capable player. 

BTW, the “one-off” IT expense (of 5-10% market cap) has been quite recurring, whereas the systems have remained ineffective. For what it’s worth, their Facebook page is well run and they respond quickly. Has anyone tried their app?

Am I completely off the mark? 


Title: Re: FLYBE.L - Flybe
Post by: KJP on June 18, 2017, 10:57:27 AM

Also, the idea that the company faces little competition in its core routes might be too stretched: considering its fixed costs, if Flybe had flown only those routes, it would have lost money. There’s just not enough of them to make profit. For that it will always have to compete in the busier hubs, like London, so we’re back to the problem of a commoditised industry, albeit where Flybe is the least capable player. 


Do you mind sharing your calculations?  How did you identify "core routes" and determine their profitability (or lack thereof)?
Title: Re: FLYBE.L - Flybe
Post by: ebdem on June 19, 2017, 03:18:04 AM
Management with high salary, little skin in the game, high turnover – check
Failed promises and Loss making culture – check
Growing leverage, diminishing cash - check

Thank you for your insights on FlyBe :).
I see your points and would like add something to these three.
- Management turnover is high, but we there is also some quality change through the new management and this has also have to been taken in account. Saad Hammad did change a lot in the company - in my eyes to the good. He was more growth oriented then the new plans - so he finally had to go.
- The development since the IPO was bad and management made mistakes and was forced to use a lot of energy to handle this mistakes. But beginning this year they are having the ability to more activly manage their structures. Therefore I think we have a somehow different game.
- Cash was used to buy planes, which generates a good return on investment. In my eyes the balance sheet is still quite stable and these investments make sense.

Also, the idea that the company faces little competition in its core routes might be too stretched: considering its fixed costs, if Flybe had flown only those routes, it would have lost money. There’s just not enough of them to make profit. For that it will always have to compete in the busier hubs, like London, so we’re back to the problem of a commoditised industry, albeit where Flybe is the least capable player.

Here I am interested in your data. Can you maybe share it?
Title: Re: FLYBE.L - Flybe
Post by: LightWhale on June 20, 2017, 05:40:14 AM

Saad Hammad did change a lot in the company - in my eyes to the good.
I think we have a somehow different game.
the balance sheet is still quite stable and these investments make sense.

Agree on all. B/S stability is also testified by the low rates lenders charge, and that no covenants are attached. To clarify for my bearish approach, I initiated a position last week and am trying to determine its final size. The only way I know to do that is by undermining my own inclination to buy more. may I ask what position size you guys hold?

Here I am interested in your data. Can you maybe share it?

Sure, but even before the numbers, the fact that management makes future plans to stick to competitive routes (e.g., the new slots in Heathrow), despite intention to reduce capacity, implies that these are needed.


How did you identify "core routes" and determine their profitability (or lack thereof)?

Flybe doesn't break down the profitability of network components, so my model is very simplistic. For what it's worth:

FY15 seats of 10.3 (before forced expansion)
Target LF (75%)
Yield and cost/seat of FY17
Interest 7m
That gives me 8.7m pretax.

But if I reduce from that 21% seats, representing the non-exclusive routes, I get -16m pretax, and need LF of 76.6% to break even.

Title: Re: FLYBE.L - Flybe
Post by: ebdem on June 25, 2017, 02:56:29 PM
Sorry. Needed some time to reply.

To add information to the balance sheet talk: Fly.Be owns 27 aircrafts. 20 are Q400 (https://en.wikipedia.org/wiki/Bombardier_Dash_8#Series_400 (https://en.wikipedia.org/wiki/Bombardier_Dash_8#Series_400) and 7 are E175 (https://en.wikipedia.org/wiki/Embraer_E-Jets (https://en.wikipedia.org/wiki/Embraer_E-Jets)).

I am holding 3-4%, but it also around 25% under water. Greenwood is at 4,5% (https://www.gwinvestors.com/wp-content/uploads/2017.04.06-Q1-2017-Letter-Conscious-Capitalists-w-Appendix.pdf (https://www.gwinvestors.com/wp-content/uploads/2017.04.06-Q1-2017-Letter-Conscious-Capitalists-w-Appendix.pdf)).

I think load factor will increase, while they are reducing the flight network. Load factor is at the moment also lowered by the (i think) Cardiff contract and on the graphic I posted from the IR presentation, we can see the optimization potential for the network. There seem to be many routes with low load factors. I have to look deeper into the numbers of the overhead to get your argument...
Title: Re: FLYBE.L - Flybe
Post by: LightWhale on June 25, 2017, 10:59:44 PM
Thanks for the reply.

I see your point about LF increase. The model I mentioned includes a load factor of 75%, which is a 5-6% increase from FY2016-17, and a target they have only achieved once in the last decade. Sure, they might do even better, but it would not be conservative to assume that. What they are returning this year is 6 Q400, and not any of the E-195 which hurt their LF so much.


on the graphic I posted from the IR presentation, we can see the optimization potential for the network. There seem to be many routes with low load factors. I have to look deeper into the numbers of the overhead to get your argument...

