Author Topic: FLYBE.L - Flybe  (Read 11675 times)

KJP

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Re: FLYBE.L - Flybe
« Reply #10 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?


ebdem

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Re: FLYBE.L - Flybe
« Reply #11 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.
« Last Edit: June 09, 2017, 05:25:55 AM by ebdem »

KJP

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Re: FLYBE.L - Flybe
« Reply #12 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. 

LightWhale

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Re: FLYBE.L - Flybe
« Reply #13 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?
 
« Last Edit: June 16, 2017, 11:56:32 AM by LightWhale »

KJP

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Re: FLYBE.L - Flybe
« Reply #14 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.

ebdem

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Re: FLYBE.L - Flybe
« Reply #15 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.

LightWhale

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Re: FLYBE.L - Flybe
« Reply #16 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? 


« Last Edit: June 18, 2017, 08:39:04 AM by LightWhale »

KJP

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Re: FLYBE.L - Flybe
« Reply #17 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)?

ebdem

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Re: FLYBE.L - Flybe
« Reply #18 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?

LightWhale

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Re: FLYBE.L - Flybe
« Reply #19 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.

« Last Edit: June 20, 2017, 05:51:47 AM by LightWhale »