Blackbird brings down Flybe shares

Budget airline Flybe did much as expected in the third quarter, certainly in terms of passenger numbers. But a warning from management that the business would only break-even at the pre-tax profit level in the year to March caused analysts to slash forecasts by over a third. Understandably, the share price crashed to a 14-month low. All now depends on the success of a three-year turnaround plan.

Some of Flybe's London City routes have been tougher to crack since launch, and the incumbent operators are pulling out all the stops to see off Flybe. "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," warned the carrier.

There have also been problems with so-called Project Blackbird. Flybe has nine Embraer E195 jets to get off its books. But it's proving more difficult than expected, and management believe that annualised carrying costs will be about £26 million per annum, as flagged in November. "Exit timing and costs will still be dependent on the terms of each specific transaction," says the firm.

This is a problem because the City had anticipated some sort of solution by now. Analyst Gerald Khoo at broker Liberum had thought the planes would all be sold before the end of this financial year and at no net cost. London City routes were expected to reach full maturity fare quicker, too.

The surplus jets are now expected to remain with Flybe until March 2016. That's why he's slashed forecasts for underlying pre-tax profit before "Blackbird" costs by nearly £9 million from £24.7 million to just £16 million. That's had an impact on subsequent years, so 2016 estimates fall by over 35% to £24.5 million. Include Blackbird and losses grow to £10 million for the year to March 2015 and to £1.5 million in 2016 compared with previous forecasts for a profit of £38.1 million.

There'll be no help from the plunge in oil prices, either. Flybe's hedging policy on both fuel and the US dollar means lower fuel costs will not benefit Flybe significantly until 2017.

Admittedly, a 3.8% drop in passenger revenue during the final three months of 2014 to £126.8 million was anticipated. Flybe sold its 25 pairs of runway slots at Gatwick to easyJet for £20 million in 2013. Costs fell in Flybe's third quarter, too, and forward bookings are trending ahead of last year.

Mr Khoo remains mostly positive. "A March 2016E EV/EBITDAR of 5.1x suggests upside potential if management can deliver on a three-year turnaround programme that is less than half complete, and deal with Project Blackbird (surplus aircraft) on a reasonable time horizon and at reasonable cost," he writes. However, execution risk is high and the price target tumbled from 180p to 140p.

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