The market has not yet recovered from the fall out of Thomas Cook Plc. Not all holidaymakers have received reimbursement. Also, we have not satisfactorily resolved the issue of how Thomas Cook could still offer holiday packages, twenty-four hours before going into administration.

This morning we wake up to the rumour, rather than hard news that Flybe may be in some financial difficulty. We have previously discussed how hindsight is a wonderful weapon when it comes to company analysis. Is it a weapon that is about to be used again?

Flybe's financial statements

You might recall that Flybe was taken over by a consortium made up of Virgin Atlantic (30%), Stobart Group (30%) and Cyrus Capital Partners (40%). The consortium operates under the name of Connect Airways. Flybe was offered financial support by its new partners to underpin its turnaround. Flybe’s most recently filed financial statements to March 2018 confirm that revenue increased by 6.7% to £752m and the operating loss decreased by 56% to £13.5m. On balance sheet borrowings have reduced to £154m through the use of cash deposits. The cash flow statement confirms that cash from operating activities is £13.8m and after minimal investment in fixed assets reduces to a deficit of £15.5m. This is not fatal, but Flybe also generated a similar deficit of £123m in the previous year, albeit after a bigger investment in fixed assets. Flybe has extended its year-end from March 2019 through to 4 July 2019, so its most recent financial statements have not yet been filed. The consortium that owns Flybe, Connect Airways Ltd has not yet filed a set of financial statements. The financial facts, based on the 2018 performance, are that breakeven sales are £781m while actual sales were £752m. So, ignoring any cost management programme, Flybe will need to increase sales by 3.9% just to breakeven. The airline sector is often characterised as first into recession and first out of recession, confirming that it is a volatile sector. 2019 was a tough year for many businesses, and we have commented on that in previous articles. Flybe’s competitors are aggressive; therefore, the challenge to increase sales by more than anticipated growth in GDP is a tall order. The rumour this morning is that Flybe is trying to renegotiate funding. The news is a poisoned chalice. Consumers are still raw over the Thomas Cook debacle and will probably choose to avoid Flybe – just in case. This, of course, will make the situation worse. Revenue and cash will be further eroded. The website is accepting booking for flights scheduled to depart tomorrow. So, for all intent and purposes, it is business as usual. The financial analysis of the 2018 financial statements and the performance of the economy in 2019 suggest that management face a tough challenge in securing a safe and profitable future for Flybe.

Author: Bill Liddell, Director.