Yes, a lot of room for improvement. However, the slide shows that about 60% of routes are highly profitable, 30% are low profitability/ break even, and the rest 10% lose very little money. Had we looked at that graph without knowing the financial results, we would have concluded that Flybe was very profitable. But it doesn't add up, so considering that actual cashflow is negative, either the slide is wishful thinking, or it highlights the tacit overhead.

The stock can quickly double, but the last years have demonstrated how susceptible airlines are to exogenous shocks, and the range of possible outcomes seems wide. So i'm thinking to keep the position small. Do you expect them to be CF positive this year, or only next year? do you mind posting your numbers?
Title: Re: FLYBE.L - Flybe
Post by: ebdem on June 27, 2017, 01:48:09 AM
As I understand FlyBe, the historical comparison is a bit hard, cause we are having a company with many different faces or better phases, that are reflected in the numbers. Yes, the numbers look bloody. But what do they say for the future? Some of the problems might still exist (maybe in IT), but in my eyes it's hard to use other numbers for the future.

On the handback of planes: They hand the planes back, if lease expires. So we have to wait a bit, till E-195 will be handed back.

Yes. Overhead is a point. It was 4,3 mio pound in 2016/17. Yes, you are right, that the chart might be missleading. But it shows one problem, that can be tackled in the company. If they can manage the network activly and don't need to play firefighters to place leased planes unprofitable, they have the chance to get a better network and have the chance to lower overhead costs. You need less firefighters in the future, if there is no fire.

Yes. There are still risks. But how big is the downside and how big is the upside? In the company I see more upside, cause they have in their hands to increase profitability. Brexit might be an issue, but with May's new government, I don't see a hard kind of Brexit and more willness to find compromises. We will see.
Title: Re: FLYBE.L - Flybe
Post by: ebdem on July 26, 2017, 09:46:37 AM
In my eyes, the trading update sounds quite good: https://www.investegate.co.uk/flybe-group-plc--flyb-/rns/q1-2017-18-trading-statement/201707260700040823M/
Title: Re: FLYBE.L - Flybe
Post by: KJP on December 15, 2017, 06:36:19 AM
https://ec.europa.eu/transport/sites/transport/files/legislation/2017-12-11-notice-to-stakeholders-air-transport.pdf

Title: Re: FLYBE.L - Flybe
Post by: KJP on January 31, 2018, 07:30:32 AM
The various presentations on Flybe's website and its annual reports provide timelines for the upcoming surrender at end of lease for the E195s and some of the Q400s.  This past year should turn out to be the turning point in terms of fleet size.  Of course, Brexit is also looming, and I don't think anyone can really predict what that's going to do to Flybe, either in terms of demand on its wholly domestic routes or its ability to continue flying its UK-Europe routes.

Finely getting some control over fleet size is having the desired effect -- Flybe's planes were alot fuller last quarter than they were a year ago without any decline in price per ticket:  http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/FLYB/13515378.html

Without Brexit, the situation should continue to improve as more planes come off lease and are handed back.  But Brexit without a deal that allows Flybe to keep flying to the continent may kill the company.   

Title: Re: FLYBE.L - Flybe
Post by: KJP on October 17, 2018, 06:43:54 AM
https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/FLYB/13831394.html

Continuation of both the good (fewer empty seats as they chop the fleet down to size), the bad (rising costs, including fuel and USD denominated debt against sterling revenue) and the potentially ugly (no Brexit deal yet).
Title: Re: FLYBE.L - Flybe
Post by: kab60 on January 11, 2019, 04:06:58 AM
Ouch. Down 80 percent due to offer from Virgin at 1 pence/share (versus market price of 16,4 pence before opening).
Title: Re: FLYBE.L - Flybe
Post by: KJP on January 11, 2019, 04:41:18 AM
Ouch. Down 80 percent due to offer from Virgin at 1 pence/share (versus market price of 16,4 pence before opening).

What a mess.  When I first looked at this a few years ago, I never imagined that getting squeezed by credit card companies would ultimately cause the liquidity crisis that killed the company.
Title: Re: FLYBE.L - Flybe
Post by: LightWhale on January 11, 2019, 09:50:39 PM
https://news.sky.com/story/tinkler-stokes-stobart-war-with-raid-on-flybe-shares-11605107

how peculiar
Title: Re: FLYBE.L - Flybe
Post by: ukvalueinvestment on January 12, 2019, 04:42:10 AM
Possibilities:

- Pure spite.  Wants to vote against the deal just because he hates Stobart.  Seems like there's a lot of downside for him in doing that - depending on where he bought the shares - but then again they wouldn't have cost that much, as a % of his net worth.
- He knows the airline industry, thinks there might be a counter bid (and that Stobart would be prepared to pay more). 

Either way, I hope (as a shareholder) that he gets what he wants.