Flybe loses a quarter of its value after disappointing update

The airline world may be concentrating on International Airline Group’s attempt to buy Aer Lingus, but there is also time to note a disappointing update from Flybe.

The budget airline’s shares have lost nearly a quarter of their value - down 21.75p at 68.25p - after it said it would only break even in the full year after a fall in third quarter passenger revenue. Analysts were expecting a profit of £9m or so.

After moving into profit last year, the airline had already moved back into the red in the first half due to one off costs and a charge relating to ending its Finnish joint venture.

Now it says passenger revenues dropped 3.8% to £126.8m in the three months to December, after increased competition on its routes from London City Airport. It said:

We believe that this competitive pressure will extend the period of time that these routes take to reach maturity and deliver the full contribution we expect.

It also said the recent plunge in the oil price would have no beneficial on its 2015 figures and minimal impact on 2016 “given our hedging profile on both fuel and the US dollar.” But it said continued lower oil prices could give it flexibility to cut fares if it seemed commercially necessary.

It said it was still seeking to dispose of nine unwanted Embraer E195 aircraft (known as project Blackbird) which cost around £26m a year. It plans to use five of them on selected routes this summer but is still looking for a permanent solution for these aircraft.

Despite the problems chief executive Saad Hammad said:

Flybe’s improvement in its core Uk business continues to progress. Only a year into our three year transformation we now have a platform which enables us to compete in a tough environment where the consumer demands value. We are now well positioned to continue our positive momentum towards delivering sustained profitability and value to shareholders.

Analysts at Liberum said:

Flybe’s third quarter trading update showed an encouraging performance for the quarter itself, but suggests caution is warranted on the outlook.

Management’s guidance of break even underlying pretax profit for March 2015 implies a £9m cut to our estimates. We have cut our forecasts to reflect the new London City routes taking longer to mature. We also adjust our assumptions on Project Blackbird to allow for the surplus aircraft being retained for longer. Despite the slower progress, we still see significant turnaround potential. Our recommendation remains buy with a reduced target price of 140p (previously 180p).