Shares in Flybe (LSE: FLYB) slumped by as much as 10% in early deals this morning after the company revealed a worse than expected loss for the first half.
For the six months ended 30 September, group revenue increased by 43.4% year-on-year and operating profit after adding back depreciation, amortisation and aircraft rental charges increased 11.1% year-on-year.
On the flip side, Flybe reported a 13.4% fall in net profit, 15.9% fall in profit before tax and a cash outflow from operations of £0.5m. Further, passenger revenue per seat fell 6.9% as the group’s load factor declined 4.3 percentage points to 72%.
Unfortunately, the outlook the company provided within the results shows more of the same going forward. Flybe UK’s current forward booking profile for Q3 shows seat capacity up 16% year-on-year but the number of seats sold is down to 49% from 52% in the same period last year. Passenger yield is down 5% and revenue per seat is down 9%.
Turbulence ahead
These figures are disappointing. Flybe’s turnaround has been in progress for some years now, and the City was expecting it to come to a completion this year. But it appears as if there’s more turbulence ahead for Flybe. Indeed, within today’s release management warns, “the aviation market is a turbulent one at the moment and there is limited forward visibility. Excess seat capacity in the European short-haul market coupled with a weaker pound, and both business and consumer uncertainty are impacting all airlines.”
However, Flybe is well positioned to weather an uncertain market environment. At the end of September, the group had net debt of £24.8m, compared to net assets of £167m. What’s more, going forward Flybe will be able to control its own capacity growth. With no new aircraft deliveries planned, according to management, business will be able to move from being supply-driven to demand-driven and capacity will peak in the coming year. This will give the company an advantage over peers such as easyJet (LSE: EZJ), which is quickly discovering how damaging excess capacity can be.
Excess capacity
Easyjet placed a deal to buy 135 new aircraft at a list price of £8bn in 2013, despite Sir Stelios, whose easyGroup owns just over a third of the airline, voting against the purchase. As these aircraft come online, easyJet is grabbing more customers, but excess capacity is making it difficult to set prices. In the company’s October trading update management warned that revenue per seat would fall 8.7% during the fourth quarter, although passenger numbers are set to increase by around 6% during the second half of 2016.
These numbers are somewhat similar to those of Flybe. However, shares in Flybe are trading at an enterprise value-to-EBITDA ratio of 0.5 and a price-to-book ratio of 0.5 compared to easyJet’s EV/EBITDA ratio of 4.6 and P/B of 2.2.
So overall, while Flybe is struggling, the company is better positioned than its larger peer easyJet for the current environment. Moreover, Flybe’s valuation looks too hard to pass up.
